CFA Institute’s Code of Ethics and Standards of Professional Conduct codify the ethical guidelines for the investment profession that are critical to maintaining the integrity of capital markets and investor trust. Members, candidates, and even firms make a commitment to uphold these standards as they help elevate ethical decision-making universally around the globe.
As investment professionals, we are certain to face important ethical decisions in our day-to-day activities. Some scenarios we encounter will be straightforward, while others may be more complex. No matter what circumstances we face, continuous learning remains imperative in an investment industry that continues to evolve with products undergoing innovation and a regulatory environment continuing to adapt.
For that reason, each week we will feature a sample case from CFA Institute’s Ethics in Practice Casebook. Each case is built upon a real-life example that may involve a regulatory matter or even a CFA Institute Professional Conduct investigation. At the end of the case is a multiple-choice question that addresses the ethical nature of the actions taken in that case.
This week’s case involves Standard IV(C) Responsibilities of Supervisors.
Futures, Feed Yards, and Furtive Actions.
Rosenthal Collins Group (RCG) is a registered futures commission merchant with a number of branch offices, including one in Memphis, Tennessee. Phillips is hired to be the branch manager of the Memphis office, supervising a number of employees, including Lewis. Phillips allows Lewis to work from home, and as a result, Lewis has no physical office in the Memphis branch of RCG or even access to the building. Unknown to Phillips or RCG, Lewis also works for another futures commission merchant (AFCM). Lewis arranges swap agreements for AFCM, including orders with several cattle feed yards. And through another employee at RCG, he helps open new futures accounts for the feed yards RCG represents. Although the other employee at RCG receives all the commissions for the feed yard accounts, she surreptitiously splits these commissions with Lewis. This commission sharing arrangement is also unknown to Phillips. Phillips actions as a supervisor are
A. acceptable if RCG did not develop adequate policies and procedures for the detection and deterrence of possible misconduct by its employees.
B. acceptable if Phillips was not provided adequate training from RCG on its compliance policies and procedures.
C. acceptable if RGC home office conducted regular audits of the Memphis branch.
D. unacceptable because Phillips did not diligently perform his supervisory responsibilities.
What do you think is the correct choice? Feel free to discuss in the comments below and make sure to check back later this week as we post the analysis. The completion of this case qualifies for 0.25 hour of Standards, Ethics, and Regulation (SER) credit.
[Update – 7/30/2020]
Welcome back! Here is the analysis of this case:
This case is about adequately exercising supervisory responsibility. CFA Institute Standard IV(C): Responsibilities of Supervisors states that “[CFA Institute] members must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.” At a minimum, supervisors must make reasonable efforts to detect and prevent legal, regulatory, and policy violations by ensuring that effective compliance systems have been established. They must also understand what constitutes an adequate compliance system and make reasonable efforts to see that appropriate compliance procedures are established, documented, communicated to covered personnel, and followed. Supervisors must alert their superiors and firm management if there is an inadequate compliance system in place and work with them to develop and implement effective compliance tools. If the absence of or inadequacy of the compliance system prevents effective supervisory control, an investment professional should decline to accept supervisory responsibility until the firm adopts reasonable procedures to allow the effective exercise of supervisory responsibility.
If Philips knew that RCG had not developed adequate policies and procedures for the detection and deterrence of potential misconduct by RCG employees, it would be incumbent on him to bring this to the attention of RCG, help develop adequate compliance policies, or decline supervisory responsibility. In the absence of adequate compliance policies, it would not be acceptable for Phillips to act as branch manager. A lack of adequate policies would also not be an excuse for failing to detect potential misconduct by RCG employees, including Lewis, which means Answer A would not be correct. Similarly, if RCG did not properly train Phillips on RCG compliance policies that did exist, Phillips should decline supervisory responsibility until he adequately understands RCG policies and procedures and expectations for maintaining his subordinates’ compliance with those policies. Lack of training on how to supervise should not be an excuse for inadequate supervision but a catalyst to seek out that training, thus making Answer B not the right choice.
A regular audit of the Memphis branch by RCG home office compliance personnel could be an excellent way to ensure that branch employees are complying with applicable law, regulations, and RCG policies. But it is not a substitute for effective and regular supervision by Phillips, the onsite branch manager, making Answer C incorrect. Although it is not clear from the case what steps Phillips did take to diligently exercise supervisory responsibility, the fact that Lewis worked from home and did not have access to the branch office, suggests that Phillip’s “hands on” supervision was minimal at best and obviously ineffective. Answer D is the best choice.
This case is based on an enforcement action by the US Commodity Futures Trading Commission from 2014
Image by Philipp T from Pixabay
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