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(A) Duties to Employer - Loyalty.
Loyalty to Firm or Clients’ Interests First?
Kuznetsov is a portfolio manager for a large investment firm that encourages its employees to sell proprietary investment products to their clients. Kuznetsov complies with this directive and within a year becomes the firm’s top seller of these investment vehicles. He receives stellar performance reviews and a large bonus. But Kuznetsov eventually determines that the firm’s investment products are underperforming and more expensive than other outside investment options that are suitable for his clients and present a better chance for growth.
So, he sharply cuts back on purchasing the firm’s investment products for his clients. Although his supervisor puts increasing pressure on him to resume selling the firm’s products, Kuznetsov refuses. He complains several times to management that he is being pressured to place the firm’s interest above his client’s interests. He surreptitiously records several conversations with his supervisor and makes copies of client records that document what he considers to be his supervisor’s inappropriate conduct. When management ignores his complaints and his supervisor begins giving Kuznetsov poor performance reviews, he files a complaint with the local regulator against his supervisor and his firm, providing the recordings and copies of client files as evidence. After the firm becomes aware of Kuznetsov’s actions, he is fired. Kuznetsov’s actions are
A. inappropriate because he failed to keep client information confidential.
B. appropriate because he is protecting client interests.
C. inappropriate because he violated his duty of loyalty to his employer by taking his dispute with his supervisor to the regulator, exposing the employer to financial and reputational harm.
D. inappropriate because he could have met his ethical obligation by dissociating from the unethical activity of his supervisor.
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 – 9/17/2020]
Welcome back! Here is the analysis of this case:
Analysis:
This case involves CFA Institute Standard IV(A): Duties to Employer – Loyalty, which states that CFA Institute members “must act for the benefit of their employer and not…divulge confidential information or otherwise cause harm to their employer.” But the interests of an investment professional’s employer are secondary to protecting the interests of clients. Circumstances may arise in which investment professionals can engage in conduct contrary to their employer’s interests in order to comply with their duties to clients. In pressuring Kuznetsov to sell more expensive and less profitable investment products to his clients, the employer is acting contrary to client interests.
In general, Kuznetsov’s conduct in recording his conversations with his supervisor, copying client records, and reporting the employer to the regulator are justified because he is attempting to protect his clients’ interests by calling out his employer’s unethical (and possibly illegal) conduct. (However, certain jurisdictions may have laws against surreptitiously recording conversations without the other party’s consent.) Dissociating from the conduct may have removed him from the situation, but it would not be effective in this case because it would not necessarily prevent Kuznetsov’s employer from taking advantage of its clients and reassigning their accounts to employees who would engage in the misconduct. His “whistleblowing” activity is not a violation of the CFA Institute Code of Ethics and Standards of Professional Conduct in these circumstances (Answer B).
This case is based on a US SEC enforcement action from 2015.
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