Ethics Case Study of the Week: Just Building Client Relationships?

By Gary Sarkissian posted 22 days ago


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 I(B) Independence and Objectivity. 

Just Building Client Relationships?
Soto is a founding partner and CEO of JPA, a large wealth management firm with offices throughout the world. The firm has many global institutional clients that include state owned entities run by government officials. In an effort to build client relationships, Soto initiates a “Client Internship Program” that allows clients to refer candidates for internships at JPA. Referrals from this program are considered for employment outside of the firm’s normal rigorous and competitive hiring process. The larger the JPA client, the more likely a referral from that client would be hired into a lucrative, career building internship position. JPA hires more than 200 relatives and friends of the key executives of many JPA clients, including relatives and friends from many government agencies that JPA has investment banking or asset management relationships with.  JPA generates more than $100 billion in revenue from these investments and uses the connections generated with these clients to assist other clients and navigate complicated regulatory landscapes. Soto’s actions in establishing the JPA “Client Internship Program” are

A. appropriate because the internship program benefits clients.
B. appropriate because the program is an incentive for clients that hire JPA, similar to discounted fees.
C. appropriate because the program creates a mutually beneficial business relationship between JPA and its clients.
D. a violation of the CFA Institute Code and Standards.

What do you think is the correct choice?  Click the “Analysis” button below to see the analysis, and feel free to discuss in the comments below.  The completion of this case qualifies for 0.25 hours of Standards, Ethics, and Regulation (SER) credit

This case related to CFA Institute Standard I(B): Independence and Objectivity, which states that CFA Institute members “must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise...another’s independence and objectivity.” JPA uses the internship opportunity to personally benefit the relatives and friends of certain key individuals, including government officials, with the intent to corruptly influence those decision making officials and executives. So, response D is the correct choice because this practice is a violation of Standard I(B), and there are likely legal and regulatory provisions relating to anti-bribery, such as the US Foreign Corrupt Practices Act, that may be relevant depending on the legal regime(s) applicable to JPA.

Modest gifts and entertainment in the ordinary course of business may be acceptable in the context of promoting professional services. Similarly, firms may offer large or significant clients discounts or incentives commensurate with their position. But this does not extend to offering what amounts to bribes to individual executives or government officials to influence the hiring process or look favorably on investment transactions. In this case the benefits were not to JPA’s investment clients but were personal to the individual decision makers.

This case is based on a US SEC enforcement action from 2016.

Image by reginasphotos from Pixabay

© 2018 CFA Institute. All rights reserved. You may copy and distribute this content, without modification and for non-commercial purposes, provided you attribute the content to CFA Institute and retain this copyright notice. This case was written as a basis for discussion and is not prescriptive of how a business situation or professional conduct matter should or should not be handled or addressed. Certain characters mentioned are fictional to facilitate discussion, and any resemblance to actual persons is coincidental.