Ethics Case Study of the Week: Mixing Business and Personal Travel?

By Gary Sarkissian posted 12-07-2020 10:21


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 III(A) Loyalty, Prudence, and Care. 

Mixing Business and Personal Travel?
Braun and his firm are hired by a regional government to serve as its financial adviser for issuing general obligation bonds. The municipality conducts several bond offerings over a number of years for constructing a number of municipal facilities, including a maximum security detention facility and two school buildings. In connection with the bond issues, Braun makes a number of trips to New York City to meet with ratings agencies in connection with these offerings. The trips are typically planned for a Monday or Friday so Braun can obtain the cheapest travel costs. Braun’s wife accompanies him on the trips and they typically spend the weekend either before or after the meetings in New York City to enjoy sporting events, theater performances, and museums. Braun often makes a number of flight and hotel changes after a trip is booked to accommodate meetings with other clients. Braun submits his trip expenses to his supervisor who deducts trip costs she believes are unrelated to the business purpose of the trip and submits the bills to the municipality for reimbursement. Which of the expenses below can most likely be billed to the client—for example, the government entity issuing the bonds?

A.  Braun’s accommodation and meal expenses for the weekend days because the travel rates are cheaper over a weekend.
B.  Tickets to the sporting and theater events, as long as they do not exceed an amount for reasonable business entertainment.
C.  Flight and hotel change fees that result from the regular course of Braun’s business activities.
D.  The travel and accommodation expenses for Braun’s wife if he discloses to his supervisor that she is making the trips and receives written approval for her travel.

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 hour of Standards, Ethics, and Regulation (SER) credit

This case relates to CFA Institute Standard III(A): Loyalty, Prudence, and Care, which states that members have a duty of loyalty to their clients, must act for their clients benefit, and must place client interests before their own interests. Under this standard, investment professionals, including municipal security dealers, must not engage in any deceptive, dishonest, or unfair practice when handling client accounts. Charging excessive or lavish expenses for the personal benefit of the investment professional at the expense of the client can constitute a deceptive, dishonest, or unfair practice that violates Standard III(A). All of the expenses incurred by Braun can, in some way, be considered personal or business-related expenses that should not be charged to the municipality seeking to issue the bonds.

In the context of conflicts of interests, the CFA Institute Code of Ethics and Standards of Professional Conduct allow members to accept or provide modest gifts and entertainment done in the ordinary course of business (a gift basket at the holidays from a vendor or to a client, for example). But that “ordinary course of business” does not allow investment professionals to charge clients for obviously extraneous entertainment expenses tangentially connected to a business meeting. Even if Braun notified and received permission from his employer for his spouse to accompany him on the business trip, that permission cannot extend to treating the client unfairly by charging the client for the spouse’s expenses. And although busy investment professionals may be forced, by other priorities, to change travel arrangements when a trip on behalf of a client has already been scheduled, additional expenses resulting in the change most likely must be borne by Braun as an overhead cost, not charged to the client. (Under some limited circumstances, those expenses might be charged to the client necessitating that the travel changes be made).

It is possible that the savings in travel fees for booking a weekend travel schedule is greater than the additional accommodation and meal expense for Braun to stay in New York City the extra days, making the cost to the client lower. If this is the case, Braun would be meeting his duty of loyalty to the clients by choosing the most inexpensive travel schedule overall, thus limiting costs to the client. Under these circumstances, choice A describes the expenses most likely to be able to be billed to the client.

This case is based on an enforcement action by the US Financial Industry Regulatory Authority.

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© 2019 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.