Ethics Case Study of the Week: Local Regulations Stricter than the Code and Standards

By Gary Sarkissian posted 04-12-2021 08:00


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 e volve 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(A) Knowledge of the Law.

Local Regulations Stricter than the Code and Standards
Huang is the CEO and an executive director of GLB Group, a diversified company engaged in the business of securities investment and finance. The company’s shares have been listed on the Stock Exchange of Hong Kong (SEHK) for the past two decades. Huang circulates the unaudited financial statements for the past fiscal year to the company’s board of directors. The financial statements show a substantial increase in profitability over the previous fiscal year. Shortly after Huang provides this information to the board of directors, dramatic movements are seen in the trading volume and price of GLB stock.

Relying on his obligation under the CFA Institute Code of Ethics and Standards of Professional Conduct to keep employer information confidential, act with diligence, and have a reasonable and adequate basis for investment actions, Huang decides to wait for the audited financial statements to be prepared before releasing the statements publicly. Three weeks later, after the audited financial statements are ready, GLB issues a profit alert that states GLB expects a sharp turnaround of its results for the year, mainly attributable to the substantial net gains of its investments. Following publication of the profit alert, the share price of the company jumps 24%. Huang’s actions are   

A. inappropriate.
B. appropriate because the unaudited financial statements are confidential GLB information.
C. appropriate because he waited for the financial statements to be finalized prior to making a public disclosure.
D. appropriate if he cautioned the directors not to share the information publicly.
E. none of the above.

What do you think is the correct choice?  Click the “Analysis” button below to see the analysis for this case, 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 knowledge of regulations relating to the disclosure of corporate information. CFA Institute Standard I(A): Knowledge of the Law states that CFA Institute members must comply with all applicable laws governing their professional activities and, in the event of a conflict, must comply with the more strict law. Because GLB’s stock is listed on the SEHK, the rules and regulations governing that exchange are applicable to it and to Huang. Securities Futures Ordinance Section 307 requires that, once information related to fiscal year performance comes to the knowledge of a company, the information must be publicly disclosed to the market as soon as reasonably practicable.

In this case, the disclosure did not take place until several weeks later. Failure to ensure timely disclosure resulted in a breach of SEHK regulations. Huang waited to receive the finalized financial statements before making an announcement, thinking his actions were appropriate in fulfilling his duties under the CFA Institute Code of Ethics and Standards of Professional Conduct. Even if this was a proper interpretation of his responsibilities under the standard, the legal requirement of prompt disclosure, as the stricter rule, trumps the provisions of the applicable CFA Institute standards. Choice A is the best answer.

This case is based on a November 2018 enforcement action by the Hong Kong Securities and Futures Commission.

Image by carolyuen from Pixabay  

© 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.