Ethics Case Study of the Week: Protecting Clients, or Waiving their Rights?

By Gary Sarkissian posted 05-10-2021 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 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. 

Protecting Clients, or Waiving their Rights?
McMaster is the founder and sole director of Dover Financial Services, a financial services business that sells financial products and provides clients with financial product advice. McMaster directs Dover’s numerous authorized representatives to incorporate the “Dover Client Protection Policy” as part of the contracts with their clients that set forth the terms for providing financial advice. The protection policy states that it “contains a number of client protections designed to ensure that you (the client) receive the best possible advice and the maximum protection available under the law.” The protection policy’s terms are intended to excuse Dover and its authorized representatives from various liabilities arising from their failure to act in a client’s best interest, relieve Dover and its authorized representatives of their duty to conduct suitability analyses of clients and investments, and inaccurately lead clients to believe that they cannot make claims against Dover or its representatives for securities law violations.  McMaster’s actions are

A. appropriate because Dover and McMaster fully disclosed the terms of the Dover Client Protection Policy to clients.
B. appropriate because Dover and McMaster are free to negotiate the terms of advisory agreements with clients.
C. appropriate so long as the Dover Client Protection Policy did not misrepresent a client’s legal rights.
D. inappropriate.
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 the obligation of investment advisors to act in their clients’ best interests. CFA Institute Standard III(A): Loyalty, Prudence, and Care sets forth a duty of loyalty on the part of CFA Institute members for their clients, and requires them to act for the benefit of their clients and place their clients’ interests before their own. Other CFA Institute standards require members to provide diligent, independent, and thorough advice as well as have a reasonable and adequate basis for investment action [Standard V(A)], conduct a suitability analysis for any investment recommendation to their clients [Standard III(B)], and not make any misrepresentations relating to investment services [Standard I(C)]. Taken together, these components of the CFA Institute Code of Ethics and Standards of Professional Conduct define the fundamental principles applicable to investment professionals and detail what conduct investors should expect from their financial advisers. The terms of the Dover Client Protection Policy improperly attempt to “disclose away” Dover and McMaster’s fundamental ethical (and very likely legal) obligations to clients by limiting liability for failures to act in the client’s best interest or provide appropriate advice.

Although in general clients and advisers are free to negotiate the terms of advisory agreements, it is improper for advisers to use the client agreement to create a significant imbalance in the rights and obligations of the adviser or limit the fundamental ethical obligations of loyalty, prudence, and care to their clients. Disclosure does not cure such conduct. Furthermore, the Dover Client Protection Policy was deceptive in that it misrepresented the client’s right to bring legal action for ethical and regulatory violations and falsely gave the impression that a client would benefit from its terms. Choice D is the best answer.

This case is based on a June 2018 regulatory action by the Australian Securities and Investments Commission.

Image by Catkin 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.