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 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(D) Misconduct.
“No Risk” Trades
Manley is an investment adviser for a regional bank with a number of discretionary, fee-based accounts for high-net-worth individuals. The bank’s internal policies and procedures permit trade error corrections for up to 30 days following a failure to place a trade. The policy is intended to address errors in which an adviser fails to send an order to the trade desk. To rectify the error, the adviser is permitted to buy or sell a security at the current market price, with the price differential charged to the adviser personally through an internal error account.
On many occasions, Manley uses the trade error correction policy to benefit clients who are unhappy with their account performance. Manley identifies a security whose price has increased in the last 30 days. He then tells the trade desk that he had mistakenly failed to buy that particular security some days before when the price was substantially lower than the current market price. Once the request is approved, the trade desk purchases the security and charges the price differential to Manley personally through the error account. Shortly thereafter, Manley sends an order to sell the security and net a profit for the client. Manley then tells the client that he had “flipped” them a profitable trade or has given them a “gift” or “no-risk” trade. Manley’s actions are
A. inappropriate.
B. appropriate because Manley is acting for the benefit of the client.
C. appropriate because the bank is not harmed by Manley’s actions.
D. appropriate because Manley has disclosed to the client that he engaged in a no-risk trade on their behalf.
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 professional misconduct. CFA Institute Standard I(D): Misconduct prohibits CFA charterholders from engaging in professional conduct involving dishonesty, fraud, or deceit. Manley engaged in a misleading, fraudulent, and deceptive practice when he misused the bank’s policies for error correction to enhance client account performance when no legitimate error had been made. In effect, he personally compensated clients as a way of misleading them about his true ability as an investment adviser as well as about the real performance of their accounts so that they would continue as his clients. The fact that these practices did not cause financial losses for either his clients or the bank does not make the conduct any less deceptive or misleading. Disclosing to clients that he provided them a “gift” or “no-risk” trades also does not mitigate the fraudulent conduct. Choice A is the best response.
This case is based on a March 2019 enforcement action by the Investment Industry Regulatory Organization of Canada.
Image by Gino Crescoli 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.
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