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 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 the circumstances, continuous learning remains imperative in an investment industry that continues to evolve with products undergoing innovation and an adapting regulatory environment.
For that reason, each week we feature a sample case from CFA Institute’s Ethics in Practice Casebook. Many cases are built upon real-life examples that may involve a regulatory matter or even a CFA Institute Professional Conduct investigation. At the end of each 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.
When a Hobby Turns Into a Business
Marcos, a baggage handler for a regional airline, learns about investing by reading books during breaks at work and participating in online seminars produced by the mutual fund family that sponsors the airline’s retirement account. He also obtains a few investment-related certificates, including the Investment Foundations® certificate from CFA Institute. He begins to manage the retirement accounts of a few friends and other airline employees who hear of his investing hobby by word-of-mouth. For a nominal flat fee of $300, Marcos “takes over” the employees’ airline retirement accounts, selects their investments, and makes their trades. With his colleagues’ permission, Marcos trades directly in their accounts by logging into their accounts, having the broker/dealer’s “activation code” for a trade sent to the employee, and then getting the employee to text him the code so he can complete the trade. Some of his fellow employees add Marcos’s email address to their account profiles so that the activation codes are sent directly to his email.
Marcos uses a market timing strategy for the mutual funds he selects. He invests his fellow employees’ assets in a single mutual fund available through the airline retirement platform and sells everything when he believes that the price is right. He then invests the assets in a bond fund while waiting to choose the next investment. When Marcos is added to a Facebook group for airline employees to post interesting “selfie” photos, he posts a picture of the retirement statement of one of his friends that shows close to $1 million in assets. None of the account holder’s identifying information is shown. This drives more airline employees to seek out Marcos to manage their retirement investments. Marcos starts his own Facebook group, which grows to 9,000 members, in which he promotes his investment prowess, answers questions about retirement investing, and posts information about the airline retirement plan. Eventually Marcos manages more than $110 million in assets for 934 fellow employees collecting more than $280,000 in fees. Marcos’s actions are
A. appropriate because he is not an investment adviser but is informally assisting fellow employees.
B. appropriate because he has the full permission of his colleagues to manage their retirement accounts in this manner.
C. inappropriate because he is violating the Code of Ethics and Standards of Professional Conduct applicable to those who have earned the CFA Institute Investment Foundations certificate.
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 the law. CFA Institute Standard of Professional Conduct I(A): Knowledge of the Law states that CFA Institute members must understand and comply with all applicable laws, rules, or regulations governing their professional activities. Although Marcos is managing money for a group of friends and colleagues, he is engaged in activities that make him an investment adviser. He is advertising his services through his Facebook group, providing investment advice, making investment decisions, and trading on behalf of individuals for a fee. There is no indication that he has registered with the appropriate authorities as an investment adviser or taken any of the steps required of investment advisers, such as maintaining trading records, creating written client agreements, evaluating suitability of investments, and so forth. Although he has the permission of his “clients” to manage their investments, he has not properly registered as an investment adviser. And even though it would advisable and beneficial for any investment adviser to comply with the CFA Institute Code of Ethics and Standards of Professional Conduct, those earning the Investment Foundations certificate from CFA Institute are not required to abide by the Code and Standards. Choice D is the best response.
This case is based on a US SEC enforcement action from September 2019.
Image by 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.