Ethics Case Study of the Week: Campaign Contribution—or Pay-to-Play?

By Gary Sarkissian posted 24 days ago

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(B) Independence and Objectivity.

Campaign Contribution—or Pay-to-Play?
Myers is a founder of and partner at Redbrick, a $3 billion hedge fund focused on environmental, social, and governance investments. In support of upcoming state elections, he donated $2,000 to DeFrietas, one of the candidates. As a passionate climate advocate and an avid proponent of responsible investment, Myers supported DeFrietas’ backing of environmental policies to reduce air pollution and mitigate the effects of climate change. Myers also thought that his political contribution might be beneficial for Redbrick because DeFrietas was running for a position that had influence over which hedge funds received investments from the state’s pension plans. Myers informed all Redbrick limited partners (LPs) about the contribution and clarified that he had used personal rather than company funds for the political contribution. Myers’ actions are

A. appropriate because he provided full disclosure about his political contribution to his clients.
B. appropriate because he used personal funds and the amount of his donation is insignificant relative to the size of the fund.
C. appropriate because his donation supports a candidate whose environmental policies align with his beliefs.
D. inappropriate because making donations to try to win investments from the state pension fund violates the CFA Institute Code of Ethics and Standards of Professional Conduct.

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 CFA Institute Standard I(B): Independence and Objectivity, which states that CFA Institute members must not offer any gift, benefit, compensation, or consideration that reasonably could be expected to compromise another’s independence and objectivity. Managers may try to gain lucrative allocations from government-sponsored pension funds by making requested donations to the political campaigns of individuals directly responsible for the manager hiring decisions. This activity would be prohibited by Standard I(B). In this case, Myers seems to have both proper and improper motivations for making a political contribution to DeFrietas. On the one hand, Myers supports DeFrietas’ positions on protecting the environment and wants to further those goals. The standard is not meant to prevent participation in the political process through financial or other support for candidates by investment professionals. On the other hand, Myers recognizes that financial support of DeFrietas could benefit Redbrick by currying favor with someone who may be in a position to determine whether to invest in Redbrick’s fund.

The source of the funds—personal or from Redbrick—is irrelevant if the donation was meant to influence DeFrietas. Similarly, disclosure to clients does not address or mitigate the issue of the contribution’s effect on the independence and objectivity of the hiring decision maker. The question is whether the donation is reasonably designed to improperly affect DeFrietas’ independence and objectivity and to benefit Myers or Redbrick directly. Many factors would go into this determination, including the size of the donation, Myer’s intent in making the donation, and how influential DeFrietas’ position would be in making the hiring decision. As Myers’ actions could be perceived as inappropriate, the safest course of action would be to avoid any potential conflict by not donating to the DeFrietas campaign and by seeking to support environmental protection policies in some other way.

In the United States, “pay-to-play” scandals and similar events have led to numerous laws, rules, and regulations at the state and federal level governing political contributions. Under US law, it is unlawful for investment advisers, including hedge funds and private equity firms, to provide compensatory advisory services to a government client for a period of time following a political contribution by the firm or one of its “covered associates” to political candidates or officials in a position to influence the selection of advisers to manage public pension funds or other government client assets. Small contributions are exempted by the rule. CFA Institute members should take care to ensure that their conduct in making political donations complies with the law so as not to risk a violation of CFA Institute Standard I(A): Knowledge of the Law.

This case was submitted by Anna Sembos, CFA, who serves as volunteer with Compliance Connection, an extension of the CFA Institute Global Monitoring Program.

Image by mohamed_hassan 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.