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.