Ethics Case Study of the Week: Shifting Around Fund Expenses

By Gary Sarkissian posted 10-25-2021 08:00

CFA Institute’s Code of Ethics and Standards of Professional Conduct outline 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 evolving investment industry 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 III(D) Performance Presentation.

Shifting Around Fund Expenses
Smith is a portfolio manager at an alternative asset management firm, AltInvest LLC. At the direction of her boss, she makes a one-time allocation of the expenses incurred by the Private Credit Opportunities fund to the Private Credit Special Situations fund. Her boss wants to temporarily boost the end-of-year results of the Private Credit Opportunities fund, which has been underperforming. Her boss explains that the Private Credit Special Situations fund closed recently and just entered its long investment period, thus investors in the fund would not yet expect it to deliver good results. In contrast, the investment period of the Private Credit Opportunities fund ended years ago, and its harvesting period is soon coming to an end. Boosting the performance of the Private Credit Opportunities fund also should help attract investors to the Private Credit Opportunities II fund. The consolidated performance results of AltInvest are not affected by the reallocation of expenses between these two funds. Smith’s actions are

 A. inappropriate.
 B. appropriate because the consolidated performance results of AltInvest are not affected by the reallocation of expenses.
 C. appropriate because the chosen way of reporting is only temporary.
 D. appropriate because Smith followed the directions of her boss.

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 III(D): Performance Presentation, which states that CFA Institute members must make reasonable efforts to ensure that the investment performance results communicated to their clients are fair, accurate, and complete. Smith’s actions are inappropriate because reallocation of expenses between the two funds renders a misrepresentation and is not a fair, accurate, and complete presentation of the two funds’ performance, even though the consolidated results of AltInvest are not affected. Developing and maintaining clear and accurate communication with clients regarding the performance of their investments is critical because it allows clients to make well-informed decisions about their investment portfolios, including about whether to withdraw their money from underperforming funds or whether to invest in follow-on funds. Any misrepresentation of performance, however temporary, affects investors’ assessment of their investments and subsequently their investment decisions. In this case, Smith made the allocation of expenses at the direction of her boss, who had determined that the temporary boost of the Private Credit Opportunities fund’s end-of- year results would benefit AltInvest. But the interests of an investment professional’s employer are secondary to protecting the interests of clients. In asking Smith to make the reallocation of expenses between the two funds, her employer is acting contrary to Smith’s clients’ interests. Following the direction of a supervisor does not excuse unethical behavior or actions contrary to a client’s best interests. Choice A is the best answer.

This case was written 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.