A. Prosper’s issues begin with ANR performance that is calculated incorrectly and posted to client accounts. The CFA Institute Standard of Professional Conduct III(D): Performance Presentation requires CFA Institute members to make reasonable efforts to ensure that investment performance is presented in a fair, accurate, and complete manner. The ANR is calculated using a computer program that was created many years earlier, and over the years, it has developed a defect that leads to dropping underperforming accounts from the calculation. Although the person currently responsible for calculating the ANR did not create the computer program, that employee does not understand the program’s process and has not adequately reviewed the calculation method to ensure that it is accurate, thus allowing the error to continue.
B. Although the customer service employee responding to client complaints is not responsible for the ANR calculation error, that employee is responsible for acting in accordance with Standard III(A): Loyalty, Prudence, and Care to protect client interests once the issue has been raised. That employee failed to elevate any of the investor complaints to Prosper’s personnel responsible for the calculation and apparently simply recalculated the ANR using the same flawed code. The customer service employee did not engage with or investigate the client complaints with sufficient reasonable care, diligence, competence, or professionalism, as required by Standard V(A): Diligence and Reasonable Basis and the Code of Ethics.
C. The marketing employee using erroneous ANR performance is not responsible for the calculation error. Team members should be able to rely on the work of others in their firm (in this case, those calculating the ANR) to fulfill their responsibilities in an appropriate manner to produce accurate work. But in this case, the marketing employee is ultimately responsible for distributing misleading information that misrepresents the true performance of the securities, which violates Standard I(C): Misrepresentation. Once the marketing employee becomes aware that the information is inaccurate, that employee must take steps to remediate the error and distribute accurate and complete information.
D. The compliance employee has a responsibility to review the firm’s policies and procedures to ensure that they meet relevant regulatory and ethical requirements. Prosper only sporadically reviews all the computer programs and processes used by the company, uses employees to calculate the ANR performance that lack an understanding of the ANR calculation process, and conducts only a high-level review that would not catch the error in the ANR calculation. Similar to the customer service employee, the compliance employee did not exercise sufficient care, diligence, competence, or professionalism as required by Standard V(A): Diligence and Reasonable Basis and the Code of Ethics to ensure that an adequate compliance program was in place to address errors or properly investigate problems once discovered.
E. The Prosper CEO likely has no direct involvement with the calculation and presentation of performance, addressing client complaints, or creating and implementing compliance procedures. But the CEO does have overall responsibility to ensure that the firm complies with the law (Standard I(A): Knowledge of the Law) and protects client interests (Standard III(A): Loyalty, Prudence, and Care) as well as overall supervisory responsibility for firm employees (Standard IV(C): Responsibilities of Supervisors). The CEO is allowed to delegate this responsibility. But the Code and Standards require those with supervisory responsibility to make reasonable efforts to ensure that those under their supervision comply with applicable laws and the Code and Standards. The breakdown of the policies and procedures of the firm designed to accurately calculate performance, adequately address complaints, and implement an appropriate compliance program are all red flags indicating a potential failure of the CEO to properly supervise employees of the firm.
This case is based on an April 2019 US SEC Enforcement Action.