Ethics Case Study of the Week: Friends and Family Access

By Gary Sarkissian posted 11-29-2021 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 VI(B) Priority of Transactions.

Friends and Family Access
Kapadia is a trader for an asset management company that manages several large global mutual funds. 
Kapadia executes the equity buy-and-sell orders for the portfolio managers of one of the company’s mutual funds. He has discretion to execute the orders at any time during the day depending on market conditions. Prior to executing the orders, Kapadia contacts several close friends and relatives to provide them with information on what securities are set to be traded by the mutual fund. In turn, they make trades that mirror the imminent trades to be executed by Kapadia on behalf of the mutual fund. Kapadia’s actions are

 A. inappropriate.
 B. appropriate if he disclosed his actions to his employer or to the mutual fund.
 C. appropriate because he did not share confidential information about individual clients.
 D. inappropriate only if the client was harmed financially by the conduct.
none of the above.

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 the unethical and often illegal practice of front-running, or trading on advance information for one’s personal account prior to trading for client accounts to gain an economic advantage. CFA Institute Standard VI(B): Priority of Transactions states that investment transactions for clients must have priority over investment transactions for personal benefit. In this case, Kapadia facilitated the front-running by his friends and relatives on the trades of his employer’s mutual fund. Although Kapadia may not have directly benefited financially, he benefited personally by providing the information to those with whom he had close relationships. This practice is unethical and inappropriate even if the trades of his friends and relatives did not disadvantage the mutual fund by moving the price of the security or causing the fund to lose the price advantage or any profit from its own trades. Kapadia cannot cure this unethical behavior by disclosing his actions to his employer or the fund. Although Kapadia did not share the confidential information of individual clients or individual investors of the fund, he did share confidential information about the fund itself. Choice A is the best answer.

This case is based on a 2016 enforcement action by the Securities and Exchange Board of India.

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© 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.