Ethics Case Study of the Week: The Radio Testimonial

By Gary Sarkissian posted 12-13-2021 10:04 AM

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 I(A) Knowledge of the Law.

(Note: The Ethics Case Study of the Week series will be taking a holiday break from the Connect Blog and will be returning on January 10, 2022.  We wish you and your loved ones a safe and wonderful holiday season!)

The Radio Testimonial
Mallouk is president and majority owner of Creative Planning, Inc. (CPI), a US-based registered investment adviser with approximately $36.2 billion in assets under management. To advertise his business, Mallouk purchases several dozen radio advertisements in the local market. CPI’s policies and procedures require that the chief compliance officer or president review and approve any marketing materials or advertising concerning the firm or its services before publication or distribution. All of the radio spots are produced by two local radio hosts who have their own show that airs every weekday morning. Mallouk provides the radio station with copy points for the advertisements and approves the 60-second prerecorded advertisement that the pair record. After a few months, one of the radio hosts becomes a client of CPI. During his live radio program, in conjunction with the prerecorded ads, the host regularly mentions his client relationship with CPI, praises his CPI wealth manager by name, and details his satisfaction with the advisory services he received from CPI. Mallouk’s actions are

 A. appropriate as long as the content of the advertisements is truthful and accurate.
 B. appropriate as long as Mallouk does not provide any benefit to the radio host to highlight his positive experience with CPI.
 C. appropriate because Mallouk cannot control or preapprove what the radio host says during his program.
 D. inappropriate.

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(A): Knowledge of the Law, which requires CFA Institute members to abide by applicable law. The response to this case turns on the regulations governing CPI’s advertising practices. The facts presented do not describe the governing regulations, but the CFA Institute Ethical Decision-Making Framework specifies that investment professionals identify relevant facts when facing an ethical dilemma. If important facts are not known, investment professionals should seek out all information relevant to determining the appropriate course of action. Applicable law is always a relevant and important fact. In this case, the law and regulation applicable to CPI as a US-based adviser stipulates that it is a

fraudulent, deceptive, or manipulative act, practice, or course of business for any investment adviser to, directly or indirectly, publish, circulate, or distribute any advertisement that refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser. [Rule 206(4)-1(a)(1) under Section 206(4) of the Advisers Act]

The radio host’s live commentary accompanying the prerecorded spots constitutes an advertisement for CPI that was a testimonial, which is prohibited by applicable law. Mallouk’s conduct, therefore, violates CFA Institute Standard I(A). Mallouk also violated his firm’s policies and procedures by not reviewing the content of the radio host’s commentary. Mallouk and CPI could have directed that the radio host refrain from making a testimonial or providing extraneous commentary to the preapproved ads. Mallouk also could have monitored the station broadcasts or reviewed transcripts of the live spots to ensure that the advertisement met legal requirements. Even if the comments contained truthful and accurate information and the radio host was making those comments of his own volition with no incentive, the type of advertising violated the law. Choice D is the best answer.

This case is based on an 18 September 2018 enforcement action by the US SEC.

Image by Michi S 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.