Ethics Case Study of the Week: Pick Me! Pick Me!

By Gary Sarkissian posted 02-07-2022 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 IV(B): Additional Compensation Arrangements.

Pick Me! Pick Me!
Estevez is a senior research analyst with BIR, a boutique investment research firm that covers micro and small-cap companies. These companies hire BIR to provide research coverage to promote their stock to investors who otherwise might not be aware of them. Because of BIR’s stellar reputation, its research services are in heavy demand by both investors and those companies seeking to get on investors’ radar. Estevez helps BIR select the companies that should receive coverage and also oversees a team of junior analysts who conduct the research. Some companies encourage Estevez to select their company for research by providing her a separate bonus if they are included in the BIR research universe. Estevez’s actions are

 A. unacceptable because her independence and objectivity in conducting the research are compromised if the research is solicited and paid for by the covered company.
 B. acceptable as long as Estevez does not use material nonpublic information from the company.
 C. unacceptable if Estevez’s compensation from BIR is tied to the specific findings of the report.
 D. acceptable as long as her company approves offered payments from covered companies.

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

The facts of this case relate to CFA Institute Standard IV(B): Additional Compensation Arrangements, which requires members to obtain written consent from their employer when they accept any gift, benefit, or compensation that might reasonably be expected to create a conflict of interest with their employer. In this case, Estevez receives a benefit from companies that are selected by BIR to receive research coverage. Because Estevez is involved in the process of choosing the companies that BIR agrees to research, that presents a conflict of interest because she might favor those companies that pay her the bonus.

Issuer-paid research itself is not automatically unethical and does not automatically compromise the analyst’s independence and objectivity. But this area is fraught with conflicts, so important safeguards must be in place. BIR must adopt strict procedures protecting the inviolability of the analyst’s opinion from influence by the company. Such safeguards must also include full disclosure of any conflicts of interests on the part of the analyst conducting the research, full disclosure of any compensation arrangements, including the source of the payment for the research, and policies that disconnect the findings of the research from the level or nature of the payment. In this case, Estevez would have to disclose to her company that she is receiving the benefit from the issuer and BIR would have to disclose to the users of the report that the company paid Estevez the bonus and is paying for the research. The research could be considered independent and objective if Estevez did not use material nonpublic information from the company and if BIR’s compensation for the research from the company was not tied to the specifics of the report. But even if that was the case, it would not alleviate the issue of Estevez accepting bonuses from the covered companies without informing her employer. Choice D is the best answer, although it is incomplete because full disclosure is needed as well.

Image by Arek Socha 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.