Ethics Case Study of the Week: When Romance Leads to Conflict

By Gary Sarkissian posted 02-28-2022 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 VI(A) Disclosure of Conflicts.

When Romance Leads to Conflict
Archer is an investment adviser who began his career as a portfolio manager at SR Wealth Management (SRWM). One of his accounts at SRWM was the joint investment account of a young couple. When Archer leaves SRWM to join YC Capital, a competitor, the couple’s account is assigned to another adviser at SRWM. Two years after leaving SRWM, Archer bumps into Lucy, the wife of the couple who was his former client, at a social event. She tells Archer that she and her husband are separated and in the process of divorcing. She also shares that she has been unhappy with the new adviser SRWM assigned to manage the couple’s joint account after Archer left because it has performed poorly, and the fees seem to have increased substantially.

Archer offers to look over the couple’s SRWM account information and statements to see whether there is a problem. He is shocked to see that the investments are not in line with the information in the couple’s Investment Policy Statement, and that there seems to be a high level of turnover in the account. Archer asks Lucy to dinner and shares his thoughts about the issues he has found with couple’s account. After that, Archer and Lucy begin dating. Shortly after beginning the relationship with Archer, Lucy withdraws the bulk of the assets from her and her estranged husband’s SRWM account and opens a personal account at Archer’s new firm, YC Capital, with Archer as the portfolio manager. Archer does not disclose to his employer that he and Lucy are in a relationship. Archer’s actions are

 A. inappropriate because he violates his duty of loyalty to Lucy’s husband as a former client.
 B. inappropriate because he accesses and examines records from his former employer and criticizes a former colleague.
 C. inappropriate because he violates his duty to disclose conflicts of interest by failing to inform his employer about his personal relationship with Lucy.
 D. appropriate.
 E. 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 disclosure of conflicts of interest. CFA Institute Standard VI(A): Disclosure of Conflicts requires CFA Institute members to make full and fair disclosure of all matters that could reasonably be expected to interfere with their duties to clients or employers. In this case, Archer’s personal relationship with his client is a potential conflict that should be disclosed to his employer because he may have an incentive to neglect other advisory clients in favor of Lucy’s account as a way to enhance their relationship.

Archer is not violating confidentiality or any duty to his former employer by examining the investment records of his former client because the client provided those records to him; he did not access them inappropriately. He does not have a duty of loyalty to Lucy’s husband, a former client, because he is no longer his investment adviser. Presumably, Archer understands that Lucy is using joint marital assets to open a personal account, without the consent of her current husband. If Archer knows that Lucy is acting in contravention of the law or a court order or is perpetrating a fraud against her husband in using those assets to open the account, Archer would also be violating Standard I(D): Professional Misconduct, which prohibits members from engaging in any professional conduct involving dishonesty, fraud, or deceit. Without further information indicating any fraud, deceit, or dishonesty, choice C is the best response.

This case is based on facts provided by Tanuj Khosla, CFA, CAIA.

Image by Steve Buissinne 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.