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Ethics Case Study of the Week: Inadvertent Billing Errors

By Gary Sarkissian posted 03-07-2022 14:33

  
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(C) Responsibilities of Supervisors.


Inadvertent Billing Errors
Olsen is president and CEO of RCS, a registered investment adviser. RCS offered clients an advisory fee between 0.4% and 1.5% of their assets under management based on fee breakpoints described in its fee schedule. The schedule reduced the advisory fee as a client’s assets under management increased.  RCS’s fee schedule was incorporated by reference in client advisory agreements, distributed to clients upon request, and disclosed in RCS’s regulatory disclosure filings. RCS’s written policies and procedures manual stated that RCS was to conform its client fees and fee billing practices to those described in the regulatory filings in the advisory agreements provided to clients. In certain instances, however, RCS failed to apply the breakpoint discounts. As a result, RCS improperly calculated advisory fees and thereby overcharged certain clients. As president and CEO, Olsen

 A. met his ethical responsibilities if he delegated responsibility for billing and fees to competent personnel in RCS’s accounting department.
 B. met his ethical responsibilities if he made certain that appropriate policies and procedures were in place to ensure that RCS properly billed its clients.
 C. met his ethical responsibilities if the erroneous billing was the result of clerical error and inadvertent.
 D. failed to meet his ethical responsibilities.
 E. none of the above


What do you think is the correct answer?  The analysis for this case is shown below.  Feel free to discuss in the comments as well.  The completion of this case qualifies for 0.25 hour of Standards, Ethics, and Regulation (SER) credit.

Although the harm to clients and the misconduct of the firm is clear, the facts and answer choices examine this case from the perspective of Olsen’s supervisory responsibility. CFA Institute Standard of Professional Conduct IV(C): Responsibilities of Supervisors requires members to make reasonable efforts to ensure that those subject to their supervision or authority comply with applicable law and ethical responsibilities. As president and CEO, Olsen has overall accountability for the conduct of the firm and is ultimately responsible for compliance with applicable legal requirements and fulfilling the firm’s ethical duties to clients. As the leader of RCS, he may delegate these responsibilities to competent and knowledgeable subordinates. Whether conduct constitutes reasonable supervision in compliance with Standard IV(C) is determined by the facts or circumstances of each particular case.

Delegation of billing functions to competent personnel alone does not absolve Olsen of his supervisory responsibility. At a minimum, Olsen should have made reasonable efforts to prevent and detect violations by ensuring the establishment of effective compliance systems. At the same time, ignoring or not properly implementing compliance policies and procedures could result in a violation of the Standard because of the failure to supervise. The occurrence of inadvertent errors may not indicate improper structure or application of billing policies and procedures but could be a red flag indicating the existence of ineffective policies or sloppy, error-prone work that should be addressed through adequate supervision. The CFA Institute Ethical Decision-Making Framework calls on those seeking to engage in ethical conduct to identify the relevant facts to determine the appropriate course of action. In this case, although the firm’s actions harmed clients and resulted in liability for regulatory violations, the facts given are insufficient to allow a definitive determination of whether the overcharging of clients was a result of inadequate supervision by Olsen. Choice B is the best answer.

This case is based on a US SEC Enforcement Action from November 2018.



Image by mohamed Hassan from Pixabay


© 2019 CFA Institute. All rights reerved. 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.

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