Ethics Case Study of the Week: Company Transparency During a Global Pandemic

By Gary Sarkissian posted 26 days ago

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 Standards V(B) Communication with Clients and Prospective Clients, I(C) Misrepresentation, IV(A) Duties to Employers: Loyalty, and II(B) Market Manipulation.

Company Transparency During a Global Pandemic
Because of a global pandemic, which has severely limited the demand for its products, Everett Inc., a major sports equipment manufacturer, has shut down its operation and laid off 90% of its employees. But the government is considering invoking its emergency powers and contracting with the company to make desperately needed medical equipment. A team of Everett’s engineers is working on retooling the machines at the company’s manufacturing plant. In addition, if and when regular product production is resumed, the company will be eligible to receive low cost loans under a government stimulus plan that could greatly affect Everett’s long-term financial position. Jabari, the company’s chief financial officer (CFO), is responsible for investor relations as well as managing the company’s employee pension plan. He is wrestling with how to address all of this information and different potential outcomes in disclosures to investors. Jabari should

 A. refrain from providing any information because the future is uncertain.
 B. disclose the potential government contract and that Everett’s engineers are working on transforming the company’s manufacturing capabilities.
 C. express confidence to investors that, in his opinion, the low-cost government loans will result in minimal disruption to the company’s past profitability projections.
 D. protect investor interests by aggressively touting Everett’s long-term financial prospects to keep the stock price from collapsing.
 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.

One of the fundamental ethical principles for investment professionals is transparency. This principle is embodied in a number of CFA Institute Standards of Professional Conduct, including Standard V(B): Communication with Clients and Prospective Clients and Standard I(C): Misrepresentation. Under these Standards, CFA Institute members must disclose basic information about investments, disclose significant limitations and risks, identify factors that are important to investment analysis, distinguish between fact and opinion, and most importantly, not misrepresent any facts related to investment analysis or their professional activities. At the same time, CFA Standard IV(A): Duties to Employers – Loyalty prohibits CFA Institute members from divulging confidential information about their employer, and Standard II(B): Market Manipulation prohibits members from engaging in practices that distort security prices with the intent to mislead market participants.

In this case, one of Jabari’s responsibilities as CFO of Everett is to provide information about the company to investors and the securities markets so they can make informed investment decisions. Refraining from providing any information about the company (A) will likely not satisfy investors or the financial markets and lead to negative financial consequences for Everett. Although the potential government contract and knowledge that Everett engineers are working on retooling the company’s machines to manufacture medical personal protective equipment is factual (B), Jabari must make sure that this information about the early stages of an enormous new business initiative is not confidential or material nonpublic information. Such information should be disclosed only when it is timely to give to investors generally.

And although the existence and eligibility of Everett for the low-cost government loan program (C) is apparently publicly known, Jabari’s opinion about whether the company takes advantage of this program, the amount of money borrowed, and how the funds will affect Everett’s bottom line seem at this point to be both opinion and speculative. Protecting investor interests and the interests of Everett employees and retirees by maintaining the company’s stock price (D) is a worthy goal. But doing so by circulating false and misleading information in an effort to manipulate the stock price is unethical and a violations of CFA Institute Standard II(B). Although it may be difficult in the uncertain and challenging times, Jabari must work to come up with a balance between helpful, factual information and informed information about the future without disclosing confidential information or overly building up Everett’s financial prospects in a way that could be seen as manipulating the company’s stock price. Under the facts provided, Choice E is the best response.

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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.