Ethics Case Study of the Week: Cleaning House

By Gary Sarkissian posted 20 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 Standard IV(C) Responsibilities of Supervisors.

Cleaning House
At the beginning of the year, Ito joined Dachshund Investment Strategies as Head of Trading, responsible for supervising all traders at the firm. One of the traders under Ito’s supervision is responsible for trading futures contracts for clients, including silver and gold futures contracts on the COMEX contract market. Over the course of the previous 18 months, the trader placed hundreds of orders for futures contracts on these commodities, then canceled the orders before their execution with the intent to move the market in a direction favorable to genuine client orders. Ito finds out about the trader’s conduct six weeks into his tenure. He promptly suspends the trader and reports the conduct to the firm’s management committee, shareholders, and regulator as well as the CFA Institute Professional Conduct Program.

In coordination with the firm’s chief compliance officer, Ito conducts an internal review of all aspects of the trader’s activities for the past three years, which reveals the scope of the misconduct. In the ensuing months, Ito leads an overhaul of Dachshund’s systems and controls and implements a variety of enhancements to detect and prevent similar misconduct. As part of this process, Ito hires a compliance consultant to assist in revising the firm’s trading compliance and surveillance programs. Ito develops and implements anti-manipulation training for his traders, stages a series of compliance workshops, establishes a trading compliance risk management committee, creates a new trading compliance program, and builds a new trade reporting and review framework. With respect to Ito’s responsibilities under the CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards), which of the following is most likely true based on the facts presented? Ito

 A. violated the Code and Standards because the trader engaged in misconduct.
 B. failed to appropriately supervise the trader.
 C. inappropriately shared confidential internal information outside the firm.
 D. acted appropriately when confronted with the trader’s misconduct.
 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 Ito’s responsibilities under CFA Institute Standard of Professional Conduct IV(C): Responsibilities of Supervisors, which requires CFA Institute members to make reasonable efforts to ensure that anyone subject to their supervision complies with applicable laws, rules, regulations, and the Code and Standards. In this case, Ito supervised a trader who engaged in market manipulation through “spoof” trades over the course of several months. Arguably, the fact that the misconduct went on so long is an indication that Dachshund’s policies and procedures to prevent this type of fraud by traders were inadequate. But misconduct on the part of an employee under your supervision does not automatically mean that you have violated your responsibilities under Standard IV(C).

In this case, Ito was not responsible for developing those policies and procedures and had only recently been hired. He most likely had not yet had time to become aware of the misconduct or bring any inadequate compliance system to the firm’s attention. When Ito does become aware of the trader’s misconduct, he promptly initiated an appropriate and thorough review to determine the extent of the wrongdoing, reported the misconduct to the appropriate parties, developed and implemented new compliance procedures, engaged in remedial measures, and trained those under his supervision as to the expected and proper standard of conduct. Providing information to entities outside the firm responsible for enforcement of securities regulations and compliance with the CFA Institute Code and Standards is best practice at a minimum and may be required by applicable law. Choice D is the best response.

This case is based on an enforcement action by the US Commodity Futures Trading Commission in October 2019. In recognition of the company’s self-reporting, cooperation, and remediation, the Commission imposed a significantly reduced civil monetary penalty against the firm.

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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.