Ethics Case Study of the Week: Suspending On-Site Due Diligence

By Gary Sarkissian posted 05-16-2022 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 Standards V(A) Diligence and Reasonable Basis and V(B) Communication with Clients and Prospective Clients.

Suspending On-Site Due Diligence
In the past, Yoon, a research analyst covering the global travel and lodging industry, has routinely met with the management of companies that she covers and visited their facilities prior to drafting and updating her research reports. Yoon considers it critical to her work to gain first-hand knowledge of the management and facilities and obtain feedback from employees and guests of the properties. Because of restrictions on travel and in-person gatherings brought on by a global pandemic, she is not able to conduct the type of thorough research she has conducted in the past. Nevertheless, Yoon’s employer is demanding constant updates on her research given the swiftly changing environment for this industry. Yoon should

 A. provide only factual information about the companies and refrain from any analysis until she can resume her normal research practices and form a detailed and well researched opinion.
 B. conduct her research as best she can given the restrictions and disclose any issues in her report.
 C. provide no information on how she conducts her research because that information is proprietary information of the firm.
 D. continue to provide research but make no mention of how the research process has been affected by the travel restrictions.
 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

CFA Institute Standard V(A): Diligence and Reasonable Basis requires CFA Institute members to exercise diligence, independence, and thoroughness as well as have a reasonable and adequate basis supported by appropriate research and investigation for making investment recommendations or taking investment action. Yoon’s well-established routine and procedures for conducting analysis of the global travel and lodging industry are disrupted by the global pandemic. Steps she normally takes to thoroughly analyze her investment recommendations are now prohibited. Although she could refrain from undertaking any analysis until her high standards of investigation can be resumed (A), that is likely not practical given the uncertainty of when the restrictions will be lifted and the demands of her employer.

Standard V(B): Communication with Clients and Prospective Clients requires members to disclose the basic format and general principles of the investment processes they use to analyze investments and select securities. Although Yoon does not have to provide the minute detail of her research process that would give away confidential or proprietary information, she must disclose the basic process for conducting her research. Therefore, the course of conduct in Choice C would not be an option. If she continues to provide research and recommendations without any mention about the change in process for conducting that research and that her in-person capabilities have diminished (D), that would violate Standard V(B), which requires CFA Institute members to disclose any changes that may materially affect the investment process they use to analyze investments and disclose any limitations and risks associated with the process. Given the facts, Yoon’s best course of action is Choice B, which is to conduct her research as best she can given the restrictions and disclose any issues in her report.

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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.