Ethics Case Study of the Week: Investing for a Higher Cause

By Gary Sarkissian posted 05-23-2022 08:00 AM

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 I(C) Misrepresentation.

Investing for a Higher Cause
Henderson is an investment adviser and a leader in his church who regularly travels on mission trips to a developing country. During these visits, he befriends a bishop of the local church. The local church leader convinces Henderson to form a joint venture for the purpose of allowing individuals in the United States to invest in local securities that fund infrastructure development projects in the country. The local church leader assures Henderson that the securities have the backing of the local government. Henderson agrees to form the joint venture with the local church leader and offers his clients the opportunity to invest in local securities through purchases of shares in the joint venture. His solicitation targets his clients, members of religious organizations with which Henderson is associated, and alumni of the religious university that Henderson attended. Henderson states that he had “been led by the Spirit” to form this joint venture and claims that the investment opportunity will “stir up the apostles, leaders, and evangelists to lead the way in the church and in the world.” He refers to his local partner in the joint venture as a “believer” and an “apostle/tentmaker in his country.” He states that the projects funded by the “government-backed” securities purchased by the joint venture will “help bring the Word to nonbelievers.” Henderson’s actions are

 A. unethical because he appeals to the religious beliefs of individuals to solicit investments.
 B. ethical as long as the investments are suitable for his clients.
 C. unethical because his claims about the securities are misleading.
 D. ethical if he diligently investigates the investment opportunity and has a reasonable basis for the recommendation.
 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 is related to misrepresentation. CFA Institute Standard of Professional Conduct I(C) prohibits CFA Institute members from making any misrepresentations relating to investments. Although the underlying securities purchased by the joint venture may be guaranteed by the local government, clients are buying shares of the joint venture, which are not “government-backed” investments. Also, the claim that the securities are “government backed” does not specify the government involved, potentially implying that it is the US government (which is very likely more creditworthy than the local government). It is not necessarily unethical to market investments as having subjective and tangential religious benefits to potential investors that have a particular interest in achieving those goals. For instance, promoting and selling socially responsible investments to those seeking to invest in assets that advance social or environmental goals is a valid and established investment practice. In this case, although Henderson has diligently investigated the investments and the securities themselves may be suitable for clients, these facts would not remedy or supersede the misrepresentations about the shares of the joint venture being “government backed” that mislead investors about the characteristics or merits of the investment. Choice C is the best response.

This case is based on a US SEC enforcement action from September 2019.

Image by S. Hermann & F. Richter 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.