Ethics Case Study of the Week: Providing Investment Research to Clients

By Gary Sarkissian posted 07-10-2022 13:49

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 III(B) Fair Dealing.

Providing Investment Research to Clients
Scherzer is the head of research at a large investment management firm. He publishes monthly “Recommendation Update Reports” on the firm’s investment recommendations. These reports clarify whether the firm has changed any of its investment recommendations. The reports are sent to clients via email on the first Friday of the month and posted on the firm’s website the following Monday. The internal policy of the firm is that any change in recommendation can only be made once a month through this report. Scherzer also publishes weekly reports with information gathered by analysts that may implicitly signal a future change in recommendation or lead a reader to infer that a recommendation will be changed in the next monthly report. Although the monthly “Recommendation Update Reports” are sent to all clients, those clients that want to see the weekly publication must pay a fee of $1,000 per year. This option is available to any client and is fully disclosed as part of every client agreement. To comply with the CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards) Scherzer is required to

 A. do nothing because his actions comply with the Code and Standards.
 B. publish the monthly reports on the firm’s website at the same time it is sent to clients.
 C. send the weekly reports to all clients at no additional charge.
 D. restrict communication about investment recommendations to the monthly reports because that is when a recommendation is provided.
 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 fair dealing among clients. CFA Institute Standard III(B): Fair Dealing requires CFA Institute members to deal fairly and objectively with all clients when providing investment analysis and making investment recommendations. The Standard requires that information about investment recommendations be disseminated in such a manner that all clients have a fair opportunity to act on the information. Scherzer distributes the recommendation update reports to all clients simultaneously via email, giving each an opportunity to act on the information. The Code and Standards do not require Scherzer to publish the reports to the public on the firm’s website. Scherzer is also not limited by the Code and Standards to communicating with clients about investments only when an investment recommendation is provided and can provide updated or clarifying information to clients as appropriate. The Code and Standards allow CFA Institute members to provide more personal, specialized, or in-depth service to clients who are willing to pay for premium services through additional fees, as long as those services do not disadvantage other clients who do not pay additional fees, the differing levels of service are disclosed to clients, and the services are made available to all. Choice A is the best response.

This case is based on a question sent to the CFA Institute Ethics Helpdesk.

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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.