Ethics Case Study of the Week: Time Saver

By Gary Sarkissian posted 08-15-2022 08:00 AM

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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 among industry participants.

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 ethics case to help reinforce the code and standards. 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.

Time Saver
Charlotte McGreevy was recently hired from graduate school for an equity analyst role at BLSH Capital, an investment manager that invests primarily in technology sector companies. As part of her coverage assignment, McGreevy will need to research the semiconductor industry and present her findings and recommendations to BLSH’s investment committee.

McGreevy began performing her research with the assistance of her associate Chad Farley. Farley, however, later became sick with the flu and was unable to come to work, leaving McGreevy to finish her research report on her own. Unable to locate Farley’s charts and written summaries, McGreevy decided to avoid “reinventing the wheel” by using content from a recently published industry primer report by 80-86 Securities, for whom BLSH was a client. From 80-86’s report, she incorporated various charts and tables, and even copied an industry glossary verbatim into her report. She also replicated most of the recommendations written by the analyst of that report. The charts and tables included attribution to 80-86, but the industry glossary and recommendations did not.

McGreevy later presented her report to BLSH’s investment committee. The firm’s CIO, who also sits on the committee, applauded McGreevy for her analysis and conclusions.

Which of the following statements is correct?

A. McGreevy violated only standard I(B) Independence and Objectivity, as she used an outside firm’s opinion rather than her own.
B. McGreevy violated both standards I(B) Independence and Objectivity and V(A) Diligence and Reasonable Basis.
C. McGreevy violated standard I(C) Misrepresentation.
D. McGreevy did not violate the code and standards.
E. None of the above statements is correct.

What do you think is the correct choice? The “Analysis” section below will walk through the reasoning and provide the correct answer. Also, 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.

Analysis
This case relates to both standards I(C) Misrepresentation and V(A) Diligence and Reasonable Basis. Standard I(C) states that “Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.” This includes plagiarism, which, according to CFA Institute’s standards of practice guidance, is defined as “copying or using in substantially the same form materials prepared by others without acknowledging the source of the material or identifying the author and publisher of such material.” While the case does state that McGreevy’s report included attribution to 80-86 for its charts and tables, it did not do so for the industry glossary and investment conclusions.

In addition, it was incumbent on McGreevy to do her own due diligence before presenting her recommendation to the investment committee. Standard V(A) Diligence and Reasonable Basis applies to the use of secondary or third-party research, and the standards of practice guidance states that “[i]f members and candidates rely on secondary or third-party research, they must make reasonable and diligent efforts to determine whether such research is sound.” Based on the facts presented in the case, McGreevy was pressed for time after Farley became sick and decided to rely on 80-86’s research report to help construct her own report without spending the time to review the soundness of 80-86’s analysis.

Answers A and B misapply standard I(B), which states that practitioners must maintain independence and objectivity and “must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.” The best answer is C.

This case was written by Gary Sarkissian, CFA

Image by Gino Crescoli from Pixabay

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