Ethics Case Study of the Week: Working for Father

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 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.  


Working for Father
Sasha Denikin begins his investment career as a research analyst for Galaktika Investment Partners, a company founded, operated, and controlled by his father, Franz Denikin. After several years, the elder Denikin transfers ownership of Galaktika to Sasha and his brother, but Franz communicates to clients that he retains management of all client accounts. Sasha and his brother become directors of the company, and Sasha is promoted to chief compliance officer (CCO) when the long-time CCO announces her retirement.

Prior to his promotion, Sasha had no previous compliance experience or responsibilities. The plan is for the long-time CCO to retain compliance responsibilities as a consultant while mentoring Sasha and providing him with on-the-job training. Despite his title, Sasha has no actual authority to supervise his father’s conduct because Franz Denikin exerts absolute control over Galaktika. Sasha does not have permission to contact clients or review Galaktika communications with clients because his father insists that all contact with clients go through him. During his tenure as CCO, Sasha raises multiple compliance issues with his father regarding his father’s actions. But Sasha is powerless to enforce company policies and procedures with respect to his father’s conduct. Sasha continues to serve as Galaktika CCO until he resigns in frustration to take a position with another investment company. Sasha Denikin’s actions are

A. unacceptable.
B. acceptable because the long-time CCO who Sasha is being trained to replace continues to retain some responsibility for firm compliance.
C. acceptable because Franz Denikin holds the actual power and client responsibilities at the firm and thus cannot be under the supervision of a subordinate.
D. acceptable because Sasha quits his job as CCO and resigns as director when he is frustrated by the inability to exercise his compliance responsibilities.
E. none of the above.


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 represents a failure on the part of Sasha Denikin to properly exercise supervisory responsibility. CFA Institute Standard IV(C): Responsibilities of Supervisors requires CFA Institute members to make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the CFA Institute Code of Ethics and Standards of Professional Conduct. CFA Institute members with supervisory responsibility must make reasonable efforts to prevent and detect violations by ensuring the establishment of effective compliance systems. If they clearly cannot discharge supervisory responsibilities because of an inadequate compliance system, they should decline in writing to accept the supervisory responsibility until the firm adopts reasonable procedures to allow adequate exercise of supervisory responsibility.

Sasha Denikin knows that he is unqualified to serve as CCO of Galaktika, but he still accepts the role. Serving as CCO means that Sasha has supervisory responsibility over all firm employees related to compliance matters. His father’s status as the founder and true driving force of the company does not exempt him from oversight by the CCO. But Sasha has difficulty discharging his duties because the firm’s policies and procedures gives him no real power over his father to ensure that his father’s conduct complies with internal policies and regulatory rules and regulations. Sasha knows that his father is ignoring firm rules, but even though he is CCO and a director of the company, Sasha has no authority or ability to supervise and control Franz Denikin’s conduct.

Although the prior CCO attempts to mentor Sasha while training him to grow into the role, Sasha accepts the role of CCO and its incumbent responsibilities despite a lack of compliance education and expertise. If Sasha is unable to discharge his responsibilities because of an inadequate compliance system or lack of experience, he should refuse the CCO role until fully trained and Galaktika adopts effective procedures to allow his exercise of supervisory responsibility over his father. Sasha chooses to quit the CCO job and resign from the firm only after he failed to adequately exercise his supervisory responsibilities for a significant period of time in which clients’ interests were likely harmed. Choice A is the best response.

This case is based on an enforcement action by CFA Institute Professional Conduct against a CFA Institute member and charterholder. The case resulted in a decision by a Disciplinary Review Panel to impose a five-year suspension of membership and the right to use the CFA designation.



Image by mohamed Hassan 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.

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