Ethics in Finance Case Studies- Topics 7-12 PDF

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Ethics in Finance Case Studies: Topics 7-Topic 7:Professionalism: Standard I (A) Knowledge of the Law videoKnowledge of the Law:- Members and candidates must understand and comply with all applicable laws, rules, andregulations of any government, regulatory organisation, licensing agency, or profess...

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Ethics in Finance Case Studies: Topics 7-12 Topic 7: Professionalism: Standard I (A) Knowledge of the Law video Knowledge of the Law:!

- Members and candidates must understand and comply with all applicable laws, rules, and regulations of any government, regulatory organisation, licensing agency, or professional association governing their professional activities!

- In the event of conflict, members and candidates must comply with the more strict law, rule or regulation!

- Members and Candidates must not knowingly participate or assist in and must dissociate from any violations of such laws, rules or regulations! Applicable law: the law that governs the investment professional’s conduct! Which laws apply depend on:!

- The nature of the activities ! - Jurisdiction of the relevant law and/or regulator ! CFA institute members and candidates are always subject to the Code and Standards ! Investment professionals must comply with the law and regulatory bodies that govern their activities!

- They are not required to be legal experts! - They must know how to get compliance guidance ! - They must be vigilant in learning about changing laws! The relationship between the Law and the Code and Standards!

- Follow the ‘more strict’ course of conduct! - Stricter laws impose greater restrictions on your action or calls for members to exert a greater degree of action of protect the interests of investors! For CDA Institute Members and Candidates: Summary!

- Code and Standards are always applicable ! - Cannot violate Code and Standards even if the conduct is legal! - Follow the more strict law or regulation! What about if members do business with people that they know are unethical? Investment professionals are responsible for legal and ethical violations of others in which they knowingly participate or assist.!

- If members are unsure, they can seek advice from their compliance department or legal counsel!

- Action: Dissociate from the activity!

Strategies to dissociate from the unethical activity of others

- Discussions with management (then employer)! - Stopping the activity! - Step away from the activity (removing name from reports, asking for a different assignment or refusing to accept or continue to advise an exisiting client)!

- Contacting compliance (supervisors, compliance department)! - Seeking other employment (extreme case)! Reporting

- Report violations of the Code and Standards by members or candidates to the CFA Institute! - Inactivity (not dissociating or reporting) can have negative impacts on the integrity of the market! Report legal and ethical violations to a regulatory authority

- When mandated by law! - On a voluntary basis (whistleblowing)! - When it protects client or public interests! Cases

Colleen White is excited to use new technology to communicate with clients and potential clients. She recently began posting investment information, including performance reports and investment opinions and recommendations, to her Facebook page. In addition, she sends out brief announcements, opinions, and thoughts via her Twitter account (for example, “Prospects for future growth of XYZ company look good! #makingmoney4U”). Prior to White’s use of these social media platforms, the local regulator had issued new requirements and guidance governing online electronic communication. White’s communications appear to conflict with the recent regulatory announcements.! What should White of done: A. Studied the new legal requirements for online communication! B. Checked with her firm’s compliance departments! C. Not engaged in the activity White is in violation of standard I (A) because she her communication does not comply with the exisiting guidelines for the use of social media. ! White should be aware of the changing laws and requirements that are applicable to her industry.! White is not required to be an expert, but should seek knowledge from reliable sources such as outside council, third party service providers or her firms compliance department.

James Collins is an investment analyst for a major Wall Street brokerage firm. He works in a developing country with a rapidly modernising economy and a growing capital market. Local securities laws are minimal—in form and content—and include no punitive prohibitions against insider trading. THE CFA Institute Code and Standards prohibit trading on material nonpublic I(insider) information.! Collins may:! A. Trade on insider information because it is legal where he works! B. Trade on insider information if applicable law allows it! C. Not trade on insider information Collins must abide by the Code and Standards because it is stricter. Kamisha Washington’s firm advertises its past performance record by showing the 10-year return of a composite of its client accounts. However, Washington discovers that the composite omits the performance of accounts that have left the firm during the 10- year period and that this omission has led to an inflated performance figure. Washington is asked to use promotional material that includes the erroneous performance number when soliciting business for the firm. ! Washington should:! A. Bring the error to the attention of her supervisor an the firm’s compliance department! B. Continue to use the misleading advertising and say nothing! C. Leave the firm Misrepresentation of a firms performance is a violation of the Code and Standards. ! She would violate the Code and Standards if she advertised them knowing they have been inflated.! Washington must dissociate herself from the activity ! Compliance Practices 1. Adopt robust compliance policies and procedures business wide!

- Includes procedures for when a violation occurs ! 2. Staying informed through continuing education! 3. Keep current policies of rules, laws and regulations readily available ! 4. Maintain rigorous compliance resources! 5. Provide regular education and training ! Summary

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Required to abide by applicable law! Applicable law is what governs conduct! Nor required to be legal experts; seek consultation! The Code and Standards are always applicable! When in conflict, follow the more strict rule!

- Dissociate from violations by others.!

Professionalism: Standard I (B) Independence and objectivity

- Members and candidates must use reasonable care and prudent judgement to achieve and maintain independence and objectivity in their professional activities!

- Members and candidates 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 or objectivity! Key concepts of Standard I (B)

- Challenges to interdependent and objectivity! - Gifts from clients! - Compromising the independence and objectivity of others! Clients benefit from the independence and objective work and options of investment professionals! Clients expect investment recommendations based on independent thought! Standard I (B) is closely related to Standard VI - Conflicts of Interest! Challenges from various sources:!

- Corporate issuers! - Outside vendors and service providers! - Business or personal relationships Employers! Challenges from Inducements:

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Gifts and benefits! Travel and accommodations! Investment opportunities! Personal relationships! Business relationships ! Compensation! Threats to continuing business!

Gifts from clients can be distinguished from gifts or consideration from those seeking to influence to the detriment of clients.

- Considered supplemental compensation! - Reward fro a good job versus seeking an advantage over other clients! - Should be disclosed to the employer!

Cannot compromise the independence and objectivity of other investment professionals

- Gifts beyond the normal course of business! - “Pay-to-Play”!

Davis, an analyst fro an asset management firm, attends a presentation for securities analysts at the headquarters of a manufacturing company. The analysts are very impressed with the presentation and asks the CEO many questions. After the meeting, the Head of Investor Relations invites all analysts to a club house for dinner and karaoke. Most of the other analysts accept the invitation.! Davis should:! A) Accept the invitation! B) Accept the dinner but not karaoke ! C) Decline the invitation

Edward Grant directs a large amount of his commission business to a New York-based brokerage house. In appreciation for all the business, the brokerage house gives Grant two tickets to the World Cup in South Africa, two nights at a nearby resort, several meals, and transportation via limousine to the game. ! Grant should::! A) Not accept the tickets and travel accomodations! B) Accept the tickets and travel accommodations! C) Accept and disclose receipt of the tickets and travel accomodations to his employer

Theresa Green manages the portfolio of Ian Knowlden, a client of Tisbury Investments. Green achieves an annual return for Knowlden that is consistently better than that of the benchmark she and the client previously agreed to. As a reward, Knowlden offers Green two tickets to Wimbledon and the use of Knowlden’s flat in London for a week. ! Green should:! A) Not accept the tickets and travel accomodations! A) Accept the tickets and travel accommodations! B) Accept and disclose receipt of the tickets and travel accomodations to her employer

Mandel, CFA oversees a team of investment professionals who manage labor union pension funds. Mandel seeks to win a competitive asset manager search to manage a significant allocation of the pension fund of the United Doughnut and Pretzel Bakers Union (UDBU). To improve Mandels chances of winning the competition, Mandel made significant monetary contributions to Gomez’s union reelection campaign fund. Even after UDBU was hired as a primary manager of the pension, Mandel continued to contribute to Gomez’s reelection campaign chest as well as to entertain lavishly the union leader and his family at top restaurants on a regular basis. All of Mandel’s outlays were routinely handled as marketing expenses reimbursed by UDBU expense accounts.! Mandel’s actions are! A) A violation of Standard I (B)! B) Routine to client development expenses! C) Acceptable if approved in advance by his firm

Compliance practices 1. Adopt robust compliance policies and procedures regarding gifts, travel reimbursements, and specs cost arrangements! 2. Report personal investments! 3. Disclose personal or business relationships! 4. Manager compensation arrangements! Summary

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Required to maintain independence and objectivity! Challenges can come from many sources! Challenges can be gifts, benefits, compensation, or threats to withhold business! Gifts from clients may be accepted under certain circumstances with disclosure! Cannot compromise the independence and objectivity of others! Professionalism: Standard I (C) Misrepresentation

Members and candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities. ! Key concepts:

- False statements or omission of facts! - Variety of sources and topics ! - Plagiarism! False statements or omission of facts

- False statements farm investors, destroy trust, and damage market integrity ! - Misrepresentation means a statement omission that is misleading!

- ‘Knowingly’ - you know or should know! Misrepresentations can be found in a variety of places

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Written materials! Oral communications! Electronic communications! Webpages! Social media!

Common topics for potential misrepresentation

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Qualifications/Credentials! Services/Capabilities! Performance record! Investment characteristics/guarantees! Professional activities/CFA designation! Third-party materials!

Plagiarism is misrepresentation

- Using material without acknowledgement ! - Presenting other’s work as your own! - Employer can determine attribution for work done on behalf of the firm!

Claude Browning, a quantitative analyst for Double Alpha, Inc., returns in great excitement from a seminar. In that seminar, Jack Jorrely, a well publicized quantitative analyst at a national brokerage firm, discussed one of his new models in great detail, and Browning is intrigued by the new concepts. He proceeds to test this model, making some minor mechanical changes but retaining the concept, until he produces some very positive results. Browning quickly announces to his supervisors at Double Alpha that he has discovered a new model and that clients and prospective clients alike should be informed of this positive finding as ongoing proof of Double Alpha’s continuing innovation and ability to add value. ! Browning’s conduct is:! A) Acceptable because he paid for the seminar to obtain new investing ideas! B) Acceptable because he made changes to Jorrely’s model! C) Unacceptable

McGuire includes in his firm’s marketing materials some ‘plain language’ descriptions of various concepts, such as the price-to-earnings (P/E) multiple and why standard deviation is used as a measure of risk. The descriptions come from standard reference sources.! McGuire:! A) Can copy the material word for work from the reference course! B) Can use the reference material but must describe the concepts in his own words ! C) Must acknowledge the author of the source material

Swanson runs a small investment advisory firm that manages both equity and fixed-income strategies for his clients. He advertises on the firm’s website that his firm provides these management services. The team of investment professionals that runs the fixed-income strategy for Swanson leaves to join a competitor. Until he can hire a replacement ream , Swanson engages a sub advisor to manage his clients’ fixed-income investments. He makes no changes to the firms website. ! Swanson:! A) Must update the website to note the changes! B) Does not need to update the website because the investment strategies remain the same! C) Does not need to update the website if the sub advisor is as qualified as the departed employees

Paul Ostrowski runs a small, two- person investment management firm. Ostrowski’s firm subscribes to a service from a large investment research firm that provides research reports that can be repackaged as in- house research from smaller firms. Ostrowski’s firm distributes these reports to clients as its own work. ! Ostrowski:! A) Cannot plagiarise the reports but including them in the blog! B) Must attribute the research to its source! C) Cannot misrepresent his capabilities by sharing research he has not produced

Compliance practices

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Be honest about credentials, capabilities, investments and performance history! Exercise care when using third-party information ! Disclose the use fo external managers/services! Acknowledge sources! Review communications/websites for updates!

Summary

- Prohibits making any misrepresentations!

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Can be statements or omissions! Can be in oral, written, or electronic communication! Avoid plagiarism! Acknowledge sources and reliance on third-party information or services! Professionalism: Standard I (D) Misconduct

Members and candidates must not engage in any professional conduct involving dishonesty, fraud or deceit or commit any act that reflects adversely on their professional reputation! Key concepts

- Conduct that negatively reflects on professional integrity, good reputation, or competence! - Professional reputation! - Legal conduct versus professional competence ! Examples of professional misconduct: 1. Filing fraudulent reimbursement requests! 2. Abusing alcohol in the workplace! 3. Harassing colleagues or staff! 4. Abusing legal or professional regulatory entities ! Conduct not covered by the Standard:

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Political activism! Personal financial stress! Minor legal infractions unrelated to professional responsibilities! Private contractual disputes! Personal conduct if related to dishonesty, fraud, or deceit !

Simon Sasserman is a trust investment officer at a bank in a small affluent town. He enjoys lunching every day with friends at the country club, where his clients have observed him having numerous drinks. Back at work after lunch, he clearly is intoxicated while making investment decisions. His colleagues make a point of handling any business with Sasserman in the morning because they distrust his judgment after lunch. ! Sasserman’s conduct! A) Raises questions about his professional integrity and competence! B) Is acceptable because it takes place on his lunch break! C) Is a personal matter

Carmen Garcia manages a mutual fund dedicated to socially responsible investing. She is also an environmental activist. As the result of her participation at non-violent protests, Garcia has been arrested on numerous occasions for trespassing on the property of a large petrochemical plant that is accused of damaging the environment. ! Garcia’s conduct:! A) Damages her professional reputation! B) Does not rise to the level of professional misconduct! C) Is related to her professional responsibilities

Vargas and Anderson regularly work on projects that require them to work late after their coworkers leave the office. At first their evening conversations focused on their work. But overtime, Anderson asks Vargas about her personal and dating life. His comments become more personal, including compliments about her clothing and appearance, and he asks Vargas to join him for late dinners after they are done working. ! Anderson’s conduct is:! A) Acceptable because personal relationships are not covered by Standard I (D)! B) Acceptable if Anderson is not in a supervisory role! C) A violation of Standard I (D)

Summary

- Refrain from any conduct that calls into question your reputation for integrity and competence ! - Standard not meant to address purely personal behaviour ! - The legality of conduct is not necessarily determinative of whether covered by Standard I (D)...