CFA Level 1 - Ethics and Standards
Standard IV consists of three subsections:
Standard IV-A: Loyalty
Standard IV-B: Additional Compensation Arrangements
Standard IV-C: Responsibilities of Supervisors
Why Are CFA Charterholders recommended to inform employers on ethical standards?
One of the core purposes of the CFA Institute is to promote ethical awareness throughout the securities, investment research and financial management (and related) industries.
While CFA Members and Candidates are obligated to follow these principles, nonmembers may not be aware of their existence and may be unwittingly breaking certain provisions of the Code and Standards. Any violation can be potentially harmful to all employees of the firm, including CFAs who would be forced to explain why their company wasn't following the same guidelines that they had pledged to follow as members of the CFA Institute.
The CFA Institute hopes that by recommending to its Members and Candidates that they disseminate the Code and Standards to more senior coworkers, the ethical principles captured in the Code and Standards will be adopted as a minimum rule of conduct and will enhance ethical awareness, honesty and personal conduct throughout an organization.
Many firms, large and small, have internal guidelines and expectations for their employees - the CFA Institute gives a ready roadmap that it hopes every organization will embrace.
Since CFA Members and Candidates often have coworkers (with greater seniority) that are also CFA Institute members, there's often a belief that this Standard is already fulfilled since "someone else must have taken care of it". Instead, all Members and Candidates should take personal responsibility to investigate whether the Code and Standards are incorporated into their firm's internal compliance program.
Distinction between "Required" and "Recommended"!
For example, one does not need to distribute the Code and Standards throughout the firm and request an RSVP from everyone. Nice idea, but it's not required. An exam situation might present a CFA member who complied with a required part but one of the answer choices might suggest he is in violation because he didn't follow through on a recommended action. That would be a wrong answer. Failing to act on required parts of Standards is a violation. Failing to act on recommended parts is not.
Standard IV-A: Loyalty
In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.
Reasoning behind Standard IV-A
In the eyes of the CFA Institute and its membership, ethical standards involve a measure of loyalty to the person or the entity that is "signing the paycheck". Unlike some other practices that are commonly regarded by society as unethical (such as lying, stealing or showing up to work intoxicated), the principle of loyalty to one's employer is the subject of debate - and legitimately so, given that loyalty is not always given back in return (as anyone who's been downsized or separated surely knows).
Indeed, the very wording of Standard IV-A is done under the premise that certain employees will at some point put their own interests ahead of their loyalty to the firm. Given that these situations are inevitable, the Standard seeks to guide those individuals into making principled choices that ultimately protect the interests of the employer, while at the same time reflecting well on that individual and on the profession.
Standard IV-A is sometimes misunderstood, with critics pointing out that the Standard places an unfair burden on members who aren't always out to do harm to their employer. A member may merely be trying to be enterprising, or may be providing a service to a modest core of trusted clients - who all too often are loyal to that individual for what he or she can do, and are not particularly concerned with the firm with which this person is currently affiliated. With that qualifier in place, the following activities might be seen as a violation:
Distinction between "Required" and "Recommended"!
For example, one does not need to distribute the Code and Standards throughout the firm and request an RSVP from everyone. Nice idea, but it's not required. An exam situation might present a CFA member who complied with a required part but one of the answer choices might suggest he is in violation because he didn't follow through on a recommended action. That would be a wrong answer. Failing to act on required parts of Standards is a violation. Failing to act on recommended parts is not.
Standard IV-A: Loyalty
In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.
Reasoning behind Standard IV-A
In the eyes of the CFA Institute and its membership, ethical standards involve a measure of loyalty to the person or the entity that is "signing the paycheck". Unlike some other practices that are commonly regarded by society as unethical (such as lying, stealing or showing up to work intoxicated), the principle of loyalty to one's employer is the subject of debate - and legitimately so, given that loyalty is not always given back in return (as anyone who's been downsized or separated surely knows).
Indeed, the very wording of Standard IV-A is done under the premise that certain employees will at some point put their own interests ahead of their loyalty to the firm. Given that these situations are inevitable, the Standard seeks to guide those individuals into making principled choices that ultimately protect the interests of the employer, while at the same time reflecting well on that individual and on the profession.
Standard IV-A is sometimes misunderstood, with critics pointing out that the Standard places an unfair burden on members who aren't always out to do harm to their employer. A member may merely be trying to be enterprising, or may be providing a service to a modest core of trusted clients - who all too often are loyal to that individual for what he or she can do, and are not particularly concerned with the firm with which this person is currently affiliated. With that qualifier in place, the following activities might be seen as a violation:
- Misappropriation of trade secrets- that is, taking the methods used to build a clientèle at the current firm and applying the same techniques to compete for the same clients
- Misuse of confidential information
- Discussing the new firm with numerous coworkers and offering all of them jobs at the new shop, igniting a mass resignation
- Soliciting the current client base for services at the new business while still employed at the old place
- Misappropriating client lists, property or information
- A breach of contract between the employer and employee (particularly if it regards provisions of a signed non-compete contract)
Definitions as They Apply to Standard IV-A
- Practice - Any service currently available (for remuneration) at the individual's firm. Thus, if a CFA member is employed at an investment advisor and is hired to write the ethics section of a CFA Level I study guide, he or she would not be violating Standard IV-A, since his or her employer does not publish CFA study guides.
- Undertaking Independent Practice - "Actually engaged in competitive business" should be distinguished from "making preparations" to begin independent practice. An individual is free to prepare for a new independent venture, as long as the preparations do not involve any of the activities listed above (and, in particular, don't actively solicit clients). As noted previously, each circumstance is unique - actions must remain consistent with the duty to be loyal to one's employer.
Actual earned and collected compensation is not necessary to violate this Standard. Many people violate the Standard but claim (as a defense) that no fees have been collected or earned. If activities could eventually result in compensation - that is, if the intent is to lay the groundwork for a new affiliation that will eventually net that person compensation - then the activities could be judged under the guidelines of this Standard.
Applying Standard IV-A
The following questions should be considered when applying the Standard:
- What sort of relationship does the CFA Member or Candidate have with the employer, and what is the agreement under this relationship? In the investment business, a firm will retain some employees merely as independent contractors. In addition, some independent contractors have relationships with multiple firms. In these cases, the duty to loyalty is likely to be more narrowly defined than it must be for a full-time employee. What is the degree of control that a firm has over the employee?:
- How many hours are worked and at what location?
- Does the member take other independent contracting jobs or is he or she searching for full-time work?
- What is the relationship between the independent contractor and any of the firm's clients?
- Duties within an independent contractor's relationship are best to be specified in a carefully defined agreement (preferably written), after which the independent contractor is bound by those terms.
- What if the practice is unsolicited and benefiting a friend or neighbor? Take an example of a portfolio manager and CFA charterholder, Ben Wilson, who starts by offering his neighbor Lisa Green, who has limited experience with financial planning, free portfolio advice on a large inheritance she just received. Since Ben's advice did not result in compensation, and none was expected, there is no violation. Soon thereafter, Lisa asks Ben to take a look at the 401(k) plan of her company, which has just fired its previous money manager. Ben develops a financial plan and is compensated at a rate 20% lower than that given to the previous manager. Even with the discount, Ben must obtain written consent from two parties to continue the arrangement: his current employer and Lisa's employer. Failure to obtain written permission violates Standard IV-A.
- Has written consent been obtained? Standard IV-A provides that Members and Candidates have fully complied with their duty to their employer as long as all competing business arrangements are fairly represented and fully disclosed, in writing, to the employer, as well as to the individual or entity that the outside practice will benefit. Both the employer, and the additional outside beneficiaries of the member's work, must agree to the arrangement.
- What is the duty owed by a CFA Member or Candidate who is part time, an independent contractor or a college intern, and is openly seeking full-time employment elsewhere? For example, take the hypothetical case of Matt Miller, a CFA candidate who was serving as an unpaid summer intern for an institutional money manager. Matt assists the analysts in the research department by writing reports on potential stock ideas, focusing on telecommunications stocks. He also obtains access to the firm's proprietary stock-screening tools. Near the end of Matt's internship, he accepts a job as a telecom analyst for a brokerage, which he landed in part due to the work as an intern (Matt had discussed the internship in detail in the interview). Since the internship was highly educational and since the work done there can directly help him get started at the full-time job, Matt copies all of the research reports, stock screening models and related spreadsheets. Has Matt violated the Duty to Employer Standard? In this case, Matt received no monetary compensation for his efforts, but, in regard to the application of the Standard, Matt did receive benefits in terms of relevant work experience and shared knowledge with the analysts of the firm. Since he benefited, he is considered an employee - and since he is an employee, he is bound by the duty of loyalty to his employer. To fully comply with Standard IV-A, Matt will need to obtain written permission from the firm that provided the summer internship in order to use all reports and financial models created or used in the course of the internship.
- What About Whistle blowing? Protecting the integrity of the capital markets and individual client interests runs paramount to a member’s or candidate’s personal interests, or their loyalty to the firm. If an employer is engaged in illegal or unethical activities, and a member or candidate refuses to comply because it would go against what’s best for the markets or clients, then violating standard IV(A) may be justified (as long as the motive is not personal gain). Members and candidates should understand their company’s policies on whistle blowing and encourage the adoption of best practices.
How to Comply
1. Provide a written statement describing the relationship, the type of service, the expected duration and the expected compensation.
2.Do not render services until written consent from employer is received.
3.Disclose to clients the identity of one's employer, clarify that it is an independent arrangement and state the fees that would apply under a similar contract with the employer.
4.Do not render services until client reads and understands these disclosures and provides written consent.
Final Note: Doesn't This Standard Seem Unfair?
Following Standard IV-A can, in some cases, truly test even the most ethical CFA member, as it can require balancing competing interests and motivations and may, to some extent, place the CFA Member or Candidate at an unfair disadvantage. In other words, starting a new business practice necessitates solicitation of potential clients, and one's best prospects are likely to be contacts made in one's current business relationship. The CFA charterholder may wonder, "These clients have enjoyed a longstanding affiliation with this firm because of me, and they are happy primarily because of me, yet I'm not allowed to solicit them for my new venture until after I resign?" The reason for the Standard is that requiring someone to accept a bit of temporary unfairness when leaving a firm is a small price to pay for the greater good provided to the profession as a whole - namely, promoting an ethic of loyalty.
(See more) Standard IV-B: Additional Compensation Arrangements
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