Gratitude or Bonus: How Investment Professionals Should Handle Offers from Clients
Theresa receives a trip to London to experience Wimbledon from a highly satisfied client. Geoff can earn a winter retreat in Monaco if he achieves a client’s performance targets. But what is required of Theresa and Geoff, and any investment professionals, before accepting such offers?
Before taking any offered compensation, they must determine whether their employer allows such actions. Gifts and additional compensation from clients may be acceptable, whereas similar offers from vendors may be more apt to have a negative influence on the professional objectively dealing with the third-party firm.
Throughout their careers, investment professionals may receive offers of a gift or bonus compensation from a client that surpasses the value of a fruit basket, or box of chocolates. The professional may have a strong relationship with the client and would not want to take any action to offend. The client may be genuinely pleased with the actions of the professional and is offering the gift out of gratitude. Alternatively, the client may promise a reward or bonus to the professional should she or he achieve specified results in the future.
In addition to employers’ policies concerning client offers, for investment professionals who are CFA Institute members or CFA® program candidates, there are also elements of the Code of Ethics and Standards of Professional Conduct that offer perspective on this topic. Those most directly associated with offers of gifts or compensation from clients include: Standard I(B) Independence and Objectivity, Standard IV(B) Additional Compensation Arrangements, and Standard III(B) Fair Dealing. In applying these principles, any investment professional can receive the appropriate approvals and make the necessary disclosures.
Earned vs. Retrospective
When a client offers members and candidates some form of compensation, timing is a key factor in determining compliant actions. In some situations, the offer is tied to specified actions for earning the item. Beyond exceeding the performance expectations, other quid pro quo arrangements could relate to allocations of IPOs or other hot offerings. For instance, if the member or candidate is required to meet specific objectives to earn the offered compensation, then Standard IV(B) would require written approval by the firm and the client before acceptance.
At other times, a client may retroactively look at past performance or allocations received and decide to offer a gift to the member or candidate. In this scenario, Standard I(B) would not require the professional to gain firm permission before accepting the gift, but disclosure of acceptance would need to be made to the employer. The guidance further recommends seeking approval before accepting the offered item when time allows. This is especially prudent should the value of the offered item be above what would be considered nominal in its market.
Reviewing the Standards
- Standard I(B) Independence and Objectivity focuses on disclosing the acceptance of gifts from clients to one’s employer. The acceptance of a gift by members and candidates indicates that they do not believe there is an impact on their independence and objectivity to continue managing all client accounts effectively. Full disclosure of the gift allows the employer to monitor client interactions and activities to ensure ongoing independence and objectivity remains uncompromised.
- Standard IV(B) Additional Compensation Arrangements focuses on obtaining permission from your employer before entering into compensation agreements with outside parties. Such agreements at times may come from clients of the firm. The firm would want to know about offers from clients because such agreements may lead to potential conflicts with services being provided to other clients. When arrangements are made in advance, members and candidates have sufficient time to seek the permission of the employer before accepting the offer. In gaining the employer’s permission, an informed decision can be made as to whether or not the offer would create an unacceptable conflict of interest with other client accounts.
- Standard III(B) Fair Dealing focuses on fair and objective treatment of all clients especially in the areas of communicating investment recommendations and taking investment actions. Members and candidates must make every effort to treat all clients in a fair and impartial manner.
In the development of policies allowing acceptance of gifts or compensation from clients, members and candidates should encourage their employers to consider the potential “slippery slope” of misconduct surrounding this activity. Firm policies for any offered item of nonnominal value from clients should consider the possible harm to other clients should a member or candidate subconsciously or consciously treat clients that offer gifts or compensation more favorably than others.
When in Doubt, Don’t
In any scenario, the member or candidate must consider how accepting the gift would be viewed by outside parties, including other clients or even regulators. In situations where a disadvantage is perceived by another party, whether it is a conflict of interest or loss of independence, that party may elect to end the client relationship or file a regulatory complaint against the member and/or employer.
It could also lead to the perception that any client offer tampers with the ability of the member or candidate to treat all clients fairly. The gift or compensation may influence subtle changes and differences in focus of the member or candidate in favor of those making the offers. Such subtle changes may challenge work rules and compliance procedures supporting fair dealing within the firm. Simply disclosing the gift or compensation does not remove the requirement of the member or candidate to ensure the fair treatment of all clients.
For members and candidates, this may lead to the decision not to accept any gift or compensation beyond a nominal nature from clients or others. Best practice dictates that members and candidates reject any offer of gift, compensation, or entertainment that could be expected to threaten their independence and objectivity.
For firms, this signifies the importance of developing and enforcing policies and procedures pertaining to gifts or compensation offered by any party, including clients. Maintaining the trust and confidence between market participants is a vital component of an effective capital market.
What about Theresa and Geoff?
Both Theresa and Geoff’s offers from clients are examples from the 11th edition of the Standards of Practice Handbook. To see whether Theresa made it to Wimbledon, or Geoff wintered in Monaco, review “Independence and Objectivity Example 8” (Theresa) on page 35, and “Additional Compensation Arrangements Example 1” (Geoff) on page 140.
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