Views on the integrity of global capital markets
13 October 2017

Ethics in Practice: Keep Up Your Ethical Exercise! Case for Week of 9 October

CFA Institute Ethical Decision-Making Framework

Analysis of the case is now available below. Check it out!

Continue practicing your ethical decision-making skills and stay tuned for an analysis to be posted later this week.

Case

Elizabeth is an investment manager at a wealth management firm with high-net-worth clients. When Elizabeth was hired a few years ago, her sister opened an investment account with the firm. Elizabeth has decided to leave the firm to set up her own boutique hedge fund with her colleagues. She asks her sister to close her existing account and put that money in the new hedge fund. Elizabeth’s request is:

Answer Choices

  1. Acceptable since she has no obligation to keep her sister’s account at the wealth management firm.
  2. Unacceptable because she should not solicit her employer’s client to join the new fund.
  3. Unacceptable if she signed a non-compete agreement with her employer.
  4. Unacceptable if her hedge fund strategy is not suitable to her sister.

Have an idea for a case for us to feature? Send it to us at ethics@cfainstitute.org.

Analysis

The main ethical principle at issue in this case is Duty to Employer.  CFA Institute Standard IV(A): Duty to Employer – Loyalty, states that members “must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities” and must not “cause harm to their employer.”  In this case, Elizabeth could potentially cause harm to her employer by causing her sister to move her assets away from the wealth management advisor.  But this case also highlights a key element of the CFA Institute Ethical-Decision-Making Framework – to identify relevant facts before choosing a course of action.  Sometimes not all the relevant facts are known.  Is Elizabeth still working for her employer when she asks her sister to leave the firm?  The facts are not clear.  If so, her actions are unacceptable because she would be causing harm to her employer (choice B).  The fact that the client is a close relation is irrelevant, Elizabeth’s sister is still a client of the firm. If Elizabeth is no longer employed by the wealth manager advisor, soliciting former clients may not pose a problem.  But if she has left, does Elizabeth have a non-compete agreement with her employer prohibiting her from soliciting clients of her employer?  If so, she would be prohibited from soliciting clients, including her sister, to the new hedge fund.  Choice D brings up the issue of suitability of investments.  Even if Elizabeth has already left the firm and a non-compete agreement is not in force, she should only be soliciting clients for whom the investment is suitable under Standard III(C): Suitability which states that members must “determine than an investment is suitable to the client’s financial situation” before making a recommendation or taking action. Is the hedge fund a suitable investment for Elizabeth’s sister? The question doesn’t provide any clues. Even if the hedge fund is a suitable investment, Choice D still does not address the main issue of whether Elizabeth his harming her employer.  There may be no “obligation” to keep her sister’s investments at the wealth management firm (Choice A), but depending on the facts, it would be unethical for her to do so.  Properly applying the Ethical Decision-Making Framework calls for identifying the relevant facts.  All the choices could be correct, depending on facts that are not provided in the question.  We need to know more.

More About the Ethics in Practice Series

If developing your ethical decision-making skills interests you, then you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions. We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why. If you are not a CFA Institute member, you can post your choice and reasoning in the comments section. For CFA Institute members, we would like you to join the conversation in our new Member App and post your responses there. Later in the week, we will post an analysis of the case and you can see how your response compares.

CFA Institute Member App

The Member App gives our members access to a content from multiple CFA Institute publications, including these weekly Ethics in Practice posts. Best of all, the app allows in-app submission of Continuing Education credits, which members can earn by reading and participating in the conversation for each case. (0.25 CE, 0.25 SER). The app is available in the Apple and Google Play stores. After downloading, simply log in using your CFA Institute website credentials (e.g., john.doe@cfainstitute.org + password).

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Image Credit: ©CFA Institute

About the Author(s)
Jon Stokes

Jon Stokes is the director of ethics education at CFA Institute. He is responsible for development and maintenance of the CFA Institute Code and Standards, as well as the design and management of the CFA Institute Ethical Decision Making training programs. Stokes holds a JD degree.

3 thoughts on “Ethics in Practice: Keep Up Your Ethical Exercise! Case for Week of 9 October”

  1. Paul R. Johnson says:

    I think this is great. I would like to see us incorporate this as a component of our team meetings.

  2. Henry Hernandez says:

    The correct answer should be the letter C. Unacceptable if she signed a non-compete agreement with her employer.

  3. Victor Comé says:

    C Is correct. Unacceptable if she signed a non-compete agreement with her employer. Doing that, she is acting in conflict of interest even if she didn’t sign the non complete agreement, simply because the new hedge fund belongs to her and she will be stealing the client of her employer although is her sister.

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