Views on the integrity of global capital markets
24 November 2017

Ethics in Practice: Firm’s Funds Are Best Investment, Right? Case for Week of 20 November

CFA Institute Ethical Decision-Making Framework

Analysis Now Available!

Are your ethical decision-making skills improving? Keep on practicing with this week’s case.

Case

Miriam works as an investment adviser for JVC Wealth Managers. JVC provides wealth management services to high-net-worth clients through discretionary, diversified, risk-adjusted investment management accounts that hold positions in both mutual funds and hedge funds. On average, Miriam has invested 74% of her clients’ mutual fund assets and 63% of her clients’ hedge fund assets in JVC proprietary funds, earning JVC and its affiliates additional fees. Miriam’s actions are

  1. acceptable because clients hiring JVC as an investment manager should expect that the firm will prefer investing in its own funds.
  2. acceptable if Miriam indicates her preference for investing client assets in JVC proprietary funds.
  3. unacceptable if there are non-proprietary mutual funds and hedge funds that meet the clients’ investment needs.
  4. unacceptable because the additional fees earned by JVC violate the duty of loyalty, prudence, and care that Miriam owes to her clients.

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

Analysis

This case involves a potential conflict of interest for Miriam between providing cost efficient investment vehicles for her clients and selling her employer’s investment products. CFA Institute Standard VI(A): Disclosure of Conflicts states that CFA Institute members “must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity” or interfere with their duties to their clients. Best practice is to avoid conflicts of interest if possible, otherwise mitigate the conflict of interest through the disclosure called for in Standard VI(A). Although the additional fees earned by JVC from selling proprietary funds present a potential conflict, the fees do not automatically violate Miriam’s fiduciary duty to her clients (Answer D). It is possible that those proprietary funds are the best and most appropriate investment vehicles for Miriam’s clients even with the additional fees. But because there is a potential conflict of interest, Miriam must clearly disclose those fees “such that the disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively” according to Standard VI(A). And although Answer C is based on the existence of alternative non-proprietary mutual funds, that response does not say that those funds are superior to JVC funds or have lower costs. Assuming that the clients understand that Miriam, who works for JVC, will sell JVC products at every opportunity, is not sufficient (Answer A). The best answer in this case is Answer B, which calls for Miriam to disclose the conflict. This disclosure should be made at the outset of the relationship and address what investment vehicles will be used by JVC along with their costs.

This case is based on a 2015 US SEC Enforcement action.

 

More About the Ethics in Practice Series

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 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 CFA Institute Code of Ethics and Standards of Professional Conduct 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 below. 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 CFA Institute 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). Hint: Save the post to your library in the app to find it easily.

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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.

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