Ethics in Practice: Different Service for Different Clients? Case for Week of 12 March: Analysis Posted!
Situations that could prove a challenge to ethical behavior are not always black and white. This week’s case presents an interesting situation. Read on to learn more and be sure to let us know what you think the money manager should do and why, particularly what CFA Institute Standard of Professional Conduct may apply.
Korloff is a money manager for several clients. One of the clients, a pension fund, accounts for 35% of the assets under management at Korloff’s firm. The fund pays more management fees to the firm than any other client. The executive director of the pension fund has made it clear that, because of this dominant position, she expects Korloff to give the pension fund “enhanced service” service in the form of advance information on investment recommendations, priority position for initial public offerings, supplemental research reports on potential investments, and daily personal contact. Korloff should
- refuse to comply with the request.
- comply with the request only if his preferential treatment does not disadvantage other clients.
- comply with the request because the fund is such a large and important client.
- comply with the request because the fund is paying for the preferential treatment with the higher fees.
This case relates to Standard III(B): Fair Dealing, which states that CFA Institute members and candidates “must deal fairly and objective with all clients when providing investment analysis, making investment recommendations, and taking investment action.” Treating clients “fairly” means not favoring one client over another or discriminating against clients when disseminating investment recommendations or actions. Differentiated service to clients, in the form of personal, specialized, or in-depth service to clients who are willing to pay for premium service, is acceptable under the standard. Fair dealing also dictates that recommendations be distributed in way that all clients for whom the investment is appropriate for have a fair opportunity to act on the recommendation. Korloff may provide preferential treatment (reflecting the amount and level of fees paid by the pension fund) in the form of supplemental research and daily contact to the pension fund without disadvantaging other clients.
But different levels of service cannot disadvantage or negatively affect other clients and should be disclosed and made available to all clients and potential clients. So, in this case, providing “enhanced service” to the pension fund is acceptable as long as the preferential treatment does not disadvantage other clients and it has been disclosed to them that they can also receive enhanced service along with the pension fund. Two aspects of the request — providing advanced recommendations to the fund and giving the fund priority position for initial public offerings — would disadvantage other clients by systematically benefiting the pension fund at the expense of other clients. With all of this in mind, choice B is the best response.
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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 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.
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