Views on the integrity of global capital markets
24 May 2018

Ethics in Practice: Violated Professional Standards or Not? Case Analysis Now Included

CFA Institute Ethical Decision-Making Framework

What did you decide about the research analysts in this week’s case (21 May)? See how your analysis of the case compares.

Research analysts are tasked with the sometimes difficult job of determining the value of companies and whether they are a good investment. But in the course of that work, sometimes assumptions can prove to be wrong. Does that violate the CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards)?


Manley, Head of Research at a long–short equity fund, leads a team of four analysts. One of the fund’s portfolio managers asks Manley to look at a particular small-cap company as a possible investment target. Because there is little information available on the company, Manley assigns the challenging task to Chang, one of the fund’s top junior analysts, who spends a week conducting research. Chang builds a cash flow projection model that shows the company is deeply undervalued. Manley briefly reviews the model and publishes a research report on the company with the author listed as the Research Department that recommends a “Buy” at the current price. The fund makes a substantial investment in the company’s stock. Later, several brokerage houses come out with research pieces on the company that include cash flow projections that are considerably lower than Chang’s model. Over the course of six months, the investment loses 25% of its value. Manley thoroughly reviews Chang’s model and discovers two assumptions that eventually proved erroneous as well as an arithmetic mistake. Choose one of the answers below and then join the conversation to make an argument for your choice.

  1. Manley violated the CFA Institute Code and Standards.
  2. Chang violated the CFA Institute Code and Standards.
  3. Manley did not violate the CFA Institute Code and Standards.
  4. Chang did not violate the CFA Institute Code and Standards.


Many people chose response A this week, which was the easy answer; the subordinate’s work was flawed so the supervisor must be responsible. And that can be true under some circumstances. But response C — no supervisor violation — could be just as correct given the right facts and circumstances. Providing your choice without explanation earns you a grade of “incomplete.” This week’s case shows how you must identify all the relevant facts before making a decision to analyze a decision from an ethical perspective. Read on for arguments that could be made for each answer.

Case for Response A. Manley violated Standard V(A): Diligence and Reasonable Basis by relying on the erroneous work done by Chang. In addition, as Head of Research, Manley violated Standard IV(C): Responsibilities of Supervisors by failing to supervise Chang, who himself violated the standards (See Response B analysis). Manley only briefly reviewed Chang’s work. Finally, Manley misrepresented the author of the research report as that of “the Research Department” when Chang conducted the research.

Case for Response B. Chang violated Standard V(A): Diligence and Reasonable Basis. Chang included two erroneous assumptions in his model. It is not clear from the facts that he had a reasonable and adequate basis or that he thoroughly analyzed the information to create his model. Furthermore, he did not thoroughly check his model because he made an arithmetic mistake that contributed to skewing the model results.

Case for Response C. Manley did not violate the standards because he reasonably relied on the work of one of his colleagues, who had a track record of exercising diligence and thoroughness and conducting appropriate research. Furthermore, there is no indication from the facts that Manley failed to adequately supervise Chang. The facts of the case do not indicate the supervisory steps Manley or the fund have in place to monitor Chang’s work. A “brief” review by Manley of the research may be appropriate if other steps are in place (peer review, for example) to check the appropriateness of Chang’s analysis. And there is no indication that Chang violated the standards. (See Response D analysis). Finally, it is proper to have the author of the research report listed as the “Research Department” because the work is that of the firm.

Case for Response D. Chang did not violate the standards because there is no indication from the facts that he failed to exercise diligence and thoroughness or that his research was not supported by appropriate research and investigation. Although the two assumptions ultimately proved erroneous, that does not automatically mean that they were inappropriate when initially made by Chang given the facts he was aware of at the time. Being incorrect about an investment recommendation or prediction is common. An inaccurate prediction is not sufficient evidence that a violation of the CFA Institute Code and Standards occurred. It is also not clear from the facts that the arithmetic mistake was material or affected the outcome of the model.

This case is based on facts written by Tanuj Khosla, CFA, CAIA.

Have an idea for a case for us to feature? Send it to us at

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. The Ethics in Practice series gives you an opportunity to “exercise” your ethical decision-making skills. 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 using the CFA Institute Ethical Decision-Making Framework and through the lens of the CFA Institute Code of Ethics and Standards of Professional Conduct. Then join the conversation and let us know which of the choices you believe is the right one and explain why. Later in the week, we will post an analysis of the case and you can see how your response compares.

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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