Views on improving the integrity of global capital markets
07 June 2018

Ethics in Practice: Doing Too Much to Make Investments a Success? Case Analysis Now Included

CFA Institute Ethical Decision-Making Framework

Check out the analysis to see how you did analyzing this week’s (4 June) case.

Investment managers may seek help or guidance if they are looking for investment opportunities in different jurisdictions. But when do the efforts to get that guidance go too far? Read this week’s case and then join the conversation to let us know whether you think the hedge fund manager violated the CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards).


Corrales manages a hedge fund that seeks out investment opportunities in developing markets. Using assets of the fund’s investors, the fund hires local companies to serve as “sub-advisers” to explore and obtain promising investment opportunities and navigate local laws and regulation. The sub-advisers often have very limited experience as financial consultants or advisers but do have close relationships and connections with local high-ranking government officials. The payments made by Corrales, through the sub-advisers, often cover substantial “deal fees” and other expenses that facilitate governmental support of each investment. Corrales does not require the local business partners to provide details of their activities or what specific expenses are covered by the fees. Corrales reports these expenditures to fund investors as operating expenses necessary to the success of the investment. Over several years, the hedge fund is very successful producing an 18% annual rate of return for its investors. Did Corrales actions violate the Code and Standards?

  1. Yes.
  2. No because it is acceptable to hire sub-advisers and business consultants to assist in procuring investment opportunities and managing specialized assets.
  3. No because the payments to the sub-advisers represent legitimate expenses to ensure the success of investments and protect the interest of investors.
  4. No, as long as the sub-advisers provide more detail about the nature and purpose of the payments and this information is disclosed to the hedge fund investors.


To better serve clients, investment professionals may choose to delegate to third parties work that requires particular specialization, knowledge, or expertise. For example, an investment adviser may hire sub-advisers to handle a particular strategy or investment style outside the scope of the adviser’s ability or experience. A global adviser may hire a sub-adviser to manage an asset allocation invested in a particular market, and the payments to the sub-adviser would be legitimate investment expenses that could properly be passed on to investors in the fund.

But the facts of this case indicate that Corrales is not hiring a true sub-adviser but essentially paying locally connected officials to secure access to investment deals to ensure the success of the fund’s investments. The “sub-advisers” have no financial experience but are close to the government officials, and the “deal fees” are not supported by any documentation that details legitimate investment expenses. The “operating expenses” charged by Corrales to the fund are most likely funding corrupt transactions and bribes through local intermediaries. This practice violates multiple standards:

  • I(A): Knowledge of the Law because the conduct would violate any type of anti-bribery laws.
  • I(C): Misrepresentation because he is improperly labeling the expenditures as investment fees.
  • V(A): Diligence and Reasonable Basis because no reasonable and adequate basis for the “investment” action exists.
  • V(C): Record Retention because no appropriate records are being kept to support the action.
  • VII(A): Conduct as Participants in CFA Institute Programs because assuming Corrales is a charterholder, his conduct compromises the integrity to the CFA designation.

This case is based on a US SEC enforcement action from 2017.

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 and Standards Education at CFA Institute. His responsibilities include design and creation of on-line ethics education, development and maintenance of the CFA Institute Code of Ethics and Standards of Professional Conduct, and the design and management of the CFA Institute Ethical Decision-Making and Giving Voice to Values education programs. Stokes holds a JD degree.

2 thoughts on “Ethics in Practice: Doing Too Much to Make Investments a Success? Case Analysis Now Included”

  1. Chris Tobe says:

    There were hundreds of these “placement agents” in US Public pensions as I outline in my book Public Pensions Secret Investments. However, since their discovery at CALPERS and Citizens United placement agents have gone away mostly but are still legal I have made a number of complaints to the SEC on this practice they could care less.

  2. Chris Tobe says:

    In my book I claim almost all Private Equity contracts which are widely held in Public Pensions and endowments violate the Code in the following way

    III A – Members must act to the benefit of their Clients – private equity general partners (GPs) have waived their fiduciary responsibility to pension funds and other LPs; Vague and misleading wording allows PE firms to take advantage of their asymmetric position of power vis-à-vis investors and the lack of transparency in their activities. Analyses of limited partnership agreements (LPAs) have also uncovered clauses that specifically allow private equity firms to waive their fiduciary responsibility towards their limited partners — leading to serious conflicts of interest

    IIIB Fair Dealing “The General Partner may take its own interests into account in the exercise of such discretion. The exercise of such discretion may negatively impact the Limited Partners

    IIID Performance Presentation – Many GP’s have manipulated the value of companies in their fund’s portfolio;

    VI A Conflicts of Interests, Disclosure – GP’s have waived their fiduciary responsibility to pension funds and other LPs and having conflicts in the secret contracts

    VI(B) Priority of Transactions, by allowing general partners to benefit at the expense of limited partnerships. Again, secret but typical language allows this in these contracts.

    VI C Fee Disclosure – Private equity general partners (GPs) have misallocated PE firm expenses and inappropriately charged them to investors; have failed to share income from portfolio company monitoring fees with their investors, and have collected transaction fees from portfolio companies without registering as broker-dealers as required by law. Also allowed undisclosed fee arrangements

Leave a Reply

Your email address will not be published. Required fields are marked *