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02 August 2018

Ethics in Practice: Disclose Investigation to CFA Institute? Case and Analysis

CFA Institute Ethical Decision-Making Framework

Check out the analysis below to see how you did assessing this week’s (30 July) professional conduct case.

CFA Institute asks its members to annually attest that they have abided by the organization’s standards of professional conduct. Do you know what needs to be included on that statement? Consider this week’s case, which asks two questions, and then join the conversation to share what you believe are the correct choices.

Case

Gordon is an investment representative at Wallsend Financial Services, a mutual fund dealer. Wallsend requires its employees to disclose outside business activity for review and approval by the firm. While working for Wallsend, Gordon serves as a director on four outside boards. Gordon gets approval from Wallsend for three of the boards positions, but the fourth is for a charity called Born in the 50s to help homeless children that is run by his father. Gordon does not submit the position for approval because it is a volunteer role that he has taken only temporarily to help his father. Wallsend eventually discovers Gordon’s service on the Born in the 50s board. Wallsend is in the process of reducing their workforce, and after confirming that Gordon failed to disclose his involvement on the additional board, they terminate him for violation of their policy. Now unemployed, Gordon receives his Professional Conduct Statement (PCS) from CFA Institute. Is Gordon required to disclose the internal investigation by Wallsend concerning his nondisclosed service as a director on the Born in the 50s board?

  1. No, it was an internal matter at Wallsend, and no client was involved.
  2. No, Gordon was a volunteer and his firing was unjustified and likely driven by Wallsend’s workforce reduction motive.
  3. No, this was not a question of Gordon’s professional conduct or activities.
  4. Yes, Gordon should disclose this matter on his PCS.

Gordon ultimately decides not to disclose the matter to CFA Institute because he believes he was wrongfully terminated. But he receives a notice of investigation from the regulator concerning his violation of Wallsend’s internal policy. Gordon decides to just settle with the regulator. He receives a one-month suspension and a fine for violating the rules pertaining to outside business activity. CFA Institute discovers Gordon’s settlement with the regulator through its monitoring efforts and initiates its own investigation. As a CFA charterholder, Gordon is required to cooperate in the Professional Conduct investigation, but Gordon wants to resign his membership to avoid the CFA Institute investigation. What are Gordon’s options?

  1. Even if Gordon resigns, he was a member and charterholder at the time of the conduct and thus CFA Institute has jurisdiction over him.
  2. If Gordon refuses to cooperate, CFA Institute can impose a Summary Suspension followed by a Revocation of Gordon’s CFA® charter.
  3. If Gordon cooperates with the Professional Conduct investigation, he will be able to tell his side of the story and contribute evidence in support of his position.
  4. All of the above apply.

Analysis

This case addresses issues related to the disclosure, investigation, and sanctioning of member misconduct by the Professional Conduct division of CFA Institute. Regarding whether Gordon must disclose Wallsend’s internal investigation on his PCS, the correct answer is yes, thus in the first set of multiple choice answers, choice D is the right decision. Choice A is incorrect because even if it was an internal matter at Wallsend and no client was harmed, the PCS contains six questions and the second question requires a yes response if you have you been “the subject of any investigation (internal or external) in which your professional conduct or activities were questioned or at issue.” Choice B is also incorrect because the issue is not whether Gordon was justified in his actions or whether his employer had an ulterior motive, the issue is whether there was in fact an internal investigation by his employer involving his professional conduct or activities. And choice C is incorrect because although Gordon may disagree that the temporary volunteer work for his father constitutes a professional activity that needs to be reported, his employer obviously thought it was an activity that needed to be reported. Therefore, the Wallsend investigation needed to be disclosed regardless of its merits.

Regarding the second set of multiple choice answers, choice D is again the right decision because this time, answers A, B, and C are all true. Under the CFA Institute Rules of Procedure, CFA Institute has jurisdiction over Gordon because he was a member and a charterholder at the time of the conduct. If Gordon refuses to cooperate, CFA Institute will proceed with a Summary Suspension, which will lead to a printed Notice of Disciplinary Action followed by a Revocation. Finally, if Gordon cooperates with the Professional Conduct investigation, he will be able to tell his side of the story and contribute evidence in support of his position.

This scenario is based on a real case handled by the Professional Conduct division at CFA Institute. A Disciplinary Review Committee found that the member violated the following Standards: I(A): Knowledge of the Law, IV(A): Duty to Employers– Loyalty, and VI(A): Disclosure of Conflicts. The member in the actual case did in fact disclose the matter on the PCS and in a timely manner. Therefore, there was no violation of Standard VII(A): Conduct as Participants in CFA Institute Programs, which makes it a violation to misrepresent information on a PCS.

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


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.

1 thought on “Ethics in Practice: Disclose Investigation to CFA Institute? Case and Analysis”

  1. Tian says:

    no sure whether B or D for the first question. For the second question, should be D.
    If goodwill and self-judgement are allowed, then should be no problem in not disclosing.

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