Ethics in Practice: Marketing Investment Services. Case and Analysis–Week of 1 October
How did you do evaluating this week’s (1 October) case? Check out the analysis below.
Mallouk is president and majority owner of Creative Planning, Inc. (CPI), a US-based registered investment adviser with approximately $36.2 billion in assets under management. To advertise his business, Mallouk purchases several dozen radio advertisements in the local market. CPI’s policies and procedures require that the chief compliance officer or president review and approve any marketing materials or advertising concerning the firm or its services before publication or distribution. All of the radio spots are produced by two local radio hosts who have their own show that airs every weekday morning. Mallouk provides the radio station with copy points for the advertisements and approves the 60-second prerecorded advertisement that the pair record. After a few months, one of the radio hosts becomes a client of CPI. During his live radio program, in conjunction with the prerecorded ads, the host regularly mentions his client relationship with CPI, praises his CPI wealth manager by name, and details his satisfaction with the advisory services he received from CPI. Mallouk’s actions are
- appropriate as long as the content of the advertisements is truthful and accurate.
- appropriate as long as Mallouk does not provide any benefit to the radio host to highlight his positive experience with CPI.
- appropriate because Mallouk cannot control or preapprove what the radio host says during his program.
This case relates to CFA Institute Standard I(A): Knowledge of the Law, which requires CFA Institute members to abide by applicable law. The response to this case turns on the regulations governing CPI’s advertising practices. The facts presented do not describe the governing regulations, but the CFA Institute Ethical Decision-Making Framework specifies that investment professionals identify relevant facts when facing an ethical dilemma. If important facts are not known, investment professionals should seek out all information relevant to determining the appropriate course of action. Applicable law is always a relevant and important fact. In this case, the law and regulation applicable to CPI as a US-based adviser stipulates that it is a
- fraudulent, deceptive, or manipulative act, practice, or course of business for any investment adviser to, directly or indirectly, publish, circulate, or distribute any advertisement that refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser. [Rule 206(4)-1(a)(1) under Section 206(4) of the Advisers Act]
The radio host’s live commentary accompanying the prerecorded spots constitutes an advertisement for CPI that was a testimonial, which is prohibited by applicable law. Mallouk’s conduct, therefore, violates CFA Institute Standard I(A). Mallouk also violated his firm’s policies and procedures by not reviewing the content of the radio host’s commentary. Mallouk and CPI could have directed that the radio host refrain from making a testimonial or providing extraneous commentary to the preapproved ads. Mallouk also could have monitored the station broadcasts or reviewed transcripts of the live spots to ensure that the advertisement met legal requirements. Even if the comments contained truthful and accurate information and the radio host was making those comments of his own volition with no incentive, the type of advertising violated the law. Choice D is the best answer.
This case is based on an 18 September 2018 enforcement action by the US SEC.
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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. 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.
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