Views on improving the integrity of global capital markets
08 November 2018

Ethics in Practice: Billing Inaccuracies. Case and Analysis–Week of 5 November

CFA Institute Ethical Decision-Making Framework

Check out the analysis to see how you did in analyzing this week’s case (5 November) and determining which CFA Institute Standard was involved.

Case

O’Reilly is chief financial officer of Global Strategic Partners (GSP), a global investment adviser that merged with Holland Advisers, a smaller regional investment adviser. As a result of the merger, GSP becomes the adviser of record for several thousand Holland clients. For a period following the merger, GSP maintains Holland’s legacy billing system for original Holland clients until those clients can be converted to GSP’s billing system and platform. When the Holland billing system is converted, O’Reilly reviews the client billing information to ensure that it is correctly copied into the GSP billing system.

Unbeknownst to O’Reilly, Holland’s billing system has a number of billing inaccuracies. For instance, Holland’s billing system inadvertently causes client advisory fees to default to the highest available account fee when client accounts in one advisory program are transferred between branches. Also, Holland’s billing system charges outside manager fees on assets that are held in money market accounts that do not use an outside manager. Finally, Holland’s billing system does not reimburse advance-billed fees when clients terminate their accounts. Some of these fee billing errors resulted from coding or other systems errors, whereas others were caused by administrative errors, including the failure of Holland personnel to immediately input negotiated lower fee rates into the billing system. As chief financial officer of GSP, O’Reilly

  1. is not responsible for inadvertent billing system errors by Holland before the merger.
  2. fulfills his responsibilities by reviewing client billing information for Holland clients to ensure that it is correctly copied into the system.
  3. fails to meet his ethical responsibilities to his firm’s advisory clients.
  4. acts appropriately as long as he remedies Holland’s billing errors once the client accounts are converted to GSP’s billing system and platform.

Analysis

This case relates to CFA Institute Standard III(A): Loyalty, Prudence, and Care, which states that CFA Institute members must act with reasonable care and prudent judgment when acting for the benefit of their clients. According to the facts, advisory clients of Holland Advisers are overcharged on their fees as a result of errors in the Holland billing system. After the merger, these investors become clients of GSP, and “for a period following the merger,” GSP uses Holland’s billing system. Although the errors may have been inadvertent and created by personnel of another entity at a time that predated O’Reilly’s involvement, they carry over and become O’Reilly’s responsibility once GSP uses the inaccurate billing system, even temporarily.

As chief financial officer, O’Reilly becomes responsible for the accuracy of the rates charged clients and the billing system used to collect client fees. Fixing the issues when the billing is converted to the GSP system does not account for the initial period of overbilling by GSP when using the Holland system. It is not enough for O’Reilly to ensure the accuracy of the information being transferred. He also should have confirmed that the fee information was accurate and consistent with the clients’ advisory agreements. Otherwise, the billing anomalies have the potential to cause the incorrect fee rates to transfer into GSP’s billing system. Choice C is the best answer.

This case is based on a 2017 Enforcement Action by the US SEC.

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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: Billing Inaccuracies. Case and Analysis–Week of 5 November”

  1. Great initiative with this series. I think the correct answer is “C”.

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