Ethics in Practice: Overcharging Clients. Case and Analysis — Week of 10 December

How did you do evaluating this week’s (10 December) case? Check out the analysis below.

Case

Olsen is president and CEO of RCS, a registered investment adviser. RCS offered clients an advisory fee between 0.4% and 1.5% of their assets under management based on fee breakpoints described in its fee schedule. The schedule reduced the advisory fee as a client’s assets under management increased. RCS’s fee schedule was incorporated by reference in client advisory agreements, distributed to clients upon request, and disclosed in RCS’s regulatory disclosure filings. RCS’s written policies and procedures manual stated that RCS was to conform its client fees and fee billing practices to those described in the regulatory filings in the advisory agreements provided to clients. In certain instances, however, RCS failed to apply the breakpoint discounts. As a result, RCS improperly calculated advisory fees and thereby overcharged certain clients. As president and CEO, Olsen

1. met his ethical responsibilities if he delegated responsibility for billing and fees to competent personnel in RCS’s accounting department.
2. met his ethical responsibilities if he made certain that appropriate policies and procedures were in place to ensure that RCS properly billed its clients.
3. met his ethical responsibilities if the erroneous billing was the result of clerical error and inadvertent.
4. failed to meet his ethical responsibilities.
5. None of the above.

Analysis

Although the harm to clients and the misconduct of the firm is clear, the facts and answer choices examine this case from the perspective of Olsen’s supervisory responsibility. CFA Institute Standard of Professional Conduct IV(C): Responsibilities of Supervisors requires members to make reasonable efforts to ensure that those subject to their supervision or authority comply with applicable law and ethical responsibilities. As president and CEO, Olsen has overall accountability for the conduct of the firm and is ultimately responsible for compliance with applicable legal requirements and fulfilling the firm’s ethical duties to clients. As the leader of RCS, he may delegate these responsibilities to competent and knowledgeable subordinates. Whether conduct constitutes reasonable supervision in compliance with Standard IV(C) is determined by the facts or circumstances of each particular case.

Delegation of billing functions to competent personnel alone does not absolve Olsen of his supervisory responsibility. At a minimum, Olsen should have made reasonable efforts to prevent and detect violations by ensuring the establishment of effective compliance systems. At the same time, ignoring or not properly implementing compliance policies and procedures could result in a violation of the Standard because of the failure to supervise. The occurrence of inadvertent errors may not indicate improper structure or application of billing policies and procedures but could be a red flag indicating the existence of ineffective policies or sloppy, error-prone work that should be addressed through adequate supervision. The CFA Institute Ethical Decision-Making Framework calls on those seeking to engage in ethical conduct to identify the relevant facts to determine the appropriate course of action. In this case, although the firm’s actions harmed clients and resulted in liability for regulatory violations, the facts given are insufficient to allow a definitive determination of whether the overcharging of clients was a result of inadequate supervision by Olsen. Choice E is the best answer.

This case is based on a US SEC Enforcement Action from November 2018.

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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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