Views on improving the integrity of global capital markets
21 February 2019

Ethics in Practice: Client Agreement Terms. Case and Analysis–Week of 18 February

CFA Institute Ethical Decision-Making Framework

Check the analysis of this week’s case (18 February) to see if you made the right choice.

Case

McMaster is the founder and sole director of Dover Financial Services, a financial services business that sells financial products and provides clients with financial product advice. McMaster directs Dover’s numerous authorized representatives to incorporate the “Dover Client Protection Policy” as part of the contracts with their clients that set forth the terms for providing financial advice. The protection policy states that it “contains a number of client protections designed to ensure that you (the client) receive the best possible advice and the maximum protection available under the law.” The protection policy’s terms are intended to excuse Dover and its authorized representatives from various liabilities arising from their failure to act in a client’s best interest, relieve Dover and its authorized representatives of their duty to conduct suitability analyses of clients and investments, and inaccurately lead clients to believe that they cannot make claims against Dover or its representatives for securities law violations.

McMaster’s actions are

  1. appropriate because Dover and McMaster fully disclosed the terms of the Dover Client Protection Policy to clients.
  2. appropriate because Dover and McMaster are free to negotiate the terms of advisory agreements with clients.
  3. appropriate so long as the Dover Client Protection Policy did not misrepresent a client’s legal rights.
  4. inappropriate.
  5. none of the above.

Analysis

This case relates to the obligation of investment advisors to act in their clients’ best interests. CFA Institute Standard III(A): Loyalty, Prudence, and Care sets forth a duty of loyalty on the part of CFA Institute members for their clients, and requires them to act for the benefit of their clients and place their clients’ interests before their own. Other CFA Institute standards require members to provide diligent, independent, and thorough advice as well as have a reasonable and adequate basis for investment action [Standard V(A)], conduct a suitability analysis for any investment recommendation to their clients [Standard III(B)], and not make any misrepresentations relating to investment services [Standard I(C)]. Taken together, these components of the CFA Institute Code of Ethics and Standards of Professional Conduct define the fundamental principles applicable to investment professionals and detail what conduct investors should expect from their financial advisers. The terms of the Dover Client Protection Policy improperly attempt to “disclose away” Dover and McMaster’s fundamental ethical (and very likely legal) obligations to clients by limiting liability for failures to act in the client’s best interest or provide appropriate advice.

Although in general clients and advisers are free to negotiate the terms of advisory agreements, it is improper for advisers to use the client agreement to create a significant imbalance in the rights and obligations of the adviser or limit the fundamental ethical obligations of loyalty, prudence, and care to their clients. Disclosure does not cure such conduct. Furthermore, the Dover Client Protection Policy was deceptive in that it misrepresented the client’s right to bring legal action for ethical and regulatory violations and falsely gave the impression that a client would benefit from its terms. Choice D is the best answer.

This case is based on a June 2018 regulatory action by the Australian Securities and Investments Commission.

Let us know what you think of Ethics in Practice by taking this short survey.

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: Client Agreement Terms. Case and Analysis–Week of 18 February”

  1. Sohail Abid khan says:

    It should be “D”

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