Views on improving the integrity of global capital markets
17 October 2019

Ethics in Practice: Providing Investment Research to Clients. Case and Analysis–Week of 14 October

Check out the analysis to see how you did in analyzing this week’s case (14 October) and determining which CFA Institute Standard was involved.

Case

Scherzer is the head of research at a large investment management firm. He publishes monthly “Recommendation Update Reports” on the firm’s investment recommendations. These reports clarify whether the firm has changed any of its investment recommendations. The reports are sent to clients via email on the first Friday of the month and posted on the firm’s website the following Monday. The internal policy of the firm is that any change in recommendation can only be made once a month through this report. Scherzer also publishes weekly reports with information gathered by analysts that may implicitly signal a future change in recommendation or lead a reader to infer that a recommendation will be changed in the next monthly report. Although the monthly “Recommendation Update Reports” are sent to all clients, those clients that want to see the weekly publication must pay a fee of $1,000 per year. This option is available to any client and is fully disclosed as part of every client agreement. To comply with the CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards) Scherzer is required to

  1. do nothing because his actions comply with the Code and Standards.
  2. publish the monthly reports on the firm’s website at the same time it is sent to clients.
  3. send the weekly reports to all clients at no additional charge.
  4. restrict communication about investment recommendations to the monthly reports because that is when a recommendation is provided.
  5. none of the above.

Analysis

This case relates to fair dealing among clients. CFA Institute Standard III(B): Fair Dealing requires CFA Institute members to deal fairly and objectively with all clients when providing investment analysis and making investment recommendations. The Standard requires that information about investment recommendations be disseminated in such a manner that all clients have a fair opportunity to act on the information. Scherzer distributes the recommendation update reports to all clients simultaneously via email, giving each an opportunity to act on the information. The Code and Standards do not require Scherzer to publish the reports to the public on the firm’s website. Scherzer is also not limited by the Code and Standards to communicating with clients about investments only when an investment recommendation is provided and can provide updated or clarifying information to clients as appropriate. The Code and Standards allow CFA Institute members to provide more personal, specialized, or in-depth service to clients who are willing to pay for premium services through additional fees, as long as those services do not disadvantage other clients who do not pay additional fees, the differing levels of service are disclosed to clients, and the services are made available to all. Choice A is the best response.

This case is based on a question sent to the CFA Institute Ethics Helpdesk.

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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.


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: Providing Investment Research to Clients. Case and Analysis–Week of 14 October”

  1. Eduards says:

    Thank you for these articles / cases.
    This one is rather hard, close to grey line as possible. I guess as long as there is no explicit reference to recommendation change within weekly info mails made by Scherzer, he is in compliance with CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards).

    What if the information gathered by analysts (I assume their reports) contain wording “is a strong buy” whilst firms rating is “hold” – if the wording is used in the weekly report, would that constitute violation?

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