Ethics in Practice: Advisory Account Review. Case and Analysis–Week of 28 October
Check the analysis of this week’s case (28 October) to see if you made the right choice.
St. Petersburg Investment Partners (PIP) is an investment management firm with several branch offices that provides investment advice to thousands of advisory clients. Raymond is one of hundreds of financial advisers working at PIP, and Jaynes is his branch manager. The client agreement for all PIP client accounts states that PIP will provide “ongoing investment advice and monitoring of securities holdings,” and that the PIP financial adviser assigned to the account will “manage the assets of the account according to the client’s objectives.” The client agreement also states that account management includes regular review of the account to determine whether keeping the client in an advisory account is suitable for the client or whether the client should consider moving to a brokerage-only account with lower fees. A key parameter for making this evaluation is account inactivity, defined as no trading for at least 12 months.
Bower is PIP’s chief compliance officer responsible for drafting and implementing the firm’s compliance policies and procedures. The compliance procedures require each PIP financial adviser to “continually monitor their client accounts, discuss with client’s reasons for inactivity, and document all conversations and meetings with clients to demonstrate on-going management.” After 12 months of inactivity, the compliance procedures require compliance staff to contact the branch managers to confirm in writing that advisory services are being provided to clients. A routine regulatory audit indicates that for the past several years, more than 150 of Raymond’s advisory accounts had no securities trading activity for at least 12 months and these accounts paid PIP approximately $1 million in advisory fees.
Choose a response and provide an explanation that supports your choice.
- Only Raymond violated the CFA Institute Code and Standards.
- Raymond and Jaynes both violated the CFA Institute Code and Standards.
- Raymond, Jaynes, and Bower all violated the CFA Institute Code and Standards.
- Neither Raymond, Jaynes, nor Bower violated the CFA Institute Code and Standards.
- None of the above.
This case involves the improper management of client accounts because of a failure to comply with the policies and procedures established by PIP. Although PIP informs its clients that it will continually monitor their account for inactivity to determine whether the clients would be better off in less expensive brokerage-only account, that does not happen with Raymond’s clients. Raymond does not note or discuss the inactivity in at least 150 accounts as promised, violating his duty to his clients under CFA Institute Standard III(A): Loyalty, Prudence, and Care.
PIP’s compliance procedures indicate that compliance personnel are also expected to monitor client inactivity and contact branch managers about inactive accounts, which also did not happen in Raymond’s case. Bower, as chief compliance officer, failed to supervise his compliance staff properly to ensure the implementation of firm policy, a violation of CFA Institute Standard IV(C): Responsibilities of Supervisors.
Presumably, once informed of the account inactivity, the branch manager is responsible for following up with the financial adviser to determine whether a change to a brokerage-only account is warranted. Neither Raymond nor Bower, who are explicitly responsible for monitoring account inactivity, bring Raymond’s 150 inactive accounts to Jaynes’s attention. It is unclear from the facts whether Jaynes has direct responsibility for monitoring account inactivity. But Jaynes does have overall responsibility for managing his branch’s advisers to make sure they are managing client accounts appropriately and complying with rules, regulations, and firm policies and procedures. Because his supervision of Raymond is ineffective, leading to a compliance breakdown, Jaynes has also violated CFA Institute Standard IV(C): Responsibilities of Supervisors.
The failure to appropriately manage client accounts in this case resulted in a breakdown from Raymond, Jaynes, and Bower in fulfilling their professional responsibilities under the CFA Institute Code and Standards. C is the best choice.
This case is based on a September 2019 US SEC enforcement action.
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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.
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