Welcome Back to CFA Level I Ethics: Duties to Employers | CFA Level I Ethics
In this study session, we’ll tackle Standard 4, which focuses on duties to employers. We’ll dive into Standard 4A (loyalty to employer), 4B (additional compensation arrangements), and 4C (responsibilities of supervisors).
4A. Loyalty to Employer – A Balancing Act
Standard 4A emphasizes the importance of acting in the best interest of your employer without divulging confidential information or causing harm. But it’s crucial to understand the situations in which this standard applies:
- Standard 4A is relevant only if you’re an employee of the firm.
- If you’re an independent contractor, your contract or agreement with the firm will dictate your obligations.
- Firms should adopt a standardized classification structure to differentiate between employees and contractors.
Now, remember Standard 3A (loyalty to clients) and 4A (loyalty to employer)? What happens when they conflict? Here’s the priority order: clients’ interests come first, followed by your employer, and lastly, your self-interest.
Key takeaways: Whistleblowing on your employer for illegal activities or to protect the integrity of capital markets is not a violation of Standard 4A. However, whistleblowing for personal gain is a violation.
Work-Life Balance and Independent Practice
Standard 4A doesn’t require you to neglect personal and family responsibilities. Instead, it encourages finding a balance between personal and employment obligations through discussion and consensus with your employer.
If you’re involved in independent practice, it’s vital to seek permission from your employer and disclose all aspects of the services. This includes compensation, duration, and the nature of the activities.
Leaving Your Employer: Appropriate Behavior Matters
When you decide to leave your employer, you must continue to act in their best interest until your employment officially ends. Here are some important points:
- Don’t misappropriate trade secrets, misuse confidential information, solicit clients, or steal client lists.
- Files and records are the property of the employer. Don’t make copies without permission.
- Comply with your employer’s policy on notifying clients of your planned departure.
After leaving the company, be cautious about reproducing work or contacting clients. Be sure to respect the previous employer’s intellectual property and follow the applicable rules and regulations.
Application (Sharing Employer’s Research Outside the Firm):
Jane Thompson, an equity analyst at XYZ Investments, receives a call from her friend Mark, who is an investment advisor at another firm. Mark asks for Jane’s opinion on a particular stock that he is considering recommending to his clients. Jane shares her employer’s research report and her own analysis with Mark, without obtaining permission from her employer.
Comment: Jane’s actions violate Standard IV(A) as she shared her employer’s proprietary research and her own work with an external party without her employer’s consent. By doing so, she failed to act in the best interests of her employer.
Application (Using Employer’s Resources for Personal Gain):
Tom Davis works as a financial advisor at a wealth management firm. He starts a side business providing financial planning services to a niche market. Tom uses his employer’s resources such as office space, computer, and proprietary financial planning software to support his side business during his work hours.
Comment: Tom’s actions violate Standard IV(A) as he is using his employer’s resources for personal gain without obtaining permission. This conduct is not in the best interest of his employer and may cause conflicts of interest.
4B. Additional Compensation Arrangements – Gifts with Strings Attached
Standard 4B states that you must not accept gifts, benefits, compensation, or consideration that might create a conflict of interest with your employer’s interests unless you obtain written consent from all parties involved. This standard refers to bonuses offered by clients as incentives for future performance.
To comply with Standard 4B, obtain written consent from your employer before accepting any such offers. Include the full proposed amount, benefits, terms, and confirm the details with the party offering the additional compensation.
Application (Participation in a Startup):
David Green, a portfolio manager at an investment management firm, decides to invest in his friend’s startup company and becomes an advisory board member to provide financial guidance. David receives equity in the startup as compensation for his advisory role. He continues managing client portfolios at his firm without disclosing his involvement and compensation from the startup to his employer.
Comment: David violated Standard IV(B) by not disclosing his involvement and equity compensation in the startup to his employer. This arrangement could create a conflict of interest, especially if the startup’s industry is related to any of the client portfolios that David manages. To comply with Standard IV(B), David should inform his employer in writing about his participation and compensation from the startup and seek the employer’s consent.
4C. Supervisory Responsibilities – Keeping Everyone in Check
Standard 4C requires you to make reasonable efforts to ensure that anyone under your supervision complies with applicable laws, rules, regulations, and the Code and Standards”.
This standard applies to any member or candidate who has employees subject to their control, regardless of whether they are members or candidates of the CFA program. Let’s explore the key aspects of this standard.
Reasonable Efforts
- High standards are expected when you are in a supervisory position.
- Overseeing a large team does not excuse you from supervisory lapses.
- If necessary, delegate supervisory duties to subordinates and ensure they understand and fulfill the supervisory standards required.
Compliance with Laws, Rules, Regulations, and the Code and Standards
- Ensure everyone under your supervision complies with all applicable requirements, regardless of their membership or candidacy status in the CFA program.
- You are responsible for implementing an adequate compliance system that meets industry standards, regulatory requirements, and the Code and Standards.
- If your firm’s compliance system is inadequate, bring it to the attention of management and recommend corrective actions. Decline supervisory responsibility in writing if necessary.
Compliance System Components
Your compliance system should:
- Prevent violations by having clear and easy-to-understand procedures, designating a compliance officer with defined authority, outlining the scope of procedures and prohibited conduct, and structuring incentives to discourage unethical behavior.
- Detect violations through a system of checks and balances and clear procedures for reporting violations.
- Respond promptly and adequately after detecting violations by defining the scope of investigation, applying interim sanctions (e.g., suspending an employee from certain duties), and following necessary procedures to mitigate the situation.
Supervisor’s Role in Compliance
As a supervisor, you should:
- Disseminate compliance procedures to appropriate personnel.
- Periodically update procedures to ensure compliance with the law.
- Continually remind and educate personnel about compliance procedures.
- Incorporate a professional conduct evaluation in employee performance reviews.
- Review employee actions to ensure compliance and identify violators.
- Report violations to the compliance department promptly and follow necessary procedures to mitigate the situation.
Remember that simply educating an employee at the beginning of their employment is not enough. Continually educate your staff through meetings, emails, and even posters at the workplace to remind them of the importance of compliance procedures and the code of ethics.
Application (Supervising Remote Employees):
Emma Smith, a portfolio manager at a financial firm, has a team of analysts working remotely due to the rise in remote work trends. Emma holds regular virtual meetings and is confident in her team’s abilities but has not established a procedure to monitor their trading activities or verify the accuracy of their research. One of the analysts, John, engages in insider trading without Emma’s knowledge.
Comment: Emma has violated Standard IV(C) by failing to establish reasonable procedures for supervising remote employees’ activities. Even though the team is working remotely, Emma must ensure that proper monitoring and reporting mechanisms are in place to prevent or detect any unethical behavior, such as insider trading. Emma should implement a supervision system that includes regular check-ins, trade reviews, and research verification.
Application (Supervising New Employee Onboarding Process):
Rachel Adams, a compliance officer at an investment firm, is responsible for overseeing the onboarding process of new employees. Rachel’s responsibilities include ensuring that new employees are aware of the firm’s policies and procedures, as well as providing them with training on ethical standards. However, due to her busy schedule, Rachel often delegates the onboarding process to her assistant without verifying whether the training has been completed. As a result, a new employee, Mike, engages in unethical practices that violate the firm’s standards.
Comment: Rachel has violated Standard IV(C) by failing to adequately supervise the onboarding process for new employees. Her oversight led to a lack of proper training, which resulted in Mike’s unethical behavior. Rachel should ensure that new employees receive comprehensive training on the firm’s policies, procedures, and ethical standards, and she should verify that all training has been completed to maintain a high level of compliance within the firm.
And there you have it! That’s Standard 4C on supervisory responsibilities. Make sure to read through some case studies and continue to the next standard, where we’ll learn about investment analysis, recommendations, and actions.
✨ Visual Learning Unleashed! ✨ [Premium]
Elevate your learning with our captivating animation video—exclusive to Premium members! Watch this lesson in much more detail with vivid visuals that enhance understanding and make lessons truly come alive. 🎬
Unlock the power of visual learning—upgrade to Premium and click the link NOW! 🌟
