Reading 2-IV: Standards of Professional Conduct & Guidanc style, center, manager, college, 2011

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Session 1: Ethical and Professional Standards
Reading 2-IV: Standards of Professional Conduct & Guidance: Duties to Employers

LOS B.: Additional Compensation Arrangements.

 

 

Jan Hirsh, CFA, is employed as manager of a college endowment fund. The college’s endowment is held by the brokerage firm Advisors, Inc. Over the years, Hirsh has developed a solid relationship with Advisors. Because of this relationship, Advisors has given her their Platinum level service for her personal account. Advisors ordinarily gives the Platinum level only to clients who do a minimum of $2,500 of commission business in a year. Hirsh has never reached the $2,500 commission level and probably will never do so. According to Standard IV(B), Additional Compensation Arrangements, Hirsh needs to:

A) inform her supervisor verbally about the Platinum account.

B) inform her supervisor in writing about the Platinum account.

C) do none of the actions listed here.

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Having the Platinum account is a benefit from her managing the endowment, which led to the relationship with Advisors. Members should report to their employers any additional compensation or benefits they receive for their services. This must be in writing. Doing $2,500 in business alone will not negate her obligation unless she explicitly tells Advisors that she is willing to accept whatever penalties accompany a Platinum account when a client does less business.

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An analyst working at an investment firm has a client that rents limousines. The client tells the analyst that as long as he is the client’s analyst, he can have free use of a limousine several times a year. The analyst needs to:

A) inform his supervisor in writing of the offer if the analyst intends to accept the offer.

B) do nothing since the offer is not linked to the performance of the client's portfolio.

C) explicitly refuse such an offer.

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Standard IV(B) requires that members disclose to their employer in writing all benefits that they receive in addition to their regular compensation for services they perform on behalf of their employer. They also need to get consent from their employer in writing. The written report to the employer should include the details of any written or oral agreement for extra compensation. The analyst does not have to refuse the offer.

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Jill Marsh, CFA, works for Advisors where she manages a portfolio for a wealthy family. Marsh earns 1% of the portfolio’s value each year in the form of a commission from Advisors. The family just told her that any year the portfolio she manages earns more than a 10% return, the family will give her the use of the family’s vacation home for one week. Hirsh will comply with Standard IV(B), Additional Compensation Arrangements, if she:

A) does nothing with respect to this.

B) sends an e-mail to her supervisor about the vacation home.

C) delivers a typed memo to her supervisor about the vacation home the first time she uses it.

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Standard IV(B) requires that members disclose to their employer in writing all benefits that they receive in addition to their regular compensation for services they perform on behalf of their employer. E-mail messages qualify. As long as the agreement is in effect, she must inform her employer even if she has yet to use the potential benefit.

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To comply with Standard IV(B), Additional Compensation Arrangements, members should do all of the following EXCEPT:

A) state the terms of oral or written agreements regarding the compensation and the duration of the agreement.

B) immediately make a written report to their employer specifying any compensation benefits they receive.

C) reject any outside compensation immediately because it is not appropriate to accept outside compensation in a business setting.

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There is no reason to reject any outside compensation immediately because it is inappropriate to accept it. However, all outside arrangements must be reported to the member’s employer.

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Dick Bowden, a CFA charterholder, receives a free country club membership in exchange for financial advice he can offer the firm. He should:

A) do nothing; it is his business where he spends his free time.

B) reject the country club membership since it is illegal under CFA Institute rules and regulations to accept outside compensation.

C) disclose the arrangement to his employer.

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Dick should disclose the arrangement to his employer under Standard IV(B), Additional Compensation Arrangements.

 

Dick should disclose the arrangement to his employer under Standard IV(B), Additional Compensation Arrangements.

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Chris Babcock, CFA, a portfolio manager for a large Texas investment firm, has been offered compensation in addition to what her firm pays her. The offer is from one of her clients and the additional compensation will be based on her yearly performance in excess of the market index. Babcock should:

A) turn down the offer because it represents a clear conflict between this client and Babcock's other clients.

B) make written disclosure to all parties involved before she accepts this offer.

C) make written disclosure to her other clients before she accepts this offer.

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Standard IV(B), Additional Compensation Arrangements, applies in this situation. Standard IV(B) states, “No gifts, benefits, compensation, or consideration are to be accepted with may create a conflict of interest with the employer’s interest unless written consent is received from all parties.”

The key words here are "written consent" - members must obtain written consent because such arrangements may affect loyalties and objectivity and create potential conflicts of interest.

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An analyst needs to inform his supervisor in writing of which of the following?

A) A client and the analyst alternate paying for lunch at a local sandwich shop.

B) Both the lunch and the bonus mentioned in the other answers.

C) An annual bonus, sent to the analyst by a client, which varies with the performance of the client's portfolio that the analyst manages as an employee even though no verbal or written agreement exists about the bonus.

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Standard IV(B) requires that members disclose to their employer in writing all benefits that they receive in addition to their regular compensation for services they perform on behalf of their employer. Since the bonus varies with the performance of the client’s portfolio, there is a clear link to the services of the analyst. The analyst is not required to report the lunch since it is not linked to performance.

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David Saul, CFA, heads the trust department at Savage National Bank. Fairway Enterprises invites Saul to sit on its Board of Directors. In return for his services on the Board, Fairway offers to provide Saul and his family with access to the facilities at Wilmont Country Club at no cost. Saul will not receive any monetary compensation for his services on the Board. According to CFA Institute Standards of Professional Conduct, which of the following actions must Saul take?

A) Saul must obtain written consent from all parties to only if he decides to accept the offer to serve on the Board of Directors.

B) Saul must disclose in writing to Savage Bank the terms of the offer whether or not he accepts the offer to serve on the Board of Directors.

C) Saul must reject the offer to serve on the Board of Directors.

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Standard IV(B) requires that members obtain written consent from all parties involved before accepting monetary compensation or other benefits that they receive for their services that are in addition to compensation or benefits conferred by a member's employer. In this situation, Saul may also be obligated to disclose his participation on Fairway's Board to clients, prospective clients, and employer under Standard VI(A), Disclosure of Conflicts.

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Jill Marsh, CFA, works for Advisors where she manages various portfolios. Marsh’s godfather is an accountant and has done Marsh’s tax returns every year as a birthday gift. Marsh’s godfather has recently become a client of Advisors and asked specifically for Marsh to manage his account. In order to comply Standard IV(B), Disclosure of Additional Compensation Arrangements, she needs to:

A) have her godfather cease doing her taxes.

B) do neither of the actions listed here.

C) liquidate from her personal portfolio any stocks her godfather owns and verbally tell her supervisor about the tax services.

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Standard IV(B) requires that members disclose to their employer in writing all benefits that they receive in addition to their regular compensation for services they perform on behalf of their employer. It is not unreasonable for an individual’s godfather to give them a birthday gift. Moreover, since the tax services were a regular birthday present before her godfather became a client, this implies that they are unrelated to any investment management services.

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Sharon West is a CFA charterholder and trust officer for REO Trust Company. Soon after beginning work for REO, West finds that REO has been conducting all its securities transactions through her brother who is a registered representative. West's brother charges REO commissions that are equal to the lowest available from another broker. West's brother tells her that if she continues doing business with him, he will give her a substantial discount on all personal transactions she conducts through him. West:

A) must inform her employer of the arrangement because it provides her with additional compensation.

B) must inform her employer of the arrangement because she is doing business with a member of her immediate family.

C) does not need to inform her employer of the arrangement because the commissions her brother charges the firm are the lowest possible.

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Members are required to disclose to their employer in writing all monetary compensation or other benefit they receive in addition to the employer’s compensation. The discounting of West’s commissions is a benefit that must be disclosed.