Reading 2-IV: Standards of Professional Conduct & Guida

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CFA Institute Area 1-2: Ethical and Professional Standards
Session 1: Code of Ethics and Professional Standards
Reading 2-IV: Standards of Professional Conduct & Guidance: Duties to Employers
LOS B.: Additional Compensation Arrangements.

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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 she is doing business with a member of her immediate family.

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

C) does not need to inform her employer of the arrangement because REO has been doing business with her brother before she was hired.

D) 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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Answer and Explanation

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

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Dan Lee, CFA, is a portfolio manager with Jewel Investment Advisors. Doris Black, one of Lee's long-time clients, told Lee the he could use her vacation home in Aspen, Colorado, for a week during skiing season if the return on her portfolio exceeded its benchmark by two percentage points during the next year. Black also agreed to reimburse Lee and his wife for their transportation expenses to Aspen. Lee accepted this arrangement. According to CFA Institute Standards of Professional Conduct, what is Lee's obligation, if any, to disclose this arrangement to Jewel? Lee:

A) need not disclose either the arrangement to use Black's vacation home or the reimbursement of expenses.

B) must disclose in writing the arrangement to use Black's vacation home but not the reimbursement of expenses.

C) must disclose the reimbursement of expenses but not the arrangement to use Black's vacation home.

D) must disclose both the arrangement to use Black's vacation home and the reimbursement of expenses.

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Answer and Explanation

Standard IV(B) requires that Lee disclose to Jewel in writing all monetary compensation or other benefits that they receive for their services.

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Jan Hirsh, CFA, is employed as manager of a college endowment fund. The colleges 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) do none of the actions listed here.

B) inform her supervisor verbally about the Platinum account.

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

D) change her intentions and start doing $2,500 in business with Advisors each year.

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Answer and Explanation

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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Jill Marsh, CFA, works for Advisors where she manages various portfolios. Marshs godfather is an accountant and has done Marshs tax returns every year as a birthday gift. Marshs 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) do none of the actions listed here.

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

C) liquidate from her personal portfolio any stocks her godfather owns.

D) have her godfather cease doing her taxes.

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Answer and Explanation

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 individuals 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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Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with Worldwide Brokerage. Worldwide suggests to Calaveccio that they are willing to provide him with additional compensation for order flow. Is this permissible under the Code and Standards?

A) Yes, if he receives written consent from TrustCo and discloses the arrangement to his clients and prospects.

B) Yes, if he discloses the arrangement in writing to TrustCo.

C) Yes, if he obtains written permission from Trustco and his clients and prospects.

D) No, such an arrangement is in violation of the Code and Standards.

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Answer and Explanation

In conformance with Standard IV(B), Calaveccio is required to obtain written consent from TrustCo. In conformance with Standard VI(C), he is also required to disclose the additional compensation to clients and prospects. Written permission from his clients and prospects is unnecessary.

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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 reject the offer to serve on the Board of Directors.

C) Saul need not disclose to Savage Bank his acceptance of the offer, because the offer involves no monetary compensation.

D) 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.

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Answer and Explanation

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 a portfolio for a wealthy family. Marsh earns one percent of the portfolios 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 percent return, the family will give her the use of the familys 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.

D) delivers a copy of the Code and Standards to the family to let them know of her obligations as a member of CFA Institute.

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Answer and Explanation

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

A) 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.

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

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

D) Neither the lunch nor the bonus mentioned in the other answers.

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Answer and Explanation

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 clients 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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Selma Brown, CFA, is a portfolio manager for Mainland Securities. Rick Wood, one of her clients and owner of Wood Fitness Centers, offers to permit Brown and her immediate family to use the facilities at his fitness centers at no cost during 2003. To get this benefit, Brown must achieve on Woods portfolio at least a 2-percentage point return above the total return on the S&s 500 index during 2002. Brown orally informs her immediate supervisor of the nature and duration of the proposed arrangement.

Arnold Turley, a CFA Institute member, is a portfolio analyst at Mainland Securities. He was just elected to the Board of Directors for Omega Services, which pays him $1,000 plus expenses for attending each of its quarterly board meetings. Turley e-mails Mainlands compliance officer informing her of this arrangement with Omega and receives a reply informing him that the agreement is acceptable.

Did Brown or Turley violate CFA Institute Standards of Professional Conduct?

A) Brown: Yes, Turley: No.

B) Brown: Yes, Turley: Yes.

C) Brown: No, Turley: No.

D) Brown: No, Turley: Yes.

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Answer and Explanation

Brown violated Standard IV(B), Additional Compensation Arrangements, because she must disclose in writing other benefits to be received for services that are in addition to compensation conferred by her employer. Turley did not violate Standard IV(B) because he received consent from his employer in writing, which includes e-mail.