Day 6- Ethics

[CFAZod]

It's noon, I'm still in my pajamas, I have bed head, have drunk four cups of coffee, have eaten a bowl of cereal, and the laundry has piled up. It has begun.

Standard 1- Professionalism, A. Knowledge of the Law. 'Participation or Association with Violations by Others.

The idea of whether candidates know or should know that their conduct may contribute to a violation troubles me. I find the language interpretive. It seems as though the judgement of a certain matter is highly subjective, especially the concept of dissociating from wrongdoing being done by others. The material outlines steps that may be taken to dissocaiate from ethical violations. Of course it depends on the situation and the candidates' role, but at which step is the standard satisfied? Does one need to revert to the particulars of the 'most strict' rule? No one wants to go to the extreme of actually voluntarily resigning from employment based on continual refusal by the firm to stop engaging in unethical actions.

"Seeking counsel often does not asbolve a member or candidate from the requirement to comply with the law or regulation." The particular comment goes on to state that the situation should be reported to his supervisor, an independent legal opinion should be sought, and it should be determined whether the regulator should be notified of the error.

So one one hand it is recommended to seek legal counsel, and on the other this may not absolve a candidate.

 

[CFAZod]

Taken from the readings, page 18, Application of the Standard (Knowledge of Law):

Lawrence Brown�s employer, an investment-banking firm, is the principal
underwriter for an issue of convertible debentures by the Courtney
Company. Brown discovers that Courtney Company has concealed severe third quarter
losses in its foreign operations. The preliminary prospectus has already
been distributed.

Comment: Knowing that the preliminary prospectus is misleading, Brown
should report his findings to the appropriate supervisory persons in his firm.
If the matter is not remedied and Brown�s employer does not dissociate from
the underwriting, Brown should sever all his connections with the underwriting.
Brown should also seek legal advice to determine whether additional
reporting or other action should be taken.

First off, why merely dissociate from an underwriting? Perhaps you could still do the underwriting (and collect fees) if a message is sent to the receivers of the prospectus stating the findings and recognizing the error and subsequently recognizing that with the correct, adjusted numbers indicating the losses the underwriting is still viable?

Nonetheless, it is commented that Brown should notify supervisors and if the underwriting is not remedied and dissociated from, he should seek legal advice and "determine whether additional reporting or other actions should be taken."

In the previous example's comment (regarding Michael Allen), it states that, "Although it is recommended that members and candidates seek the advice of legal counsel, the reliance on such advice does not absolve a member or candidate from the requirement to comply with the law or regulation."

So somewhere in "determine whether additional reporting or other actions should be taken" lies compliance to the Standard. Compliance relies on the applicable 'most strict' law, rule, regulation, etc. If the Standards are the 'most strict', then what in the hell is compliance if we are told that other actions may need to be taken? If compliance in some instance is, say, an SEC rule, then perhaps compliance relates to very specific action. To comply with the Standards when they are the 'most strict' law, it is open to interpretation what the "additional reporting or other actions that should be taken" are.

 

[plyon]

CFAZod Wrote:
-------------------------------------------------------

>
> The idea of whether candidates know or should know
> that their conduct may contribute to a violation
> troubles me. I find the language interpretive.
> It seems as though the judgement of a certain
> matter is highly subjective, especially the
> concept of dissociating from wrongdoing being done
> by others. The material outlines steps that may
> be taken to dissocaiate from ethical violations.

I'm just going to take a flyer here that you were NOT a liberal arts major in college. This is why many of our more quantitatively orientated brethren on AF find ethics so difficult.

Yes. These questions and issues require your judgement. Yes. Your answers to these questions in the real world may be subjective. That shouldn't be so surprising.

But I do not believe that the exam itself gets into too many gray areas. If you can understand the guiding principles as have been outlined in the two posts here, then you can answer questions related to them.

 

[CFAZod]

Dude, do you by chance work with SEC, NASD, or other regulatory rules regularly? If so, do you find that agency regulations are often more strict than the Standards? It just seems as though using one's judgement and finding the Standards most strict creates a sort of vicious circle, and causes one to rely heavily on the opinions of a legal counsel or supervisory structure and written firm policies that may not always "absolve" a candidate.

I wasn't a liberal arts major. The Economics curriculum was relatively quantitatively intensive considering it was originally a part of the arts program. I suppose it rolled with the changes after being introducted in that liberal core during the late 60's. To quote the Big Lebowski, "the bums (read: hippies)lost".

 

[CFAZod]

Standard 1- Professionalism, B. Independence and Objectivity.

"Every member and candidate should endeavor to avoid situations that could cause or be perceived to cause a loss of independence or objectivity in recommending investments or taking investment actions."

It seems from the readings that gifts and bonuses, as long as they dont threaten the independence and objectivity of the candidate, may be accepted from clients as opposed to entities seeking influence. Yet the readings acknowledge that although not as great, the potential for gaining favor for a certain client to the detriment of other clients still exists. I guess I just chalk this up to more gray area existing.

The readings mention that candidates may accept bonuses or gifts from clients but must disclose to their employers such benefits from clients. This begs the question, does a candidate need to disclose benefits from clients before receiving them, or doesn't it matter in which order it takes place?

 

[TorontoTim]

CFAZod, many questions. My short answers:

1. Yes, a lot of the ethics issues are "subjective", as in one must apply judgment, which is a matter of opinion. While this stuff doesn't lend itself to quantitative analysis, it may help make things more "objective" by applying the "reasonable person" standard that's used in law. By taking actions A, B and C to dissociate yourself, would the reasonable person see you as being associated with the bad people?

2. You said: "No one wants to go to the extreme of actually voluntarily resigning from employment based on continual refusal by the firm to stop engaging in unethical actions." I disagree. If you're working at a firm that continually engages in unethical actions, and the firm is aware of that, and it continually refuses to stop, then is that really a place where you want to work? Looking at that from the point of view of the Standards, under the circumstances are you able to keep working at the firm but sufficiently dissociate yourself from the bad stuff? Seems unlikely, but if you can, go for it. If not, better resign.

3. Seeking legal/compliance advice in tricky situations is a very good idea. True, that *may* not absolve you, but I assure you it will go a long way, as long as you are completely up front with them about the facts involved (so they can give informed advice), and as long as you have no reason to believe that their advice is suspect.

4. Re the underwriting, I think you'll cause yourself unnecessary angst if you tackle exam questions that way. The comment says "if the matter is not remedied", which must imply that no correcting statement was issued. If you now suggest that maybe someone can contact recipients of the preliminary prospectus, you're playing with the facts.

5. Re gifts and bonuses, think about categorizing conflicts into "not OK at all; avoid" vs. "OK as long as you disclose and/or manage". Since the gift being referred to is OK as long as disclosure (to the employer) is made, then in principle there's probably no requirement that the disclosure come before the gift -- in fact in some cases that will be impossible. If it's made immediately afterwards, then you're probably fine. All of that, of course, is subject to any applicable legislation or internal policy that says otherwise.

P.S. re bed head, pyjamas, etc. -- it's 4:30pm and I'm just about to go have my morning shower. I feel your pain.