Various questions regarding ethics

[Gurifissu]

Ethics is the section I feel the less comfortable in, and in which the range of my results is the widest. After doing numerous questions, I still feel insecure regarding the following concepts, so if anyone can reassure me, it’d be great!
1. Compensation: When a client offers an analyst/manager lavish compensation (worth $10,000 for example), the manager needs the permission of his employer before he accepts the gift. What type of permission is required here? Written? Informal? If the gift is worth less than 100€, there are NO need for disclosure (even if it is recommended), right?
If, on the other hand, a company for which you provide research reports offers you ANY type of gift (>100€), is it required to refuse it?
2. Misconduct: If you were to be arrested (convicted or not) for bad or illegal behaviour, outside of work, in a totally informal and unrelated context, are you violating the standards? According to me, yes…
3. Market manipulation is clearly forbidden, except for tax purposes (as I have seen in one of the questions). How come? and is this ALWAYS the case?
4. In case of an oversubscribed IPO, you should prioritize your clients’ discretionary accounts (include family accounts in which you have no beneficary interests), and approach the IPO using a pro-rata basis (or sometimes, on a random draw basis). What kind of pro-rata is that? The client account size seems unfair. Should it be the order size? The client’s interests?
5. Disclosure of changes in investment processes: say a manager is managing a discretionary account, and is using a tactical asset allocation combined with a core-sattelite approach. Is he required to disclose the strategies he is currently using and the changes he makes to clients and prospective clients?
6. I have seen on a question that a manager can make safe recommendations to all of his clients, disregarding suitability. Is this always the case? If the manager judges independently an investment to be safe, can he recommend it to all?
7. i) An analyst runs an activity that does not compete with his current employer and is compensated for it, he need not disclose this to his employer. Right?
ii) An analyst runs an activity that does compete with his company’s activities, and is not compensated for it (and has no prospects of being compensated), does he need his employer’s approval?
iii) An analyst runs an activity that competes with his employer’s, and is compensated for it. He needs approval from his employer, clients, and prospective clients, right? Are those approvals supposed to be written?
Thank you very much guys!

 

[Jun Sik Kim]

1. Compensation: When a client offers an analyst/manager lavish compensation (worth $10,000 for example), the manager needs the permission of his employer before he accepts the gift. What type of permission is required here? Written? Informal? If the gift is worth less than 100€, there are NO need for disclosure (even if it is recommended), right?
According to IV(B) Additional Compensation Arrangements, members and candidates are required to obtain written consent from all parties invovled before accpeting compensation or other benefits from third parties (even clients) that might create a conflict with their employer’s interest.
In your example, such lavish compensation is reasonable enough to affect loyalty & objectivity and create potential conflicts of interest to the employer. Here you MUST get a written consent (any form of communication that can be documented), which I believe which is formal rather than informal, before accepting such compensation.
If the gifts is perceived to be small in value, which is lower than the limit set by the employer, this is unlikely to create a conflict of interest with the employer’s interest. In this case, Standard IV (B) does not apply and no written consent is required.
If, on the other hand, a company for which you provide research reports offers you ANY type of gift (>100€), is it required to refuse it?
If an employer requires you to report any offer of gifts in any value, not reporting offers will create a conflict of interest with the employer’s interest, which breaches Standard IV (B). You must get a written consent if your employer wants it and the gift is reasonable to cause a conflict of interest with the employer.
2. Misconduct: If you were to be arrested (convicted or not) for bad or illegal behaviour, outside of work, in a totally informal and unrelated context, are you violating the standards? According to me, yes…
This part is also tricky to me.
Standard regarding Misconduct addresses all conduct that reflects poorly on the professional integrity, good reputation, or competence of members and candidates. This Standard is primarily aimed at conduct and actions related to a member’s professional life.
I came across to a question where a professional was involved in a fight in a rugby match, and this wasn’t violating Misconduct as it was outside work and not related to professional activity. Also, personal bankrupcy itself does not violate the Standard of Misconduct, but if the circumstances of the bankruptcy involve fradulent or deceitful business conduct, the bankruptcy may be a violation of this standard.
In my opinion, if a misconduct took place within working hours, it is definitely violating the standard. However, if a conduct is taken outside of working hours, you have to look into the facts and circumstances of the conduct and see if it reflects adversely on their professional activity.
3. Market manipulation is clearly forbidden, except for tax purposes (as I have seen in one of the questions). How come? and is this ALWAYS the case?
According to the Standard of Makret Manipulation, the term “market manipulation” include 1) the dissemination of false or misleading information and 2) transactions that deceieve or would be likely to mislead market particpants by distorting the price-setting mechanism of financial instruments.
In the CFA Level 1 textbook, it states “Standard II(B) is not intended to preclude transactions undertaken on legitimate trading strategies based on perceeived market inefficiencies. The intent of the action is critical to determining whether it is a violation of this standard.” Buying and selling securities for sole purpose of tax incentive will not violate this standard, assuming there are no intention to create market manipulation.
4. In case of an oversubscribed IPO, you should prioritize your clients’ discretionary accounts (include family accounts in which you have no beneficary interests), and approach the IPO using a pro-rata basis (or sometimes, on a random draw basis). What kind of pro-rata is that? The client account size seems unfair. Should it be the order size? The client’s interests?
I’m not really sure on this, but the only thing I know for hot IPO is that members are prohibited from withholding such securities for own benefit and must make a bona fide public distributions. Members should allocate partially executed orders among the participating client accounts pro rata on the basis of order size while not going below an established minimum lot size for some securties.
On the other side, client’s interests are counted when allocating trades for new issues.
5. Disclosure of changes in investment processes: say a manager is managing a discretionary account, and is using a tactical asset allocation combined with a core-sattelite approach. Is he required to disclose the strategies he is currently using and the changes he makes to clients and prospective clients?
The Standard V(B) Communication with Clients and Prospective Clients requires that members to disclose to clients the basic format and general principles of the investment processes they use to analyse investments, select securities, and constuct portfolios and must promptly disclose any changes that might materially affect those processes.
For purpose of marketing, a manager may not want to reveal all strategies he is using for confidentiality issues. This is my opinion that managers can hide some facts but must maintain adequate description of the investment strategy. Also for any changes, if it is material change, he must promptly disclose such change.
6. I have seen on a question that a manager can make safe recommendations to all of his clients, disregarding suitability. Is this always the case? If the manager judges independently an investment to be safe, can he recommend it to all?
All clients have different needs, risks, return objectives and financial constraints. I don’t think a manager can recommend an investment to ALL clients as some clients’ suitability will not be satisfied, unless he only has a client group with similar suitability needs.
7. i) An analyst runs an activity that does not compete with his current employer and is compensated for it, he need not disclose this to his employer. Right?
ii) An analyst runs an activity that does compete with his company’s activities, and is not compensated for it (and has no prospects of being compensated), does he need his employer’s approval?
iii) An analyst runs an activity that competes with his employer’s, and is compensated for it. He needs approval from his employer, clients, and prospective clients, right? Are those approvals supposed to be written?
If an analyst is setting up a new company, Standard of Loyalty shuold be discussed. Under this standard, members who plan to engage in independent practice for compensation must notify their employer and describe the types of services the member will reender to prospective independent clients.
If an analyst is doing extra works or outside arrangements receiving compensations, the member must obtain permission (WRITTEN CONSENT) for additional compensation because such arrangements may affect loyalties and objectivity and create potential conflicts of interest. This is under Standard IV (B) Additional Compensation Arrangements.
I think you have to evaluate if the arrangement is going to affect loyalties and objectivity and create a conflict of interest with the employer.
I tried best to answer your questions, but some of my answers could be wrong. All my answers are derived from CFA level 1 ethics textbook. If you find any mistakes or things should be added, please let me know. Thanks!

 

[agbonline]

I am also having some confusions related to these scenarios. Help would be appreciated. If above answers are incorrect please what course of action would be best according to you.
Thanks in advance