Level 1 CFA® Exam Ethics, Standards IV (A) & IV (B)

With Standard IV, we move on from the responsibilities towards clients (which were discussed in Standard III) to the duties to employers.

We start with Standard IV (A): Loyalty.

Employer-Employee Relationship

As a CFA candidate, you are obliged to act to the benefit of your employer and not to deprive your employer of the skills you possess.

However, Standard IV (A): Duties to Employers – Loyalty clearly says that when there is an employer-employee relationship both employees and employers have their responsibilities:

• RESPONSIBILITIES OF AN EMPLOYEE – they are determined in the policies adopted by the company that the employee works for.
• RESPONSIBILITIES OF THE EMPLOYER – the employer is first and foremost obliged to ensure an ethically oriented work environment.

Compliance with the Employer’s Policies

The employer-employee relationship should be governed by specific principles that should be followed as long as they are not in conflict with the Code and Standards or any applicable laws and regulations.

Nowadays, firms tend to adopt the Code and Standards as their ethics policy. In such a case, as a CFA candidate (or member/charterholder), you can stay loyal both to your employer and to the provisions of the Code and Standards at the same time.

If a company does not adopt the Code and Standards, it will develop its own compliance procedures. In this situation, you are bound to obey the company’s compliance procedures as long as no conflicting procedures are developed.

Remember that in case of any conflicts, you are obliged to obey the stricter rule.

SO, basically if the employer's compliance procedures are in conflict with the Code and Standards >> it means you must follow the principles set by the Code and Standards, or the applicable law if it is even stricter! (cf. Standard I (A)).

Dealing with Conflicting Situations

Now, let’s say that e.g.:

• your employer fails to ensure an ethically oriented work environment, or
• your stance and the stance of your employer differ in some VERY important aspects.

(...)

Standard IV (B) describes yet another limitation of employees, namely it regulates additional compensation for the work performed. According to this standard, CFA members and candidates must not accept any gifts or compensations that might compromise their decisions or actions unless all parties involved agree to it in writing.

Why? The reasons are threefold:

1. A possible conflict of interest may occur when such a gift or compensation is accepted.
2. Additional compensation for work may hinder the objectivity requested from investment professionals.
3. It may also affect the real costs of services provided by the professional.

For these reasons, every situation in which a benefit is offered to an investment professional should be disclosed to the employer. This will allow the employer to make a judgment about whether the compensation received affects the duties performed by the employee.

The information included in Standard IV (B) is vital for you because of the nature of work you do or may be doing in the future. In direct contact with the client, you will often encounter situations in which some benefits (outside the compensation that you will receive for your work from the employer and outside any regulations that will govern your provision of services to the client) will be offered to you.

Standard IV (B) does not form a rigorous prohibition on additional compensations in work but it necessitates that you inform your employer about such benefits and seek approval.

Accepting a Gift

Sometimes you will wonder whether you can accept an offer.

(...)

CFA Exam: Loyalty

The employer-employee relationship should be governed by the policies and procedures established by the employer. Mind, however, that such policies and procedures must not conflict with applicable laws or the Code and Standards.

1. BENEFIT THE EMPLOYER – Do not deprive the employer of the benefit of your skills and abilities or otherwise harm the employer. Always consider the effects of your actions on the sustainability and integrity of the employer.
2. PERSONAL OBLIGATIONS? – When personal matters interfere with your work on a regular or significant basis, talk with the employer about balancing personal and employment obligations.
3. SEEKING OTHER EMPLOYMENT? – Continue to act in the employer’s best interest and do not engage in any activities that would conflict with your duty of loyalty until your resignation becomes effective. Follow the employer’s policies when notifying clients of your planned departure.
4. CLIENT SOLICITATION? – Never before your resignation becomes effective and never by taking advantage of your employer’s files and records. In the absence of a non-compete agreement, after you depart your employer, you may contact your former clients to invite them, either overtly or implicitly, to hire you or your new employer.
5. YOUR RECORDS OR FILES? – You must not take any records or files to a new employer without the written permission of the previous employer even if you are their author. Such documents are the property of the employer.
6. EASIER TRANSITION BETWEEN EMPLOYERS? – Some companies have agreed on some common procedures that specify what information departing employees are permitted to take upon resignation if they move to another employer that also signed such an agreement, e.g., the “Protocol for Broker Recruiting” in the United States that allows taking some general client contact information upon departure (however, the specific client information may be used only by the departing employee + for protection, a copy of such information must be provided to the local management team for review).
7. CONFIDENTIAL? – The skills and experience you obtain while being employed are not confidential and you may use them at your new work. Also, simple knowledge of the names and existence of former clients is generally not confidential unless deemed such by an agreement or law. However, you must not divulge any confidential information while working for or after leaving your employer.
8. SOCIAL MEDIA? – Best practice is to maintain separate accounts for personal and professional social media activities. Such professional accounts are the property of the employer and should be handled based on the employer’s policies, e.g., when leaving the job.
9. REQUEST FOR PROPOSAL (RFP)? – Refrain from responding to an RFP that your employer is also responding to ‘cos that will lead to direct competition between the employee and the employer (unless you receive permission from the employer and the entity sending out the RFP).
10. INDEPENDENT COMPETITIVE ACTIVITY? – Abstain from an independent competitive activity if it conflicts with the interests of your employer. Otherwise, notify the employer about your intention to enter such independent activity and inform the employer about the types of services to be provided, the expected duration of the services, and the compensation for the services.
11. WHISTLEBLOWING? – You’re not bound by the loyalty rule if there’s some potentially unethical or illegal activity on your employer’s part that needs prompt disclosure.
12. PERSONAL ADVANTAGE? – Never at the expense of the employer. So, don’t use the employer’s resources for your personal advantage unless you obtain consent from the employer.
13. INDEPENDENT CONTRACTOR? – There’s a variety of business relationships within the investment industry, e.g., an employee vs an independent contractor. Loyalty in the sense of the Code and Standards applies to employees.

CFA Exam: Additional Compensation Arrangements

Unless you obtain permission (in the form of a written consent) and all parties involved agree to it, do not accept any gifts, benefits, compensation, or consideration that might threaten your employer’s interest. Always disclose such acceptance and make such arrangements in the form of a written report.

1. OBTAIN PERMISSION – from your employer before making any arrangements for additional compensation for the services you provide;
2. WRITTEN CONSENT – means any form of communication that can be documented and retrieved if needed, including e-mail;
3. BENEFIT – any direct compensation by the client and any indirect compensation or other benefit received from a third party;
4. THREATEN – HOW? – by (i) competing with your employer’s interest and compromising your duty of loyalty; (ii) affecting your objectivity as a professional; and (iii) creating a potential conflict of interest with the employer;
5. DISCLOSURE – enables the employer to evaluate your actions and motivations and assess the true cost of the provided services;
6. WRITTEN REPORT – should specify the terms of an agreement to receive compensation or benefits arranged for in writing (including performance incentives) in addition to the compensation and benefits received from the employer, including the nature of the additional compensation, the approximate amount of such compensation, and the duration of the agreement.