LM03 Guidance for Standards I-VII

Part 7

Standard IV: Duties to Employers

Standard IV (A) Loyalty

In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.

Interpretation:

• Assume you work for an investment management firm and have committed to work 45 hours a week. During this time, you’ll not indulge in any activity that will deprive your employer of your skills and abilities.
• Now, assume you are about to place a large buy order for a stock for a client. You are tempted to place an order for your own account before buying for the client. This is called front running and it must be avoided, as you must place your client and employer’s interests before your own interests.
• Everything else takes precedence before duty to your own self. Of course, it’s not a blanket statement that requires members and candidates to always put work ahead of personal commitments and important family obligations. The standard recommends members to enter into a dialogue with employers to strike a balance between work and personal life.

Guidance:

• The employer must not have rules/written policies that conflict with responsibilities of members and candidates. If there are any, then you must encourage your employer to change those policies.
• Independent practice: Independent practice is engaging in a business activity where you get paid, and the work is not related to the employer. Assume you are thinking of starting an independent practice to work over the weekends or after-work hours. There are certain rules that govern this:
  • You must not start a practice that conflicts with the interests of your employer.
  • Obtain consent from your employer before starting the practice. Disclose the types of services you will render, the expected duration of the services, and the compensation.
• Leaving an employer: Assume you have submitted your resignation and decided to leave your employer. There is a one-month notice period. During this period:
  • You must continue to act in the best interests of your current employer.
  • You must not reveal trade secrets to your new employer.
  • You must not misuse client lists.
  • You must not solicit existing clients to shift their business to the new employer.
  • Once you have left your current employer and are being paid by the new employer, you may seek business from old clients if you have not signed a non-compete agreement with the previous employer.
• Guidelines for what is acceptable after starting work at a new firm:
• It is okay to use skills and experience gained at the previous employer as they are not considered confidential. Knowledge of the names of former clients is not considered confidential.
• One must not use anything (records/work) stored in paper or electronic format from the previous firm. Ex: Excel model for the pharmaceutical industry developed at the previous employer.
• Use of social media:
  • Follow firm policies with respect to social media for interacting with clients and prospective clients. Ex: when employees are leaving an organization, it may not be appropriate to announce it on social media as firms may have rules on how and when to announce this to clients.
  • The recommended practice is to have separate accounts for personal and professional social media activities.
  • If there are no firm rules, it’s best to act in the spirit of the Standard and not engage in any activity that would harm the employer.
• Whistle-blowing: Bringing insider knowledge of illegal/unethical activities in an organization to the attention of law enforcement activities is called whistle-blowing. Whistle-blowing is not acceptable if the intent is for personal gain.
• Nature of employment: Understand the nature of employment (full-time employee or a contractor). You need to be aware of the terms of the relationship: number of hours, compensation, benefits, work location, client expectations, etc.

Recommended procedures for compliance:

• Competition policy: Relates to the independent practice, we saw in the guidelines section. You must understand the rules/procedures of your firm with respect to pursuing an independent practice.
• Termination policy: Understand the termination policies of your employer.
• Incident-reporting procedures: Be aware of incident-reporting procedures at your firm. If there is none, encourage your firm to adopt one.
• Employee classification: Understand your status within the firm: part-time, full-time, or contractor. Be aware of the policies that apply to your class.

Standard IV (B) Additional Compensation Arrangements

Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest, unless they obtain written consent from all parties involved.

Interpretation:

• Assume you are a portfolio manager working for an investment management firm. Assume a client has benefited immensely from your work, and would like to gift an expensive cruise for you and your family as a token of appreciation. This is an example of additional compensation.
• Assume you use a brokerage firm to execute orders for your clients. If the brokerage wants to send a gift so that you continue to direct business to them in the future, it is an example of additional compensation.

Guidance:

• Obtain permission before accepting compensation that might create a conflict. You must first disclose to your employer and obtain written consent for any compensation that may create a conflict.
• “Written consent” includes any form of communication that can be documented.
• Not all gifts need to be reported. For example, if a brokerage firm sends you a desktop calendar, or if a client sends you a pen as a token gift (not of significant value), then it need not be reported.
• Discuss possible limitations to their abilities to provide services that may be competing with your employer’s during the negotiation and hiring process.

Recommended procedures for compliance:

• Make an immediate written report to your supervisor and compliance officer specifying any compensation you propose to receive.
• The details of the report should be confirmed by the party offering the additional compensation, including performance incentives offered by clients. In our earlier example, where the client offered an expensive vacation, when you disclose the same to your employer, it must be validated by the client. This written report should state the terms of any agreement.

Standard IV (C) Responsibilities of Supervisors

Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.

Interpretation:

• This standard applies to anyone who has supervisory responsibilities, irrespective of whether or not the employees under their supervision are CFA Institute members, CFA charterholders, or candidates.
• If the number of employees under supervision is large, then supervisors may delegate responsibilities to subordinates, but that does not absolve them of responsibility in case a violation happens. Supervisors must ensure their subordinates are aware of the rules, applicable laws, firm policies, Code and Standards, etc.
• They must have regular training programs on compliance policies for employees under their supervision.
• If the compliance procedures at a firm are inadequate, they must bring it to the attention of the firm’s senior managers.
• If the compliance procedures are inadequate or non-existent, then members and candidates should decline supervisory responsibility.

Guidance:

• System for supervision
  • Understand the compliance procedures of the firm.
  • Ensure adequate compliance procedures are in place that cover all possible violations. It is not possible to cover every potential violation that may occur.
  • Once a violation is detected, a supervisor must immediately report the misconduct and initiate an assessment to determine the extent of wrongdoing. It is not sufficient to warn the employee or rely on his/her statements that it will not recur.
  • He must also ensure that the act is not repeated until the investigation is complete.
• Supervision includes detection
  • Supervisors are responsible for detecting violations.
  • Supervisors are responsible for ensuring compliance procedures are implemented and that they are followed through periodic review.
  • Assume you as a supervisor have taken adequate steps to ensure compliance procedures are in place. Despite this, a violation occurs. Since adequate steps were taken, you as a member may not be in violation of the standard under these circumstances. However, it is an indication that the existing compliance procedures are not sufficient.

Recommended Procedures for Compliance:

• Encourage firms to adopt a code of ethics for strong ethical foundation.
• Have adequate compliance procedures to ensure the policies in the Code and Standards, and securities laws are implemented at the firm, and adhered to, on a daily basis.
• Distinguish between the code of ethics and compliance procedures. Keeping them separate helps serve their individual purpose.
  • Compliance procedures must be written in plain language such that any average person can understand and assimilate them easily.
  • Assign a compliance officer who has the authority to implement the firm’s compliance procedures.
  • Establish the hierarchy of supervision and assign duties among supervisors.
  • Once the compliance system is in place, supervisors must periodically monitor to detect violations and, if discovered, must take the necessary actions.
• Implementation of compliance education and training.
• Establish an appropriate incentive structure.
  • Supervisors and firms must analyze the compensation structure to see if it encourages profits at the expense of ethical behavior.
  • Is “how” profits are generated given less importance than “how much” profits are made for the firm?

Share on :