Ethics - Standard IV - Duties to Employers

Start time - 2:15 pm

Three down, four to go.  I'll note at this point I'm on page 91 of the CFAI materials and have been reading the pages pretty closely (though not word for word).  Covering the rest of the Standards will get me to page 150, so I think my goal is to try and just crank through standards IV to VII (I'm getting faster as I do more).  Pgs 151-170 are practice problems for the Ethics portion.  After that readings 3 and 4 will go into detail on Global Investment Performance Standards (GIPS) which looks to be a complete transcription of the entire standards with no indication of which are more/less important...need those Schweser notes, ASAP.

Standard IV - Duties to Employers

IV(A) Loyalty
MCs must act for benefit of employer and not deprive employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to the employer.

I'll note here this one seems the most straightforward of the standards so far, so I will skim for anything interesting rather than present the entire framework.  It should be fairly obvious when a violation has occurred, but I will look for grey areas/non-intuitive processes.

• Again, client comes first, even before employer, but you should consider impact on sustainability of employer
• Does not require MC to subordinate important personal matters to work
• Employers are not obligated to adhere to the Code/Standards
• No independent practices that conflict - notify employer of any business activity and receive consent
• Departing employees must be handled carefully
• Does not prohibit using knowledge gained, but firm records and work should be erased or returned to employer unless firm gives permission
• It is OK to contact former clients so long as contact info doesn't come from records of former, or violate non-competes - can use public records
• Whistleblowing - personal and firm interests are secondary to preserving integrity of capital markets - in this case disobeying your firm might be the right thing
• Independent contractors - duties are defined by the contract

Procedures

• Competition procedures, termination policies/manage transitions, have policies for reporting incidents, clearly indicate how employment status relates to duties

Notes from examples:

• Simple knowledge of names and existence of former clients is not confidential info
• Cannot solicit clients until after you have left tho or use the former firm's marketing lists
• Preparation to start a competing business is fine, you just cannot conduct business.  Must be done on your own time and outside the office though.
• If you are mayor of a town and compensated you must disclose this if the duties are time consuming enough to detract from your employer - but I take from this that you can be paid for outside work and not report so long as it doesn't hurt employer

IV(B) Additional Compensation Agreements

MCs must not accept gifts etc. that competes with or might reasonably be expected to create a conflict of interest with employer's interest unless they obtain written consent from all parties involved.

• Make a written report
• Include terms and nature of the agreement and duration

Notes from examples:

• Can be non-monetary as well and must be reported

IV(C) Responsibilities of Supervisors

MCs must make reasonable efforts to detect/prevent violations of applicable laws, rules, regulations and Code/Standards by anyone subject to their supervision or authority.

• 'Reasonable' is a function of number of employees and the work they perform
• If you have alot of subs, you need to delegate but delegation does not relieve them of supervisory responsibility
• Must instruct subs about methods to prevent/detect violations
• Must put in place written procedures and subject these to periodic review
• Making good procedures isn't enough - must make sure these are being followed
• 'Adequate' procedures are those that meet industry stds, regulatory reqs, Code/Standards, and firm circumstances
• Should design to anticipate most likely violations
• Should be appropriate for size and nature of org
• Promptly act once any violation is discovered.  Cannot just rely on employee's statements.  Reporting alone is not enough
• Ensure it will not be repeated
• If systems are inadequate, make corrections, or put in writing you cannot take supervisory responsibility until remedied
• Enforce investment as well as non-investment related policies equally (e.g. mandatory vacations)

Procedures

• Make code of ethics in plain accessible language.  Compliance procedures are the application of the code of ethics.
• Identify situations where violations are likely to occur
• Designate a compliance officer
• Once program in place, disseminate and periodically review
• If a violation occurs, act promptly, conduct thorough investigation, and take actions

Notes from examples:

• Must exercise reasonable caution to prevent subs from using MNPI

End of Standard IV.

3:15 pm, approximately 1 hour