Standards of Practice Guidance 2014 Show
The StandardMembers 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. Test your understanding of Standard IV(B)
Guidance
Standard IV(B) requires members and candidates to obtain permission from their employer before accepting compensation or other benefits from third parties for the services rendered to the employer or for any services that might create a conflict with their employer’s interest. Compensation and benefits include direct compensation by the client and any indirect compensation or other benefits received from third parties. “Written consent” includes any form of communication that can be documented (for example, communication via e-mail that can be retrieved and documented). Members and candidates must obtain permission for additional compensation/benefits because such arrangements may affect loyalties and objectivity and create potential conflicts of interest. Disclosure allows an employer to consider the outside arrangements when evaluating the actions and motivations of members and candidates. Moreover, the employer is entitled to have full knowledge of all compensation/benefit arrangements so as to be able to assess the true cost of the services members or candidates are providing. There may be instances in which a member or candidate is hired by an employer on a “part-time” basis. “Part-time” status applies to employees who do not commit the full number of hours required for a normal work week. Members and candidates should discuss possible limitations to their abilities to provide services that may be competitive with their employer during the negotiation and hiring process. The requirements of Standard IV(B) would be applicable to limitations identified at that time. Back to top Recommended Procedures for ComplianceMembers and candidates should make an immediate written report to their supervisor and compliance officer specifying any compensation they propose to receive for services in addition to the compensation or benefits received from their employer. The details of the report should be confirmed by the party offering the additional compensation, including performance incentives offered by clients. This written report should state the terms of any agreement under which a member or candidate will receive additional compensation; “terms” include the nature of the compensation, the approximate amount of compensation, and the duration of the agreement. Back to top Application of the StandardExample 1 (Notification of Client Bonus Compensation):Geoff Whitman, a portfolio analyst for Adams Trust Company, manages the account of Carol Cochran, a client. Whitman is paid a salary by his employer, and Cochran pays the trust company a standard fee based on the market value of assets in her portfolio. Cochran proposes to Whitman that “any year that my portfolio achieves at least a 15% return before taxes, you and your wife can fly to Monaco at my expense and use my condominium during the third week of January.” Whitman does not inform his employer of the arrangement and vacations in Monaco the following January as Cochran’s guest.
Example 2 (Notification of Outside Compensation):Terry Jones sits on the board of directors of Exercise Unlimited, Inc. In return for his services on the board, Jones receives unlimited membership privileges for his family at all Exercise Unlimited facilities. Jones purchases Exercise Unlimited stock for the client accounts for which it is appropriate. Jones does not disclose this arrangement to his employer because he does not receive monetary compensation for his services to the board.
Example 3 (Prior Approval for Outside Compensation):Jonathan Hollis is an analyst of oil-and-gas companies for Specialty Investment Management. He is currently recommending the purchase of ABC Oil Company shares and has published a long, well-thought-out research report to substantiate his recommendation. Several weeks after publishing the report, Hollis receives a call from the investor-relations office of ABC Oil saying that Thomas Andrews, CEO of the company, saw the report and really liked the analyst’s grasp of the business and his company. The investor-relations officer invites Hollis to visit ABC Oil to discuss the industry further. ABC Oil offers to send a company plane to pick Hollis up and arrange for his accommodations while visiting. Hollis, after gaining the appropriate approvals, accepts the meeting with the CEO but declines the offered travel arrangements. Several weeks later, Andrews and Hollis meet to discuss the oil business and Hollis’s report. Following the meeting, Hollis joins Andrews and the investment relations officer for dinner at an upscale restaurant near ABC Oil’s headquarters. Upon returning to Specialty Investment Management, Hollis provides a full review of the meeting to the director of research, including a disclosure of the dinner attended.
About the Author(s)CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. CFA Institute works with
academic institutions with the University Affiliation Program. Academic institutions that embed a significant portion of the CFA Program Candidate Body of Knowledge (CBOK)—including the Code of Ethics and Standards of Professional Conduct—into their curriculum may be eligible to participate in the University Affiliation Program. What is the disclosure obligation?The ongoing disclosure obligation refers to the issuer's obligation to provide certain information to the markets in a timely manner and on a continuous basis. It refers above all to the disclosure of inside information and other ongoing information as required by regulations.
What are the four obligations that brokerThe best interest standard is an overarching obligation, which is satisfied only if you comply with four component obligations: Care, Disclosure, Conflict of Interest and Compliance.
What is a conflict of interest SEC?A conflict of interest is defined as "an interest that might incline a broker-dealer or investment adviser—consciously or unconsciously—to make a recommendation or render advice that is not disinterested." For financial firms, there is rarely a way to conduct business and completely avoid all conflicts with retail ...
What is form CRS?Form CRS is a client or customer relationship summary. Advisers and brokers are required to deliver a relationship summary to you beginning in summer 2020. The relationship summary contains important information about the adviser or broker.
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