CFA Level 1

AAA

Ethics and Standards - 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.

Reasoning behind Standard IV-B
As with a number of Standards, the disclosure required by Standard IV-B is intended to uncover and prevent potential conflicts of interest - in this case, the potential conflicts that can arise with additional gifts or monetary bonuses offered to an individual in a position of trust.

  • Money Motivates - The investment business is one that draws highly intelligent, capable and motivated people. Some are drawn to the fact that the work itself can often be interesting, dynamic and challenging, while others are motivated by the opportunity to enhance the financial well-being of others by their strategies, insight and planning. At the same time, there is no question that the potential for lucrative salary, bonuses and other perks has traditionally been a primary draw for young graduates assessing potential career options and for those who have worked in other industries but are looking for another career path.
  • Money Corrupts - Thus, this is an industry populated with individuals who are often primarily motivated by money, who sell and market their services to wealthy individuals and companies who usually have plenty of excess money to spend. This Standard acknowledges that greed and money have the possibility to corrupt - that is, when we accept additional gifts and money from an outside party, it's possible that the money could either directly or indirectly affect our decision-making. Instead of acting objectively in the best interests of all clients and in the best interests of our employer, we might develop loyalty to those who provide the most expensive gifts, and even act to conceal the nature of our relationship with the gift givers.
  • Money - It's Not Always Bad - Standard IV-B does not assume that every arrangement for additional bonuses and gifts is a corrupt one. To be sure, Standard IV-B doesn't prevent someone from accepting additional gifts, benefits, bonuses and so forth - it's just that when rewards and/or compensation are accepted, the Standard obligates the CFA Member or Candidate to inform his or her employer, in writing. As with other Standards, the principles of fair representation and full disclosure are the guiding principles, as we believe that the employer is entitled to this full disclosure. It is the employer's responsibility to decide whether or not additional compensation arrangements are appropriate, and whether they affect the actions and motivations of that employee.

Definitions as They Apply to Standard IV-B

  • Compensation - Compensation applies to direct cash payments or bonuses by the clients, as well as indirect compensation provided by third parties. It applies to non-monetary gifts, which includes complementary vacations, memberships to country clubs or health clubs, reimbursement of expenses - anything that is provided to the employee by the client and could create even the appearance of a conflict of interest.
  • In Writing - "In writing" means any form of communication that can be documented. Computer email is regarded as an acceptable format for disclosure, assuming that the direct supervisor has access to and uses email.

Applying Standard IV-B

  • Reward for a Job Well Done - Violations of Standard IV-B will often develop quite innocently, often by the actions of a wealthy client who is simply making a friendly gesture. Take a case where a well-to-do retired couple has vacation property. They regard their investment advisor as a close friend and wish to show off the property, but they also want to give the advisor some incentive (i.e. if he outperforms the market in their portfolio, they offer him to take a week's vacation at their expense). Accepting this arrangement would be a violation unless the analyst discloses the offer in writing to his or her employer.
  • Limit the Gifts - Analysts sometimes will attend an industry conference where the sponsor will give complementary giveaways to attendees, such as pens and notepads, coffee mugs and book bags. Generally speaking, such items are considered nominal and wouldn't fall under the scope of this Standard, even though they are gifts. However, suppose a technology company presents at a conference, and then gives away a free notebook computer and printer to an influential analyst, hoping for a favorable recommendation. Standard IV-B would prohibit such activity unless the employer was notified. Generally speaking, one should avoid even the appearance of impropriety by declining any gifts. Complementary items such as pens and book bags are not seen as a violation, though one should recognize that the Standards have evolved so as to limit the acceptance of free gifts.

How to Comply

1. CFA members must report all arrangements for additional monetary compensation to their immediate supervisor, preferably prior to the acceptance of the gift, but immediately thereafter otherwise.

2. Written reports should include the specific terms, including the duration of the agreement, specific amounts that could be potentially earned and the nature of non-monetary benefits.

3. Review all existing internal compliance procedures relating to compensation from clients and business associates and the potential for conflicts. For example, outside business partners have traditionally paid for travel and other expenses in order to entice an employee to visit, but in recent years many firms have acted to strictly limit this practice. Discuss these issues with the compliance officer and understand what is and is not acceptable for that firm.

4. Follow all instructions made as a result of the disclosure. An employer may decide that a compensation arrangement is not appropriate, and if so, an employee is bound to follow that decision.

Standard IV-C: Responsibilities Of Supervisors
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