CFA Level 1 Question of the Week – Ethical and Professional Standards

Question

Edson Williams is a portfolio manager at an investment bank. Williams has been successful in bringing in new business for the bank and in increasing assets under management. For this reason, he has received a considerable amount of additional compensation but has never disclosed this fact to clients or prospective clients.

With regards to the CFA Institute Standards of Professional Conduct, Williams is most likely in:

 	A. compliance with the Standards.
 	B. violation of Standard VI(C): Referral Fees and Standard V(B):
Communication with Clients and Prospective Clients.
 	C. violation of Standard VI(C): Referral Fees, Standard V(B): Communication
with Clients and Prospective Clients, and Standard VI(A): Disclosure of
Conflicts.

Matt_AnalystPrep · Answer

The correct answer is A.According to Standard VI(C) – Referral Fees, the disclosure of fees received from or paid to recommendations of products or services allows employers and clients to evaluate any potential bias that may arise from referral fees. However, the standard is not meant to cover compensation by employers to employees for generating new business when it would be obvious to clients that the employees are referring potential clients to the services of their employers.Standard V(B) – Communication with Clients and Prospective Clients specifies that members must disclose limitation and risks associated with investment recommendations and activities.Standard VI(A) – Disclosure of Conflicts dictates that CFA members must disclose any and all circumstances which might result in a conflict of independence and objectivity, or interfere with loyalty to clients or employer.