As you know, CFA members and candidates, must follow the CFA’s Code of Ethics and observe the Standards of Professional Conduct. These rules set a high standard of conduct that sets CFA members apart from other participants in the capital markets. Recent scandals in the financial services industry support the notion that CFA membership reflects a higher calling.
Code of Ethics
Among other things, the Code of Ethics requires that members act with integrity, competence, diligence, and respect, Members must act ethically to the public, clients, employers, colleagues and other participants in the capital markets.
Standards of Professional Conduct
The Standards of Professional Conduct set specific behavioral requirements on professionalism, integrity, and discharging duties to clients, employers, and the Institute. Members must comply with laws and regulations, and exercise independence and objectivity. For capital markets, members are of course prohibited from insider trading, tipping and market manipulation. Members must exercise duties of loyalty, fair dealing, and suitability. Members must present performance data accurately and preserve client confidentiality. Members also owe duties of loyalty to employers, and may not accept benefits that might create conflicts of interest. Members must be diligent, independent and thorough in making investment recommendations, and have a reasonable basis for recommendations supported by research. Members owe disclosure duties to clients and must retain records to support investment recommendations. Conflicts of interest must be disclosed fully, fairly, and prominently. Transactions for clients must take priority over member’s own transactions. Finally, members may not engage in conduct that harms the reputation or integrity of the Institute including avoiding misrepresenting or exaggerating the meaning of membership.
Recent Massive Ethical Lapses in the Financial Services Industry
These standards set the gold standard for CFA members and candidates for membership. With these high ethical standards as background, how can we explain the massive breaches of duty and ethical lapses in the financial services industry widely reported in the past few years?
Everyone knows about Bernie Madoff’s $19 billion ponzi scheme, or R. Allen Stanford’s $7 billion certificate of deposit fraud. Locally, Tom Petters ran a $3.65 billion ponzi scheme hurting many investors over many years.
But it is not just ponzi schemes, so-called blue-chip money managers have also been accused or convicted of massive breaches of fiduciary duty recently. Raj Rajaratnam built Galleon Group into a $7 billion hedge fund, and was an investment superstar until he was convicted of insider trading and his fund folded. Jerome Kerviel, a French trader with Societe Generale lost $4.9 billion Euros by hiding losses, forging documents and lying to his superiors.
Another Minnesotan, Phil Falcone of Chisholm, ran Harbinger Capital, a multi-billion dollar hedge fund. Falcone recently agreed to be banned from the securities industry, after admitting that he used $113 million of his investors’ money to pay his personal taxes, and redeem certain clients over others.
No one can forget Joseph Cassano of AIG’s Financial Products division. Cassano supervised a business that wrote billions of dollars in credit default swaps backed by massively troubled residential mortgages and other debt obligations. AIG was ultimately bailed out by taxpayers for over $80 billion.
What about Jon Corzine, former co-CEO head of Goldman Sachs, former senator and governor of New Jersey, and former CEO of MF Global. MF Global allegedly transferred $750 million in customer assets to meet firm capital requirements which ultimately resulted in a meltdown of the firm.
Most recently, SAC Capital Advisers and its CEO, Steven A. Cohen have been in the news. SAC, a $10 billion hedge fund, has recently been charged by the SEC for failure to supervise, and indicted by the Department of Justice for securities fraud related to insider trading.
What do Madoff, Stanford, Petters, Rajaratnam, Kerviel, Falcone, Cassano, Corzine and Cohen all have in common other than all were either money managers or financial services executives who are alleged to have engaged in violations of securities and commodities laws, breaches of fiduciary duty among other things? The simple answer is that none of these individuals who are so tied to recent capital markets failures, and have never been, members of the CFA Institute. I sent these names to the Professional Conduct Department at the CFA Institute in Charlottesville, and was advised that none of these individuals have ever been members of the CFA.
CFA Membership is a Higher Calling
Does the fact that this group of executives is not CFA members mean that there have never been ethical or criminal violations by CFA members? Of course not. My sample is too small and cherry-picked to make my point. The CFA Institute’s silence on the fact that these notorious individuals are not CFA members may reflect a concern that no one can predict when the next shoe will drop.
But, I am not bound by these concerns. Anecdotally at least, major lapses in the financial services industry in recent years have come from non-CFA members. These individuals were not subject to the Code of Ethics and Standards of Professional Conduct. The old adage that a fish rots from the head may be apt here. These individuals were all in some leadership capacity at their firms. Being a CFA member reflects a higher calling. Membership signifies a club of those who subject themselves to high ethical standards. The absence of CFA involvement with these problems is pretty good evidence that these standards work.
Submitted By Jonathan B. Levy, member of the Board of Directors Minnesota CFA Society, securities lawyer with Lindquist & Vennum LLP, Minneapolis.