Category Archives: Ethics

For the Financial Professional

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Fred Martin, CFA

The financial services profession is generally highly lucrative, ensuring that financial professionals do not need to worry about their own financial well-being.

But there is a catch to this prosperity.

From the very first day they join our industry to their last day of employment, a financial services professional will face a critical question: Will my actions today align with my client’s best interests?

There’s no middle ground. 

You see, our industry is lucrative so that we never have to put our own interests ahead our clients. So how does a financial services professional know whether their actions are aligned with their client’s best interests?

The answer is simple. 

If you are a professional and your actions do not CLEARLY line up with your client’s best interests, then you are not acting in their best interests. Notice that I have taken out the ambiguity here. You are either CLEARLY in the right zone or you are not.

If you are a financial services professional, you face two major roadblocks to protecting client’s interests.

The First Roadblock: You.

Are you acting properly? Can you take the simple test above and answer that you are clearly working in your clients’ best interests? If not, you should consider some serious soul-searching and a change in your business practices.

The Second Roadblock: Your Company.

What if your company has policies and procedures that you know are not in your clients’ best interests? In this case your choice is to fight or to leave. Neither choice is easy.

At the end of your career, you will be remembered as either one who tirelessly protected and nurtured your clients or one who protected yourself and your employer?

Our industry needs more professionals who will clearly look out for their clients…at any cost.

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Fred Martin is the Chief Investment Officer at Disciplined Growth Investors and is a 32-year veteran of the money management business. He is the founder of Objective Measure, a conference based in Minneapolis that is bringing clarity and trust to the financial services industry and providing tools for effective financial leadership.

To find out more about Fred Martin or The Objective Measure Conference, click here.

Facing an Ethical Dilemma?

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The CFA Society has long been an advocate for strong ethics in the Investment Profession. The Code of Ethics and Standard of Professional Conduct are an integral part of the testing process, and underscores the importance to the Society of practicing the craft while adhering to those principles. As stated in the CFA Society’s Mission & Vision Statement:

High ethical principles and professional standards are essential to positive outcomes; rules and regulations, while necessary, are not sufficient by themselves.

We think that the CFA Society’s commitment to strong ethics is part of what sets charterholders apart from other professionals in the Investment Profession. We think this is particularly important in light of highly publicized ethical failures and an increasingly skeptical attitude toward the Investment Profession from the public. We would like to reinforce this message by starting a dialogue on FreezingAssets to help promote ethical decision making. The CFA designation comes with an obligation to do more than determine what is legal. We must go beyond the bare minimum of what is required. We want to understand what is right. And to understand what is right, we need to engage in dialogue. We would like to solicit questions and concerns from members, and then tap into our member base and professional experts to explore the ethical issues involved.

So, here are the ground rules.

1) Questions should be submitted anonymously. We don’t want anyone to worry about experiencing negative career impact from engaging in dialogue. So, no real names, no company names. Just situations.

2) Real situations are better. No trying to trick the panel with things like “If God is all powerful, can he make a planet so big that he himself can’t lift?”

3) Freezing Assets is not providing legal advice. So don’t ask for it.

There is a form on Freezingassets.org for submitting questions, situations, or concerns – access the form here. As with much of what we do, this is an experiment. Maybe everybody already knows everything. But we kind of hope there are a few folks out there who are able to challenge us all to think more deeply about what we do. We think that’s really what the Code and Standards are all about.

When submitting an inquiry, you agree to the following. Neither the Blog nor the Society is giving legal advice. If you think you need to consult a lawyer or compliance professional you should do so. The Society disclaims any liability for any advice or commentary on this website. The Blog respects the privacy of its participants.

“Start Well and End Well…”

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By Shawn Eells, UnitedHealth Group, Society Member and Level III Candidate

Was just one piece of career advice shared by Dean Junkans at the recent society luncheon titled: Leadership and Career Reflections from Two Just-Retired Industry Execs. The speakers were Howard Bicker, retired Executive Director from the Minnesota Board of Investment and Dean Junkans, CFA, retired Chief Investment Officer of Wells Fargo Wealth, Brokerage and Retirement. The event was well attended by society members and guests, and rightfully so.  Audience members were treated to a noon hour of humor, humbleness and career advice from two recently retired veterans of the investment industry.

Howard Bicker kicked off the event reflecting on his career, describing the constituents he served while leading a public investment plan, the politics he encountered, and provided advice for others answering to governing bodies: present the facts, speak in plain English and be honest. Other investing wisdom shared by Mr. Bicker: keep it simple, manage costs, avoid chasing returns, and invest with conviction, i.e. make meaningful allocations to asset classes.

Dean Junkans discussed the importance of filtering out the noise and sidestepping the short-termism promoted in the media while sticking to long-term investment strategies. When asked about career advice, he responded with three important attributes: be valuable, adaptable and easy to work with. And for those aspiring to be future leaders in the investment industry? Lead from the heart, not the brain, and practice your storytelling.

The event highlighted differing opinions from two distinct investment roles. That’s what makes a market. For those wondering, “start well and end well” refers to building your brand early in your career and resisting the urge to coast into retirement. Good advice for the young and old.

 

Ask the Ethicist: Discussing Work at Home

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I live with a significant other, and we are not engaged or married. We talk about our days at work openly. I strongly trust my significant other, but being in the securities industry I am terrified of inadvertent information leaks and others we know trading on the information. That person agreed verbally never to talk about my activities outside our home. I want to keep myself covered, but I also want to be open to my significant other about my life’s work. What can I do?

Dear terrified investment professional afraid to discuss work at home:

You raise some good points but have nothing to fear. You are smart and it is prudent to agree with your significant other that he should not discuss anything about your work with third parties. This understanding should also include not tipping or trading on any such information. You, like most people, naturally want to talk at home about what happens at work since we spend so much time at work. The need to share with our significant other often conflicts with employment and compliance policies that prohibit disclosure of proprietary information, and securities law and fiduciary duty restrictions that prohibit disclosure of work-related activities.

This issue got a lot of attention recently when the SEC Enforcement Division brought an insider trading case against Filip Szymik, whose roommate worked as an analyst at William Ackman’s Pershing Square Management. Szymik learned from his roommate that Ackman was going to make a public presentation on why Herbalife, a publicly traded company, is a ponzi scheme.  Szymik had told his roommate that he would not trade on the information. Despite the understanding, Szymik told a friend named Peixoto about the upcoming presentation. Peixoto bought put options that traded in the money when Herbalife stock tanked after Ackman’s presentation.  Peixoto made only about $47,000.  The SEC charged Szymik with insider trading for tipping material nonpublic information to Peixoto who traded on the information and made a profit.  This case demonstrates the risks of trading and tipping material nonpublic information, and shows that the SEC will bring cases even against relatively small players to deter misconduct.

You have nothing to worry about from the SEC if you do not disclose material nonpublic information that your significant other could trade on or tip to another who trades.  What constitutes material nonpublic information is often a difficult interpretative question. Because Ackman is a prominent activist investor and his views and positions will affect the market, his views on Herbalife were clearly material.  Materiality is usually defined as what a reasonable investor would deem to significantly alter the total mix of information available or what a reasonable investor would deem significant in making an investment decision given the total mix of information available.  The SEC has not defined materiality, it has been defined in court cases.  Usually, but not always you know if you have material nonpublic information.  If you learn about key events before they are public such as a merger, tender offer, earnings information, loss or acquisition of key contract or business relationship and the like, you probably have material nonpublic information.  If you are trading for a client that is acquiring or disposing of a large position, you probably have non-public information.

If you need to talk about your work at home, try to talk about work in a general way without revealing nonpublic information to avoid breaching duties to clients, violating employer’s policies or securities laws.

On Thin Ice

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[an occasional series skating on the edge of ethics, investing and SRI (Sustainability, Responsibility, Impact)]
Diane Brehmer

The winner of this year’s Moskowitz prize for excellence in quantitative SRI research is Dr. Caroline Flammer, Ivey Business School, for “Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach”. The approach taken in this study finds a positive causal relationship between CSR and financial performance.

This paper uses a new approach to assess, quantitatively, whether CSR[1] is beneficial to companies. What is novel is the use of a regression discontinuity design that allows the author to draw sharp causal inference on the impact of CSR on financial performance.

Prior studies of the effect of CSR on performance have found, in general, a small positive correlation between CSR and financial performance.[2] A common concern with these studies is that endogenous factors, not reflected in the model or that cannot be measured, can just as easily explain the higher financial performance associated with CSR.

To address these concerns, Dr. Flammer’s study uses a different approach. It examines the impact of shareholder-sponsored CSR proposals that pass or fail by a small margin – “close-call” proposals – on stock prices. This approach addresses the above concerns in two ways:

  • Shareholder-sponsored proposals are developed by external shareowner groups, and hence are independent of company management. Unlike management-sponsored proposals, they cannot be strategically withdrawn by the management if the outcome is expected to be unfavorable to the management.
  • Restricting the analysis to close-call votes eliminates proposals that pass or fail by a wide margin (“wide-margin” proposals). The rationale for eliminating wide-margin proposals is that the outcomes of wide-margin proposals are anticipated and reflected in stock prices before the vote takes place. In contrast, close-call votes have a random element: their outcomes are uncertain. Close-call votes are not reflected in prices in advance and therefore are more useful for estimating the causal effect of CSR on financial performance.

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