Standard IV. Duties to Employers Flashcards
What is the CFA Standard IV. Duties to Employers: Standard IV(A): Principle of Loyalty
Fundamental Loyalty Concept
- Professional Commitment: Protect employer’s interests without complete subordination of personal needs
- Key Responsibility:Act beneficially for employer while maintaining professional integrity
What is loyalty mean in this case..
- It’s NOT about blindly following everything your employer says
- It’s about protecting your employer’s interests while maintaining your professional ethics
- You can’t use company resources or information for personal gain
- maintain employer’s trade secrets
- Respect proprietary business information
Ethical Boundaries:
- Can’t take confidential documents
- Can’t solicit clients when leaving a job
- Must maintain professional conduct even during job transitions
Example: Imagine you’re working at a financial firm and you’re planning to start your own business.
✅ CAN DO:
- Prepare for your new business on personal time
- Update your professional profiles
- Use publicly available information (name, work address, work telephone)
❌ CANNOT DO:
- Use client lists from your current employer
- Contact clients to move to your new business
- Share confidential company information
Standard IV(B): Additional Compensation Arrangements
Compensation Disclosure Requirements
-
Mandatory Transparency
○ Disclose all supplemental compensation
○ Obtain written employer consent
○ Provide detailed compensation arrangement specifics
Potential Conflict Scenarios
- Board memberships
- Performance bonuses
- Non-monetary benefits
- Client-provided incentives
Compliance Practices
- Inform supervisor/compliance officer
- Document compensation terms
- Confirm arrangement details in writing
- Avoid conflicts of interest
✅ WHAT YOU MUST DO:
-
Disclose all supplemental compensation
○ Inform employer of any additional compensation
○ Obtain written employer consent
○ Provide detailed arrangement specifics -
Follow compliance practices
○ Inform supervisor/compliance officer
○ Document compensation terms
○ Confirm arrangement details in writing
❌ WHAT YOU CANNOT DO:
-
Accept undisclosed compensation
○ Receive gifts or benefits without employer knowledge
○ Accept compensation that creates conflicts of interest
○ Hide non-monetary benefits (board memberships, etc.) -
Proceed without written consent
○ Engage in additional compensation arrangements without approval
○ Fail to document the terms of supplemental compensation
○ Neglect to disclose potential conflicts
Standard IV(C): Supervisory Responsibilities
Supervisor Obligations
Supervisors have a critical responsibility to ensure comprehensive organizational compliance through multiple layers of oversight:
- Ensure compliance with key regulatory frameworks:
○ Legal Requirements
§ Federal and state regulations
§ Industry-specific statutory mandates
○ Regulatory Compliance
§ External regulatory body guidelines
§ Comprehensive risk management protocols
○ Internal Firm Policies
§ Organizational governance standards
§ Procedural documentation and enforcement
○ Ethical Standards
§ Professional conduct guidelines
§ Integrity and transparency principles
**Detailed Supervisor Obligations **
Compliance Detection and Management
- Proactively investigate potential misconduct
○ Immediate and impartial investigation
○ Confidential reporting mechanisms - Corrective Actions
○ Implement proportional disciplinary measures
○ Provide remediation and learning opportunities
○ Limit employee activities during investigations
✅ WHAT YOU MUST DO:
- Ensure compliance with regulations
○ Establish effective compliance systems
○ Implement education and training programs
○ Create accountability structures - Detect and manage violations
○ Promptly investigate potential misconduct
○ Take appropriate corrective actions
○ Review and update compliance procedures - Implement recommended practices
○ Develop written compliance manual
○ Designate compliance officer
○ Document monitoring processes
○ Establish violation reporting procedures
❌ WHAT YOU CANNOT DO:
- Neglect supervisory duties
○ Fail to establish adequate compliance procedures
○ Ignore potential violations
○ Delegate without proper oversight - Create improper incentive structures
○ Reward results regardless of methods used
○ Promote “succeed at all costs” mentality
○ Ignore ethical considerations in performance evaluation
Whitman accepts an all-expenses-paid vacation from a client to reward good performance but doesn’t inform his employer.
A) IV(A)
B) IV(B)
C) IV(C)
B
Gupta discloses confidential performance data from his prior employer during a job interview.
A) IV(A)
B) IV(B)
C) IV(C)
A
Mattock, a supervisor, fails to implement compliance procedures and a subordinate leaks a research report early to a friend.
C
Hightower takes client research he personally authored before resigning and intends to use it at his next job.
A
A department head ignores repeated reports that junior team members are violating securities laws.
C
Webb posts publicly that he is joining a new firm and invites contacts to reconnect, breaching a nonsolicitation agreement.
A
An investment manager accepts a side agreement for performance-based pay from a client without informing his employer.
B
Gupta uses his personal blog to express opinions contradicting his employer’s published research.
A
Jones accepts nonmonetary benefits such as travel and board perks from a company he covers without notifying his firm.
B
Magee encourages clients and prospects to move with him to a new firm before officially resigning.
A
Mason receives evidence that a subordinate is engaged in suspicious trading, but does nothing.
C
A senior supervisor delegates oversight duties to a new employee without verifying their qualifications or providing training.
C
Tabbing’s trading team is conducting futures transactions with no systems for oversight or recordkeeping.
C
Gupta misuses confidential information from his former employer to enhance credibility with potential clients.
A
Allen, an equity analyst, registers a competing investment company with regulatory authorities while still employed but does so on her own time and does not solicit clients until after leaving her employer. Does this conduct violate Standard IV(A)?
a. Yes, because preparing a competing business while employed is always prohibited
b. No, as long as the preparatory work is done on her own time without client solicitation
c. Yes, because registering a company implies immediate competition
d. No, because regulatory registration is not covered under Standard IV(A)
Correct Answer:
b. No, as long as the preparatory work is done on her own time without client solicitation
Explanation:
Allen’s actions do not breach Standard IV(A) provided that she prepares for her future business outside of work hours and refrains from soliciting clients while still employed. The standard permits planning for future endeavors if done independently.
Hollis goes to a company dinner and meeting, paid for by the issuer, while covering the firm in research — and does not disclose this.
B
for these also state the violation of what standard
Madeline, an unpaid intern at Murdoch and Lowell, copies the firm’s software that she helped develop before leaving to join a new employer. What violation does this conduct represent?
a. Breach of confidentiality by sharing client data
b. Misappropriation of firm property by using firm-created work without permission
c. Improper solicitation of new business for her new employer
d. Unauthorized use of proprietary trading strategies
b. Misappropriation of firm property by using firm-created work without permission
Explanation:
Madeline’s copying of the software—even without direct cash compensation—represents the misappropriation of firm resources and property. She benefits by gaining work experience, yet the software was developed using Murdoch’s resources. This violates Standard IV(A) regarding loyalty to her employer.
Hightower, after a long tenure at his previous firm, takes proprietary documents—including client lists, account statements, and computer models—from his former employer to use at his new firm. What is the ethical issue in this scenario?
a. Hightower is allowed to use these documents since they are part of his experience
b. The documents are considered public information and may be used
c. Taking such documents constitutes misappropriation of confidential firm property
d. There is no violation if Hightower destroys the documents after reviewing them
c. Taking such documents constitutes misappropriation of confidential firm property
Explanation:
Hightower’s act of removing proprietary documents from his former employer without authorization violates Standard IV(A) because client lists, account statements, and computer models are considered confidential firm property that must not be misappropriated.
Mattock, the head of research at H&V, Inc., informs executives of her plan to change a stock recommendation before publishing it. However, she fails to implement controls to prevent trading on the information. One executive, Frampton, sells the stock from his own and client accounts. Others selectively share the change with institutional clients before public dissemination.
a. No violation because executives were notified under firm policy
b. Violation for failing to disclose the change to all clients simultaneously
c. Violation of Standard IV(C) for failing to reasonably supervise those informed of the change
d. No violation if client portfolios benefited from early action
c. Violation of Standard IV(C) for failing to reasonably supervise those informed of the change
Explanation:
Mattock failed to establish controls to prevent improper trading or selective disclosure before publication. As a supervisor, she was responsible for having systems in place to detect and prevent such misconduct.
Hollis receives an invitation from ABC Oil’s CEO to meet and discuss the company’s outlook. The CEO offers to cover travel and hotel costs, but Hollis declines these and obtains pre-approval for the meeting. Afterward, he reports the dinner conversation to his firm.
Which of the following statements best evaluates Hollis’s actions?
a. Hollis violated the standards by allowing a company he covers to provide a meal
b. Hollis acted appropriately by avoiding material gifts and fully disclosing the meeting
c. Hollis should have included the dinner discussion in his report to ensure transparency
d. Hollis’s actions are only permissible if he updates his recommendation after the meeting
b. Hollis acted appropriately by avoiding material gifts and fully disclosing the meeting
Explanation:
Hollis complied with Standard IV(B) by refusing benefits that could compromise his objectivity and by disclosing the nature of the meeting to his supervisor. Transparency and avoiding even the appearance of bias are key to maintaining professional integrity.
Nash, an investment adviser, while still employed, communicates detailed information about his firm’s unethical practices to a client and encourages her to transfer her account to his new employer. What is the primary ethical violation here?
a. Using confidential client information for personal gain
b. Disparaging his current employer and soliciting business for his future employer
c. Breaching fiduciary duty by recommending unsuitable investments
d. Misrepresenting performance metrics to clients
b. Disparaging his current employer and soliciting business for his future employer
Explanation:
Nash’s actions—publicly criticizing his current firm and actively soliciting a client for his future employer—constitute a violation of Standard IV(A).
Mason, a vice president at Wheeler & Company, notices unusual volume in Highland stock trades. A trainee under her supervision is involved in these trades. Mason’s compensation is tied to commission revenue, and she chooses not to investigate.
a. No violation because Highland is not on the recommended list
b. Violation of Standard IV(C) for failing to investigate suspicious trading by a subordinate
c. No violation as long as the trainee follows client orders
d. Violation only if Mason actively encouraged the trades
b. Violation of Standard IV(C) for failing to investigate suspicious trading by a subordinate
Explanation:
Mason ignored her duty to supervise and investigate suspicious trading behavior. Standard IV(C) requires supervisors to act diligently, even when personal incentives may conflict with supervisory responsibilities.
Chisolm, after 18 years at his former firm, intends to contact his ex-clients using information from the firm’s client list. Under Standard IV(A), which of the following statements is correct?
a. He is allowed to contact former clients if he only uses publicly available information
b. He may use the firm’s client list without permission because it’s his experience that matters
c. He is in violation if he uses confidential client lists or proprietary information obtained from his former employer
d. There is no violation as long as he does not disclose trade secrets
c. He is in violation if he uses confidential client lists or proprietary information obtained from his former employer
Explanation:
While knowledge of former client names in the public domain isn’t confidential, using client lists or other proprietary information from his former employer without permission breaches Standard IV(A).
Mattock, a senior vice president at H&V, Inc., orally informs executives of a changed recommendation for Timber Products before publication, as per company procedure. However, she fails to implement safeguards to prevent trading on or dissemination of the unpublished recommendation. One executive sells stock based on this early notice, and others inform institutional clients before the public release.
Does Mattock’s conduct violate Standard IV(C)?
a. No, because she followed company procedures
b. Yes, because she did not prevent unauthorized trading on nonpublic information
c. No, because she did not directly execute the trades
d. Yes, but only because institutional clients were informed before retail clients
b. Yes, because she did not prevent unauthorized trading on nonpublic information
Explanation:
Mattock violated Standard IV(C) by failing to reasonably supervise subordinates and implement procedures to prevent trading on material nonpublic information. Supervisors are responsible for putting in place systems to detect and prevent such actions.
Edwards, a trainee trader, assists a client in buying securities using anticipated profits from selling those same securities. His supervisor, Mason, notices unusual trading volumes in Highland stock but takes no action. Part of Mason’s compensation is based on trading commissions.
Does Mason’s inaction constitute a violation of Standard IV(C)?
a. No, because Highland is not on the firm’s recommended list
b. Yes, because she failed to supervise potential misconduct despite noticing red flags
c. No, because Edwards was acting independently
d. Yes, but only due to a conflict of interest
b. Yes, because she failed to supervise potential misconduct despite noticing red flags
Explanation:
Mason violated Standard IV(C) by failing to investigate and supervise Edwards’ actions, especially when signs of improper trading emerged. Her compensation structure further required heightened vigilance to avoid conflicts of interest.
Jones, a senior portfolio manager at Clarksville Asset Management, serves on the board of Exercise Unlimited, Inc. In return, he and his family receive free access to all company fitness facilities. Jones recommends Exercise Unlimited stock to client portfolios for which the investment is suitable but does not disclose his board service or benefits to his employer.
a. No violation because he receives no monetary compensation
b. Violation for failing to disclose a conflict of interest created by the board position and benefits
c. No violation since the recommendation is in the client’s best interest
d. Violation only if the board membership influences his investment recommendations
b. Violation for failing to disclose a conflict of interest created by the board position and benefits
Explanation:
Jones violated Standard IV(B) by not disclosing to his employer the benefits he receives through nonmonetary compensation. His role on the board and the perks create a personal incentive, which could bias his recommendations.
Whitman, a portfolio analyst at Adams Trust Company, manages the account of a client, Cochran. The client proposes that if her portfolio earns at least a 15% return in a year, Whitman and his wife can fly to Monaco at her expense and stay in her condo. Whitman does not notify his employer of this offer but accepts and vacations there the following January.
a. No violation occurs because the compensation is not monetary
b. No violation because the performance threshold was met before any reward
c. Violation for failing to disclose a contingent compensation arrangement to his employer
d. Violation for accepting compensation directly from a client instead of through the firm
c. Violation for failing to disclose a contingent compensation arrangement to his employer
Explanation:
Whitman violated Standard IV(B) by not informing his employer in writing and obtaining consent before accepting a client’s offer of supplemental compensation tied to portfolio performance. This arrangement could create a conflict of interest or bias toward that particular client’s account.
Magee, a portfolio manager at Trust Assets, becomes frustrated with his employer and accepts a job offer at Fiduciary Management. Before resigning, he asks four major clients to transfer their accounts and also solicits prospective clients he had previously presented to on behalf of Trust Assets.
a. He used confidential information inappropriately
b. He breached his duty of loyalty by soliciting clients before resigning
c. He failed to obtain approval to work for another employer
d. He violated the firm’s data retention policies
b. He breached his duty of loyalty by soliciting clients before resigning
Explanation:
Magee is still employed at Trust Assets and therefore owes them full loyalty. Soliciting both current and prospective clients for a competitor while still employed violates Standard IV(A), which requires acting for the benefit of the employer until the employment relationship formally ends.
Rasmussen notices a discrepancy between the hedge fund’s actual performance and its reported results. She raises concerns to her supervisor and compliance officer, who both dismiss her without investigation.
a. No violation unless fraud is proven
b. Violation of Standard IV(C) for failure to investigate potential misconduct
c. No violation because the hedge fund is too large to question
d. Violation by Rasmussen for disclosing internal performance concerns
b. Violation of Standard IV(C) for failure to investigate potential misconduct
Explanation:
Supervisors are required to take ethical concerns seriously and investigate possible violations. Dismissing a subordinate’s report without inquiry fails the supervisory duty outlined in Standard IV(C).
Several employees plan to leave their current firm and start their own. Before they resign, they learn of an RFP sent to their employer and its competitors. Believing their future company would qualify, they want to respond to the RFP before resigning.
a. Submit the RFP only if they don’t use proprietary information
b. Wait until after resignation to respond unless they have employer permission
c. Respond anonymously through a third party
d. Submit the RFP with a disclaimer clarifying their employment status
b. Wait until after resignation to respond unless they have employer permission
Explanation:
Submitting a competing RFP while still employed leads to direct competition with their current employer and is only permissible if they obtain prior approval. This ensures loyalty is maintained during the employment period and avoids conflicts of interest.
Crome, a private banker, accepts an offer from a rival firm, motivated in part by a signing bonus linked to the clients she can bring over. She plans to contact 70% of her clients but intends to use internal client lists from her former firm to do so.
a. None, since she built the relationships herself
b. Only a mild violation because she’s acting after termination
c. A violation of Standard IV(A) for using proprietary information
d. No violation if she uses her personal memory
c. A violation of Standard IV(A) for using proprietary information
Explanation:
Client records—whether physical, digital, or written—belong to the firm. Using them to solicit clients, even post-employment, without permission is a breach of loyalty. Crome may only use publicly available information or personal knowledge that does not rely on proprietary records.
Webb, a terminated analyst, has a nonsolicitation clause in her contract. After leaving the firm, she updates her LinkedIn profile, which notifies her network—including clients. RSI had already informed her clients and introduced her replacement.
Is she soliciticing clients?
a. Yes, because the update notifies clients indirectly
b. Yes, because she didn’t get approval to change her LinkedIn
c. No, because the update occurred after termination and wasn’t active solicitation
d. No, because LinkedIn messages are considered personal communication
c. No, because the update occurred after termination and wasn’t active solicitation
Explanation:
Standard IV(A) is not violated as long as Webb did not actively solicit clients before leaving. A passive LinkedIn update after employment has ended does not count as solicitation. However, best practice suggests maintaining separate personal and professional networks.
Gupta, a research analyst at Naram Investment Management, writes a personal blog to express disagreement with firm research published on a password-protected client site. He posts his own opposing views publicly.
a. He posted private opinions that embarrassed the firm
b. He disclosed confidential research indirectly, benefiting personally from firm resources
c. He violated Standard IV(B) by giving misleading information
d. He failed to reference all relevant sources in his commentary
b. He disclosed confidential research indirectly, benefiting personally from firm resources
Explanation:
Gupta violated Standard IV(A) by using his personal blog to communicate firm research insights that were intended for a private audience. This indirect disclosure of confidential content and use of firm-developed materials for personal branding constitutes a breach of loyalty.
Tabbing, a portfolio manager at Crozet, trades S&P 500 futures for both mutual funds and an internal profit-sharing plan. She frequently assigns more favorable trades to the internal plan after observing market movements. Her firm lacks written compliance procedures, and her supervisor, Claudius, is unaware of the allocation issues.
a. No violation if trades are eventually disclosed
b. Violation by Claudius for failing to supervise and implement proper trading procedures
c. Violation by Tabbing only, since she executed the trades
d. No violation if the allocations did not impact performance materially
b. Violation by Claudius for failing to supervise and implement proper trading procedures
Explanation:
Claudius failed to put in place and enforce compliance procedures and recordkeeping standards to prevent or detect this misconduct. Supervisors must ensure systems are in place to monitor employee behavior.
Burdette, a junior analyst, posts a “buy” recommendation on her personal social media account for a stock she is covering in her first report. Her supervisor, Graf, has not yet established a policy regarding social media use.
a. No violation because she acted on her own time
b. Violation by Graf for failing to implement procedures for online communication
c. No violation if the stock rises in value
d. Violation by Burdette only, since she made the post
b. Violation by Graf for failing to implement procedures for online communication
Explanation:
Graf violated Standard IV(C) by not putting in place social media communication guidelines. Supervisors are responsible for ensuring employees are trained on proper dissemination of research and firm policy.
Sokol, an adviser at FFWM, recommends a complex Feeder Fund with high volatility to clients without evaluating whether it is suitable for them. Bartlett, the compliance officer, fails to implement training and procedures to prevent such recommendations.
a. No violation because client losses were due to market conditions
b. Violation by Bartlett for failing to supervise and implement suitability safeguards
c. No violation if the fund was publicly available
d. Violation by Sokol only for recommending unsuitable products
b. Violation by Bartlett for failing to supervise and implement suitability safeguards
Explanation:
Bartlett violated Standard IV(C) by failing to implement training and procedures to ensure appropriate recommendations were made. Supervisors are accountable for systems that guide representatives’ conduct.
D’Addario, a trader at BOAC, provides inflated price quotes to Amity Point, which uses the prices to boost its fund valuations. Bartolucci, the CEO and D’Addario’s supervisor, is aware of the pricing practice but never created policies on pricing.
a. No violation if prices are accepted by clients
b. Violation by Bartolucci for failing to supervise and establish pricing policies
c. Violation by D’Addario only for manipulating prices
d. No violation if quotes are nonbinding
b. Violation by Bartolucci for failing to supervise and establish pricing policies
Explanation:
Bartolucci violated Standard IV(C) by failing to implement systems to govern the provision of price quotes. Supervisors must create, communicate, and enforce policies to prevent unethical practices.
