Standard III(E) – Preservation of Confidentiality

Standard III(E) – Preservation of Confidentiality requires CFA members to maintain the confidentiality of current, former, and prospective clients under most circumstance

Compliance

Due to the relationship between investment professionals and clients, it is common to obtain private information (i.e., financial, familial) required in providing due care of a client’s resources.  CFA members and candidates are obliged to withhold personal information communicated by clients. This preservation of confidentiality extends to current clients and persons who once were but are no longer clients.

An exception Standard III(E) – Preservation of Confidentiality, are cases in which sharing personal information reveals an illegal nature of client activity.  In certain circumstances, a CFA member may be required to report illegal activities to appropriate authorities. It is expected that investment professionals will comply with applicable laws associated with maintaining the client’s confidentiality.  Therefore, if a member obtains information connected to illegal activity, then s/he is encouraged to consult an attorney or compliance officer for advice regarding disclosure.

Due to the electronic nature of current business practices, CFA members must take added precautions to preserve client privacy. Stricter data security regulations have been passed in recent years to prevent accidental breaches of confidentiality. Although it is not expected that CFA members become experts in data security, they should ensure they have proper training related to their respective firms’ policies.

Violation

To prevent a violation of Standard III(E) – Preservation of Confidentiality, one must become familiar with the context of legal vs. illegal client activity in the eyes of local laws.

Additionally, according to the CFA Code of Ethics, all members and candidates are required to “maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.”  This extends to maintaining up-to-date training on client loyalty and confidentiality, including data security.

Ultimately, when induced to share client information, one should consider whether that disclosure is work-related and done to benefit the client. Will sharing that information allow a member to provide a better service? If the answer to this question is “no,” then one should reconsider betraying client confidence.

Question

James Heckman, the owner of HGI Construction, is aware that Elgrow Corporation is in need of capital improvements to a number of its facilities. Prior to approaching Elgrow, he wants to know if it’s worth the substantial amount of time to prepare a building proposal. His neighbor is an investment analyst for Smith Capital, who manages investments for Elgrow Corp.  During a weekend barbecue at his home, Heckman approaches the analyst to ask a few questions about Elgrow’s financial position, sharing his plans to approach the company with a building proposal.  Related to Standard III(E) – Preservation of Confidentiality, the investment analyst should:

1. Share what she knows in order to help Elgrow Corporation get the best proposal possible.
2. Not disclose private information because it could be a violation of Standard III(E) – Preservation of Confidentiality.
3. Not share information because she thinks HGI Construction is engaged in illegal activities.

Solution

The correct answer is B.

Client loyalty is owed to Elgrow Corp. Therefore, the investment analyst must maintain client confidentiality related to Elgrow’s financial position, and any recommendations related to capital improvements.  Sharing private information is likely a violation of Standard III(E) – Preservation of Confidentiality.