Standard III(E) – Preservation of Confidentiality

Members and Candidates are obligated to preserve confidential information regarding current, former, and prospective clients unless:

• The information concerns illegal activities on the part of the client or prospective client,
• Disclosure is required by law, or
• The client or prospective client permits disclosure of the information.

By following compliance processes, members and candidates should make reasonable attempts to prevent the unintentional disclosure of confidential information.

Application 1: Disclosing Confidential Information

Michelle Antalaya, a financial advisor, has just finished a meeting with one of her clients. Michael Brown wants to make a charity donation worth USD 250,000 to reduce his income tax liability. Brown has permitted Antalaya to offer suggestions of different charities and hold discussions with various charities on his behalf. She is allowed to disclose the size of the donation. Brown mentions that if he is satisfied with the charity selected, he will make recurring donations in the future – this information is not to be disclosed. Antalaya holds a meeting with her close friend and CFO of GirlTalk and discloses the size and the possibility of recurring donations. Brown decides to donate the proceeds to a different charity.

Which of Antalaya’s action(s) violate Standard III(E) – Preservation of Confidentiality?

1. None
2. Disclosing details about the size of the donation.
3. Disclosing details about the possibility of recurring donations in the future.

Solution

The correct answer is C.

Antalaya has violated Standard III(E) – Preservation of Confidentiality by disclosing the possibility of recurring donations. Brown gave Antalaya permission to disclose the size of the donation – this in itself would not have been a violation.

Application 2: Disclosing Possible Illegal Activity

Jason McCartney manages the investment portfolio of a wealthy businessman – Carlo Nunes. His client is under informal investigation due to suspected illegal drug activity. McCartney has noted a large increase in money coming into his Nunes’ investment accounts. When he asks Nunes about the uncharacteristic increases in his cash inflows, he is unable to share any details about the source of the funds. The laws stipulate that client confidentiality can be broken considering any illegal activity

What is the most appropriate course of action for McCartney to comply with Standard III(E) – Preservation of Confidentiality?

1. McCartney should disclose any information that could assist in their investigation to the relevant authorities.
2. McCartney should maintain client confidentiality even if it is required by law.
3. McCartney should consult his firm’s compliance department to determine the relevant policies on the disclosure of confidential information.

Solution

The correct answer is C.

McCartney should check with his compliance department before taking any action. Additionally, if the relevant authorities seek Nunes’ information, McCartney is required by law to make the required disclosures. Under Standard III(E) – Preservation of Confidentiality, McCartney does not have the authority to make any disclosures without Nunes’ permission or a requirement by law.

Application 3: Disclosing Possible Illegal Activity

Jacinta Klopp is a portfolio manager at Dwal Investment Inc. While discussing the performance of a client’s account, Klopp realizes that the client’s funds are acquired by selling drugs. Under the CFA Institute Code and Standards, the Jacinta should

1. report the client to the authorities.
2. maintain the confidentiality of the information with the client.
3. advice the client to fund their accounts through legally acquired funds.

Solution

The correct answer is A.

Member and candidates should maintain confidentiality unless it relates to illegal conduct, is needed by law, or the client consents to dissemination. Failure to report this illegal source of funds violates Standard III(E) that relates to the preservation of confidentiality.