Standard IV(B) – Additional Compensation Arrangements

Standard IV(B) – Additional Compensation Arrangements obliges members not to accept gifts, additional compensation, or consideration that competes with the interests of an employer.

Compliance

Standard IV(B) – Additional Compensation Arrangements requires members to obtain written permission before accepting gifts or additional compensation from third parties. This consent is to limit the possibility of a conflict of loyalty between employees and employers.

Clients may offer a bonus contingent upon stated return on investment, over and beyond an investment professional’s salary, or an employer-based bonus program. The nature of that client-paid contingency can result in unfair client service (see Standard III(B) – Fair Dealing).  Therefore, this offer must be disclosed to an employer for evaluation and approval.

Violation

To prevent the violation of this standard, firms are encouraged to develop well-defined, written policies related to the acceptance of gifts or extraordinary compensation by third parties.  Policies should outline the risk of conflict of loyalty, as well as the need to preserve Standard I(B) – Independence and Objectivity, and Standard III(B) – Fair Dealing.

Question

Hernan Martinez, a CFA member, serves Dinero Asset Management as an analyst.  In his free time, he helps a friend make investment decisions by reviewing her portfolio.  He accepts no fee or favor for this work.  He has not told his employer about the help he gives his friend. With regard to Standard IV(A) – Loyalty:

A. Martinez is in violation of Standard IV(A) – Loyalty because the standard prohibits CFA members from giving advice without disclosure to one’s employer

B. Martinez is in violation of Standard IV(A) – Loyalty because he is not accepting money for his time

C. Martinez is not in violation of Standard IV(A) – Loyalty

Solution

The correct answer is C.

Martinez is not in violation of Standard IV(A) – Loyalty because he is not assisting his friend for a fee.  Therefore, there is no conflict in terms of loyalty to his employer over himself.  Additionally, if he is doing this work during off-hours, then there is no conflict in terms of time-loyalty.