Standard III (E) – Preservation of Confidentiality

Members and Candidates must keep information about current, former, and prospective clients confidential unless:

1. The information concerns illegal activities on the part of the client or prospective client;
2. Disclosure is required by law; or
3. The client or prospective client permits disclosure of the information.

Members and Candidates must preserve the confidentiality of all potential, current, and former clients. Members or Candidates may be required by law to disclose client information or if they are concerned about any illegal activity. These disclosures would not violate Standard III(E) – Preservation of Confidentiality.

Status of Client

This standard extends the preservation of confidentiality to all former clients and entities. A former client can permit a Member or Candidate to disclose information. However, the terms of the disclosure are at the discretion of the former client.

Compliance with Laws

In general, Members and Candidates must comply with all applicable laws. If the applicable laws require Members or Candidates to disclose client information, or on the contrary, to maintain confidentiality in the face of illegal activity – the Member or Candidate must adhere to the law.

Electronic Information and Security

Members and Candidates are required to have an understanding of their firm’s confidentiality policies concerning electronic communications and client records. Additionally, Members and Candidates should encourage their firm to implement training programs on the firm’s confidentiality procedures.

Professional Conduct Investigations by CFA Institute

The requirements set by Standard III(E) – Preservation of Confidentiality does not prevent members from participating or cooperating with a CFA Institute Professional Conduct Program (PCP) investigation.

Compliance Recommendations

Members and Candidates should:

• Refrain from disclosing client information except to approved employees.
• Understand and comply with their firm’s electronic communication and data storage procedures.
• Make reasonable attempts to ensure compliance procedures on client privacy and electronic communications are followed to prevent the accidental dissemination of client 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?

     A. None

     B. Disclosing details about the size of the donation.

     C. 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 in light of any illegal activity

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

        A. McCartney should disclose to the relevant authorities any information that could assist in their investigation.

        B. McCartney should maintain client confidentiality even if it is required by law.

        C. 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 actions. 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.

Reading 46: Guidance for The Standards of Professional Conduct (I-VII)

LOS 46 (a) Demonstrate a thorough knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situation.