Standard I (D) – Misconduct

Members and Candidates must not engage in any professional conduct involving dishonesty fraud, or deceit, or commit any act that reflects adversely on their professional reputation, integrity, or competence.

Guidance

Standard I(D) – Misconduct addresses all conduct that reflects poorly on a Member or Candidate’s reputation, competence, and professional integrity. Any actions that involve dishonest conduct, lying, cheating, stealing, or any unethical behavior that negatively affects the Member or Candidate’s professional activities would be considered a violation of the Standard.

Actions that damage the trustworthiness, competence, and inability to carry out his or her professional activities would conflict with Standard I(D).

Violations of Standard I(D) – Misconduct include, but are not limited to:

• A member or candidate consuming alcohol during working hours.
• Personal bankruptcy arising out of fraud or deceitful action.
• Failure to perform adequate due diligence or delegating research responsibilities.

 Compliance Recommendations

• Code of Ethics: Firms should develop a Code of Ethics that employees are required to follow. Firms should ensure that employees are aware that any misconduct will not be tolerated.
• List of violations: Firms should disseminate a list of potential violations and relevant disciplinary actions to all employees.
• Employee references: Employers should screen potential employees to ensure that they are of good character.

 Application 1: Professionalism and Competence

Ewart Lucas is a portfolio manager at Brisk Insurance. He has frequent meetings with his team at a bistro next to the company’s headquarters. After a stressful management meeting, he takes his team out for lunch and orders a bottle of wine. The other members of his team decline to consume the wine. He states that he is “more relaxed and able to produce better results” after he has consumed a few glasses of wine.

Has Lucas violated Standard I(D) – Misconduct?

     A. Yes, because consuming alcohol during working hours could impair his judgment and his ability to carry out his responsibilities.

     B. No, because Lucas is out of the office – he is allowed to do whatever he likes during his lunch break.

     C. No, because his claim of superior performance after a few drinks is beneficial for his clients and the firm.

Solution

The correct answer is A. 

Lucas has violated Standard I(D) – Misconduct. His actions have raised questions about his competence and professionalism.

Application 2: Fraud and Deceit

An equity analyst includes a receipt that is not part of his expenses for a company trip. He previously missed out on a legitimate expense of the same value the month before. He is looking to be reimbursed for the previous month’s expense.

Is the analyst in conflict with Standard I(D) – Misconduct?

     A. No, because the reimbursement he is seeking is of the same monetary value as his legitimate expense.

     B. Yes, because his conduct is deceitful.

     C. Yes, because he is not allowed to claim any expenses.

Solution

The correct answer is C. 

The analyst has violated Standard I(D) – Misconduct because his actions were deceitful. His actions have adversely damaged his integrity.

Application 3: Personal Actions and Integrity

Jane Ferro is the Head of Trading at Nix Brokerage. In her spare time, she is an avid woman’s rights activist. She was recently arrested at a peaceful protest over the weekend. She is accused of creating public disruption.

Are Ferro’s actions considered to violate Standard I(D) – Misconduct?

       A. Yes, Ferro’s arrest questions her professionalism.

       B. No, the crime Ferro is accused of is not serious enough to damage her reputation.

       C. No, her actions do not reflect poorly on her professional reputation and integrity.

Solution

The correct answer is C. 

Standard I(D) – Misconduct is meant to cover conduct that reflects poorly on a Member’s or Candidate’s professional reputation, integrity, or competence. Ferro is allowed to participate in causes that she aligns with.

Application 4: Personal Actions

Jeff Sioux, a financial advisor, tells his client that he can get her the best deal refinancing her 30-year home mortgage. He gets her a deal that maximizes his commission but leaves his client with worse payment terms.

Has Sioux violated Standard I(D) – Misconduct?

        A. No, because the client chose to take up Sioux’s offer.

        B. Yes, because he received a commission for his referral.

        C. Yes, because Sioux’s actions were dishonest – he intended to maximize his commission.

Solution

The correct answer is C. 

Sioux violated Standard I(D) – Misconduct. He was dishonest and misrepresented the offer to his client. Sioux may offer to help his clients but must be honest about the offer and present the client with all the facts.

Application 5: Personal Actions

Janice Long is a financial advisor that is going through personal bankruptcy. She has made poor speculative investments over the years and has accumulated vast amounts of personal debt. Her firm’s compliance department is made aware of her financial distress through Long’s mortgage provider. The firm is investigating any potential misconduct.

Will the compliance department conclude that Long has violated Standard I(D) – Misconduct?

    A. No, her actions do not raise questions on her professionalism and competence.

    B. Yes, her financial distress is indicative of her competence and abilities.

    C. Yes, because she does not disclose her financial distress to her employer.

Solution

The correct answer is A. 

Long has not violated Standard I(D) – Misconduct. Long’s financial distress does not reflect poorly on her professional conduct or integrity. Her actions may lead her firm to question her investment actions and suitability in her role as a financial advisor.

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 situations.