Standard IV (B) – Additional Compensation Arrangements

Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.

Members and Candidates are required to receive consent from their employer before accepting compensation or benefits for services performed on behalf of their employer or services that conflict with their employer’s interest. Written communication includes all communication that can be documented.

Gifts and Additional Compensation

A Member or Candidate who receives a gift from his client for his past performance is required to be disclosed to his employer to comply with Standard I(B) – Independence & Objectivity. Note here that we’re referring to a standard seen previously.

A Member or Candidate who is due to receive additional compensation or benefits for his future performance is required to receive consent from his employer to comply with Standard IV(B) – Additional Compensation Agreements.

Compliance Recommendations

Members and Candidates should make a written report for their supervisor or compliance department outlining any compensation or benefits received for services rendered. The details of the report should be confirmed by the offering party.

Application 1: Notification of Client Bonus Compensation

Samuel White is a senior portfolio manager at Ascot Capital. He manages the investment portfolios of several high-net-worth individuals. His client, Susan Jenkins, has proposed the following bonus:

“A fully paid luxury trip to Greece for your family that is contingent on beating the return on the FTSE 100 over the following year.”

He receives written permission from his employer after making detailed disclosures to his firm’s compliance department.

Another client of his, Davis Elliot, recently gifted White a set of golf clubs for his superior performance over the year. White does not disclose this gift to his supervisor or compliance department at his firm.

Has White violated Standard IV(B) – Additional Compensation Arrangements?

     A. No, because he received written consent from his employer regarding the bonus.

     B. Yes, because he is not permitted to receive any form of additional compensation.

     C. Yes, because he fails to disclose the gift he received from Elliot.

Solution

The correct answer is A.

In this case, White has not violated Standard IV(B) – Additional Compensation Arrangements. White received consent from his employer – the additional compensation has been permitted.

However, White has violated Standard I(B) – Independence and Objectivity by failing to disclose the gift received from Elliot. For White to comply with Standard I(B), he must disclose any gifts received for past performance.

Note: Candidates need to distinguish between a gift and additional compensation agreements and the necessary disclosures required in both circumstances.

Application 2: Notification of Outside Compensation

Troy Mavis is a board member of Peak Animations. Davis does not receive any monetary compensation for the duties performed in his role. However, he receives complimentary access to Peak movie premieres and Peak Amusement Parks. Mavis purchases Peak Animations stock for suitable client accounts. Mavis does not disclose this arrangement to his employer. Mavis believes he does not need to disclose this because he does not receive monetary compensation.

Has Mavis violated Standard IV(B) – Additional Compensation Agreements?

     A. No, because he does not receive monetary compensation for his service on the board.

     B. Yes, because he fails to disclose the non-monetary benefits received for his service on the board.

     C. No, because his service as a board member does not conflict with his work arrangements.

Solution

The correct answer is B.

Mavis is required to disclose any benefits (monetary or non-monetary) to his employer for services rendered as a board member. The disclosure is required because his service as a board member may present a conflict of interest, especially because he handles client accounts that hold Peak Animations stock.

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.