Standard IV – Duties to Employers

Standard IV(A) – Loyalty

Members and Candidates must act in the best interests of their employers, not denying them the benefit of their skills and abilities, divulging sensitive information, or harming them in any other way. Members and Candidates should act in the best interests of their current employer and refrain from engaging in any activity that would clash with their duties until the resignation takes effect. Before terminating the relationship, one can make plans or preparations to change firms.

They should not give the new employer any confidential information or take any of the old employer’s assets without consent.

Application 1: Soliciting Former Clients

Judy Francis is an investment manager for several high-net-worth individuals. She is frustrated by the working environment at EY Partners. Francis has notified her employer of her intentions to leave the firm. Before her termination comes into effect, Francis asks two of her biggest clients to move to her new employer Lynx Capital. Her clients decline and maintain their relationship with her former employer.

After joining Lynx Capital, she contacts prospective clients that EY Partners was soliciting, and she manages to get these clients to sign with Lynx. Additionally, she gets in touch with current EY Partners clients using publicly available information. Francis had not signed a non-compete agreement when she was employed at EY Partners.

Which of Francis’ actions most likely violate Standard IV(A) – Loyalty?

1. Soliciting clients at EY Partners before her termination was in effect.
2. Signing EY Partners’ prospective clients after joining her new firm.
3. Contacting EY Partners’ current clients using publicly available information.

Solution

The correct answer is A.

Francis has violated Standard IV – Loyalty by soliciting clients before leaving her former employer. Her actions are not in the best interest of her employer. Francis can contact her former clients and her former employer’s prospective clients provided she did not sign a non-compete.

Application 2: Ownership of Completed Prior Work

Zachariah Davis has recently completed an unpaid internship at Zane Brokers. During his internship, he worked on automating trading reporting procedures. His work involved developing and improving existing code. Davis has been hired as a trading assistant at a different brokerage firm. His primary task is to establish reporting procedures, like his work at Zane Brokers.

Which of Davis’ potential actions would least likely violate Standard IV(A) – Loyalty?

1. Copying the code he used at Zane without permission.
2. Using his experiences and knowledge at Zane to recreate the code at his new employer with minor tweaks to fit his new employer’s needs.
3. None of the above.

Solution

The correct answer is B.

Davis can use the experience and knowledge gained during his internship at his new employer.

However, any work produced during his internship belongs to his employer. Using a copy of the code without permission from his former employer would be a violation.

Note: The unpaid internship is not relevant; Davis presumably used company resources to develop the work product.

Application 3: Starting A New Firm

Craig Fisher currently works at Generous Finance – an impact investing fund. He is planning to start a firm with his business partner. They have recently applied to secure a brokerage license from the relevant regulatory authorities. Fisher has not notified his employer about his intentions of starting his firm. Neither Fisher nor his partner has solicited any clients at their current employers.

Has Fisher violated Standard IV(A) – Loyalty?

1. No.
2. Yes, because he has not notified his current employer about starting his firm.
3. Yes, because he is not allowed to set up his firm before leaving his employer.

The correct answer is A.

Fisher has not violated Standard IV(A) – Loyalty. His preparations in setting up his firm do not conflict with his current obligations at his current employer. Fisher could potentially violate Standard IV(A) if he made the preparations during office hours or at his employer’s expense.

Application 4: Taking Former Employer’s Client List

Peng Chao, CFA, is a portfolio analyst at CVF Inc. Peng has given his one-month resignation notice. During this period, he has taken the contacts of his employer’s clients, who he brought. He intends to market his new employer’s investment products to these clients once he starts his new job. Under the CFA Institute  Code and Standards, Peng’s action:

1. violates the CFA code and standards.
2. does not violate the CFA Institute Code and Standards because he brought these clients to the former employer.
3. not violate the CFA Institute Code and Stand because he did not market to clients before leaving his employee.

Solution

The correct answer is A.

The former employer’s client’s contacts are the former employer’s property and can not be taken without permission. Peng violated the Standard IV(A) by taking the contact list.

LOS 3(a): Evaluate practices, policies, and conduct relative to the CFA Institute Code of Ethics and Standards of Professional Conduct.

LOS 3(b): Explain how the practices, policies, or conduct does or does not violate the CFA Institute Code of Ethics and Standards of Professional Conduct.