Standard IV(B) – Additional Compensation Arrangements

Members and Candidates must acquire written consent from all parties concerned before accepting gifts, benefits, remuneration, or other incentives that competes with or could reasonably be expected to create a conflict of interest with their employer’s interest.

Members and candidates must acquire written authorization from their employer before accepting any gift, benefit, or salary that could reasonably be expected to cause a conflict of interest with their employer’s interest.

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 the compliance department at his firm.

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

1. No, because he received written consent from his employer regarding the bonus.
2. Yes, because he is not permitted to receive any form of additional compensation.
3. 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?

1. No, because he does not receive monetary compensation for his service on the board.
2. Yes, because he fails to disclose the non-monetary benefits received for his service on the board.
3. 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.

Application 3: Additional Compensation

DER Inc. plans to offer its shares in an IPO. As such, it has arranged a meeting with CFA-certified analysts to discuss the upcoming IPO. In addition to paying for the transportation and food expenses for the analysts, the company has given each analyst a new phone worth €1200. Under the CFA Institute  Code and Standards, the analysts should

1. seek permission from their clients before accepting the gifts.
2. not accept the gift.
3. accept the gift, then inform their employers.

Solution

The correct answer is B.

The analysts should not accept the gift as it would appear to cause a conflict of interest with DER Inc.’s upcoming IPO. The value of the gift is too high, and it could compromise their actions in relation to the IPO whether they inform their employers or not.

LOS 4(a): Evaluate practices, policies, and conduct relative to the CFA Institute Code of Ethics and Standards of Professional Conduct.

LOS 4(b): Explain how the practices, policies, or conduct does or does not violate the CFA Institute Code of Ethics and Standards of Professional Conduct.