It is a challenge for a firm to grow, hire new employees, and assume greater responsibilities while offering a wider range of client services. We believe, however, that a serious effort at training and educating our workforce in professional ethical standards is a key to our total success. As our firm–Bingham, Osborn & Scarborough LLC (BOS)–has grown, we have broadened our expectations and requirements for all employees to comply both with the law and appropriate ethical standards of conduct, whether in dealing with our clients or with other associated professionals. We picture our legal and ethical responsibilities in layers, with each layer representing a higher or stricter standard of conduct to which we hold ourselves (see It’s All About Layers sidebar).
Are we really trying to “teach” ethics, then? In a strict sense, the answer is no. We believe that we have hired employees who are honest and ethical. But we think it is possible for a basically honest employee, intending to do the right thing, to make legal or ethical mistakes for any number of reasons:
- The employee is new to our industry and is unfamiliar with the requirements of the law.
- The employee does not have enough experience with the subject to apply his judgment correctly.
- The employee is working on just one part of a project, and cannot see how her individual actions in the broader context of the overall project could create an ethical lapse.
We began annual, mandatory ethics and compliance meetings in 1998. Every member of our firm must attend, from the founding principals to the temporary administrative staff. We expect all our employees to know the requirements of the law, the CFA and CFP code of standards, and the content of our compliance manual. However, we think it is necessary to go beyond these basics. Using case studies, we put our standards and expectations in the context of our firm’s business and the types of situations that can and have developed at the firm.
The case studies we use are updated each year and are developed by talking with employees about ethical quandaries they believe they have faced or that they have seen others face in the course of their jobs. We have a tolerant policy that says that it is OK to make a mistake–once–assuming the employee identifies and corrects the mistake, under guidance from the firm. At BOS it is never acceptable to hide mistakes.
In advance of our annual ethics and compliance meeting, eight to 10 case studies are circulated to the entire staff for thoughtful consideration. Most case studies are not black and white, and while there are no “correct” answers in every case, there are almost always some answers that are better than others. During our group meeting, we engage in lively discussion that can lead to a debate about the best solution.
We do not believe we can train all employees to always know, on their own, the best thing to do. We do believe we can train them to identify issues that will arise in the course of their work, sometimes in very subtle or surprising ways. Our goal is to raise awareness and to encourage consultation with their supervisor, peers, or our compliance officer in order to craft the best solution to a situation. These case studies, drawn from our own experience, achieve what no code of standards or off-the-shelf ethics course can provide.
The following case studies, based on how our firm serves clients, fall into categories that will probably be familiar to both clients and investment professionals alike. We discuss confidentiality, acting only in the client’s best interest when faced with conflicts of interest, full disclosure about investment transactions, acceptance of gifts, and using independence of judgment.
Case A: Confidentiality
During the second week of April, a caller to the firm identifies himself as the accountant for a BOS client. He asks for a critical tax report to be faxed, as had been promised by the portfolio manager. The client’s portfolio manager, portfolio administrator, and principal are all out of the office. You offer the accountant the opportunity to leave a voicemail. He says no, he needs the realized gains report from the previous year right away. You do not have personal knowledge of the client’s account or accountant, but you are able to print a realized gain report. The accountant is very insistent, and becoming agitated.
What should you do?
Comment: You need to get off the phone, but may promise a call back. Try to verify from company records that the accountant, in fact, works with this client and is authorized to receive financial reports. The data the accountant is asking for is confidential information and must not be released without express permission of the client. This should be documented in the client’s file. If not, you may enlist the assistance of any manager in the firm to verify the accountant’s bona fides with other records, or by calling the client to make certain the information may be released to the accountant who called.
Case B: Conflicts of Interest
You have just met with a prospective new client who owns a consulting firm that performs land use planning for several local town governments. You serve as an unpaid volunteer on the finance committee of your town. One responsibility of your committee is to review the annual budget prepared by the town administrator before it is sent to the town council for discussion and a vote. You are aware that the proposed fiscal budget your committee will review in a few weeks includes a planned expenditure for the services of your prospective client’s consulting firm.
Do you have a conflict of interest in performing your duties for the committee? What should you do?
Comment: You do have a conflict of interest, even though the client is still just a prospect. Your favorable action on his behalf could be seen as an attempt to win his business. You must disclose the conflict to the town finance committee and remove yourself from any recommendations or decisions regarding the budget as it might affect the services from this consultant. This disclosure, with written documentation, is even more important when it comes up in the context of public or governmental action.
Case C: Insider Trading?
A personal friend calls you to ask for advice about whether it is legal to make a trade. He tells you that he was briefly in a meeting room where company executives may have been euphoric about particularly good earnings, but it is just before the end of the calendar quarter, and there has been no public statement yet about quarterly earnings from the company. Your friend is interested in buying calls on the stock, with the expectation that the stock could rise significantly if improved earnings are announced.
Regardless of your advice, if your friend executed the purchase of calls, would he be in violation under insider trading rules? Would your answer be different to any of the above if the financial impact for your friend would be a gain of $20,000?
Comment: Insider trading involves the reliance on material, non-public information in making trades. It is illegal under most circumstances. The facts of each particular case are important in the determination of legality. How the individual came into possession of the information, and whether they breached a duty of confidentiality in obtaining it, can also be a factor. You must exercise extreme caution in all such cases, and make additional inquiries into the manner in which the information was obtained, the relationship of the individual to the company involved, and the materiality and dissemination of the information. If in doubt, do not exercise the trade, and caution the client to seek legal counsel. Notify your compliance officer.
Case D: Portfolio Trading Issues:
You are implementing an investment portfolio for a new client. Due to a misunderstanding between you and the client, you do not implement one of the trades the client expected you to make. The investment in question has risen in value approximately $1,000 between the time the client expected you to make the trade and when you actually execute it.