Free webinar on Ethics from CFA Institute!

As you know, Ethics is a component of the CIPM curriculum - and one that candidates should not take lightly. 

CFA Institute announced today that they will be holding a free webinar on Ethical Decision Making.  I recommend that both Principles Level and Expert Level candidates consider attending one of the sessions.  I plan to attend one of the sessions to brush up on my own understanding of ethics.

I also recommend the session to all investment professionals, but especially holders of the CIPM or CAIA designations

(picture above of Plato and Aristotle...)

Loyalty Only Goes So Far...

There was good news in the media this morning, as the United States Internal Revenue Service (IRS) awarded a former UBS employee in the amount of $104 million USD for "whistle-blowing" regarding activities at UBS that assisted some of the firm's clients in hiding assets from the IRS.  The $104 million USD reward is reputed to be the largest ever given for whistle-blowing.

This announcement comes on the heels of the SEC issuing its first ever whistle-blowing award (a much smaller sum of $50,000 USD) to someone who helped stop "multi-million dollar fraud" from occurring.

I am reminded when I read these stories of Provision IV.A of the Standards of Professional Conduct, which CIPM candidates are required to know and interpret as part of the ethics component of the CIPM Curriculum.  This provision reads:

In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.

It is important to understand that loyalty only goes so far - as covered persons (those bound by the CIPM Code of Ethics and Standards of Professional Conduct), we are not required to put our employer's interest beyond our own in all situations.  Two key situations are mentioned in the readings place limitations on loyalty.  One deals specifically with whistleblowing, and the other deals with personal interests.

With respect to whistleblowing, from page 143 in the CIPM Principles VitalBookshelf readings:

• Whistleblowing. A member’s or candidate’s personal interests, as well as the interests of his or her employer, are secondary to protecting the integrity of capital markets and the interests of clients. Therefore, circumstances may arise (e.g., when an employer is engaged in illegal or unethical activity) in which members and candidates must act contrary to their employer’s interests in order to comply with their duties to the market and clients. In such instances, activities that would normally violate a member’s or candidate’s duty to his or her employer (such as contradicting employer instructions, violating certain policies and procedures, or preserving a record by copying employer records) may be justified. Such action would be permitted only if the intent is clearly aimed at protecting clients or the integrity of the market, not for personal gain.

The picture above shows Marlon Brando in "The Godfather" film - certainly, he commanded a high level of loyalty by persons under his watch.  It may seem with companies of the stature of UBS and similar firms that the loyalty they "encourage" is similarly intimidating.  But the Code and Standards call upon us as performance professionals to do what is ethically correct - and whistleblowing may be necessary in some scenarios, in order to do what is ethically correct.

On the other point, personal interests, from page 141 in the CIPM Principles VitalBookshelf readings:

• This standard is not meant to be a blanket requirement to place employer interests ahead of personal interests in all matters. The standard does not require members and candidates to subordinate important personal and family obligations to their work. Members and candidates should enter into a dialogue with their employer about balancing personal and employment obligations when personal matters may interfere with their work on a regular or significant basis.

Happy studying!

Duties to One's Employer...?

A Principles Level candidate asked me for an interpretation of the following ethics related question from one of the practice exams:

Angela Schneider, an equity analyst at Isotonic Asset Management, joins the board of trustees of the Lightship Foundation, a large nonprofit organization. She does not inform Isotonic about this commitment because her service on the Lightship board is uncompensated and will not interfere with her regular job. In addition, she thinks that Isotonic would exert pressure on her to influence Lightship's selection of investment managers. Under the CIPM Association Standards of Professional Conduct, has Schneider violated her duty of loyalty to her employer?

A. No

B. Yes, because she must act for the benefit of Isotonic.

C. Yes, because she must disclose that she has a conflict of interest with Isotonic.

My first comment is that I suggest that candidates respond to any type of interpretative question with what they feel is the BEST answer.   At the Expert Level, this applies to questions on Ethics and questions related to the GIPS standards.  It may seem like more than one of the multiple choice options available to you COULD be correct, but candidates should try to identify the best possible answer.

Next, I would eliminate answer “C.)” from consideration, because it is not established that Ms. Schneider has a conflict of interest with Isotonic.  It is stated that her work on Lightship’s board of trustees will not interfere with her regular job.  She is not required to use her position to influence Lightship’s selection of investment managers, and in fact, it may be advisable for her not to do so.  Duties to one’s employer does not cover taking advantage of one’s personal relationships for the benefit of one’s employer. 

I would also eliminate answer answer “B.)” from consideration.  It is true that Ms. Schneider must act for the benefit of Isotonic in her work activities, but her work on the board of trustees of Isotonic is not part of her work activities

Thus, the correct answer is “A. No.” 

Note:  It might appear to candidates that the actions of Ms. Schneider are a violation of the “Additional Compensation Arrangements” section of the Standards of Professional Conduct under Standard IV (Duties to Employers).  I would say that answering “Yes” (i.e., choosing answer B. or C.) because of this should not be done for the following reasons:

• ·         The question specifically points you to another section of the Standards of Professional Conduct; i.e., “Loyalty” – thus the question is not about “Additional Compensation Arrangements.”
   
•  Ms. Schneider is not compensated for her work on Lightship’s board of trustees.

The Performance Professional... Like a Rolling Stone, Baby...

The image shown above is the album cover of the Rolling Stones' 1972 album, "Exile on Main St." Upon its initial release, this album, while enjoying substantial sales, received very mixed reviews from rock music critics. Time has viewed this album kindly, however, and the album now is generally considered to be one of the greatest rock albums of all time. The album was re-released yesterday in a remastered format with several previously unreleased demos and other features, creating quite a media buzz.

So what, you may be asking, do the Rolling Stones and this album have to do with performance measurement or the CIPM designation?

When I was growing up, for a long time my desired career choice was to become a rock radio DJ (fortunately, I did not pursue this path, as rock radio has essentially died and DJ has a completely different meaning in today's world). Thus, I like to reflect on music and related events and their broader meaning. A couple of thoughts come to mind with respect to the Rolling Stones that remind me of performance measurement.

First, when watching old interviews of the Rolling Stones, one of the things that is striking is the frequent comments that the members of the band did not set out with a plan to have a career doing rock music. They certainly did not intend to be playing music 10 years later, let alone 20, 30, 40 plus years later! Quite similar to performance analysts, really... virtually all of us that are doing performance measurement ended up doing so somewhat accidentally. Granted, the reasons we first opened our spreadsheets to calculate time-weighted returns are likely different from what drove Keith Richards to pick up a guitar... but, I think many of us share the fact that we didn't expect to be doing performance analysis 10 or 20 years later. How serendipitous for us, and Mr. Richards!

Perhaps more importantly, though, is the longevity aspect of the Rolling Stones career. People are fond of debating which band was the greatest ever - the Beatles or the Rolling Stones. I definitely favor the Beatles in that debate, as no other band (in my opinion) came close to extending rock music from a form of entertainment to a true form of artistic expression, at a critical juncture in time. But, at the same time, I think the greatest legacy of the Rolling Stones is their longevity and their professionalism. Don't be fooled by the guitars, the sneers, the leather... these guys go out on a regular basis and do what they do, and they do it well. Professionalism and doing one's job well, day-in and day-out, are so important to enabling a job that someone does to become a viable career. Musicians of many genres benefit because the Rolling Stones carry on, doing their work well.

And that is a lot of what the CIPM designation is about. Yes, we need to know how calculate returns, risk and attribution, just like a guitarist needs to know how to play certain notes, chords and techniques. But just as important, perhaps more important in the long run, is the professionalism that we bring to our daily work, and the ethics. That is how we add value to our niche and the broader investment industry, and doing so is in the long-term interest of us all.

So, see, you have more in common with Keith Richards than you might have thought...