ETH 6 Guidance for Standard IV: Duties to Employers
Standard IV collects the duties a member or candidate owes to the organization that pays them into three lettered parts. Loyalty, in part A, asks the professional to work for the employer’s benefit and to steer clear of conduct that would injure the firm. Additional compensation arrangements, in part B, bar outside pay or benefits that could collide with the employer’s interests unless everyone involved gives written consent. Responsibilities of supervisors, in part C, place a duty on anyone with people under their authority to make reasonable efforts to keep those people within the law and the Code and Standards.
As with the other guidance readings, each part comes with its plain requirement, interpretive guidance, procedures a firm can adopt, and a run of short cases that label conduct as compliant or as a violation. One early question shapes whether part A even applies: the standard governs the employment setting, so a professional must first decide whether the relationship is that of an employee or an independent contractor. An independent contractor’s obligations flow from the oral or written agreement struck with the client, not from the loyalty duty owed by an employee, so the scope of responsibility should be defined clearly at the start of each engagement.
| Subpart | Core duty owed to the employer |
|---|---|
| IV(A) Loyalty | Act for the employer’s benefit; do not deprive it of your skills, leak confidential information, or otherwise cause it harm |
| IV(B) Additional Compensation Arrangements | Do not accept outside pay or benefits that could conflict with the employer’s interest without written consent from all parties |
| IV(C) Responsibilities of Supervisors | Make reasonable efforts to see that everyone under your supervision complies with the law and the Code and Standards |
Each part is examined in its own section below. The worked cases are applied judgement scenarios: read the facts, decide whether the conduct meets the standard, and check your reasoning against the solution.
When it comes to their work, members and candidates are required to serve the interests of the firm that employs them, and they must avoid stripping it of the value of their skills, leaking confidential information, or doing anything else that would injure it.
What loyalty does and does not demand
The duty asks professionals to protect the firm by avoiding conduct that would wound it, cost it profit, or deny it the abilities it hired them for. Built into that is a duty to follow the employer’s own policies and procedures governing the working relationship, so long as those rules do not clash with the law or with the Code and Standards. Loyalty is not, however, a blanket command to put the firm ahead of everything else in life. It does not require a professional to sacrifice significant personal or family obligations to the job. Where private matters are likely to interfere with work in a regular or material way, the sensible course is to open a conversation with the employer about how to balance the two. The relationship runs both ways: an employer that wants engaged and productive staff owes them a positive, ethical working environment in return. Members and candidates are encouraged to hand their employer a copy of the Code and Standards, which explains what membership in the CFA Program requires and gives a footing for questioning any firm practice that would conflict with those duties.
Running an independent business
Holding a side business while employed is not forbidden, but a professional may not offer a service that the employer already provides without the employer’s consent, since that would compete directly with the firm. Preparing to launch an independent venture is allowed, provided the professional does not solicit or serve clients or otherwise harm the employer in the meantime. Anyone who intends to earn compensation from independent work while still employed must tell the employer first, spelling out the kind of services planned, how long they are expected to run, and what the pay will be, and must wait for the employer to consent to every term before starting.
Leaving an employer
Until the employment relationship actually ends, the professional must keep acting in the employer’s best interest. Handing in a resignation letter does not, by itself, close the relationship, especially where a notice period remains to be served; as a rule, the tie ends only when the person is no longer paid and no longer carries responsibilities at the firm. Conduct that can breach the loyalty duty during this window includes taking trade secrets without permission, misusing confidential information, soliciting the employer’s clients (openly or by implication), touting a future employer before leaving, self-dealing (grabbing for oneself a property, opportunity, or piece of information that belongs to the firm), using firm property such as client lists without authority, and running down the current employer in a way that could damage its interests.
A departing employee may make plans and preparations to compete before the relationship ends, as long as those steps do not breach loyalty. Contacting existing or prospective clients about a possible move before leaving is off limits. Once notice has been given, a professional may tell the clients they work with that they are moving to a named new firm, but must stop short of anything that reads as soliciting: they may share the new firm’s name, yet must not hand over their new contact details, describe the services on offer there, or promote the new firm to current clients without the present employer’s permission. Protecting client interests is not a licence to market the new firm while still employed; a professional who genuinely believes the employer’s practices are so damaging to clients that they cannot stay may resign and only then raise concerns with former clients or other appropriate parties.
After giving notice, the professional must follow the employer’s procedures for notifying clients of the departure, and must not carry records or files to the new firm without the former employer’s written permission. The skills and experience picked up on the job are not confidential once the person has left, and merely knowing the names of former clients is generally not confidential either, unless an agreement or the law makes it so. Knowledge gained at one firm may be used at the next. Work done for the employer, client lists, and other firm records, whether on paper or stored electronically on a personal phone, tablet, or laptop for convenience, must be returned or erased unless the firm agrees they may be kept. After employment ends, contacting former clients is permitted, provided the contact details do not come from the firm’s records or from work done for it, and provided no agreement forbids it. Because employers may require departing staff to sign agreements restricting later conduct, the professional should read any such non-solicitation or non-compete terms carefully before leaving.
Social media and whistle-blowing
Professionals must know and follow every firm policy on using social media with clients, a point that matters most when a departure is being planned, since posts can reach current clients and therefore fall under the firm’s notification rules. Accounts opened purely for firm business, including firm-approved client accounts, count as company assets and must be transferred or deleted as the firm directs; the cleanest practice is to keep personal and professional accounts separate from the start. Loyalty also has a ceiling: protecting the integrity of the markets and the interests of clients ranks above both the professional’s own interest and the employer’s. So when an employer takes part in illegal or unethical conduct, steps that would normally breach the duty to the firm, such as going against instructions or copying records to preserve evidence, can be justified, but only when the clear aim is to protect clients or market integrity rather than personal gain.
Procedures that help
- Understand the employer’s code of conduct and any limits it sets on offering similar services outside the firm, whether that means seeking approval or an outright ban.
- Know the termination policies, including how a resignation is handled, how the departure will be disclosed to clients and colleagues, and whether social media updates are allowed.
- Learn the firm’s whistle-blowing rules, and encourage the firm toward industry best practice, including the confidential, anonymous reporting channels many firms are required to maintain.
Magee manages pension accounts at Trust Assets, Inc. Unhappy with the workplace, he accepts an offer from Fiduciary Management. Before he resigns from Trust Assets, he asks four large accounts to leave and open relationships with Fiduciary, and he talks several prospects, people he had previously pitched on behalf of Trust Assets, into signing with Fiduciary.
Hightower has spent 15 years at Jason Investment Management, rising from analyst to senior portfolio manager and a seat on the investment policy committee. He plans to leave and start his own firm, and he has taken care not to let any Jason client know he is leaving, so as not to be accused of soliciting. He intends to copy and take with him seven items he developed or worked on at Jason: the client list with contact details, client account statements, sample marketing presentations carrying the firm’s performance record, the firm’s recommended securities list, the asset allocation models, the stock selection models, and spreadsheets for the corporate recommendations he built as an analyst.
Nash, an adviser, tried without success to get his firm to stop churning client accounts, then took a job at a competitor. At the firm’s direction, and before leaving, he notified his clients that their accounts would be reassigned internally. One client asked why he was leaving, and Nash described his firm’s unethical practices in detail, named his new employer, and urged her to follow him. That crossed the line: running down the current employer and soliciting the client for a future one breaches Standard IV(A), and it is a violation even if the client truly stood to gain by moving to the new firm. Once he had actually left, Nash would be free to share his concerns with former clients and suggest they change managers.
Members and candidates are barred from taking any gift, benefit, payment, or other consideration that competes with the employer’s interest, or that could reasonably be expected to create a conflict with it, unless written consent is secured from every party involved.
Why permission comes first
Before taking pay or benefits from a third party for work done for the employer, or for anything that could conflict with the employer’s interest, the professional must get the employer’s permission. The reach is wide: it covers direct payment from a client and any indirect compensation or other benefit from outside parties, and it is not limited to money. Written consent means any communication that can be documented, an email that can be retrieved and stored being the standard example. The reason for the rule is that such arrangements can bend a professional’s loyalties and objectivity and open conflicts of interest. Disclosure lets the employer weigh those outside ties when judging the professional’s actions and motives, and it lets the firm see the true cost of the services being delivered. Where a professional is hired part-time or on contract and can therefore work for several firms, the parameters around serving other, possibly competing, employers should be negotiated with the employer during hiring.
What to disclose
Any compensation a professional expects to receive on top of what the employer pays, including performance incentives offered by clients, must be disclosed to the employer through a supervisor or compliance officer. The disclosure should set out the terms: the nature of the compensation, its approximate size, and how long the arrangement will run. The party offering the extra compensation should acknowledge and confirm those details.
Whitman is a portfolio analyst at Adams Trust Company (ATC) and manages the account of a client, Cochran, who pays ATC a standard fee tied to the market value of her portfolio. Whitman draws a salary from ATC. Cochran proposes that in any year her portfolio returns at least 15% before taxes, Whitman and his wife may fly to Monaco at her expense and use her condominium during the third week of January. Whitman says nothing to ATC and takes the trip the following January as Cochran’s guest.
Hollis covers the oil and gas sector for Specialty Investment Management and has published a detailed report recommending ABC Oil Company. Weeks later ABC Oil’s investor relations office calls: the chief executive liked the report and invites Hollis to visit and discuss the industry, offering to send a company plane and arrange accommodation. Hollis obtains the appropriate approvals, accepts the meeting, but declines the travel offer. He later meets the chief executive, and afterward joins him and the investor relations officer for dinner at a high-end restaurant. Back at Specialty, Hollis gives the director of research a full account of the meeting, including the dinner.
Members and candidates are obliged to take reasonable steps to see that everyone under their supervision or authority follows the applicable laws, rules, and regulations, along with the Code and Standards.
Who is a supervisor, and what reasonable supervision means
Anyone with employees under their control or influence exercises supervisory responsibility, whether or not those employees are CFA Institute members, charterholders, or candidates. What counts as reasonable supervision depends on how many people are involved and what work they do. A professional overseeing a large team may not be able to watch each person directly, so supervisory duties can be delegated to subordinates who oversee the others; the delegating professional must then instruct those subordinates on how to promote compliance, including preventing and detecting breaches of laws, firm policies, and the Code and Standards.
As a baseline, a supervisor has to take reasonable steps to head off and catch violations by ensuring that effective compliance systems are in place. An effective system reaches beyond adopting a code of ethics: it sets policies and procedures aimed at compliance and reviews what employees actually do. Recurring education and training help staff meet their obligations, and incentives, whether financial or not, that reward ethical behavior alongside business results encourage compliance. Often, particularly in large firms, a professional has supervisory responsibility without the authority to set or change firm-wide policies or incentive structures. That limit does not excuse inaction: the professional should work with superiors and within the firm to build effective compliance tools, among them a written code of ethics, day-to-day compliance policies and procedures, ongoing education and training, an incentive scheme that pays off ethical behavior, and firm-wide best-practice frameworks such as the GIPS standards and the CFA Institute Asset Manager Code of Professional Conduct. A supervisor who finds the compliance system inadequate must raise it with senior management and recommend a fix, and if a missing or weak system makes the supervisory role impossible to carry out, the professional should decline that responsibility until the firm adopts reasonable procedures.
Building and enforcing the system
A supervisor must understand what an adequate compliance system looks like for the firm and make reasonable efforts to see that procedures are established, documented, communicated to the people they cover, and followed. Adequate here means designed to meet industry norms, regulatory requirements, the Code and Standards, and the firm’s own circumstances, and once procedures are set the supervisor must make reasonable efforts to see they are monitored and enforced. To work at all, procedures have to be in place before a violation happens; although no system can foresee every breach, it should anticipate the activities most likely to lead to misconduct, and it should be scaled to the size and nature of the organization. When a supervisor learns that an employee has broken, or may have broken, the law or acted unethically, relying on the employee’s own account of how far it went, or on a promise that it will not happen again, is not enough, and neither is simply reporting it upward and telling the employee to stop. The supervisor must promptly begin an assessment of the wrongdoing and, while that plays out, take steps to keep it from recurring, such as limiting or more closely monitoring the employee’s activities.
Supervision includes detection
Detecting violations, not just preventing them, is part of the duty. A supervisor exercises reasonable supervision by putting written compliance procedures in place and checking periodically that they are being followed. If a supervisor has adopted reasonable procedures and built an effective program, a violation that slips through despite those efforts may not itself put the supervisor in breach, though its occurrence can be a sign that the procedures were inadequate. Merely enacting procedures is not always enough: a supervisor who knows, or should know, that the compliance procedures are not being followed can be in violation of the standard.
Codes of ethics and adequate procedures
Firms are encouraged to adopt a code of ethics, which anchors an ethical culture, reinforces the loyalty owed to clients, deters misconduct, and protects the firm’s reputation. There is an important line between a code of ethics and the concrete policies and procedures that secure compliance with it and with the law. A standalone code should be written in plain language around fundamental, principle-based concepts that apply to everyone, kept free of dense procedures and legal boilerplate, so that it conveys clearly that employees hold positions of trust. Detailed compliance procedures, which put those principles into daily practice, belong separately; mingling them into the code works against the goal of a simple, memorable statement of ethical duty. Firms are also encouraged to share their code with clients.
Adequate compliance procedures should be gathered in a clear, accessible resource tailored to the firm and written to be easy to follow. They should name a compliance officer with clearly defined authority, responsibility, and resources to run the procedures and investigate potential violations; describe the supervisory hierarchy and assign duties among supervisors; build in checks and balances; state the scope of the procedures; document the monitoring and testing of compliance; spell out permissible conduct; and set out how violations are reported and sanctioned. Once a program is running, the supervisor should circulate it to the right people, update it periodically, keep educating staff, issue reminders, fold a conduct review into performance appraisals, monitor employee actions, and enforce the rules when a breach occurs. On discovering a violation, the supervisor should act quickly, make sure a full inquiry establishes its scope, tighten supervision or place limits on the alleged offender while the inquiry runs, and review the procedures for changes that would prevent a recurrence. Regular ethics and compliance training reinforces all of this, and the incentive structure deserves close attention: a culture that rewards results regardless of how they are achieved can push even well-intentioned staff toward misconduct, so compensation is better tied to how outcomes are reached than to sheer revenue generated.
Mattock runs research at H&V, Inc., a regional brokerage, and is responsible for its procedures on releasing research. She decides to change her rating on Timber Products from buy to sell and, as the firm’s procedures require, tells other H&V executives before the report is written up. She does not, however, put in place any procedure to stop those insiders from trading on or spreading the change. After her conversation with Frampton, an executive who reports to her, Frampton dumps Timber stock, both from his personal account and from several discretionary client accounts, and other staff tip off some institutional customers before the report reaches all clients who had received earlier Timber coverage.
Tabbing is a senior vice president and portfolio manager at Crozet, Inc., a registered adviser and broker-dealer, reporting to its president, Claudius. Crozet advises the ABC and XYZ public mutual funds, whose prospectuses allow futures trading only to hedge market risk, and it runs the Crozet Employee Profit-Sharing Plan (CEPSP), a retirement plan. Impressed by her record, Claudius makes Tabbing portfolio manager for the funds and assigns her 20% of CEPSP’s assets, to be run for aggressive growth. Tabbing routinely places S&P 500 index futures orders for the funds and for CEPSP without telling the brokers, before or during the trade, which account each order is for, and often no internal ticket records the time or the intended account. She waits to see how the market moves, then assigns the better-priced positions to CEPSP and the worse-priced ones to the funds. Crozet has no written procedures or compliance manual for futures trading, and compliance does not review it.