Duties to Employers

This reading covers Standard IV, Duties to Employers: Loyalty, Additional Compensation Arrangements, and Responsibilities of Supervisors. A candidate must be able to apply each part to a fact pattern, recommend practices and procedures that prevent violations, and tell conduct that conforms from conduct that violates.

Overview — what Standard IV protects

Standard IV Duties to Employers has three parts. Standard IV(A) Loyalty protects the employer's business, clients, information and property. Standard IV(B) Additional Compensation Arrangements keeps outside benefits from drawing an employee's loyalty or objectivity away from the employer. Standard IV(C) Responsibilities of Supervisors makes anyone with authority over others answerable for trying to prevent their violations. The three LOS cover applying the Standards to a fact pattern (LOS 98.a), recommending procedures that prevent violations (LOS 98.b) and sorting conduct into "conforms" and "violates" (LOS 98.c).

Loyalty to an employer never requires a member to break the law, to harm clients or to breach the Code and Standards. Clients' interests rank above the employer's, but members should still weigh how their actions affect the firm's integrity and long-term sustainability.

LOS 98.a — Standard IV(A) Loyalty

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.

Harm to the employer includes any activity that injures the firm or deprives it of profit.

Who is an employer? An employer–employee relationship exists whenever a person works in the service of another. It does not require a written contract, and it does not require monetary compensation. Services exchanged for a benefit (for example, managing a club's reserves instead of paying membership dues) create a relationship in which the member should treat the organization as an employer. A member who is an independent contractor rather than an employee must abide by the terms of the agreement with the hiring firm; the contract defines the duties.

Personal life. Loyalty does not mean the employer comes before family or other personal obligations. Employer and employee are expected to discuss such conflicts and balance them with work duties.

Independent practice. Doing the same kind of work outside the job, for compensation or other benefit, in competition with the employer is independent practice.

• It is not banned. The member must notify the employer and obtain the employer's consent to all of its terms before the practice begins.
• The notification should fully describe the services: the types of services (nature of the activities), the expected duration and the compensation to be received. It need not disclose confidential information about outside clients. The employer may set lawful terms for the practice.
• Help given with no compensation or other benefit (reviewing a relative's portfolio for free, on one's own time) is not independent practice, so no consent is required. A non-cash benefit, such as free use of a property, counts as compensation.
• A member who already runs an independent practice and then takes a job must obtain the new employer's permission to continue the practice if it competes with the employer.

Leaving an employer. Until the resignation is effective, the member must keep acting in the employer's interest. Conduct that can breach the Standard around a departure includes misappropriation of trade secrets, misuse of confidential information, soliciting the employer's clients before leaving, self-dealing and misappropriation of client lists.

After leaving. A former employee may contact former clients, unless a valid non-compete agreement prevents it, provided the contact details come from memory or public sources (a directory, a website) rather than from records taken from the old firm. Soliciting former clients is not itself a violation, and it needs no permission from the new or old employer. Merely knowing who the former clients are is generally not confidential information, unless an agreement or the law makes it so.

Industry agreements. Where employers have signed an agreement that lets departing brokers take specified client information with them (for example, the US Protocol for Broker Recruiting), a member who stays within the terms of that agreement does not violate the Standard.

Social media. Members must follow the employer's social media policies. A member who plans to leave must make sure that any social media use (for example, announcing the move on a professional networking profile) complies with the employer's policy on notifying clients about departures.

Employer records. Records created or kept for the employer—such as client lists, models, spreadsheets and research notes—are the employer's property, whatever the medium, including a home computer, tablet or mobile phone. Taking or using them after leaving requires the former employer's permission. A member's skills, knowledge and experience are not employer records and may be used elsewhere.

Departure procedures. A member who ignores the employer's legitimate procedures for leaving (for example, the policy to tell clients and introduce the successor) violates Standard IV(A) Loyalty.

Whistleblowing. In isolated cases, a member may act against the employer's interest to protect clients or market integrity, for example by reporting illegal or unethical conduct through an appropriate channel. This is not a breach of loyalty when the action is not for personal gain and complies with applicable law. It does not automatically permit disclosure of confidential client information: that information may be disclosed only when it concerns illegal client activity, disclosure is required by law, or the client permits it. Some firms are required to have whistleblowing procedures that allow anonymous reporting. Members should know their firm's policy and encourage the firm to adopt best practices.

LOS 98.a — Standard IV(B) Additional Compensation Arrangements

Members and candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer's interest unless they obtain written consent from all parties involved.

The term covers more than pay: it includes anything of value a client provides, directly or indirectly, and any benefit a third party provides.

• The consent that matters most is the employer's. When a client or company offers the benefit (for example, a board seat), that party is also involved in the arrangement.
• Written consent includes e-mail. Telling a supervisor orally is not enough.
• Typical cases: a client promises a bonus, a holiday home or free club membership if the portfolio beats a benchmark (performance-linked benefits); a client offers free use of its facilities for as long as the member covers the account; a broker offers the member discounts on personal trades if the firm keeps its business (even when the firm already pays the lowest available commissions); a company pays a fee for serving on its board.
• The Standard does not require the member to refuse the benefit. It requires written consent before accepting it.
• It does not reach ordinary gifts that are unrelated to the member's services. A relative's long-standing birthday present that predates the client relationship, or taking turns paying for lunch with a client, is not an additional compensation arrangement.
• Future versus past performance. A client bonus that depends on how the account performs in the future is an additional compensation arrangement, and written consent is needed in advance. A client bonus that rewards performance already achieved is a gift; it must be disclosed to the employer under Standard I(B) Independence and Objectivity.
• A member hired part time should raise any arrangements that may compete with the employer when hired and respect any limits the employer sets.

LOS 98.a — Standard IV(C) Responsibilities of Supervisors

Members and candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.

The duty covers everyone under the member's supervision or authority, whether or not those people are CFA Institute members or candidates.

• Reasonable efforts cover three stages: preventing violations, detecting the ones that occur, and acting on any that are found. A supervisor who makes reasonable efforts to prevent and detect violations has not violated the Standard just because a subordinate commits one. A supervisor who makes no such effort violates the Standard even if no subordinate ever breaks a rule.
• Supervisors are expected to know the Code and Standards well and to apply them.
• Supervisory duties may be delegated, including to people who are not subject to the Standards, but the supervisor retains supervisory responsibility for the delegated duties and should instruct the delegates on how to prevent and detect violations.
• Adequate compliance system. An adequate compliance system satisfies three sets of requirements: those of the Code and Standards, those of regulators, and industry standards. A supervisor who finds the system inadequate must bring it to management's attention and recommend corrective action. If there are no compliance procedures, or the supervisor believes they are inadequate, the member must decline in writing to accept supervisory responsibility until the firm adopts adequate procedures. Urging management is necessary but does not replace declining. Resigning, relying on the Code alone or complaining to CFA Institute are not what the Standard asks for. The same applies when a supervisory role comes without the authority to act, for example a compliance head who may not enforce policies or see employees' communications with clients. Without that authority the member cannot make reasonable efforts to prevent and detect violations, so the role should be declined.
• When a violation is suspected or found, the supervisor should respond promptly and investigate thoroughly, while increasing supervision of the employee or limiting the employee's activities during the review, and involve compliance. Reporting the matter and warning the employee (a reprimand plus the employee's promise not to repeat the conduct) is not enough on its own.
• Supervisors should apply the same rigor to non-investment policies as to investment policies.

LOS 98.b — Recommended practices and procedures

Loyalty. A member is encouraged to hand the employer a copy of the Code and Standards. Keeping separate social media accounts for personal and professional use is best practice. Firms should avoid incentive and compensation systems that encourage unethical behavior.

Additional compensation. The member should make an immediate written report to the employer describing the benefit, including the terms of any oral or written agreement, the nature of the compensation, its amount and its duration. The Standard itself requires only the written consent; describing the nature, amount and duration is a recommended procedure. Firms should have the offering party confirm the details of the additional compensation, including any performance incentives.

Supervisors. A member should recommend that the employer adopt a code of ethics and encourage the employer to give it to clients. The code of ethics should be kept separate from the detailed compliance procedures, because mixing the two can dilute the ethical message.

Once the program exists, the supervisor should distribute it to the relevant staff, update it as needed, keep educating staff and issue reminders, require professional conduct evaluations (for example, as part of each performance review) and review employee actions to monitor compliance and spot violations. The Standard does not require formal hearings after a violation.

LOS 98.c — Quick guide: conforms or violates?