IV-A：Loyalty

（1）Soliciting Former Clients

• Samuel Magee manages pension accounts for Trust Assets, Inc., but has become frustrated with the working environment and has been offered a position with Fiduciary Management. Before resigning from Trust Assets, Magee asks four big accounts to leave that firm and open accounts with Fiduciary. Magee also persuades several prospective clients to sign agreements with Fiduciary Management. Magee had previously made presentations to these prospects on behalf of Trust Assets.

• Comment:

  • prospect：
    • n. 前景; 展望; 希望; 前途; 可能性; 设想; 风景; 成功的机会; （竞赛中的）有望获胜者
    • vi. 探矿; 勘探
  • Magee violated the employee–employer principle requiring him to act solely for his employer’s benefit. Magee’s duty is to Trust Assets as long as he is employed there. The solicitation of Trust Assets’ current clients and prospective clients is unethical and violates Standard IV(A). （Magee violated Standard 4-A by soliciting the current and prospective clients of the old employer before her resignation.）
    • solicitation：(对金钱、帮助、支援等的)请求;(意见的)征求

      （2）Former Employer’s Documents and Files

• James Hightower has been employed by Jason Investment Management Corporation for 15 years. He began as an analyst but assumed increasing responsibilities and is now a senior portfolio manager and a member of the firm’s investment policy committee. Hightower has decided to leave Jason Investment and start his own investment management business. He has been careful not to tell any of Jason’s clients that he is leaving; he does not want to be accused of breaching his duty to Jason by soliciting Jason’s clients before his departure. Hightower is planning to copy and take with him the following documents and information he developed or worked on while at Jason:

  • the client list, with addresses, telephone numbers, and other pertinent client information
  • client account statements
  • sample marketing presentations to prospective clients containing Jason’s performance record
  • Jason’s recommended list of securities
  • computer models to determine asset allocations for accounts with various objectives;
  • computer models for stock selection
  • personal computer spreadsheets for Hightower’s major corporate recommendations, which he developed when he was an analyst.

• Comment:

  • Except with the consent of their employer, departing members and candidates may not take employer property, which includes books, records, reports, and other materials, because taking such materials may interfere with their employer’s business opportunities.
  • Taking any employer records, even those the member or candidate prepared, violates Standard IV(A).
  • Employer records include items stored in hard copy or any other medium (e.g., home computers, portable storage devices, cell phones).

    （3）【IMP】Addressing Rumors

• Reuben Winston manages all-equity portfolios at Target Asset Management (TAM), a large, established investment counselor. Ten years previously, Philpott & Company, which manages a family of global bond mutual funds, acquired TAM in a diversification move. After the merger, the combined operations prospered in the fixed-income business but the equity management business at TAM languished. Lately, a few of the equity pension accounts that had been with TAM before the merger have terminated their relationships with TAM. One day, Winston finds on his voice mail the following message from a concerned client: “Hey! I just heard that Philpott is close to announcing the sale of your firm’s equity management business to Rugged Life. What is going on?” Not being aware of any such deal, Winston and his associates are stunned. Their internal inquiries are met with denials from Philpott management, but the rumors persist. Feeling left in the dark, Winston contemplates leading an employee buyout of TAM’s equity management business.

• Comment:

  • prosper：繁荣; 成功; 兴旺; 发达
  • languish：
    • vi. 变得衰弱无力，失去活力; （植物等）凋萎; 长期受苦，受煎熬; 被忽视，遭冷落; 松弛，松懈; 被迫滞留; 未能取得进展，没有成功
    • n. 衰弱无力，倦怠，凋萎; 惹人爱怜的眼神(或神色)
  • contemplate：考虑; 沉思; 思忖; 深思熟虑; 思量; 端详; 苦思冥想; 考虑接受
  • An employee-led buyout of TAM’s equity asset management business would be consistent with Standard IV(A) because it would rest on the permission of the employer and, ultimately, the clients.
  • In this case, however, in which employees suspect the senior managers or principals are not truthful or forthcoming, Winston should consult legal counsel to determine appropriate action.
    • forthcoming：
      • adj. 即将到来的; 即将发生(或出版等)的; 现成; 随要随有; 乐于提供信息
      • n. 来临

        （4）【IMP】Ownership of Completed Prior Work

• Laura Clay, who is unemployed, wants part-time consulting work while seeking a fulltime analyst position. During an interview at Bradley Associates, a large institutional asset manager, Clay is told that the firm has no immediate research openings but would be willing to pay her a flat fee（统一收费（费用）） to complete a study of the wireless communications industry within a given period of time. Clay would be allowed unlimited access to Bradley’s research files and would be welcome to come to the offices and use whatever support facilities are available during normal working hours. Bradley’s research director does not seek any exclusivity for Clay’s output, and the two agree to the arrangement on a handshake. As Clay nears completion of the study, she is offered an analyst job in the research department of Winston & Company, a brokerage firm, and she is pondering submitting the draft of her wireless study for publication by Winston.

• Comment:
  • ponder：思考; 考虑; 沉思; 琢磨
  • Although she is under no written contractual obligation to Bradley, Clay has an obligation to let Bradley act on the output of her study before Winston & Company or Clay uses the information to their advantage.
  • That is, unless Bradley gives permission to Clay and waives its rights to her wireless report, Clay would be in violation of Standard IV(A) if she were to immediately recommend to Winston the same transactions recommended in the report to Bradley.
    • waive：放弃(权利、要求等)
  • Furthermore, Clay must not take from Bradley any research file material or other property that she may have used.

• 【IMP】Emma Madeline, a recent college graduate and a candidate in the CFA Program, spends her summer as an unpaid intern at Murdoch and Lowell. The senior managers at Murdoch are attempting to bring the firm into compliance with the GIPS standards, and Madeline is assigned to assist in its efforts. Two months into her internship, Madeline applies for a job at McMillan & Company, which has plans to become GIPS compliant. Madeline accepts the job with McMillan. Before leaving Murdoch, she copies the firm’s software that she helped develop because she believes this software will assist her in her new position.

• Comment:

  • Even though Madeline does not receive monetary compensation for her services at Murdoch, she has used firm resources in creating the software and is considered an employee because she receives compensation and benefits in the form of work experience and knowledge.
  • By copying the software, Madeline violated Standard IV(A) because she misappropriated Murdoch’s property without permission.

    （5）【IMP】Soliciting Former Clients（3 题）

• Dennis Elliot has hired Sam Chisolm, who previously worked for a competing firm. Chisolm left his former firm after 18 years of employment. When Chisolm begins working for Elliot, he wants to contact his former clients because he knows them well and is certain that many will follow him to his new employer. Is Chisolm in violation of Standard IV(A) if he contacts his former clients?

• Comment:
  • Because client records are the property of the firm, contacting former clients for any reason through the use of client lists or other information taken from a former employer without permission would be a violation of Standard IV(A).
  • In addition, the nature and extent of the contact with former clients may be governed by the terms of any noncompete agreement signed by the employee and the former employer that covers contact with former clients after employment.
  • Simple knowledge of the names and existence of former clients is not confidential information, just as skills or experience that an employee obtains while employed are not “confidential” or “privileged” information.
  • The Code and Standards do not impose a prohibition on the use of experience or knowledge gained at one employer from being used at another employer, and do not prohibit former employees from contacting clients of their previous firm, in the absence of a noncompete agreement.
  • Members and candidates are free to use public information about their former firm after departing to contact former clients without violating Standard IV(A).
  • In the absence of a noncompete agreement, as long as Chisolm maintains his duty of loyalty to his employer before joining Elliot’s firm, does not take steps to solicit clients until he has left his former firm, and does not use material from his former employer without its permission after he has left, he is not in violation of the Code and Standards.

• 【IMP】After leaving her employer, Shawna McQuillen establishes her own money management business. While with her former employer, she did not sign a noncompete agreement that would have prevented her from soliciting former clients. Upon her departure, she does not take any of her client lists or contact information and she clears her personal computer of any employer records, including client contact information. She obtains the phone numbers of her former clients through public records and contacts them to solicit their business.
• Comment:
  • McQuillen is not in violation of Standard IV(A) because she has not used information or records from her former employer and is not prevented by an agreement with her former employer from soliciting her former clients.

• Angel Crome has been a private banker for YBSafe Bank for the past eight years. She has been very successful and built a considerable client portfolio during that time but is extremely frustrated by the recent loss of reputation by her current employer and subsequent client insecurity. A locally renowned headhunter contacted Crome a few days ago and offered her an interesting job with a competing private bank. This bank offers a substantial signing bonus for advisers with their own client portfolios. Crome figures that she can solicit at least 70% of her clients to follow her and gladly enters into the new employment contract.

• Comment:

  • Crome may contact former clients upon termination of her employment with YBSafe Bank, but she is prohibited from using client records built by and kept with her in her capacity as an employee of YBSafe Bank.
  • Client lists are proprietary information of her former employer and must not be used for her or her new employer’s benefit. The use of written, electronic, or any other form of records other than publicly available information to contact her former clients at YBSafe Bank will be a violation of Standard IV(A).

    （6）【IMP】Starting a New Firm

• Geraldine Allen currently works at a registered investment company as an equity analyst. Without notice to her employer, she registers with government authorities to start an investment company that will compete with her employer, but she does not actively seek clients. Does registration of this competing company with the appropriate regulatory authorities constitute a violation of Standard IV(A)?

• Comment:

  • Allen’s preparation for the new business by registering with the regulatory authorities does not conflict with the work for her employer if the preparations have been done on Allen’s own time outside the office and if Allen will not be soliciting clients for the business or otherwise operating the new company until she has left her current employer.

    （7）【IMP】Competing with Current Employer

• Several employees are planning to depart their current employer within a few weeks and have been careful to not engage in any activities that would conflict with their duty to their current employer. They have just learned that one of their employer’s clients has undertaken a request for proposal (RFP) to review and possibly hire a new investment consultant. The RFP has been sent to the employer and all of its competitors. The group believes that the new entity to be formed would be qualified to respond to the RFP and be eligible for the business. The RFP submission period is likely to conclude before the employees’ resignations are effective. Is it permissible for the group of departing employees to respond to the RFP for their anticipated new firm?

• Comment:

  • A group of employees responding to an RFP that their employer is also responding to would lead to direct competition between the employees and the employer. Such conduct violates Standard IV(A) unless the group of employees receives permission from their employer as well as the entity sending out the RFP.

    （8）Externally Compensated Assignments

• Alfonso Mota is a research analyst with Tyson Investments. He works part time as a mayor for his hometown, a position for which he receives compensation. Must Mota seek permission from Tyson to serve as mayor?

• Comment:

  • mayor：市长; (英格兰、威尔士和北爱尔兰由议员选举产生的)镇长; 郡长
  • mayoral：市长的
  • If Mota’s mayoral duties are so extensive and time-consuming that they might detract（减损; 贬低; 诋毁） from his ability to fulfill his responsibilities at Tyson, he should discuss his outside activities with his employer and come to a mutual agreement regarding how to manage his personal commitments with his responsibilities to his employer.

    （9）Whistleblowing Actions

• Meredith Rasmussen works on a buy-side trading desk and concentrates on in-house trades for a hedge fund subsidiary managed by a team at the investment management firm. The hedge fund has been very successful and is marketed globally by the firm. From her experience as the trader for much of the activity of the fund, Rasmussen has become quite knowledgeable about the hedge fund’s strategy, tactics, and performance. When a distinct break in the market occurs, however, and many of the securities involved in the hedge fund’s strategy decline markedly in value, Rasmussen observes that the reported performance of the hedge fund does not reflect this decline. In her experience, the lack of any effect is a very unlikely occurrence. She approaches the head of trading about her concern and is told that she should not ask any questions and that the fund is big and successful and is not her concern. She is fairly sure something is not right, so she contacts the compliance officer, who also tells her to stay away from the issue of this hedge fund’s reporting.

• Comment:

  • Rasmussen has clearly come upon an error in policies, procedures, and compliance practices in the firm’s operations. Having been unsuccessful in finding a resolution with her supervisor and the compliance officer, Rasmussen should consult the firm’s whistleblowing policy to determine the appropriate next step toward informing management of her concerns. The potentially unethical actions of the investment management division are appropriate grounds for further disclosure, so Rasmussen’s whistleblowing would not represent a violation of Standard IV(A).
    • come upon：偶然碰到（或发现）; （某种态度或感觉）开始影响（某人）
    • whistleblowing：(向当局或公众)检举，揭发
  • See also Standard I(D)–Misconduct and Standard IV(C)–Responsibilities of Supervisors.

    （10）Notification of Code and Standards

• Krista Smith is a relatively new assistant trader for the fixed-income desk of a major investment bank. She is on a team responsible for structuring collateralized debt obligations (CDOs) made up of securities in the inventory of the trading desk. At a meeting of the team, senior executives explain the opportunity to eventually separate the CDO into various risk-rated tranches to be sold to the clients of the firm. After the senior executives leave the meeting, the head trader announces various responsibilities of each member of the team and then says, “This is a good time to unload some of the junk we have been stuck with for a while and disguise it with ratings and a thick, unreadable prospectus, so don’t be shy in putting this CDO together. Just kidding.”

• Smith is worried by this remark and asks some of her colleagues what the head trader meant. They all respond that he was just kidding but that there is some truth in the remark because the CDO is seen by management as an opportunity to improve the quality of the securities in the firm’s inventory.
• Concerned about the ethical environment of the workplace, Smith decides to talk to her supervisor about her concerns and provides the head trader with a copy of the Code and Standards. Smith discusses the principle of placing the client above the interest of the firm and the possibility that the development of the new CDO will not adhere to this responsibility. The head trader assures Smith that the appropriate analysis will be conducted when determining the appropriate securities for collateral. Furthermore, the ratings are assigned by an independent firm and the prospectus will include full and factual disclosures. Smith is reassured by the meeting, but she also reviews the company’s procedures and requirements for reporting potential violations of company policy and securities laws.

• Comment:

  • unload：卸载; (从车、船上)卸，取下; 拆掉，退出，取出(子弹或胶卷等); 脱手，卖掉; 推卸(责任); 甩掉(包袱)
  • junk：
    • n. 中国式帆船; 废旧物品; 无用的东西; 无价值的东西
    • vt. 废弃; 丢弃; 把…当作废物扔弃
  • Smith’s review of the company policies and procedures for reporting violations allows her to be prepared to report through the appropriate whistleblower process if she decides that the CDO development process involves unethical actions by others.
  • Smith’s actions comply with the Code and Standards principles of placing the client’s interests first and being loyal to her employer. In providing her supervisor with a copy of the Code and Standards, Smith is highlighting the high level of ethical conduct she is required to adhere to in her professional activities.

    （11）【IMP】Leaving an Employer

• Laura Webb just left her position as portfolio analyst at Research Systems, Inc. (RSI). Her employment contract included a non-solicitation agreement that requires her to wait two years before soliciting RSI clients for any investment-related services. Upon leaving, Webb was informed that RSI would contact clients immediately about her departure and introduce her replacement.

• While working at RSI, Webb connected with clients, other industry associates, and friends through her LinkedIn network. Her business and personal relationships were intermingled because she considered many of her clients to be personal friends.
• Realizing that her LinkedIn network would be a valuable resource for new employment opportunities, she updated her profile several days following her departure from RSI.
• LinkedIn automatically sent a notification to Webb’s entire network that her employment status had been changed in her profile.

• Comment:

  • Prior to her departure, Webb should have discussed any client information contained in her social media networks. By updating her LinkedIn profile after RSI notified clients and after her employment ended, she has appropriately placed her employer’s interests ahead of her own personal interests.
  • In addition, she has not violated the non-solicitation agreement with RSI, unless it prohibited any contact with clients during the two-year period.

    （12）【IMP】Confidential Firm Information

• Sanjay Gupta is a research analyst at Naram Investment Management (NIM). NIM uses a team-based research process to develop recommendations on investment opportunities covered by the team members. Gupta, like others, provides commentary for NIM’s clients through the company blog, which is posted weekly on the NIM password-protected website. According to NIM’s policy, every contribution to the website must be approved by the company’s compliance department before posting. Any opinions expressed on the website are disclosed as representing the perspective of NIM.

• Gupta also writes a personal blog to share his experiences with friends and family. As with most blogs, Gupta’s personal blog is widely available to interested readers through various internet search engines. Occasionally, when he disagrees with the team-based research opinions of NIM, Gupta uses his personal blog to express his own opinions as a counterpoint to the commentary posted on the NIM website. Gupta believes this provides his readers with a more complete perspective on these investment opportunities.

• Comment:

  • counterpoint：
    • n. 对位法，对位(各声部互相结合); 复调; 惬意(或有趣)的对比
    • vt. 用…作对比; 与…形成对比
  • Gupta is in violation of Standard IV(A) for disclosing confidential firm information through his personal blog. The recommendations on the firm’s blog to clients are not freely available across the internet, but his personal blog post indirectly provides the firm’s recommendations.
    Additionally, by posting research commentary on his personal blog, Gupta is using firm resources for his personal advantage. To comply with Standard IV(A), members and candidates must receive consent from their employer prior to using company resources.

    IV(B) Additional Compensation Arrangements

    （1）Notification of Client Bonus Compensation

• Geoff Whitman, a portfolio analyst for Adams Trust Company, manages the account of Carol Cochran, a client. Whitman is paid a salary by his employer, and Cochran pays the trust company a standard fee based on the market value of assets in her portfolio. Cochran proposes to Whitman that “any year that my portfolio achieves at least a 15% return before taxes, you and your wife can fly to Monaco at my expense and use my condominium during the third week of January.” Whitman does not inform his employer of the arrangement and vacations in Monaco the following January as Cochran’s guest.

• Comment:

  • Whitman violated Standard IV(B) by failing to inform his employer in writing of this supplemental, contingent compensation arrangement. The nature of the arrangement could have resulted in partiality to Cochran’s account, which could have detracted from Whitman’s performance with respect to other accounts he handles for Adams Trust. Whitman must obtain the consent of his employer to accept such a supplemental benefit.
    • partiality：[ˌpɑːrʃiˈæləti] 偏袒; 偏爱; 特别喜爱; 酷爱

      （2）Notification of Outside Compensation

• Terry Jones sits on the board of directors of Exercise Unlimited, Inc. In return for his services on the board, Jones receives unlimited membership privileges for his family at all Exercise Unlimited facilities. Jones purchases Exercise Unlimited stock for the client accounts for which it is appropriate. Jones does not disclose this arrangement to his employer because he does not receive monetary compensation for his services to the board.

• Comment:

  • Jones has violated Standard IV(B) by failing to disclose to his employer benefits received in exchange for his services on the board of directors. The nonmonetary compensation may create a conflict of interest in the same manner as being paid to serve as a director.

    （3）【IMP】Prior Approval for Outside Compensation

• Jonathan Hollis is an analyst of oil-and-gas companies for Specialty Investment Management. He is currently recommending the purchase of ABC Oil Company shares and has published a long, well-thought-out（考虑周密的; 妥当） research report to substantiate（证明; 证实） his recommendation. Several weeks after publishing the report, Hollis receives a call from the investor-relations office of ABC Oil saying that Thomas Andrews, CEO of the company, saw the report and really liked the analyst’s grasp of the business and his company. The investor-relations officer invites Hollis to visit ABC Oil to discuss the industry further. ABC Oil offers to send a company plane to pick Hollis up and arrange for his accommodations while visiting. Hollis, after gaining the appropriate approvals, accepts the meeting with the CEO but declines the offered travel arrangements. Several weeks later, Andrews and Hollis meet to discuss the oil business and Hollis’s report. Following the meeting, Hollis joins Andrews and the investment relations officer for dinner at an upscale restaurant near ABC Oil’s headquarters.

• Upon returning to Specialty Investment Management, Hollis provides a full review of the meeting to the director of research, including a disclosure of the dinner attended.

• Comment:

  • Hollis’s actions did not violate Standard IV(B). Through gaining approval before accepting the meeting and declining the offered travel arrangements, Hollis sought to avoid any potential conflicts of interest between his company and ABC Oil.
  • Because the location of the dinner was not available prior to arrival and Hollis notified his company of the dinner upon his return, accepting the dinner should not impair his objectivity.
  • By disclosing the dinner, Hollis has enabled Specialty Investment Management to assess whether it has any impact on future reports and recommendations by Hollis related to ABC Oil.

    IV(C) Responsibilities of Supervisors

    （1）Supervising Research Activities

• Jane Mattock, senior vice president and head of the research department of H&V, Inc., a regional brokerage firm, has decided to change her recommendation for Timber Products from buy to sell. In line with H&V’s procedures, she orally advises certain other H&V executives of her proposed actions before the report is prepared for publication. As a result of Mattock’s conversation with Dieter Frampton, one of the H&V executives accountable（负有责任的; (对自己的决定、行为)负有责任，有说明义务） to Mattock, Frampton immediately sells Timber’s stock from his own account and from certain discretionary client accounts. In addition, other personnel inform certain institutional customers of the changed recommendation before it is printed and disseminated to all H&V customers who have received previous Timber reports.

• Comment:
  • Mattock has violated Standard IV(C) by failing to reasonably and adequately supervise the actions of those accountable to her. She did not prevent or establish reasonable procedures designed to prevent dissemination of or trading on the information by those who knew of her changed recommendation.
  • She must ensure that her firm has procedures for reviewing or recording any trading in the stock of a corporation that has been the subject of an unpublished change in recommendation. Adequate procedures would have informed the subordinates of their duties and detected sales by Frampton and selected customers.

• Deion Miller is the research director for Jamestown Investment Programs. The portfolio managers have become critical of Miller and his staff because the Jamestown portfolios do not include any stock that has been the subject of a merger or tender offer. Georgia Ginn, a member of Miller’s staff, tells Miller that she has been studying a local company, Excelsior, Inc., and recommends its purchase. Ginn adds that the company has been widely rumored to be the subject of a merger study by a well-known conglomerate and discussions between them are under way. At Miller’s request, Ginn prepares a memo recommending the stock. Miller passes along Ginn’s memo to the portfolio managers prior to leaving for vacation, and he notes that he has not reviewed the memo.
• As a result of the memo, the portfolio managers buy Excelsior stock immediately. The day Miller returns to the office, he learns that Ginn’s only sources for the report were her brother, who is an acquisitions analyst with Acme Industries, the “well-known conglomerate,” and that the merger discussions were planned but not held.
• Comment:
  • Miller violated Standard IV(C) by not exercising reasonable supervision when he disseminated the memo without checking to ensure that Ginn had a reasonable and adequate basis for her recommendations and that Ginn was not relying on material nonpublic information.

• Mary Burdette was recently hired by Fundamental Investment Management (FIM) as a junior auto industry analyst. Burdette is expected to expand the social media presence of the firm because she is active with various networks, including Facebook, LinkedIn, and Twitter. Although Burdette’s supervisor, Joe Graf, has never used social media, he encourages Burdette to explore opportunities to increase FIM’s online presence and ability to share content, communicate, and broadcast information to clients. In response to Graf’s encouragement, Burdette is working on a proposal detailing the advantages of getting FIM onto Twitter in addition to launching a company Facebook page.
• As part of her auto industry research for FIM, Burdette is completing a report on the financial impact of Sun Drive Auto Ltd.’s new solar technology for compact automobiles. This research report will be her first for FIM, and she believes Sun Drive’s technology could revolutionize the auto industry. In her excitement, Burdette sends a quick tweet to FIM Twitter followers summarizing her “buy” recommendation for Sun Drive Auto stock.
• Comment:
  • Graf has violated Standard IV(C) by failing to reasonably supervise Burdette with respect to the contents of her tweet. He did not establish reasonable procedures to prevent the unauthorized dissemination of company research through social media networks.
  • Graf must make sure all employees receive regular training about FIM’s policies and procedures, including the appropriate business use of personal social media networks.
  • See Standard III(B) for additional guidance.

• Chen Wang leads the research department at YYRA Retirement Planning Specialists. Chen supervises a team of 10 analysts in a fast-paced and understaffed organization. He is responsible for coordinating the firm’s approved process to review all reports before they are provided to the portfolio management team for use in rebalancing client portfolios.
• One of Chen’s direct reports, Huang Mei, covers the banking industry. Chen must submit the latest updates to the portfolio management team tomorrow morning. Huang has yet to submit her research report on ZYX Bank because she is uncomfortable providing a “buy” or “sell” opinion of ZYX on the basis of the completed analysis. Pressed for time and concerned that Chen will reject a “hold” recommendation, she researches various websites and blogs on the banking sector for whatever she can find on ZYX.
• One independent blogger provides a new interpretation of the recently reported data Huang has analyzed and concludes with a strong “sell” recommendation for ZYX. She is impressed by the originality and resourcefulness of this blogger’s report.
• Very late in the evening, Huang submits her report and “sell” recommendation to Chen without any reference to the independent blogger’s report. Given the late time of the submission and the competence of Huang’s prior work, Chen compiles this report with the recommendations from each of the other analysts and meets with the portfolio managers to discuss implementation.

• Comment:

  • Chen has violated Standard IV(C) by neglecting to reasonably and adequately follow the firm’s approved review process for Huang’s research report. The delayed submission and the quality of prior work do not remove Chen’s requirement to uphold the designated review process.
  • A member or candidate with supervisory responsibility must make reasonable efforts to see that appropriate procedures are established, documented, communicated to covered personnel, and followed.

    （2）Supervising Trading Activities

• David Edwards, a trainee trader at Wheeler & Company, a major national brokerage firm, assists a customer in paying for the securities of Highland, Inc., by using anticipated profits from the immediate sale of the same securities. Despite the fact that Highland is not on Wheeler’s recommended list, a large volume of its stock is traded through Wheeler in this manner. Roberta Ann Mason is a Wheeler vice president responsible for supervising compliance with the securities laws in the trading department. Part of her compensation from Wheeler is based on commission revenues from the trading department. Although she notices the increased trading activity, she does nothing to investigate or halt it.

• Comment:

  • Mason’s failure to adequately review and investigate purchase orders in Highland stock executed by Edwards and her failure to supervise the trainee’s activities violate Standard IV(C).
  • Supervisors should be especially sensitive to actual or potential conflicts between their own selfinterests and their supervisory responsibilities.

    （3）Supervising Trading Activities and Record Keeping

• Samantha Tabbing is senior vice president and portfolio manager for Crozet, Inc., a registered investment advisory and registered broker/dealer firm. She reports to Charles Henry, the president of Crozet. Crozet serves as the investment adviser and principal underwriter for ABC and XYZ public mutual funds. The two funds’ prospectuses allow Crozet to trade financial futures for the funds for the limited purpose of hedging against market risks. Henry, extremely impressed by Tabbing’s performance in the past two years, directs Tabbing to act as portfolio manager for the funds. For the benefit of its employees, Crozet has also organized the Crozet Employee Profit-Sharing Plan (CEPSP), a defined contribution retirement plan. Henry assigns Tabbing to manage 20% of the assets of CEPSP. Tabbing’s investment objective for her portion of CEPSP’s assets is aggressive growth. Unbeknownst to Henry, Tabbing frequently places S&P 500 Index purchase and sale orders for the funds and the CEPSP without providing the futures commission merchants (FCMs) who take the orders with any prior or simultaneous designation of the account for which the trade has been placed. Frequently, neither Tabbing nor anyone else at Crozet completes an internal trade ticket to record the time an order was placed or the specific account for which the order was intended. FCMs often designate a specific account only after the trade, when Tabbing provides such designation. Crozet has no written operating procedures or compliance manual concerning its futures trading, and its compliance department does not review such trading. After observing the market’s movement, Tabbing assigns to CEPSP the S&P 500 positions with more favorable execution prices and assigns positions with less favorable execution prices to the funds.

• Comment:

  • Henry violated Standard IV(C) by failing to adequately supervise Tabbing with respect to her S&P 500 trading.
  • Henry further violated Standard IV(C) by failing to establish record-keeping and reporting procedures to prevent or detect Tabbing’s violations.
  • Henry must make a reasonable effort to determine that adequate compliance procedures covering all employee trading activity are established, documented, communicated, and followed.

    （4）Accepting Responsibility

• Meredith Rasmussen works on a buy-side trading desk and concentrates on in-house trades for a hedge fund subsidiary managed by a team at the investment management firm. The hedge fund has been very successful and is marketed globally by the firm.

• From her experience as the trader for much of the activity of the fund, Rasmussen has become quite knowledgeable about the hedge fund’s strategy, tactics, and performance.
• When a distinct break in the market occurs and many of the securities involved in the hedge fund’s strategy decline markedly in value, however, Rasmussen observes that the reported performance of the hedge fund does not at all reflect this decline. From her experience, this lack of an effect is a very unlikely occurrence. She approaches the head of trading about her concern and is told that she should not ask any questions and that the fund is too big and successful and is not her concern. She is fairly sure something is not right, so she contacts the compliance officer and is again told to stay away from the hedge fund reporting issue.

• Comment:

  • Rasmussen has clearly come upon（偶然碰到（或发现）; （某种态度或感觉）开始影响（某人）） an error in policies, procedures, and compliance practices within the firm’s operations.
  • According to Standard IV(C), the supervisor and the compliance officer have the responsibility to review the concerns brought forth by Rasmussen. Supervisors have the responsibility of establishing and encouraging an ethical culture in the firm.
  • The dismissal（开除; 解散; 撤职; 摒弃; 不予受理; 不予考虑; 不予理会） of Rasmussen’s question violates Standard IV(C) and undermines the firm’s ethical operations.
  • See also Standard I(D)–Misconduct and, for guidance on whistleblowing, Standard IV(A)–Loyalty.

    （5）Inadequate Procedures

• Brendan Witt, a former junior sell-side technology analyst, decided to return to school to earn an MBA. To keep his research skills and industry knowledge sharp, Witt accepted a position with On-line and Informed, an independent internet-based research company. The position requires the publication of a recommendation and report on a different company every month. Initially, Witt is a regular contributor of new research and a participant in the associated discussion boards that generally have positive comments on the technology sector. Over time, his ability to manage his educational requirements and his work requirements begin to conflict with one another. Knowing a recommendation is due the next day for On-line, Witt creates a report based on a few news articles and what the conventional wisdom of the markets has deemed the “hot” security of the day.

• Comment:

  • Allowing the report submitted by Witt to be posted highlights a lack of compliance procedures by the research firm.
  • Witt’s supervisor needs to work with the management of On-line to develop an appropriate review process to ensure that all contracted analysts comply with the requirements.
  • See also Standard V(A)–Diligence and Reasonable Basis because it relates to Witt’s responsibility for substantiating a recommendation.

    （6）Inadequate Supervision

• Michael Papis is the chief investment officer of his state’s retirement fund. The fund has always used outside advisers for the real estate allocation, and this information is clearly presented in all fund communications. Thomas Nagle, a recognized sell-side research analyst and Papis’s business school classmate, recently left the investment bank he worked for to start his own asset management firm, Accessible Real Estate.

• Nagle is trying to build his assets under management and contacts Papis about gaining some of the retirement fund’s allocation. In the previous few years, the performance of the retirement fund’s real estate investments was in line with the fund’s benchmark but was not extraordinary. Papis decides to help out his old friend and also to seek better returns by moving the real estate allocation to Accessible. The only notice of the change in adviser appears in the next annual report in the listing of associated advisers.
• Comment:
  • Papis’s actions highlight the need for supervision and review at all levels in an organization. His responsibilities may include the selection of external advisers, but the decision to change advisers appears arbitrary.
  • Members and candidates should ensure that their firm has appropriate policies and procedures in place to detect inappropriate actions, such as the action taken by Papis.
  • See also Standard V(A)–Diligence and Reasonable Basis, Standard V(B)– Communication with Clients and Prospective Clients, and Standard VI(A)– Disclosure of Conflicts.