Standard IV(A) Loyalty

Standard IV(A) requires members and candidates to protect the interests of their employer by refraining from any conduct that would injure the firm, deprive it of profit, or deprive it of the member’s or candidate’s skills and ability. In matters related to their employment, members and candidates must not engage in conduct that harms the interests of their employer. Implicit in this standard is the obligation of members and candidates to comply with the policies and procedures established by their employers that govern the employer–employee relationship—to the extent that such policies and procedures do not conflict with applicable laws, rules, and regulations or the Code and Standards.

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.

The employer–employee relationship imposes duties and responsibilities on both parties. Employers must recognize the duties and responsibilities that they owe to their employees if they expect to have contented and productive employees. The employer is also responsible for a positive working environment, which includes an ethical workplace.

Members and candidates are encouraged to provide their employers with a copy of the Code and Standards. These materials will inform the employer of the responsibilities of a CFA Institute member or candidate in the CFA Program. The Code and Standards also serve as a basis for questioning employer policies and practices that conflict with these responsibilities.

Although Standard IV(A) does not preclude members or candidates from engaging in an independent business while still employed, members and candidates are prohibited from providing a service offered by their employer without their employer’s consent because such conduct would conflict with the interests of their employer. Members and candidates are not prohibited from preparing to enter into an independent business so long as they do not solicit or provide services to clients or otherwise cause harm to their employer. Members and candidates who plan to engage in an independent business for compensation while employed must notify their employer and describe the types of services they will render to prospective independent clients, the expected duration of the services, and the compensation for the services. Members and candidates must not render services until they receive consent from their employer to all of the terms of the arrangement.

When members and candidates are planning to leave their current employer, they must continue to act in the employer’s best interest until the employment relationship ends. A letter of resignation does not necessarily signify the end of the relationship, especially if there is still a period of employment to complete. Generally, the employment relationship ends once the employee is no longer being paid or no longer has responsibilities at the company. Members and candidates must not engage in any activities that could conflict with their duty of loyalty to their employer until their employment relationship ends. Activities that may constitute a violation of Standard IV(A) include the following:

• unauthorized use of trade secrets;
• misuse of confidential information, explicit or implicit solicitation of an employer’s clients, or promotion of a new employer prior to cessation of employment;
• self-dealing (appropriating for one’s own benefit property, a business opportunity, or information belonging to one’s employer);
• unauthorized use of any firm property, including clients or client lists; and
• discussing a change in employment in a manner that disparages or denigrates the current employer such that it could cause harm to the firm’s interests.

A departing employee is generally free to make arrangements or preparations to go into a competitive business before terminating the relationship with his or her employer as long as such preparations do not breach the employee’s duty of loyalty. Members and candidates who are contemplating seeking other employment must not contact existing clients or potential clients prior to leaving their employer to discuss a potential change in their employment status. After providing notice to their employer of their intent to resign, members and candidates may inform the clients with whom they work that they are leaving and going to a new firm but must not communicate information in a manner that could be seen as explicitly or implicitly soliciting clients or business for the new employer. For instance, while they may provide the name of their new employer, members and candidates must not provide their contact information at their new employer before their employment ends without permission of their current employer. They also must not describe to clients the services available at the new firm or in other ways implicitly or explicitly promote their new employer to their current firm’s clients without the permission of their current employer.

Members and candidates cannot promote the services of a new firm in the name of protecting the interests of clients until their employment with their current firm ends. Members and candidates who believe the conduct or business practices of their employer are so egregious that they harm client interests are free to resign their position and subsequently notify their former clients or other appropriate parties of their concerns.

Once notice is provided to the employer of the intent to resign, the member or candidate must follow the employer’s policies and procedures related to notifying clients of his or her planned departure. In addition, the member or candidate must not take records or files to a new employer without the written permission of the previous employer. Members and candidates also must comply with their employer’s policies regarding the use of social media during their employment, including the manner of disclosing their departure on firm social media platforms.

Once an employee has left the firm, the skills and experience that the employee obtained while employed are not “confidential” or “privileged” information. Similarly, simple knowledge of the names and existence of former clients is generally not confidential information unless deemed as such by an agreement or by law. Standard IV(A) does not prohibit experience or knowledge gained at one employer from being used at another employer. Work performed on behalf of the employer, client lists, or other firm records—whether stored as paper copies or electronically on personal devices, such as phones, tablets, or laptop computers, for the member’s or candidate’s convenience—must be returned to the employer or erased unless the firm gives permission to keep those records after employment ends.

Once employment with the former firm has ended, the standard does not prohibit members and candidates from contacting clients of their previous firm as long as the contact information does not come from the records of or as a result of work for their former employer or such outreach does not violate an applicable agreement with the former firm. Members and candidates are free to use public information after departing to contact former clients without violating Standard IV(A) as long as there is no specific agreement not to do so. However, employers may require employees to sign agreements that preclude departing employees from engaging in certain conduct after they have left the firm. Members and candidates should take care to review the terms of any such agreement when leaving their employer to determine what, if any, conduct those agreements may prohibit.

Members and candidates must understand and abide by all applicable firm policies and regulations as to the acceptable use of social media to interact with clients and prospective clients. This requirement is especially important when a member or candidate is planning to leave an employer.

Social media use makes determining how and when departure notification is delivered to clients more complex. Members and candidates may have developed profiles on these platforms that include connections with individuals who are clients of the firm. Communications through social media platforms that potentially reach current clients must adhere to the employer’s policies and procedures regarding notification of departing employees.

Social media connections with clients also raise questions concerning the differences between public information and firm property. Members and candidates may create social media profiles solely for professional reasons, including firm-approved accounts for client engagements. Such firm-approved business-related accounts are part of the firm’s assets, thus requiring members and candidates to transfer or delete the accounts as directed by their firm’s policies and procedures. Best practice for members and candidates is to maintain separate accounts for their personal and professional social media activities.

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, certain 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.

Standard IV(A) applies in the employment context. A wide variety of business relationships exists in the investment industry. For instance, a member or candidate may be an employee or an independent contractor. Members and candidates must determine whether they are employees or independent contractors in order to determine the applicability of Standard IV(A).

A member’s or candidate’s duties in an independent contractor relationship are governed by the oral or written agreement between the member and the client. Members and candidates should take care to clearly define the scope of their responsibilities and the expectations of each client in the context of each relationship. Once a member or candidate establishes a relationship with a client, he or she has a duty to abide by the terms of the agreement.

Employers may establish codes of conduct and operating procedures for their employees to follow. Members and candidates should fully understand those policies and procedures to ensure that they are not in conflict with the Code and Standards. Members and candidates must understand any restrictions placed by the employer on offering similar services outside the firm while employed by the firm. The policy may outline the procedures for requesting approval to undertake the outside service or may be a strict prohibition of such service. Members and candidates should clearly understand the termination policies of their employer, including those that relate to the resignation process, how the termination will be disclosed to clients and staff, and whether updates posted through social media will be allowed. Members and candidates should be aware of their firm’s policies related to whistle-blowing and encourage their firms to adopt industry best practices in this area. Many firms are required by regulatory mandates to establish confidential and anonymous reporting procedures that allow employees to report potentially unethical and illegal activities in the firm.

Magee manages pension accounts for Trust Assets, Inc. He 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 previously made presentations to these prospects on behalf of Trust Assets.

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 Investment’s clients that he is leaving; he does not want to be accused of breaching his duty to Jason Investment by soliciting its 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 Investment: (1) the client list, with addresses, telephone numbers, and other pertinent client information; (2) client account statements; (3) sample marketing presentations to prospective clients containing the firm’s performance record; (4) Jason Investment’s recommended list of securities; (5) computer models to determine asset allocations for accounts with various objectives; (6) computer models for stock selection; and (7) spreadsheets for Hightower’s major corporate recommendations, which he developed when he was an analyst.

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.

Nash is hired as an investment adviser working with retail clients for a regional investment advisory firm. Shortly after starting work, Nash realizes that the advisers at the firm are under pressure to churn investments in client accounts to generate fees. He brings his concerns to his immediate manager, the chief compliance officer, and ultimately to the senior managers of the firm. He is unsuccessful in getting the firm to change its practices and finds other employment at a competing firm. Upon handing in his resignation but prior to leaving his current employer, at the employer’s direction, he sends notice to clients he worked with that he will be leaving the firm and informs them that their accounts will be transferred to other portfolio managers at the firm. One of his clients contacts him and inquires more about the circumstances of his departure. Nash describes in detail the unethical practices of his firm, gives the client information about his new employer, and encourages the client to transfer her account and follow Nash to his new firm.

Elliot has hired 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?

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 seek clients. Does registration of this competing company with the appropriate regulatory authorities constitute a violation of Standard IV(A)?

Several employees are planning to depart their current employer in 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 created a request for proposal (RFP) to review and possibly hire a new investment consultant. The RFP has been sent to the employer and all 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?

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 recruiting agent contacted Crome to offer her an attractive position with a competing private bank. This bank offers a substantial signing bonus for advisers with their own client portfolios. Crome believes that she can solicit at least 70% of her clients to follow her and gladly enters into the new employment contract.

Research Systems Inc. (RSI) terminated the employment of Webb, one of its portfolio analysts. Webb’s employment contract included a nonsolicitation agreement that requires her to wait two years before soliciting RSI clients for any investment-related services. While 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. Upon Webb’s departure, RSI informed her clients and introduced her replacement. Webb updated her LinkedIn profile several days after her departure from RSI. LinkedIn automatically sent a notification to Webb’s entire network that her employment status had changed.

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 NIM’s 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. Gupta’s personal blog is widely available to interested readers. 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.