Just went over my some questions from a past schweser exam. I’ll give the gist of the question. If a client offers to give a large gift such as a week’s vacation on a cruise for past performance, do we need to get permission for this or just disclose it since this is prior performance?
this type of thing always kills me. i always go on the basis that things for past performance only need disclosure but things for future performance need permission. reason is that for future performance the gift may give you a bias to favor that clients portfolio.
I would say hands down you need permission due to the fact that it is a “large” gift and has the potential to lead to bias, even if it was due to past performance. Disclosure on the other hand-not sure you would need to disclose as I believe this is where the “past” performance comes into play, and you would only need to disclose if there was an arrangement going forward. (my disclosure-I havent studied ethics since January)
Definitely need to disclose it. There isn’t a doubt about that. I do think though that asking permission for such a large gift is necessary despite it referring to past performance. IMO I just think this is a bad question.
if you go by this reasoning then all ethics questions are bad questions
…there seems to be a thin line between asking permission and disclosing receipt of gift. It is ok to accept LARGE gift for past performance from clients, but such MUST be disclosed. The key is a gift from client (particularly for past performance) is seen as different from a gift from a broker or institutions seeking to influence your decision going forward. The point of disclosure enables your employer evaluate whether that gift does not compromise you going forward.
yea i say disclosing it and asking permission is about the same, cause when you disclose it you are basically make sure it is okay. And even if it is for past performance, it may comprise your performance in the future, so permission/disclosure is neccesary.
Disclosing and asking permission are not the same - the test will be extremely picky about knowing what is just to be disclosed and what will need approval. as far as for gifts for past performance, standard 1b states that gifts can be accepted as long as they are just disclosed - ie. no permission is needed. The disclosure is so that managers can watch future dealings and make sure you are not giving preferential treatment in the future. Oal29 Has it right!
little known secret: http://cfainstitute.org/centre/codes/ethics/self_exam.html, 25 more ethics questions for practice, just hit “log in” and create an account, worked to help prep for L1 will try again for L2
FinNinja Wrote: ------------------------------------------------------- > Disclosing and asking permission are not the same > - the test will be extremely picky about knowing > what is just to be disclosed and what will need > approval. > > as far as for gifts for past performance, standard > 1b states that gifts can be accepted as long as > they are just disclosed - ie. no permission is > needed. The disclosure is so that managers can > watch future dealings and make sure you are not > giving preferential treatment in the future. > > Oal29 Has it right! Wrong. See Example 1 for Standard IV B - Additional Compensation Arrangements. You need “written consent” from the employer (Page 73, CFAI text). A bonus from a client may not affect your independence & objectivity (standard I B) so disclosure would suffice from that perspective. But IV B categorically requires written consent. To op: gist of the question is not enough. Post the actual question if you need complete analysis. The circumstances stated in the question will point us towards the relevance of I B or IV B.
VR Wrote: ------------------------------------------------------- > FinNinja Wrote: > -------------------------------------------------- > ----- > > Disclosing and asking permission are not the > same > > - the test will be extremely picky about > knowing > > what is just to be disclosed and what will need > > approval. > > > > as far as for gifts for past performance, > standard > > 1b states that gifts can be accepted as long as > > they are just disclosed - ie. no permission is > > needed. The disclosure is so that managers can > > watch future dealings and make sure you are not > > giving preferential treatment in the future. > > > > Oal29 Has it right! > > Wrong. > > See Example 1 for Standard IV B - Additional > Compensation Arrangements. You need “written > consent” from the employer (Page 73, CFAI text). > > A bonus from a client may not affect your > independence & objectivity (standard I B) so > disclosure would suffice from that perspective. > > But IV B categorically requires written consent. > > To op: gist of the question is not enough. Post > the actual question if you need complete analysis. > The circumstances stated in the question will > point us towards the relevance of I B or IV B. The question is from Schweser’s practice exams. Book 1 AM test 1. Can’t remember which of the two vignettes had the question in it. At work so I don’t have it in front of me
VR Wrote: ------------------------------------------------------- > FinNinja Wrote: > -------------------------------------------------- > ----- > > Disclosing and asking permission are not the > same > > - the test will be extremely picky about > knowing > > what is just to be disclosed and what will need > > approval. > > > > as far as for gifts for past performance, > standard > > 1b states that gifts can be accepted as long as > > they are just disclosed - ie. no permission is > > needed. The disclosure is so that managers can > > watch future dealings and make sure you are not > > giving preferential treatment in the future. > > > > Oal29 Has it right! > > Wrong. > > See Example 1 for Standard IV B - Additional > Compensation Arrangements. You need “written > consent” from the employer (Page 73, CFAI text). > > A bonus from a client may not affect your > independence & objectivity (standard I B) so > disclosure would suffice from that perspective. > > But IV B categorically requires written consent. > > To op: gist of the question is not enough. Post > the actual question if you need complete analysis. > The circumstances stated in the question will > point us towards the relevance of I B or IV B. Sorry VR but standard IVB relates to compensation for future performance and has no relevance in this case since the gift is for past performance. The recommended proceedures state that written consent should be given specifying any compensation they “propose” to receive in addition to their employers compensation. Also, example 1 relates to a situation where the manager is compensated WHENEVER his return is higher than 15%. This means it would be an ongoing arangement and not a gift per se. If you don’t beleive me take a look at ex. 7 from standard I B, it is clearly the same type of arangement that CFABlackbelt is refering to (a gift for past performance) and mentions that disclosure is all that is needed, and no written consent. When you have your books available CFABlackbelt, let use know what Schwesser says about the matter. I’m betting they reference standard I B as applicable. This is a difficult Q though, I remember a debate about future/past performace gifts from last year as well.
@FinNinja, IVB does not specifically mention that the additional compensation arrangements refer only to future performance. The key to this standard is the phrase “competes with or reasonably be expected to create a conflict of interest with” the employer’s interest. Apart from that I do agree with your general concept of rewards from clients for past performance is okay based on IB with disclosure. I brought up IVB becasue the specific question OP was referring to has two clients one offering a gift for past performance without conflict of interest and another offering for future performance with a clear conflict of interest (higher probability misconduct by favoring gift-giving client in trade allocation for example). First client’s gift is acceptable based on IB if you disclose and the second client’s gift is acceptable based on IVB if you disclose and get permission.
If someone has an additional compensation agreement contingent on their future performance then the manager has the possibility to favor that portfolio in order to receive the promised compensation. If they receive a gift based on what they did in the past it is not guaranteed that they will receive a gift if the same thing occurs in the future. There is less possibility that any favoring of the portfolio will take place in the future since a gift is just a one off thing. The contingent compensation agreement may conflict with the employers compensation agreement which is why someone would need to get written permission. I’m not sure how someone would conflict with an employers compensation agreement by receiving a one time gift that wasn’t promised. I’m also not sure why anyone would create a contingent compensation agreement for past performance. The performance already happened - how is that contigent? Also, posted last year referenced from the swesser material: 1. Gifts based on past performance from clients are acceptable if disclosed 2. Gifts based on future performance are allowed if permission in writing is received 3. Gifts based on past performance from non-clients are never acceptable (unless it’s a pen or something really small)