Frank Friendly is the top institutional salesman at Dewey, Cheatem, and Howe (DC&H) making a comfortable six-figure income. DC&H policies require that research personnel report any ownership in publicly traded securities and that sales personnel report any significant ownership (representing greater than 1% of the employee’s annual salary) to its compliance department. Friendly volunteers on the board of directors of a small, private biotech firm. In addition, he owns $900 work of IBM stock. Which of the following must he disclose to his employer? Board Stock a. Yes Yes b. Yes No c. No Yes d. No No Stalla’s answer: Choice “d” is correct. Neither must be reported. Since Frank’s participation in the outside board is both voluntary (not compensated) and the firm is not publicly traded, there is no potential conflict at this time. As a salesman, his ownership of IBM stock falls below the threshold required to be reported to the firm’s compliance department.
Do you agree with Stalla’s answer?
Since 900 < 100000*0.01 - no need to disclose the IBM stocks And since it’s a non-compensatory volunteering role - no need to disclose that too. I agree with Stalla!!
Yes. He sits on a BOD of a small private company. -No issues there. Only a problem if it takes a considerable amount of time or is a conflict of interest, etc. He owns $900 of IBM. -He is not writing research reports on IBM or telling others to purchase IBM and the companies policies do not say to report it, so where is the conflict?
I think he should disclose that he’s on the board. Non-monetary compensation is possible.
I actually disagree. It has nothing to do with the board member position being compensatory or non-compensatory or about it being voluntary. The question doesn’t mention anything about the time commitment etc. Maybe the company is private; so, he as a salesman, can’t sell their stocks etc. That might be a reason why he doesn’t need to disclose it. I think the board member part is quite vague. I don’t like the fact that Stalla says that it is fine because it is voluntary and non-compensatory. They mean to imply that any outside posn. that is voluntary/non-compensatory is fine, which is wrong. The stock part is fine. Lowest 6 figure income is $100k and 1 % of that is $1k>$900.
The CFAI guidance says “Members must fully disclose to clients, prospects, and their employers all actual and potential conflicts of interest in order to protect investors and employers. These disclosures must be clearly stated.” He is serving on the BOD of a small private biotech firm. Where is the conflict or potential conflict of interest?
Most companies require disclosure of positions on Boards irrespective of compensation. I’m on the coop board of my building and I have o list that in my annual disclosure statement. The reason is to disclose the time commitment to ensure that it doesn’t afect my ability to meet my work/time obligation to my employer.
wanderingcfa, where does it say that being a board member in a small, private firm is OK? I didn’t see any such clause in the handbook. Board membership is always disclosed, to be on the safe side. Period. It is up to the employers to decide whether there is a potential conflict of interest.
dinesh.sundrani Wrote: ------------------------------------------------------- > Since 900 < 100000*0.01 - no need to disclose the > IBM stocks > And since it’s a non-compensatory volunteering > role - no need to disclose that too. > > I agree with Stalla!! I was surprized by the reasoning used here. Namely “if the company policies are less strict than the CFA Code of Ethics, Screw the CFA Code of Ethics”
Does CFAI Code and Standard mentions that we ‘always’ have to disclose the Board membership? I am yet to cover Ethics, but I don’t think it’s a mandatory rule?
dinesh.sundrani Wrote: ------------------------------------------------------- > Does CFAI Code and Standard mentions that we > ‘always’ have to disclose the Board membership? I > am yet to cover Ethics, but I don’t think it’s a > mandatory rule? I don’t think that the CFAI Code and Standard requires you to disclose Board membership (unless you have conflict of interest or additional compensation). I, however, do think that the CFAI Code and Standard requires you to disclose any security ownership to your employer.
It does not say that being a board member in a small private firm is ok but it does not say you are required to disclose it unless there is a potential or real conflict of interest. Nothing in the question implies that a conflict of interest exists and it is not required by his company. The private firm is small which implies that the amount of work necessary is minimal. He volunteers so he is not getting paid, and the biotech firm is not a public firm. The question also does not say that Frank will be involved in any investment decision making for this biotech firm. I just do not see where in the question a conflict or potential conflict is implied. I agree that realistically anyone that serves on a BOD should disclose it to your current employer.
Maybe there is more text, but there is nothing in the question saying the firm has any charterholders, so CFAI Code and Ethics is meaningless.
So I re-read Standard VI- Disclosure of conflicts. It says that the service as a director poses 3 conflicts of interest- 1. Receiving stock ownership as compensation in a publicly traded company 2. Conflict betn. duties owed to clients and duties owed to shareholder of the company 3. Opportunity to receive material non public information. #1 doesn’t apply. #3 doesn’t apply here either. #2 might still apply in a private firm, where the holdings are betn. selected personnel only. Any thoughts?
did anyone see the question where the broker was mayor of a small town and they said he didn’t have to disclose… i’m thinking that’s a pretty small town. i’m canadian so i thought of corner gas.
It isn’t “Frank Friendly, CFA” it doesn’t say the firm has adopted the CFAI code and standards…the CFAI code and standards do not apply.
Sponge_Bob_CFA Wrote: ------------------------------------------------------- > Maybe there is more text, but there is nothing in > the question saying the firm has any > charterholders, so CFAI Code and Ethics is > meaningless. I think we need to assume that CFA Code and Standards apply, unless they explicitly tell us that they don’t apply. I clearly remember reading this at the top of the Ethics section during Level I.
As a CFA candidate or memeber, the CFA Code of Standards always apply, unless there is a stricter rule, law, or regulation.
Well, does it say they are a CFA candidate or member? No. They are explicit in setting the question about this in the CFAI material.