Standard I(B) Independence and Objectivity: Receiving A Gift Is Acceptable In This Case?

Hi, can anyone answer the question below?
I think the answer is C, but still confused because B also looks correct.
Does anyone tell me which should be the answer and reason?

Thank you in advance!

Samantha Smith is a Level3 CFA candidate working as a financial analyst for a brokerage company. Her company paid for a trip to complete a research report on a publicly traded firm XYZ. After she finished her work, an employee of the firm gave Smith a company t-shirt ad baseball cap and Smith accepted. Smith:

A. Must pay the market price for the gifts.
B. May accept the gifts only after her employer’s permission.
C. Did not violate the Standard.

This one is pretty tricky … It needs to be looked from the perspective of the question, that is, if the Standard I (B) Independence and Objectivity was violated. It (among the other things) says that Members and Candidates may not accept any gifts that reasonably could be expected to compromise their own or another’s independence and objectivity.

So if you are a manager and you think that a baseball cap and a company t-shirt (which are in my opinion token items) could impair your judgement, then you are (A) not reasonable and (B) vey cheap :slight_smile:

Thus, I think the answer should be C with 85% confidence. But there is a flip side to the story… what if the T-shirt and Baseball cap were made by Armani (no, I don’t like Armani, but the analyst does :wink: ). Then i believe, you would have to report it to dedicated department in the company so it could be decided if the analysts independence and objectivity are being influenced.

All the other opinions are very wellcome…

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I also agree with @Toto_11 that it’s C here.

As stated above, the main reason is the apparent token value of the items. The problem will specify if they are LV or Armani and won’t leave it to guesswork. So we can assume they are not veblen goods in this case.

CFA likes to give these sorts of problems where one’s imagination can easily envision scenarios where the token gifts could in fact be valuable under circumstances with more information. Unless they directly give such information in the problem set, don’t insert it on your own. Just go with what the problem says in black and white.

If you go to any conference or site visits you are likely to get cheap company swag like pens and cheap stuff. It’s when that stuff rises to the level of becoming valuable that potential independence/objectivity and/or non-employer compensation issues may start to arise… depending on the nature of the question. Cheers you got this :+1:

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Have you read Ethics in the curriculum? If so, you would know that Standard I(B) doesn’t require (or even recommend) that you get your employer’s permission to accept a gift from a company that you’re researching. That isn’t relevant to the issue of independence or objectivity. (It might be relevant to the issue of loyalty to one’s employer, but that’s a different standard.)

The only question here is: will a t-shirt and ball cap reasonably be expected to compromise Smith’s independence or objectivity; i.e., will it likely make her change her recommendation from “sell” to “buy”.

No, it won’t.

An all-expense-paid two-week ski trip in Aspen might, but not a ball cap and t-shirt.

Note that you won’t be expected to probe the threshold between where a gift will compromise independence or objectivity and where it won’t. That’s not the purpose of the exam. The purpose of the exam is to determine whether you know what to do when a gift clearly falls below that threshold (as a ball cap/t-shirt does) and what to do when a gift clearly falls above it (as a lavish vacation does).

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One additional question then. Would you find it necessary to disclose the baseball cap and a t-shirt to your employer? I believe yes, because you should disclose to your employer any gift, regardless of the value.

Greetings again friend!

This is a trick type of question that CFA likes to use. You are supposed to disclose outside COMPENSATION in some form to your employer. Compensation is not this Standard I(B) it’s Standard IV(B). So you need to watch how they cite the standards. I(B) is the typical bribe or “receiving something of value that could be perceived as potentially swaying your favor” type of scenario. Does a t-shirt and cap arise to a situation where you’ll be swayed? Not likely unless it’s a high value item. Does a plane trip and hotel, or complimentary sports tickets and fancy dining trigger I(B)? Typically yes!

So what about Standard IV(B) Additional Compensation Arrangements? Does this qualify under that standard? Again I would argue no because it’s not compensation. You didn’t get promised clothes if you wrote the report. It wasn’t some side arrangement you made. And you are writing the report as part of your salaried work for your own company, you are not writing it partly due to your arrangement to receive shirts from this outside company. It was a gift they gave you after you wrote the report, so the only question is whether this would interfere with your future independence and objectivity covering the company. So it’s under I(B) not IV(B). And - importantly - this question is specifically asking about I(B) here regardless.

Standard IV(B) typically applies to side volunteer work, part-time jobs or gigs where you might receive some monetary compensation, sports tickets, or other non-monetary benefits in return for your time. You are supposed to clear such arrangements with your employer because of your duty of “time loyalty” to your employer - you don’t want time conflicts or other potential conflicts of interest with your regular salaried work. Even if the compensation is low, or the non-monetary benefits are small, that you receive as agreed “quid-pro-quo” for your time/work. Why is that, then? Because it’s taking away from the time and focus you owe your employer as their employee. They are paying you to work for them, not just whenever you’re “not” doing your side gigs. And sometimes your outside work might create another type of conflict with work or your position at work generally, in a business sense, over time. So you’re supposed to get your employer’s approval before ever agreeing to perform such “compensated” work.

Does this help?

Cheers - you got thisđź‘Ť

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Long story short - specifically check the standard they’re asking about. If it’s Standard I(B) - ask yourself if the gift is definitely worth more than 30-40 bucks for instance, or if it can have some sentimental value or similar above that (sold out tickets to a kid’s show that cost $20 but you can’t get them and the recipient has a small child who really wants to go to the show, etc.). Or ask if the paid travel or lodging is unavoidable due to a special location of the firm you need to travel to. Those are the typical nuances to I(B).

If they say Standard IV(B), then determine whether the item is compensation. A trick they can use is an unsolicited “performance bonus” type of gift from an existing client, for good work done (usually in the context where you’re a portfolio manager and their portfolio did great that year). You didn’t ask for this performance reward, but it’s a valuable thing that the client is offering to give you as some sort of appreciation or thank you. The unstated “wink wink” is that they are generous rewarding those who do well for them, so this might not be a one-off thing, it can become a regular unspoken thing if you keep kicking butt for them. In other words, an informal but understood additional “bonus” arrangement with client X.

In that case, the Standard IV(B) questions I’ve seen typically say you need to disclose and clear it with your employer first. Because your employer needs to know about it, they need to know if you’re potentially spending more time and effort on one client versus others because that client is generously rewarding you in addition to what they’re aware of - above what you are compensated for working with similar clients also - while working under the name and reputation of your employer. But in any case, this generally isn’t a t-shirt/hat combo that we’re talking about here. Those typically cost a company less than 10 bucks combined, even if they’re good quality, when ordered in bulk.

Cheers and good luck - you definitely got this :+1:

EDIT - as S2000 points out below, the standard for 1(B) has recently CHANGED so that you need to report any gifts to your employer, even if trivial, if you receive the gifts from a CLIENT. If the token gift giver is just a company you cover and not a client of yours, you do NOT need to report token gifts. You can just accept them regardless. This new rule for “any” client gifts seems to be a recent development in the standard since I studied it in 2017, and I learned something today!

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No.

Yes, actually.

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Ok, thanks Magician, thanks Grey…

Even though we are all on the same page here, I could swear i ran into one of the questions/answers where it was written that employees must disclose to employer all client gifts regardless of value, and it was specifically referenced to standard I(b)… so there’s the source of my confusion, as I didnt find it correct.

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My mistake: on rereading the curriculum I find that you must disclose it.

Good thing I checked; thanks for continually prodding me to do so.

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Just put that out of your mind, and move onward and upwards buddy! You got this :+1:
You only have to disclose things that “reasonably could be expected to compromise [your] own independence and objectivity.” This is standard I(B).

Guys let’s not get a little confused here. The token gift is outside 1(B) by definition. Anything that is “not” a token gift is under 1(B) and would require disclosure/permission from the employer.

For example, see 300 hours cheat sheet on ethics, it’s pretty accurate in my opinion:

“Best to obtain employer’s permission before accepting cash or significant perks. Token gifts (of not significant value) such as a pen does not need permission.”

This can be a trick in the CFA.

EDIT - as S2000 points out below, the standard for 1(B) has recently CHANGED so that you need to report any gifts to your employer, even if trivial, if you receive the gifts from a CLIENT. If the token gift giver is just a company you cover and not a client of yours, you do NOT need to report token gifts. You can just accept them regardless. This new rule for “any” client gifts seems to be a recent development in the standard since I studied it in 2017, and I learned something today!

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I’m pretty sure that it’s not.

Here’s the standard:

“Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.”

If it reasonably could be expected to compromise your independence or objectivity, you cannot get your employer’s permission, then accept it. The standard makes it clear: you must not accept it.

As for disclosing gifts to your employer, the curriculum is clear that gifts from clients must be disclosed (without any explicit exception for token gifts), but it is silent on whether or not gifts from anyone else must be disclosed.

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Again, the one nuance is if you’re being offered gifts from clients

Gifts from your clients must be disclosed to the employer. The nuance I was writing about. These can be viewed as informal bonuses. The direct text from CFA:

“Receiving a gift, benefit, or consideration from a client can be distinguished from gifts given by entities seeking to influence a member or candidate to the detriment of other clients. In a client relationship, the client has already entered some type of compensation arrangement with the member, candidate, or his or her firm. A gift from a client could be considered supplementary compensation. The potential for obtaining influence to the detriment of other clients, although present, is not as great as in situations where no compensation arrangement exists. When possible, prior to accepting “bonuses” or gifts from clients, members and candidates should disclose to their employers such benefits offered by clients. If notification is not possible prior to acceptance, members and candidates must disclose to their employer benefits previously accepted from clients. Disclosure allows the employer of a member or candidate to make an independent determination about the extent to which the gift may affect the member’s or candidate’s independence and objectivity.”

This is not a client scenario. This is a public company covered by the brokerage firm. As such, it falls under this part of I(B) which has no mandatory gift disclosure language whatsoever:

“External sources may try to influence the investment process by offering analysts and portfolio managers a variety of benefits. Corporations may seek expanded research coverage, issuers and underwriters may wish to promote new securities offerings, brokers may want to increase commission business, and independent rating agencies may be influenced by the company requesting the rating. Benefits may include gifts, invitations to lavish functions, tickets, favors, or job referrals. One type of benefit is the allocation of shares in oversubscribed IPOs to investment managers for their personal accounts. This practice affords managers the opportunity to make quick profits that may not be available to their clients. Such a practice is prohibited under Standard I(B). Modest gifts and entertainment are acceptable, but special care must be taken by members and candidates to resist subtle and not-so-subtle pressures to act in conflict with the interests of their clients. Best practice dictates that members and candidates reject any offer of gift or entertainment that could be expected to threaten their independence and objectivity.”

So - S2000 correctly points out - if there is a token gift by a “client” then I guess you have to disclose it now. Please disregard my prior points. But in this case, it’s not a client. You don’t have to disclose it. The CFA likes to play these little games. Chances are, token gift means no disclosure. If it’s a client, then I guess you technically do! I learned something here too.

Long story short - in this fact pattern, there is no required disclosure. If it was a different specific scenario where someone you manage money for gave you the hat instead, well, looks like you DO need to disclose that cheap hat! Wow.