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CFA SINGAPORE INSIGHTS

Is there a conflict of interest for finance professionals with side jobs?

Even if one means well, sitting on the board of directors of a charitable body could put the person in a position of power or influence over potential clients

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A conflict of interest occurs when a person becomes unreliable because of a clash between personal and professional affairs.

ANECDOTAL evidence suggests most us know a friend or a relative who has embarked on private hire car driving on the side to earn extra income. Even as Uber bows out of Singapore, other ride hailing apps such as local firm Ryde, Indonesia's Go-Jek and India's Jugnoo are joining the private-hire market in Singapore to fire up the competition against incumbent Grab. The gig economy appears to be booming, at least when it comes to the private hire car sector.

Finance professionals who take on outside business activities are usually required to seek approvals from their employers and disclose material arrangements, financial or otherwise, as the outside business activity might create a risk of a conflict of interest or confusion with clients.

A conflict of interest occurs when a person becomes unreliable because of a clash between personal and professional affairs. Such a conflict occurs when the person has a vested interest, such as money or reputation, which puts into question whether he can be unbiased in his decision-making. For example, investment managers have fiduciary duties and a duty of loyalty to the clients whose money they manage. If an investment manager chooses to take an action that benefits him at the detriment of clients, he is harming clients with a conflict of interest.

Assessing a conflict of interest in an outside business activity may not always be straightforward. One grey area requiring deliberation is the position of power or influence that the individual gains from the outside business activity. Particular attention should be paid to outside business activities performed for non-profit, charitable or religious organisations.

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Even if the individual has no ill-intentions, acting as clergy or sitting on the board of directors of a charitable organisation could place the individual in a position of power or give him influence over potential clients, particularly those who might be vulnerable. Such delicate situations should be examined with particular care.

In Singapore, the Monetary Authority of Singapore has legislated that any non-financial advisory activities conducted by representatives should not be in conflict with their financial advisory roles, result in neglect of their financial advisory duties or bring disrepute to the financial advisory industry. Representatives are also prohibited from conducting moneylending businesses, promoting junkets for casinos, acting as real estate agents and marketing products that are not regulated under the Financial Advisers Act as investments.

Practise, practise, practise

Ethical dilemmas can crop up in so many different scenarios, even ones that seem unrelated to our daily professional work. Today's case explores one such scenario.

Read through the case and test your ethical decision-making capability. As a guide, the desired ethical behaviour required is based on the CFA Institute Code of Ethics and Standards of Professional Conduct (https://www.cfapubs.org/doi/pdf/10.2469/ccb.v2014.n6.1). All CFA charterholders must adhere to the Code and Standards and renew their pledges every year.

Case: Ben and Maria

Benjamin Soh, CFA, works as a portfolio manager at Jewel Asset Management (JAM). He has been actively involved with theatre since his college days and performs occasionally as a stand-up comedian at a comedy club in Boat Quay after work hours. He is not compensated for his performances, but he is hoping to leave his job to launch an entertainment career. Audience members often show their appreciation for Benjamin's act by giving him nominal tips.

One night, Maria Teo, a broker at Newman Brokers, a firm that JAM often trades with and in sizeable volumes, stops at the comedy club with a group of friends while Benjamin is performing. Maria and her friends thoroughly enjoy Benjamin's comic routine and, as a token of appreciation, the group tips him $5,000. Benjamin should:

A: Accept the money and thank Maria and her friends for their generosity.

B: Accept the money but disclose it to his supervisor at JAM.

C: Accept the money but seek approval from his supervisor before continuing to perform at the club if he anticipates further additional compensation.

D: Not accept the money but thank Maria and her friends for their compliments on his performance.

Analysis

This case potentially involves violations of the CFA Institute standards related to independence and objectivity and/or conflicts of interest. If Benjamin accepts the tip, it could be construed as a gift to influence his conduct because some may find it implausible that an audience member would give such a generous tip irrespective of how much he or she might have enjoyed the comic sketch.

The large tip he receives from Maria and her friends after they attend his performance could be seen as an attempt by Maria to influence Benjamin's/JAM's choice of brokers.

But a key step of the CFA Institute Ethical Decision-Making Framework asks those facing an ethical dilemma to identify relevant facts. A number of relevant facts needs to be determined to make an informed decision about the appropriate course of action for Benjamin.

  • Does Maria know Benjamin and know that Benjamin works for JAM or are they strangers?
  • Does Benjamin have decision-making authority in choosing brokers on behalf of JAM (and if so does Maria know this) or is Benjamin not involved in the decision about which brokerage firm to use?
  • Does Benjamin know Maria and who she works for?
  • Was the tip primarily from Maria or did it represent a collection from the whole group of friends?
  • Do her friends work at Newman as well?
  • Is one of them particularly wealthy and generous with struggling new entertainers?

Assuming that the tip came primarily from Maria and she knew Benjamin worked at JAM and believed Benjamin to have influence over JAM's brokerage decisions, and if Benjamin knew Maria and who she worked for, then best practice would be for Benjamin to politely reject the tip because it could be perceived to influence his fairness and objectivity when allocating trades.

Although the information is incomplete, with these assumptions, the best response would be D. In working at the comedy club, Benjamin did not violate the CFA Standard which states that CFA members must not accept any "compensation… that competes with or might reasonably be expected to create a conflict of interest with their employer's interest" without written consent. Benjamin's appearances at the comedy club did not interfere or compete with his day job at JAM, and he normally received tips that were minimal in value.

  • This column has been adapted from content by CFA Institute and is printed here with permission from CFA Institute.
  • The writers are CFA charterholders who volunteer with the Singapore society on advocacy issues with a view towards promoting financial literacy among retail investors and improving overall standards and integrity in the industry.