AS the global Covid-19 pandemic rages on and amid talks of an impending devastating second wave in Europe, the fortunes of trade-dependent Singapore continue to be weighed down. Firms in Singapore may need to further reduce labour costs to save jobs and survive the pandemic.
Should employees be put on shorter work weeks or have their wages cut, some may need additional sources of compensation. After all, everyone needs to put food on the table and pay bills.
However, the affected employee still owes a duty to his or her current employer. The employee should work with the current employer to ensure that work quality does not suffer, and resolve issues such as work schedule and conflicts of interest should they arise.
One of the key principles that employees in various sectors including the financial sector should adhere to when seeking additional income streams is to be transparent. Transparency creates trust and goodwill among various parties.
Additional compensation arrangements in investment management
As a premier global association for investment management professionals, the CFA Institute, under its Additional Compensation Arrangements Standard requires members to obtain permission from their employer before accepting compensation or other benefits from third parties for the services rendered to the employer or for any services that might create a conflict with their employer's interest.
Compensation and benefits include direct compensation by the client and any indirect compensation or other benefits received from third parties.
"Written consent" includes any form of communication that can be documented (for example, communication via e-mail that can be retrieved and documented).
Members must obtain permission for additional compensation/benefits because such arrangements may affect loyalties and objectivity and create potential conflicts of interest.
Disclosure allows an employer to consider the outside arrangements when evaluating the actions and motivations of members.
Moreover, the employer is entitled to have full knowledge of all compensation/benefit arrangements so as to be able to assess the true cost of the services members are providing.
There may be instances in which a member is hired by an employer on a "part-time" basis. "Part-time" status applies to employees who do not commit the full number of hours required for a normal work week.
Members should discuss possible limitations to their abilities to provide services that may be competitive with their employer during the negotiation and hiring process. The requirements of this standard would be applicable to limitations identified at that time.
Procedures for compliance
Members should make an immediate written report to their supervisor and compliance officer specifying any compensation they propose to receive for services in addition to the compensation or benefits received from their employer. The details of the report should be confirmed by the party offering the additional compensation, including performance incentives offered by clients.
This written report should state the terms of any agreement under which a member will receive additional compensation; "terms" include the nature of the compensation, the approximate amount of compensation, and the duration of the agreement.
Ethics in action: practise, practise, practise
Today's case is adapted from material developed by CFA Institute. As a guide, the desired ethical behaviour required is based on the CFA Institute Code of Ethics and Standards of Professional Conduct.
Case study
Wong, a portfolio analyst for the Li Trust Company, manages the account of Ms Sahana, a client.
Wong is paid a salary by his employer, and Sahana pays the trust company a standard fee based on the market value of assets in her portfolio. Sahana proposes to Wong: "Any year that my portfolio achieves at least a 15 per cent return before taxes, you and your wife can fly to Chiangmai and use my condominium during the third week of January."
Wong does not inform his employer of the arrangement and vacations in Thailand the following January as Sahana's guest.
What are some concerns with this additional compensation arrangement?
A. Wong manipulating the market
B. Wong may act on material nonpublic information should he come across insider information
C. Partiality to Sahana's account
D. All of the above
E. None of the above
Analysis
Wong violated the Additional Compensation Arrangements Standard by failing to inform his employer in writing of this supplemental, contingent compensation arrangement. Wong must obtain the consent of his employer to accept such a supplemental benefit.
In submitting a written report to his firm, details of the additional compensation should be included.
Market manipulation includes
(1) the dissemination of false or misleading information and
(2) transactions that deceive or would be likely to mislead market participants by distorting the price-setting mechanism of financial instruments.
Market manipulation damages the interests of all investors by disrupting the smooth functioning of financial markets and lowering investor confidence. The issue that needs to be considered is whether Wong would be compelled to manipulate the market in an attempt to earn in excess of the 15 per cent return before taxes to be rewarded the condominium stay in Chiangmai.
The same goes for acting on material nonpublic information. Trading or inducing others to trade on material nonpublic information erodes confidence in capital markets, institutions, and investment professionals by supporting the idea that those with inside information and special access can take unfair advantage of the general investing public.
Although trading on inside information may lead to short-term profits (in this case the reward of a condominium stay in Thailand), in the long run, individuals and the profession as a whole suffer from such trading.
These actions have caused and will continue to cause investors to avoid the capital markets because the markets are perceived to be "rigged" in favour of the knowledgeable insider.
When the investing public avoids capital markets, the markets and capital allocation become less efficient and less supportive of strong and vibrant economies.
Manipulating the market including acting on material nonpublic information, in our opinion, is unlikely given the nature and quantum of the reward.
However, if the reward is significant, there may be reasonable grounds to believe that Wong may be compelled to rig the market for his personal gain.
However, the nature of the condominium arrangement could have resulted in partiality to Sahana's account, which could have detracted from Wong's performance with respect to other accounts he handles for the Li Trust Company.
Wong must treat all clients fairly when disseminating investment recommendations or making material changes to prior investment recommendations or when taking investment action with regard to general purchases, new issues, or secondary offerings.
Only through the fair treatment of all parties can the investment management profession maintain the confidence of the investing public.
When Wong has multiple clients, the potential exists for him to favour Sahana over another. This favouritism may take various forms - from the quality and timing of services provided to the allocation of investment opportunities. Hence, the suggested answer is choice C.
- 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 chapter on advocacy issues with a view towards promoting financial literacy among retail investors and improving overall standards and integrity in the industry. Comments or feedback may be directed to advocacy@cfasocietysingapore.org.
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