A portfolio manager employed full-time by a large asset management firm privately manages investment accounts for three family friends on evenings and weekends, charging each a small annual fee. She uses no employer resources, none of the family friends are clients of her firm, and there is no overlap in securities traded. Her firm's code of ethics requires written employer consent before undertaking any independent practice for compensation. She does not seek or obtain this consent. Has she violated the Code and Standards?
- ANo, because the accounts are for family friends rather than unrelated third parties
- BNo, because she used no employer resources or time and there is no conflict with existing clients
- CYes, because Standard IV(A) requires employees to obtain employer consent before engaging in independent practice for compensation that could compete with the employer
- DYes, but only because she should have disclosed the arrangement to the family friends as clients under Standard III(C)
Show answer & explanationAnswer & explanation
Correct answer: C. Yes, because Standard IV(A) requires employees to obtain employer consent before engaging in independent practice for compensation that could compete with the employer
Standard IV(A), Loyalty, requires employees who wish to undertake independent practice for compensation that could potentially compete with their employer to obtain consent from all parties involved, including the employer, before doing so. Even absent resource use or direct client overlap, providing paid investment management services independently falls within the scope of activity requiring prior employer consent, since it is the same line of business as her employer.
Why the other options are wrong
- A. The personal relationship with the individuals does not exempt paid investment management activity from the consent requirement.
- B. Absence of resource use and client overlap does not eliminate the consent requirement for competing independent practice.
- D. Standard III(C) suitability is not the primary issue here; the core violation is the failure to obtain employer consent under IV(A).
Independent Practice Consent (IV(A))
Standard IV(A), Loyalty, requires employees to obtain consent from their employer before engaging in independent, compensated practice that could compete with the employer's business, even if minimal resources are used.
- Consent must be obtained before beginning independent practice for compensation
- Applies even without direct client overlap or resource use
- Failure to disclose/obtain consent is itself the violation, regardless of intent
Memory trick: Ask before you moonlight in the same field.