A CFA charterholder, David Miller, is a financial analyst at 'Horizon Funds.' He discovers that a junior analyst made an error in a client presentation, inadvertently overstating the projected returns for a new balanced fund by 1.5% annually. The presentation has already been sent to a prospective institutional client. David's manager is currently on vacation and unreachable. What is David's most appropriate initial action according to the CFA Institute Standards of Professional Conduct?
- AWait for his manager to return before taking any action, as it is his manager's responsibility.
- BInform his firm's compliance department and seek guidance on correcting the error.
- CCorrect the error in the firm's internal records and ensure it doesn't happen again, but do not inform the client.
- DImmediately contact the prospective client to correct the error and apologize.
Show answer & explanationAnswer & explanation
Correct answer: B. Inform his firm's compliance department and seek guidance on correcting the error.
David has a responsibility under Standard I(A) Knowledge of the Law and Standard I(B) Independence and Objectivity, as well as Standard III(A) Loyalty, Prudence, and Care, to ensure accurate information is presented to clients. Given the error has already gone out, the most appropriate initial action is to inform the compliance department. They can then guide the process for correcting the error with the client in a consistent and compliant manner.
Why the other options are wrong
- A. Delaying action would violate the duty to clients and the firm, especially given the material nature of the error.
- C. Failing to inform the client about a material overstatement of projected returns is a clear violation of ethical conduct and transparency.
- D. While the client needs to be informed, David should first consult with his firm's compliance department to ensure the correction process is handled properly and consistently.
Duty to Correct Errors
When a material error is discovered in client communications, Members and Candidates must promptly take steps to correct it, typically by informing compliance and then the client.
- Material errors must be corrected.
- Prioritize informing compliance department.
- Client must be informed in a timely manner.
Memory trick: Error Found? Compliance First, Client Soon.