Q. A large manufacturing company is seeking help finding a fund manager for its pension plan. After a comprehensive but unsuccessful search, Brett Arun, CFA, is hired to solicit proposals from various fund managers. The client pays Arun a lump sum fee for his services. The search concludes with Ramport Investments being hired as the pension plan’s manager. A year after Ramport is hired, the pension administrator sends Arun a letter telling him how satisfied the pension trustees are with the services provided by the fund manager. Subsequently, without the plan sponsor’s knowledge, Arun receives a payment from Ramport for successfully introducing it to the pension plan under an agreement Arun entered into with Ramport when the initial contact with the fund manager was made. With regard to the payment received, did Arun most likely violate the CFA Institute Code of Ethics and Standards of Professional Conduct?
- No.
- Yes, because he did not disclose the referral fee to the client.
- Yes, because he should have refused payment from the fund manager.
Solution
C is correct because Arun has violated Standard VI(C)–Referral Fees because he did not disclose the referral fee arrangement with Ramport to his client prior to Ramport being appointed as the client’s fund manager. This disclosure is necessary for the client to be able to determine Arun’s level of independence and objectivity in recommending Ramport to the fund. If Arun had made proper disclosure, he would be able to accept the payment without violating any Standards.
