Friday, June 30, 2006

A Higher Bar

This year the annual CFA Exam Grading Session in Charlottesville, Virginia provided a convenient opportunity for scheduling lectures on ethics for the charter holders who are grading the third level of the CFA exam. CFA charter holders are asked to complete a twenty hours or more of Professional Development each year, including training in ethics-related issues.

The sign-up sheets for the afternoon classes filled in quickly even though it meant exam graders would be rising earlier and staying later than the usual grading day. The enthusiastic response from exam graders was not surprising. Those who volunteer to use one or two weeks of vacation allowance and spend time away from family and personal interests tend to be highly motivated anyway.

CFA charter holders in general are not the usual professional group. Ethical business and professional practice is a strong thread running throughout the CFA curriculum. Candidates must pledge to follow the CFA Code of Ethics and Standards of Professional Conduct just to embark on the quest for the charter and each of the three exam levels include questions on the code and acceptable ethical conduct. Even after the coveted certificate arrives in the mail, every charter holder must annually certify continued adherence to the code.

The CFA Code of Ethics requires charter holders to follow the most stringent rules of conduct within his or her jurisdiction or the CFA Code, which ever is the higher standard. This means that even if the charter holder is acting within the laws of his native land, he could end up in the cross hairs of the CFA Institute’s Disciplinary Review Committee. It is a committee composed of other charter holders and they tend to take the Code of Ethics quite seriously.

If an infraction has occurred, the Committee has several courses of action including a private “nasty-gram” to the charter holder or potentially humiliating public reprimand. The committee can also strip away the charter of anyone found guilty of an ethical transgression. The ultimate punishment is not taken lightly. Revocation of a CFA charter can also mean loss of employment and rights to conduct business as well as and other professional privileges such as securities licenses.

There are those who might debunk the CFA Institute as just another tentacle of the much despised economic globalization octopus. Some might see the Code of Ethics as one of those “iron fists of conditionality” that Jaqdish Bhaqwati describes in his book, In Defense of Globalization. If the investment professional wants the CFA credential, which for many is the difference between a job and the unemployment line, he or she must agree to the CFA standard of behavior even if their colleagues and employer step to a more muted drumbeat.

In my view, it is hard to make a case AGAINST setting a higher bar for ethical conduct. I have to admit I might sound like some one who drank more than one serving of the CFA cool-aid. Yet given the recent string of corporate and investment banking excesses that have sparked criminal prosecution as well as regulatory actions in the U.S. and beyond (See related posts in the May 2006 Archive - May 16, 2006 “Compensation Cliff Notes,” May 19, 2006 “The Worth of Executive Leadership,” and May 23, 2006 “At Arms Length.”), it seems practical to have one more “little voice” calling for lawful behavior.

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