ETHICAL DECISION MAKING CFA SOCIETY OF WESTERN MICHIGAN 14 NOVEMBER 2012 Michael G. McMillan, Ph.D., CPA, CFA Director, Ethics and Professional Standards

MISSION STATEMENT: To lead the investment profession globally by setting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. Ethical Decision Making

CFA INSTITUTE INTEGRITY LIST 1.Commit to a gold standard code of ethics and professional conduct [See CFA Institute Code of Ethics and Standards of Professional Conduct].Code of Ethics and Standards of Professional Conduct 2.Require training on ethical decision-making for yourself and your firm. 3.Place the client’s interests before your own. 4.Name and shame unethical behavior. 5.Recommend products with transparent payoffs, costs, and risks. 6.Help clients focus on risk as much as they do on performance. 7.Disclose your educational achievements and how you improve professional competence. 8.Strive for a conflict-free business model. 9.Advocate for stronger regulations that protect investors. 10.Act with integrity 24/7 – not just at the office. 3

ETHICAL DECISION MAKING Resolving Dilemmas: Issue Spotting & Analysis -Effective -Thinking about : -Honesty -Integrity -Character -Suitability 4

THE GOAL OF ETHICS TRAINING To encourage you to become more conscious about your thoughts and behaviors so that you are more likely to notice, and act upon, ethical issues before they become a problem. To recognize that ethical dilemmas are a normal and predictable part of most jobs. To discuss approaches for dealing with ethical issues. 5

THE SITUATIONAL VS. DISPOSITIONAL -Situational influences have more to do with unethical behavior than a person’s character. -Under the right conditions good people can be induced, seduced, and initiated to act unethically. Philip Zimbardo, Professor Emeritus, Stanford University 6

ETHICS VS. COMPLIANCE 7 You must…You should… Ethics: encourages employees to behave in way that is consistent with the organization’s values and mission.

Page 8 FUNDAMENTAL ETHICAL PRINCIPLES - Client interests come first - Maintain independence and objectivity - Avoid/manage conflicts of interest - Full and fair disclosure - Preservation of confidentiality - Fair dealing - Reasonable care & prudent judgment Page 8

RATIONALIZING UNETHICAL BEHAVIOR -Everybody else does it, so it must be okay. -That is the way they do it at Firm X. -If we do not do it, someone else will. -This is the way it has always been done. -It doesn’t really hurt anyone. -It’s not a big deal. -It’s not my responsibility. -I want to be a team player; l want to be loyal. 9

10 ETHICS & INVESTING?

RESOLVING ETHICAL DILEMMAS 1.Acknowledge that there is an ethical issue. 2.Determine who is faced with and owns the problem. 3.Gather the relevant data. 4.Test the wrong vs. right parameters. 5.Test for right vs. right paradigm. 6.Apply the resolution principles. 7.Investigate 3 rd way options – compromise. 8.Make a decision. 9.Reflect on what you learn from the decision. Ethical Decision Making 11

“I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper – to be read by their spouses, children and friends-with the reporting done by an informed and critical reporter.” Warren Buffett, Interim Chairman of the Board, Salomon Brothers Ethical Decision Making – CFA Society of Cleveland 12

You are the director of research at a large bank. You hire Peterson to be an equity analyst. Peterson and your friend Thompson, a senior equity analyst at the bank, attended university together and were roommates. During lunch one day, Peterson tells you that there is an error in the bank’s marketing brochure and website because Thompson, only studied accounting while at university and not accounting and finance. Back in your office, you check Thompson’s biographical information online and find references to an “accounting and finance” degree. What should you do? Peterson Ethical Decision Making A.Say nothing. B.Contact the Thompson and tell him what you learned. C.Contact the marketing department and tell them about the error. D.Contact the Thompson’s supervisor and tell him/her what you have learned.