CFA Practice Question

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CFA Practice Question

Juan Mendez, CFA, is an investment advisor who operates as a sole proprietor and has five clients. If Mendez seeks additional employment with a brokerage firm and is later hired, ______

A. he must get written consent from his new employer to keep his old clients and must advise his old clients in writing of his employment with the brokerage firm.
B. he must get written consent from his new employer to keep his old clients but does not have to advise his old clients in writing of his employment with the brokerage firm.
C. he must advise his old clients in writing of his employment with the brokerage firm but does not have to get written consent from his new employer to keep his old clients.
Correct Answer: B

User Contributed Comments 16

User Comment
Haiqing To do any independent things must get written consent from employer.
reily The 8th edition of the standard requires you to get consent from both employer and clients, but the new one (9th) requires to get that from employer only.
TheProfet It is a fine line type of question, as you will need to get permission from the employer and not the client. However, in order to conform with the requirement of disclosing all potential conflicts of interest, the client will need to be notified of the new employment with the brokerage firm.
bananabun2 Agreed with TheProfet
awuzie isnt this a contradiction?
SueLiu I think they would have to explicitly state that the additional employment may create conflict. You must disclose only if there is reasonable expectation of conflict, which may not exist in this case (ie. bigger brokerage firm = lower costs for all clients, better research, etc; all in the same line of work).
valeris I think if commissions are directed to the brokerage firm where advisor is employed, then conflict of interest should be disclosed. Otherwise, no conflict.
bmeisner Call me crazy but as a sole proprietor, couldn't it be construed that Mendez's clients are also his employers? After all the definition of employer is pretty loose and includes anyone who has power or right to control the details of how employees work is performed. Could not this argument be made of Mendez's clients? In that case he would need written approval from all parties. In practicality I think you would stray from the exact CFA view here.
alyl21 You must get written consent from employer. But you may advise your old clients. However in this case, there is no need to write to old clients
SuperKnight As a sole proprietor they are not your employees but your clients. There is a clear distinction, contract of service (regular employment) vs. contract for services (self-employment). The clients do not tell you how to do your job, and they do not schedule your time, therefore they are not your employer.
dblueroom Concur with TheProfet. The likelihood of conflict of interests is real, and therefore Mendez should notify his existing clients. However, under this study session, it only tests duty to employer.
Kaloyan I am not sure I understand this. If Juan is seeking for new employment, does not he need to obtain written approval from his old boss. What the new employer has to do with Juan keeping his old clients? Juan has to rely on memory or to ask in writing permission from the old employer to get with him the clients' list. So, in essence, I am unsure why Juan needs permission to retain old clients. Thank you.
geofin Juan Mendez operates as a sole proprietor. So he didn't have a boss and this standard doesn't apply to his old job (he was his own boss). So, your attention should be on the duty to his new employer...
johntan1979 I think everyone is confused about this question, including myself. But let's be clear:

1. Mendez is his own boss. He does not need permission to take on the new job at the brokerage.

2. This question is not asking about the permission to engage in additional activities outside of his current employment.

3. It is about whether he can bring his current list of clients to the brokerage firm. Which is why he needs the permission from his new boss at the new firm.
sgossett86 Well yeah john but if u were his client wouldn't you wanna know? I mean he could be pushing investments that benefit him and the main bank. As his client you'd trust him but you also should be aware of that.
gerdvar From all the comments I can conclude this is a CFA-bait question, since he SHOULD notify his employer, he doesnt HAVE to and won't commit a violation of IV(A) grounds. It could be seen as a conflict or even a violation of III(A) but, the STATEMENT doesn't suggests so.
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