In March 2021, ViacomCBS announces a $3 billion share sale, and its stock falls more than 20% in a single day. Archegos Capital Management, Bill Hwang's family office, cannot post the collateral its banks now demand. Archegos built its positions through total return swaps, contracts in which a bank passes a stock's gains and losses to Archegos in exchange for a financing fee. Archegos got the stock's returns without buying it outright and posted only part of the value as collateral, which let it run heavy leverage.
The investment industry is best framed as an ecosystem built from three components: participants, technologies (governance, processes, regulation), and markets (investment markets and the marketplace for talent and services). The key participants are asset owners, asset managers, consultants, brokers, investment banks, service providers, and regulators.
The players connect through a chain. The principal is the ultimate owner of the assets, an individual or a legal entity such as a pension fund or sovereign fund.
Common mistakes
- Naming a principle instead of analyzing the conduct. Knowing which principle describes a behavior is only the start. You also need to identify what the person actually did, which component it touches, and what response the context requires.
- Treating disclosure as a complete resolution. The framework's sequence for conflicts is avoid where possible, then manage where avoidance is not possible, using transparency plus an ethical framework, process, and practice. Disclosing a conflict and then proceeding with no further step leaves its impact unmanaged.
- Confusing suitability with fiduciary duty. Suitability asks whether a recommendation is acceptable given the client's profile. Fiduciary duty also requires loyalty to beneficiaries, prudent judgment with reasonable care, diversification, consistency with the client's mandate, and impartiality across beneficiaries.
Bottom line
- Eight principles: 1 to 4 Doing the Right Things, 5 to 8 Doing Things Right.
- Four facets of purpose: intrinsic, core, fundamental, collateral.
- Value = Purpose + Professionalism + Assurance (fiduciary duty, license to operate, trust, conflict management).
- Fiduciary duty: loyalty, prudence and care, diversification, impartiality.
Exam shortcut
Work from the conduct, not from labels, using the three-step test in the first KEY callout: conduct, component, then the response the context supports. Use the two principle groups only to organize your search: MF Global's governance and risk-culture failure maps to Principle 3, not to a process principle.
The full lesson (about 7,484 words, 50 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- investment industry
- value creation
- fiduciary duty
- client first
- intro ethical principles
- foundations
- principles for professionals
- case studies
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