Standard IV(A): Loyalty (to employers)

What does Standard IV(A) require?

In matters related to your employment, you must act for your employer’s benefit and not deprive it of the advantage of your skills and abilities, divulge its confidential information or otherwise harm it. This is the duty of loyalty to the employer .

Memorize

The duty has limits. Clients and the integrity of the market come before the employer, and loyalty never means obeying an instruction to break the law or the Code and Standards. It also does not make work outrank every personal obligation. If family matters regularly interfere with the job, talk to the employer about balancing the two. Implicit in the Standard is following the employer’s policies on the employment relationship, as long as they do not conflict with the law or the Code and Standards.

The relationship runs both ways. Employers are not bound by the Code and Standards, but they should not adopt policies that conflict with them, and senior management should design pay and incentives that do not encourage unethical behavior. You are encouraged to give your employer a copy of the Code and Standards so it knows what you are bound by.

When can you do outside work?

Independent practice means competitive paid work: services the employer itself sells. The Standard does not forbid it outright, but you must abstain from it unless your employer agrees.

Before you begin, notify the employer and describe the services you will give, the expected duration and the compensation. Do not start until the employer consents to all of the terms. Making preparations to start such a practice is different from undertaking it. Only the second is competition.

What may you do when leaving an employer?

Leaving an employer is where this Standard is tested most. Until your resignation takes effect you must keep acting in the employer’s best interest. You may prepare on your own time and with your own resources: register a company, rent an office, plan the launch, line up financing. You may not harm the firm while you prepare.

Memorize

Conduct that can breach the duty, especially in combination, includes:

• misappropriating trade secrets or misusing confidential information;
• solicitation of the employer’s clients or prospects before you leave;
• self-dealing, which is taking a business opportunity or information that belongs to the employer for yourself;
• misappropriating clients or client records .

Records are the usual trap. Books, client lists, statements, models and files stored on paper, a home computer, a phone or a portable drive are the employer’s property, even work you wrote yourself. Do not take them to a new employer without written permission. Copies you kept for convenience should be erased or returned unless the firm lets you keep them.

Once you give notice, follow the firm’s procedures for telling clients about your departure.

After you have left, the picture changes. Skills and experience are not confidential, and the simple fact that someone was a client generally is not either. You may use public information or your own memory to contact former clients, as long as the details do not come from the old firm’s records and no valid non-compete agreement or non-solicitation agreement forbids it. Read such an agreement before you resign. In some markets, industry protocols let departing staff take limited client contact information. You may rely on one only if you follow every step of it.

Duty of loyalty to the employerjob-related matters; clients and markets rank higher

• While still employed Memorize act in the employer's interest
  • Allowed register a firm, rent an office, plan, on your own time and resources
  • Not allowed solicit clients or prospects, copy lists, files or models, misuse confidential information
• Competing paid work on the side Memorize independent practice
  • Notify the employer first describe the services, compensation and duration
  • Start only after consent
• After you have left Memorize the knowledge is yours, the records are not
  • Allowed public sources, memory, skills and experience
  • Not allowed the firm's records, or anything a valid non-compete bars
• Never a breach
  • Whistleblowing aimed at protecting clients or markets

Where do the lines fall?

Situation	Verdict
A manager, still employed, emails ten firm clients about her new firm launching next month	Violation
An analyst registers a company name and signs an office lease on weekends before resigning	Fine
A departing manager copies the firm’s client database to a USB stick	Violation, even if never used
After leaving, an adviser calls former clients found in a public directory (no non-solicitation agreement)	Fine
An employee reports the firm’s hidden fee overcharges to the regulator	Not a breach of loyalty (protecting clients)
An analyst does paid weekend valuation work for a rival firm’s clients without telling the employer	Violation (independent practice without consent)

Exam tip Sort every action into two questions. Is it preparation or competition? Is it your own memory and public information, or the firm’s property? Preparation and memory are fine.

What about whistleblowing, contractors and social media?

Whistleblowing is where loyalty gives way. Your own interests and your employer’s are secondary to protecting clients and the integrity of capital markets. If your employer is engaged in illegal or unethical activity, actions that would normally breach loyalty, such as contradicting instructions, breaking certain policies or copying records to preserve evidence, may be justified. They are justified only when the intent is clearly to protect clients or the market, not for personal gain.

The nature of employment decides how the Standard applies. Employees and independent contractors are both covered, but a contractor’s duties come mainly from the written or oral agreement with each client. Control decides the status: whether hours and location are set, whether the firm provides facilities and reimburses expenses, and whether you work for several clients or employers. Define the scope of your duties clearly in any contractor relationship.

Social media accounts raise two issues. Messages that could reach current clients must follow the firm’s rules on announcing a departure. Accounts created for the firm’s business, such as firm-approved profiles for client work, are firm assets. You transfer or delete them as the firm’s policy says. Keeping personal and professional accounts separate avoids the problem.

What procedures help?

Members should encourage their firms to adopt:

• a competition policy that says what outside work is allowed and how to ask for approval, with non-compete terms fully explained before anyone signs;
• a termination policy covering how a departure is announced to clients and staff, how work is handed over and what client information, if any, may leave with the employee;
• incident-reporting procedures, ideally confidential and anonymous, for reporting suspected wrongdoing;
• clear employee classification (full time, part time, contractor) with the policies that apply to each;
• a social media policy that treats business accounts as firm property.

Go deeper Non-compete agreements and local law

A non-compete or non-solicitation agreement is a contract. Whether it can be enforced, and for how long, depends on local law, and some jurisdictions limit them heavily. Standard IV(A) does not decide that for you. It tells you to review the terms before you leave and to respect a valid agreement. If you are unsure whether an agreement applies, take advice from legal counsel before contacting any former client. Standard I(A) then applies: follow the stricter of the law and the Code and Standards.

Go deeper The limits of loyalty

Loyalty is a duty to the employer in matters related to the job. It is not a reason to break the law, mislead clients or ignore the Code and Standards. If the employer asks you to do something that violates them, the Standards come first, and you should dissociate, escalate through the firm or, if the wrongdoing is serious, report outside. This is why whistleblowing for a protective purpose is not a breach: your own interests and your employer’s both rank below clients and the integrity of the market. Loyalty also has a limit in the other direction. It covers job-related matters and does not ask you to put the employer ahead of every personal or family obligation.