## **Learning Outcomes**

This article explains how to approach ethical decision-making in CFA Level 3 scenarios by systematically identifying stakeholders, assessing how each is affected, and selecting remedies that are proportionate and effective. It clarifies the difference between primary and secondary stakeholders, shows how to map relationships among clients, employers, regulators, and the wider market, and emphasizes why overlooking secondary stakeholders can lead to incomplete or low-scoring exam answers. It details how to evaluate stakeholder impact by considering financial and non-financial consequences, time horizons, externalities, and specific duties imposed by the CFA Institute Code and Standards. It also covers the main categories of remedies—restitution, disclosure, disciplinary action, process improvements, and relationship repair—and explains how they can be combined into a coherent response that both compensates harm and strengthens future conduct. Through worked examples, this article illustrates how to deconstruct vignette-style questions, identify all affected parties, articulate the harm suffered, and recommend remedies that are transparent, proportional, and aligned with professional obligations. It prepares you to justify your chosen remedies, compare alternative courses of action, and clearly communicate stakeholder impact in exam-style written responses.

## **CFA Level 3 Syllabus**

For the CFA Level 3 exam, you are expected to understand how ethical decisions can affect stakeholders and how remedies may be structured to address harms caused, with a focus on the following syllabus points:

- Recognizing key stakeholders in a given ethical scenario, including clients, colleagues, employers, and the public
- Analyzing how ethical choices or misconduct may impact various stakeholders
- Distinguishing between primary and secondary stakeholder interests
- Assessing and recommending appropriate remedies or corrective actions following an ethical breach
- Evaluating the adequacy and proportionality of potential remedies

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. List three examples of stakeholders who might be impacted by an investment professional’s ethical lapse.
2. In an ethical misconduct scenario, how should the interests of secondary stakeholders be balanced against those of the primary client?
3. What are two principal remedies available to address harm caused by an ethical breach in the investment context?
4. True or false? Restitution to the client is always a sufficient remedy on its own after a CFA Code breach.

## **Introduction**

Ethical decision-making in investment management frequently involves complex stakeholder interests and competing priorities. Professionals must systematically identify all affected parties, consider how choices impact each group, and recognize their responsibility to remedy harm when ethical standards are violated. Sound remedies do more than merely punish wrongdoing—they seek to repair relationships, restore confidence, and prevent recurrence.

> **Key Term: stakeholder**
> A person, group, or entity affected by or having an interest in the actions and decisions of an investment professional.
>
> **Key Term: remedy**
> An action or solution implemented to correct or mitigate harm caused by an ethical breach or misconduct.

## Identifying and Mapping Stakeholders

Investment professionals operate within a network of stakeholders whose interests may differ and sometimes conflict. Before making an ethically significant decision, you must clarify all parties potentially affected.

**Common stakeholders in CFA-relevant contexts:**

- Clients (retail, institutional, or beneficiaries)
- Employers and colleagues
- Counterparties or business partners
- Regulators and the public (market integrity)
- Shareholders and management
- Wider society (including future market participants)

Primary stakeholders usually have a direct contractual, legal, or fiduciary relationship (such as clients), while secondary stakeholders are indirectly affected but remain important (such as the public or market).

> **Key Term: primary stakeholder**
> An individual or group who is directly and contractually involved with the professional and most affected by their decisions.
>
> **Key Term: secondary stakeholder**
> An individual or group indirectly affected by ethical decisions, but without a direct relationship.

## Evaluating Stakeholder Impact

For each stakeholder, the professional should consider:

- Potential gains and losses due to a decision
- Short- and long-term effects
- Any harmful externalities (unintended negative effects)
- Duties owed under CFA Institute’s Code and Standards

Stakeholders may be impacted in distinct and sometimes contradictory ways. Upholding ethical duties frequently involves balancing competing interests—for example, maximizing client outcomes without misleading the public or disadvantaging other market participants.

> **Key Term: externality**
> A consequence of an action that affects third parties who are not directly involved in the transaction or decision.

### **Worked Example 1.1**

**Scenario:**  
A portfolio manager recommends a new investment product to a client without disclosing a significant fee rebate from the product provider—a violation of CFA Standard VI(A) (Disclosure of Conflicts). The recommendation proves unsuitable and leads to the client’s financial loss.

**Question:**  
Identify two primary and two secondary stakeholders, and describe appropriate remedies.

> **Answer:**
> Primary stakeholders: The client (direct harm), employer (reputation/financial risk). Secondary stakeholders: Regulator (market trust), general public (confidence in advisory services). Appropriate remedies: Full disclosure to the client and employer, restitution of client losses, consideration of disciplinary action, and implementing processes to prevent recurrence.

## Remedies for Ethical Breaches

When an ethical lapse occurs, remedies are necessary to address injuries to stakeholders and rebuild trust. CFA candidates should weigh several possible remedies and select those proportionate to the harm.

**Key categories of remedies in CFA context:**

- **Restitution:** Financial compensation or returning lost value to harmed parties (often clients)
- **Disclosure:** Transparent communication of the breach to affected stakeholders and authorities
- **Disciplinary Action:** Warning, suspension, termination, or referral to regulatory bodies
- **Process Improvement:** Implementing controls (e.g., training, changes to procedures) to prevent recurrence
- **Apology and Relationship Repair:** Taking responsibility, apologizing, and seeking to restore stakeholder confidence

The most effective response often involves a multi-step approach, with restitution followed by corrective process changes and appropriate discipline.

> **Key Term: restitution**
> Compensation paid to a harmed party to restore their financial or personal position following an ethical breach.

### **Worked Example 1.2**

An investment firm inadvertently fails to execute a client’s limit order, resulting in a missed opportunity. The client suffers a quantifiable financial loss.

**Question:**  
What remedies should the firm offer under CFA ethical standards?

> **Answer:**
> The firm should provide full restitution to the client for the missed gain, explain the oversight, review internal procedures, and consider staff training or system upgrades. Reporting the incident may be necessary if required by regulation.

### **Exam Warning**

> Failing to consider secondary stakeholders—such as the broader market—can result in exam marks lost. Always include both primary and secondary stakeholders in your answers where relevant.

## Balancing Stakeholder Interests

Often, duties to primary stakeholders (such as clients) must be fulfilled first. However, ignoring the impact on secondary stakeholders may lead to broader harm and cumulative reputational damage. In scenarios where regulatory, professional, and stakeholder duties conflict, CFA candidates should:

- Prioritize legal and regulatory compliance
- Fulfill duties to clients and employers with fairness and objectivity
- Consider the broader impact on other stakeholders and act transparently

> **Key Term: proportionality**
> The principle that a remedy or sanction should be scaled to match the severity and scope of harm caused.

### **Worked Example 1.3**

An analyst publishes an overly optimistic research report that causes retail investors to buy into a stock at inflated prices. When the report is later corrected, investor trust and public confidence are harmed.

**Question:**  
Who are the stakeholders, and what proportionate remedies should be considered?

> **Answer:**
> Stakeholders: Primary—clients, investors who relied on the report. Secondary—the employer, the market/public. Remedies: Public retraction and correction of the research, disclosure of errors, regulatory notification if required, and review of research controls to prevent similar errors. Disciplinary action may be needed for significant misconduct.

## **Summary**

Ethical decision-making in investment management requires precise identification of all stakeholders and careful analysis of how each is affected. Appropriate remedies for breaches must both compensate those harmed and restore confidence in processes. Proportionality, transparency, and process improvements are essential. For CFA candidates, always identify primary and secondary stakeholders, explain the impact, and recommend remedies that are suitable and sufficient for the degree of harm.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Stakeholders include primary (directly involved) and secondary (indirectly affected) parties
- Stakeholder mapping precedes every significant ethical decision
- Impact analysis must consider all foreseeable consequences
- Remedies include restitution, disclosure, discipline, and process changes
- Remedies should be proportionate and may be multi-faceted
- Always evaluate and balance interests of all stakeholders where they may conflict

## **Key Terms and Concepts**

- stakeholder
- remedy
- primary stakeholder
- secondary stakeholder
- externality
- restitution
- proportionality

Ethical decision-making - Stakeholder impact and remedies