ECG is anticipating an acquisition of Government Allies, Inc., and plans are being developed for ECG to have an Initial Public Offering (IPO) in the near future which is likely to provide an extensive growth opportunity for ECG. Following due diligence activities on the planned acquisition, it comes to light that a senior ECG executive has a potential conflict of interest in the acquisition candidate. The Code of Ethic specifically forbids this type of conflict. The standard reads as follows:
Standard on Independence and Objectivity. Employees of ECG are required to use reasonable care and to exercise professional judgment to achieve and maintain both independence and objectivity in all of their professional activities. Specifically, employee are forbidden to accept or to indicate that they might accept, solicit or indicate that they might solicit, or offer or indicate that they might offer, any benefit, whether it is a gift, a form of compensation, or a special consideration that could reasonably compromise either their independence or objectivity, or that could reasonably compromise the independence or objectivity of a colleague. (CFA Institute, 2010).
Since the executive and his wife will benefit substantially from the acquisition because of their financial interest in Government Allies, Inc., should the acquisition proceed as planned, the executive and her husband would need to sell, transfer, or otherwise dispose of the shares of Government Allies. It would be a clear violation of the Standard of Independence and Objectivity if the executive and her husband received any ECG stock as a result of the acquisition.
The matter is further compounded by the fact that the executive was on the task force that has been assigned to review acquisition candidates, and compounded further still by the fact that the executive showed favor with regard to moving forward with the effort to acquire the company, Government Allies, Inc., in which she holds shares. The applicable standard reads as follows:
Standard of Misrepresentation and Communication. Employees of ECG are not to knowingly misrepresent any position or information relating to investment analysis, internal or external recommendations about investments, internal or external actions related to investments, or any other professional activities that fall within the bounds of their agreement to function as an employee of ECG. Further, an employee of ECG must use reasonable judgment in identifying and revealing factors important to their investment analyses, their internal or external recommendations related to investments, or their internal or external actions related to investments, or any other professional activities that fall within the bounds of their agreement to function as an employee of ECG. Any and all factors that are judged to be important to any aspect of an investment analysis must be included in communications with clients, prospective clients, and/or colleagues and/or superiors at ECG. Further, an employee must clearly distinguish between fact and opinion and must make those distinctions clear in any presentation of the analysis and recommendations to the client, prospective client, and/or colleagues and/or superiors at ECG. (CFA Institute, 2003).
The reporting requirements of the Sarbanes-Oxley Act, Sections 302, 401, and 404 require accurate reporting which is applicable to shareholders of the participating companies ("SOX," 2011) Prior to the execution of the IPO, the Board of Directors of ECG will need to ensure that the executive has appropriately disposed of her shares of Governmental Allies in a manner that does not compromise any of the Standards of Professional Conduct or the Code of Ethics. Further an explicative narrative regarding voting shares and forward looking financial statements impacted by the previous affiliation of the ECG executive with Government Allies must be included in the Sarbanes-Oxley Act reporting documents.
Conducting an Investigation & Appropriate Discipline
A team of members of the Ethics Committee shall conduct an investigation into this situation. The direct supervisor of the employee shall not be involved in the investigation. Should the executive employee be found in violation of the Standards of Professional Conduct or in violation of the Code of Ethics, the executive employee will be disciplined through private censure and times suspension from work that coincides with the amount of time necessary to complete the IPO. Further, the executive will not be permitted to participate or…