Forster Investment Advisors (FIA) is an asset management firm managing funds for both retail and institutional clients. FIA also undertakes Investment Banking activities including market-making.

Recently, FIA's Finance Director, who acted as the firm's Compliance Officer, retired. The Board decides to hire a part-time Compliance Officer on a consultancy basis rather than as a full-time employee, to save costs.

FIA's Managing Director asks Terry McGuinn, CFA, if he would be interested in being the Compliance Officer on a part-time basis. McGuinn, an independent compliance consultant whose clients mostly include pension funds, agrees to meet the Managing Director to discuss the position. At the meeting McGuinn is told, "FIA adopted the CFA Institute Code and Standards ten years ago. The outgoing Finance Director assured us at the time we adopted the Code that all of FIA's policies and procedures met the requirements of the Code and Standards and most of the recommendations as well. As a result we mention compliance with the Code and Standards in all of our marketing material.” After agreeing on terms and conditions, McGuinn accepts the offer to act as FIA's Compliance Officer on a part-time consultancy basis, with immediate effect. As part of the agreement, McGuinn is only required to go into the office once a week, with most of the communication between him and senior management being via e-man or over the phone as needed.

McGuinn immediately reviews a Request for Proposal (RFP) to be submitted the next day to a potential pension fund client. The proposal is identical to another RFP sent out two months ago and includes FIA's organizational structure, an in-depth description of their investment process along with the occasional use of third-party research providers and details a guarantee of a minimum 5% investment return and return of principal through a guaranteed structured savings product, underwritten by a life insurance company.

That same day, Colleen Collins, a Research Analyst approaches McGuinn concerned that she may be in possession of insider information. The analyst relates how she was at a party the night before and overheard a conversation between two CFOs of competing publicly listed manufacturing companies. The CEOs discussed an industry online newsletter, available by subscription only, speculating on the benefits of a merger between their two companies. One of these companies is on FIA's recommended buy list.

Following this conversion, McGuinn feels it necessary to enhance FIA's rules and procedures when dealing with possible insider information. He recommends the following changes to the company’s policies and procedures:

Recommendation 1:Stop market-making activities when in possession of material non public information.

Recommendation 2:Regularly review employee and proprietary trading.

Recommendation 3:Require all employees to attend an annual refresher course on how to identify and handle material nonpublic information.

After reviewing how FIA chooses and retains its stockbrokers every year. McGuinn recommends the following: Stockbroker selection should be based on the following guidelines:

Guideline l:Their ability to provide administration services.

Guideline 2:Execute transactions in a timely fashion.

Guideline 3:Obtain best prices.

McGuinn undertakes an investigation based on reports citing several FIA fund managers witnessed to have been wined and dined the past few weeks by large brokerage firms trying to get FIA’s business. The same employees have not notified him of these dinners, violating FIA’s internal policies. McGuinn notifies the employees in writing that they have been violating the company policy. In the letter of notification, he requires the employees to abide by the policy in the future.