June 2014

CFALA e-Newsletter: June 2014

Welcome to the CFALA e-newsletter, a periodic publication with stories about noteworthy events and programs sponsored or hosted by the society, guest articles by members, book reviews, and other items of interest to CFALA members. Click on the headlines below to read the full stories. And if you’d like to contribute a story suggestion or, even better, write an article, we’d love to hear from you. Please email Executive Director Laura Carney at laura@cfala.org.

*Please note that the content of this e-newsletter should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of  CFA Society Los Angeles.

In this issue ...


What Encourages Bad Behavior?

The CFALA Advocacy and Ethics Committee kicked off its first educational luncheon in May with a thought-provoking discussion by Professor Scott Wiltermuth from USC Marshall School of Business titled "The Madoff Inside Each of Us."  His work has been reported in many media outlets, including The Economist, The New York Times, The Los Angeles Times, and The Washington Post.

During the meeting, Prof. Wiltermuth discussed enlightening research on how socio-environmental factors might influence unethical behavior.   The theories he presented were based on controlled experiments which demonstrated various catalysts for potential unethical behavior.  These include the structure of incentives, goal setting, unclear standards and, surprisingly, concern for other people.   Also surprising was the demonstration that low dollar values can incentivize bad behavior as much as large dollar values especially if one person believes that their behavior helps a friend.

In the last few years, we can find many examples of people behaving unethically in all industries.  A recent example of unethical behavior in action is the debacle at the Phoenix Veterans Administration where employees falsified patient wait times in response to a set goal tied to incentives.   In hindsight, it is easy to see all the factors that contributed to the crisis at the agency which led to serious human consequences.  Tying unrealistic goals to bonuses led to unethical and dangerous behavior.

To protect against career reputational loss, it is important to be cognizant of how unethical behavior can occur. Unethical behavior often starts with small indiscretions.   Firm management and individuals both would be well advised to take a deeper look at their organizations and be attentive to the potential of unethical behavior.  When there are non-linear incentives, goals tied to compensation,   misplaced empathy for a beneficiary, inadequate supervision, depleted cognitive resources, or standards of ethical behavior are not frequently discussed, a firm may be at risk.    For more information, Prof. Wiltermuth's research reports are available at  http://www.marshall.usc.edu/faculty/directory/wiltermuth.

By Carol Poundstone Olson, CFA

CFALA Past President Receives Special Service Award For Extensive Volunteer Work

“I’m not sure how many volunteer positions I’ve held at CFALA and CFA Institute,” Marla Harkness, CFA, replies when asked for a total.  “What I recall most are the opportunities I’ve had and the great volunteers with whom I’ve worked.  There have been some interesting moments - stuffing envelopes over milkshakes at 11 p.m. at Café 50’s in West LA, taking a vanload of CFA exam graders to Camden Yard during grading, and going to the LA Flower Mart at 4:30 a.m. to get armloads of fresh flowers for the CFALA Charter event, among many others.”

Since earning her charter in 1982 Marla has been an almost continuous volunteer for CFALA or CFA Institute, and sometimes both.  She began volunteering on the CFALA Program Committee in the 1980’s, calling corporate investor relations people and scheduling company presentations to our society.  “I was sitting at a CFALA luncheon,” Marla recalls, “and mentioned how great the meeting was to the person next to me.  That guy was Shelley Grudin, CFA, who at the time was part of the CFALA leadership.  He asked if I’d like to work on a committee and I just said yes.”  Within a few years, Marla was coordinating Level II for the USC/CFALA CFA Review Program and proctoring the large Los Angeles exam site, working with dedicated volunteers like Bob Hardaway, CFA, and Frank Dohn, CFA, CFALA Past Presidents and long time CFA Institute volunteers.  In 2003, CFALA elected Marla Harkness a Life Member of the organization.   

This year, Marla completes four years as Chair of the Presidents Council, a CFA Institute Bylaws-created body consisting of the presidents of CFA Institute’s 140 Member Societies.  Prior to that she served four years as Presidents Council Representative (PCR) for the Western U.S. region.  “Over the past eight years, I’ve worked with more than 30 PCRs, probably 40 Board Chairs and members of the CFA Institute Board of Governors, as well as hundreds of society presidents and volunteers, including the past 30 or so CFALA Boards.  There have been five CFA Institute CEO’s and dozens of staff members as well.  I’m still astounded at how similar we all are no matter where we may come from – we all love learning, put our clients first, prize ethics and care deeply about this profession.  It’s really enlightening to attend a CFA Institute meeting in Hong Kong, sit in a restaurant with people from Switzerland, Japan, Brazil and the U.S. and discuss something like worldwide monetary policy easing.  The perspectives are instructive - I’ve learned so much.  Who wouldn’t want to volunteer with such a group?”

On June 3, 2014, at a CFALA event held in conjunction with the CFA Institute Research Foundation, CFA Board Chair, Aaron Low, CFA, presented Marla with CFA Institute’s Special Service Award.  This award is given periodically to honor individuals who have rendered extensive and exceptional service over many years to CFA Institute.  There have been 16 previous recipients around the world.          

“I have great friends everywhere on the globe,” Marla says.  “And I’ve gained skills that are useful in the profession but aren’t always acquired at work.”  In addition to the positions noted above, Marla was a CFA exam grader for 14 years, spent 4 years on the Council of Examiners (the group that writes the CFA examinations) and was Co-Chair of CFA Institute’s Private Client Task Force.  She served on the CFALA Board twice, for a total of ten years, worked on a number of CFALA committees and projects and is a CFALA Past President.

Marla is a believer in the benefits of volunteering.  “You get to do something that does some good,” she says. “Ours is still a developing profession and volunteering at CFALA gives one the opportunity to help shape the future.  From my point of view, only raising children has been more powerful than volunteering from the standpoint of providing psychic income.”

Juggling work and volunteer commitments is always a challenge, of course.  Marla is presently Senior Portfolio Manager at TIAA-CREF in Pasadena.  “You have to re-prioritize every day,” she notes. “Fortunately, I’ve had flexible bosses and employers who saw value in volunteer service to the profession.  I’ve been so lucky.”

By Tom Derse, CFA

CFA Institute Board Member Discusses Investment Managers' Role In Systemic Risk

Government regulators continue to focus on areas of the investment management industry that they deem is in need of additional scrutiny.

The US Office of Financial Research (OFR), the Financial Stability Board (FSB) and the Bank of England are all evaluating the need for Government to increase oversight of our industry.  A position generally accepted by the regulators is that large financial institutions are inherently systemically important and therefore must be highly regulated.  However, an article which was excerpted from a speech delivered by Robert Jenkins to the New York Society of Security Analysts on 1 May 2014, points out that while the investment management industry is important, it is not a threat.  Additionally, our industry must do a better job educating the regulators about the distinctions between different elements of the entire financial world.

In the speech, Jenkins notes neither the public nor the politicians adequately distinguish between investment management, investment banking or the banking system.  Although we don’t pocket the same pay, we are painted with the same brush.  The niceties of “buy side” versus “sell side” are lost on the layman.  We, the investment management industry, do not deploy excess leverage, we do not act as principals, we are not subsidized by taxpayers and we are not too big to fail, bail or jail.  We are not the problem.    

Jenkins points out that regulators have failed to embrace the lessons of the last debacle.  Leverage remains excessive, with current rules still permitting the balance sheets of banks to balloon to 33 times their equity.  Regulatory focus should be directed at reducing excess leverage, not policing an industry that wasn’t responsible for the last market meltdown.  We cannot afford to accept the status of scapegoats.  Jenkins, a member of the Board of Governors of CFA Institute, advocates standing up, speaking out and helping regulators understand where the real threats lie.

The full article can be found here.  Send comments to advocacy@cfala.org.

By Larry Brody  

The City of Los Angeles Proclaims May 2nd as “Investors First” Day

During the month of May CFA Los Angeles participated in a global initiative called “Putting Investors First”.  The goal is to help promote and encourage the fair treatment of investors.  CFA Institute aims to inspire the industry to ensure that investors’ rights to information, fair and honest advice, and accurate assessment of risk and reward is at the core of client service.  CFALA’s participation in this important event included a presentation on ethical decision making by Professor Scott Wiltermuth of USC on May 13th and a request to the City of Los Angeles for a proclamation.  We are thrilled that Councilmember Paul Krekorian supported our request and led the effort to Proclaim May 2nd as “Investors First” Day.  The proclamation can be viewed at this link.

Nearly 150,000 Aspiring Charterholders Sit for June 2014 CFA Exams (Published 6/4/2014)

The CFA Institute recently released top-level statistics on candidates registered for the Level I, II, and III CFA exams that were administered on June 7th.  To provide some basis for comparison, we've also provided a link to the 2013 press release.  Read more...   2013 Press Release

The Psychology of Human Misjudgment

CFA Institute Enterprising Investor's Lauren Foster recently provided a link to Charlie Munger's 1995 lecture on the Psychology of Human Misjudgment.  In it, Munger draws upon his eclectic knowledge base and acerbic wit to outline the twenty-four (plus one) psychological tendencies that, "while (being) generally useful, often mislead."  Read more...    And more...

Four Charged in $22 Million Movie Investment Scheme

Charlie Munger mentions an Influence-from-Mere-Association tendency.  Perhaps it shouldn't be surprising that the Central District of California U.S. Attorney's Office recently put out a press release describing an investment scheme revolving around a supposed Pixar-like animation company. Read more...

LA Lands Access to $1.3 Billion for Manufacturing Thanks to USC-LA Effort

Los Angeles has been designated as a Manufacturing Community as part of the White House/Department of Commerce's Investing in Manufacturing Communities Partnership initiative.  Here is an account of the designation by USC News' Merrill Balassone.  USC applied for the designation in partnership with the city of Los Angeles.  Read more...

Then There Were Three: Sony, Microsoft, Nintendo and the Evolution of the Electronic Entertainment Expo

Electronic Entertainment Exposition (E3) 2014 was held once again at the Los Angeles Convention Center.  Engadget's Sean Buckley provides us with a history of the exposition from its inception in 1995 through 2012.  Buckley's colleague, Ben Gilbert, brings us to the present day with an article that includes a link to 2014 computer and video game industry sales, demographic, and usage data.   Read more...   And more...

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