If a client offers additional compensation based on capital appreciation, what is the ethical action for the portfolio manager?

The ethical action for a portfolio manager when offered additional compensation based on capital appreciation is to obtain permission from their employer prior to accepting the compensation arrangement. This approach maintains transparency and ensures that the portfolio manager complies with company policies and regulations regarding compensation structures.

By seeking approval from their employer, the portfolio manager holds themselves accountable to both their firm and the ethical standards that govern their professional conduct. This action protects the integrity of the investment process, as it allows the employer to assess the situation and any potential conflicts of interest that might arise from the additional compensation linked to the success of the portfolio's performance.

The other options fail to uphold the necessary ethical standards in different ways. Accepting the arrangement without notifying anyone undermines the trust placed in the manager by both the employer and the client. Consulting with the client alone to finalize details could lead to complications or misunderstandings, especially if the employer is unaware, while declining any additional compensation could eliminate potential benefits for the manager and clients without addressing the ethical implications of the offer. Thus, obtaining permission is the most appropriate and ethical response.