LM03 Guidance for Standards I-VII

Part 2

Standard 1 (B) Independence and Objectivity

Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.

Interpretation:

Maintain independence and objectivity. Do not compromise your independence and objectivity under any circumstance as it can hurt not just your firm, but the whole industry. For instance, assume you are writing a research report and the firm you are covering gives you an expensive gift. Accepting the gift may shroud your judgment to be impartial and give an objective report.

Guidance:

• Buy-side clients: Assume you work in the research department of a large brokerage (buy-side) firm and you cover pharmaceutical firms. Your research reports are disseminated to institutional clients (buy-side clients) such as mutual funds. Mutual funds with large positions in pharma stocks might try to influence you to write positive reports. However, it is important for you, not to succumb to pressure. Independence and objectivity must be maintained.
• Investment banking relationships: Now assume your firm also has an investment banking (IB) division. Pfizer is a client of the firm, and the IB division is working closely on Pfizer’s secondary offering. The IB division may influence research analysts to issue favorable research reports. But, as an analyst, you must maintain your objectivity.
• Public companies: Public companies may try to influence analysts to write positive research reports.
• Issuer-paid research: Assume a company is not being widely followed. If this company approaches you to write a research report for them, and compensates you, then there is a potential conflict of interest. The best practice for independent analysts is to negotiate a flat fee for the report. The fee should be independent of the eventual recommendation. Disclosure of the type of compensation is also important.
• Travel funding: It is best for candidates to use commercial transportation paid for by their firm, and not the client. If commercial transportation is unavailable, members and candidates may accept modestly arranged travel, to participate in appropriate information-gathering events, such as a property tour.
• Credit rating agency opinions: Credit rating agencies provide ratings for fixed-income products. If you are working at a rating agency, you may be offered incentives and compensation by the sponsoring company (companies issuing bonds) to issue a favorable rating. However, you should be objective about the analysis and ensure the processes at your agency do not result in a conflict of interest.
• Influence during the manager selection/procurement process: Assume a large pension fund is in the process of selecting an asset management company (AMC) to manage their assets. In order to get this business, AMCs may try to influence the hiring manager at the pension fund by giving gifts, etc. Irrespective of which side you are in the process (pension fund or AMC which is seeking business), do not solicit gifts or contributions either directly or indirectly that may affect your independence.
• Brokerage houses: Members and candidates hire secondary fund managers to manage specific assets, for trading and reporting. There may be attempts to influence them with gifts or compensation. It is important for members to not accept such gifts and stay objective about the hiring decision.

Recommended Procedures for Compliance:

• Protect the integrity of opinions.
• Create a restricted list for companies where a firm wants to disseminate only factual information, and no negative or positive opinion.
• Restrict special cost arrangements: use corporate aircraft only if commercial transportation is not available.
• Limit gifts: a strict limit for token gifts that can be accepted must be established.
• Restrict investments: Enforce prior approval for employees purchasing equity or equity-related IPOs.
• Review procedures.
• Establish an independence policy.
• Appointed officer: appoint a senior officer to ensure compliance with the firm’s code of ethics.

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