LM03 Guidance for Standards I-VII

Part 3

Standard 1 (C) Misrepresentation         

Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.

A misrepresentation is any untrue statement, or omission of fact, or any statement that is otherwise false or misleading.

Interpretation:

The foundation of any client-customer relationship is trust. If trust is lost because of misrepresenting facts, it not only hurts you, but also hurts confidence in the entire profession and integrity of capital markets as well.

Guidance:

• Impact on investment practice: Assume your firm has been managing a large cap equity fund for several years and has added a small cap fund last year. If the firm claims it has years of experience managing small cap funds/stocks, then it would be misrepresenting facts.
  • Members and candidates must not misrepresent facts including their qualifications, or credentials. For instance, if you have cleared only two levels of the CFA program, you cannot claim to be a CFA charterholder.
  • When issuing a research report, you may be using third-party information. You must exercise care and diligence when using third-party information such as credit ratings, research, or marketing materials, to ensure there is no misrepresentation.
  • If you are using external managers to manage specific areas, you must not represent their investment practices as your own.
• Performance reporting:
  • If you have chosen a benchmark for your portfolio, are the strategies of both comparable? Are you choosing a benchmark because it makes the portfolio’s performance look better?
  • You must ensure the performance evaluation of your portfolio has a reasonable basis.
  • Provide pricing information of securities to clients on a consistent basis. Do not change pricing providers solely on the basis of higher value of a security. This is especially true of illiquid securities. This will be misrepresenting information as investors make the decision of whether or not to hold an illiquid security based on the information provided.
• Social media: The language used on social media platforms such as Facebook and Twitter is often informal. However, members and candidates must ensure the information provided is the same as in traditional modes of communication. The format must adhere to the Code and Standards, even though there is a great deal of anonymity.
• Omissions: Facts or outcomes must not be omitted, especially when it comes to performance measurement and attribution. For example, assume a manager had exceptional performance in the past three years, but negative returns in the three years preceding it. He must present the performance for the entire period and not omit years of bad performance; that is called cherry picking (or selective presentation).
• Plagiarism: Plagiarism is using the work of others without acknowledging or attributing the source of information. Examples include:
  • Using the research report of another firm, and then redistributing it by changing the names.
  • A research report based on multiple sources of information without naming the sources.
  • Excerpts from articles with little or no change in wording.
  • Not naming specific references, but instead attributing to “leading investment analysts”.
  • Using charts and graphs without naming their sources.
• Members and Candidates must disclose the source of information used in their reports. If it is paid for, then it must be disclosed. Sentences reproduced must be within quotes and the author named specifically.
• Work completed for employer: Work (models/reports/research) done within a firm may be used by others in the firm without attribution. If the person who developed a model has left the firm, the firm can continue using it as it is a property of the firm without naming the person. However, no one can claim that the work done by the person who has quit the firm has been done by the one who is now using it.

Recommended Procedures for Compliance:

• Factual presentations: Each member and candidate must be aware of the firm’s and the individual’s capabilities and limitations. A written list of the firm’s available services should guide the employees who present to clients.
• Qualification summary: Each member and candidate should prepare a summary of his/her qualifications and experience to present to clients. These must be periodically reviewed.
• Verify outside information: Ensure material from a third-party is accurate before presenting it to clients.
• Maintain web pages: Any information published on a web page must be current, and accurate.
• Plagiarism policy: Maintain copies of research reports/articles used in making your research report, attribute quotations to their source, and attribute summaries to their sources.

Standard 1 (D) Misconduct

Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.

Guidance:

Any act that involves lying, cheating, stealing, or other dishonest conduct is a violation of this standard if the offense reflects adversely on a member’s or candidate’s professional activities. Although CFA Institute discourages any sort of unethical behavior by members and candidates, the Code and Standards are primarily aimed at conduct and actions related to a member’s or candidate’s professional life. Some important points based on examples seen often:

• Using alcohol during business hours, though not illegal impairs a person’s ability to think objectively.
• If a member or candidate declares personal bankruptcy, it is not misconduct. But, if the circumstances that led to bankruptcy include deceit or fraud, then it would be a violation and deemed as misconduct.

Recommended Procedures for Compliance:

• Code of ethics: Adopt a code of ethics that every member must adhere to.
• List of violations: Communicate to all employees a list of potential violations and the associated sanctions.

Employee references: Do background (reference) checks of employees to ensure they have not had a brush with the law in the past and are eligible to work in the investment profession.

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