Standard 1(B) – Independence and Objectivity

Members and Candidates must exercise reasonable caution and discretion in their professional actions to establish and preserve independence and objectivity. They are prohibited from offering, soliciting, or accepting any gift, benefit, remuneration, or other inducement that could reasonably be considered to jeopardize their or another’s independence and objectivity.

Any potential conflict of interest should be avoided.

Application 1: Research Independence

Susan Watts is a research analyst specializing in technology stocks has quickly become a valued firm member. Her boss has a positive outlook on Space Technologies – a stock he owns. He has made it very clear that Susan should change the firm’s “Strong Buy” recommendation under no circumstance. Susan does a thorough independent analysis and concludes that Space Technologies is a “Strong Buy.” She goes on to publish the report.
Has Susan violated Standard I(B) – Independence and Objectivity? 

1. No, because she conducted her independent analysis and happened to come to the same conclusion as her boss.
2. Yes, because she reached the same “Strong Buy” recommendation as her boss.
3. Yes, because she was compromised by the opinions of her boss.

Solution

The correct answer is A. 
Standard I(B) – Independence & Objectivity emphasizes that Members and Candidates should always perform analysis and disseminate investment reports that reflect their independent opinions. If Watts believed that her independence had been compromised, she should have discontinued her coverage of Space Technologies. In this case, Watts carried out her independent analysis and reached the same recommendation as her boss. Therefore, she has not violated Standard I(B).

Application 2: Influencing Manager Selection

Todd Martinez, CFA, receives a tip from a friend – XFM Pension fund is searching for a new external fund manager. His friend tells him that the selection manager is an avid golf player and frequently visits his local golf course. Martinez’s friend introduces him to the selection manager, Michael Yang. Martinez intends to establish a close rapport with Yang. In his attempt to gain XFM Pension Fund’s business, Martinez gifts Yang with expensive golf clubs and pays for several lunches at the golf club.
Which of the following individuals has violated Standard I(B) – Independence and Objectivity? 

1. Martinez.
2. Yang.
3. Both Martinez and Yang.

Solution

The correct answer is C. 
Both Martinez and Yang are in violation of Standard I(B) – Independence and Objectivity. Martinez is knowingly trying to influence Yang’s selection decision. Additionally, as a selection manager, Yang should not accept gifts because it may impair his independence and Objectivity.

Application 3: Research Independence

Rick Martin, CFA, is a Spector Finance Group (SPG) corporate finance analyst. Martin is in the middle of the presentation with a potential client. At the end of the presentation, Martin proposes that an added benefit of contracting her firm will be research coverage on SPG.    
Is there a violation of Standard I(B) – Independence and Objectivity?    
       A. Yes, because Martin is offering free research coverage of SPG in exchange for new business.
       B. No, because she has not guaranteed positive research coverage of SPG.
       C. No, because Martin is allowed to use any means to bring in new business.

Solution

The correct answer is B. 
This is not in violation of Standard I(B) – Independence and Objectivity. Martin is allowed to offer coverage of SPG but cannot promise that the firm will produce research with a positive/buy recommendation. Any investment recommendation or reporting must be based on the analysts’ independent and objective analysis of SPG.

Application 4: Preserving Independence

Jonathan Aser, CFA, is a fund manager at ABC Construct, an infrastructural company. ABC has been known to have undertaken huge national infrastructural projects.   Jonathan intends to donate €100,000 to the election campaign of Mr. Pablo, who is running for the position of presidency. Mr. Pablo has high electoral ratings.

Jonathan believes that the donation will positively influence the allocation of the infrastructural projects to his firm.  To comply with the CFA Institute Code and Standards, Jonathan should:

1. not donate.
2. donate as it is from his pocket.
3. reduce the size of his donation.

Solution

The correct answer is A.

Jonathan should refrain from donating to comply with Standard I(B), which prohibits candidates and members from offering, soliciting or accepting any gift, benefit, remuneration, or other inducement that could reasonably be considered to jeopardize their or another’s independence and objectivity.

B is incorrect. Jonathan is donating to influence the selection of the city’s pension manager. Standard I(B) states that members and candidates are prohibited from offering, soliciting, or accepting any gift, benefit, remuneration, or other inducement that could reasonably be considered to jeopardize their or another’s independence and objectivity.

C is incorrect. Reducing the donation does not change the aim that Jonathan is trying to achieve, which is to influence the pension plan manager selection. No matter the amount, the aim is to improperly influence the allocation of infrastructural projects to his firm, which goes against Standard I(B).