Standard I(C) – Misrepresentation

Standard I(C) – Misrepresentation indicates that CFA members must not knowingly misrepresent information related to investment analysis, recommendations, or professional actions.

Compliance

Misrepresentation can be defined as omissions of information, or manipulating facts related to securities, or giving false impressions of a firm.  This relates to oral communication advertisements, electronic communication, and written communication.

Members are prohibited from guaranteeing returns on unstable investments. Exceptions to this are cases in which the investment itself has guarantees built into the product’s structure or if a firm has committed to covering any loss by the client.

As it relates to representing a firm’s reputation, it is unethical to misrepresent professional credentials, the performance of a firm, or experiences with a category of investment. Likewise, individual investment professionals may not falsify their records of performance.

A special mention of social media is made within Standard I(C) – Misrepresentation.  The CFA Institute recognizes that in some cases, the anonymous nature of communication on social media platforms may entice members to communicate differently than one would on more traditional platforms. In all cases, investment professionals are urged to provide as much truthful information as is appropriate in a public setting. It may be tempting to bolster one’s achievements or qualifications within online chat rooms, even between other investment professionals.  This is strictly prohibited regardless of the purported anonymity of the forum.

All analysis and statistical data used in written communication created outside a member’s firm must be sourced.  Failure to do so will result in plagiarism, which misrepresents the author of said work. The exception to these are cases in which agents have developed data within the same firm.

Violation

Knowing misrepresentation indicates that a member knew or should have known that information was being distorted and could well have impacted investment outcomes.

To prevent violation of Standard I(C) – Misrepresentation, all professionals within a firm should know the limits of an employer’s qualifications and services. Additionally, a firm may choose to restrict the agents who are permitted to speak for the organization.

Related to external communications, one should verify information credited to outside sources.  Additionally, a firm is obligated to update its web pages on time.

Finally, a formal plagiarism policy should be established to ensure that data is credited to its appropriate source in all forms of communication.

Question

Anna Roy, a CFA member and investment analyst, attends a client lunch where a portfolio manager professes, “You can be sure we’ll outperform the Real Estate index this year due to our fine research analysts.” Roy recognizes this statement as:

1. A violation of plagiarism policy under Standard I(C) – Misrepresentation.
2. A violation concerning the prohibition of guaranteeing returns under Standard I(C) – Misrepresentation.
3. Flattering and appropriate as a marketing technique.

Solution

The correct answer is B.

CFA members are forbidden from guaranteeing a specific rate of return on investments. Therefore, the statement is in violation of Standard I(C) – Misrepresentation.