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Reading 3 LOS 3a: demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity
Standard I(B) – Independence and Objectivity addresses the issue of gifts, payment, and favors that may compromise one’s objectivity and service to clients. This includes advisors, analysts, and credit raters.
It is recognized that third-party firms may seek to increase a CFA member’s dependence upon its research/market analysis, promotion of new securities offerings, or securities ratings. In these cases, it is not uncommon for a third-party firm to offer gifts such as event tickets, paid conference attendance, or job referrals. The Code of Standards specifies that its members must not accept these offers, as they can unduly influence an investment professional’s obligations to remain independent and objective with regard to professional activities. Likewise, members working to earn a new investment allocation must not offer such gifts as hiring incentive.
Special note is given to travel considerations. Although a firm may view the offer to fly its investment professionals on a third-party’s chartered jet as a cost-savings measure for the firm, the opportunity for conflict of interest arises. These private transportation circumstances also give a third-party the opportunity to influence CFA members’ investment recommendations, as well as offer the opportunity for a third-party to probe for investment options outside the acceptable course of business. Similarly, offers to pay for lavish accommodations, or pay for sponsored conferences and event often risk members’ independence and objectivity.
Receiving gifts from clients is distinguished from those of third-party influencers in that a client has already entered into a contractual relationship with the investment professional. In these cases, a client gift can be considered acceptable supplementary compensation. CFA members should disclose gifts from clients to their respective employers. If, perhaps, a client arrangement proceeds the investment professional’s employment with a firm, then upon employment, the member should discuss past gifts with an employer. This allows an employer to determine the extent to which an employee may remain independent and objective.
Standard I(B) – Independence and Objectivity also addresses retaliatory practices between sell-side and buy-side agents. Actions such as a downgrading a stock can create a significant impact in the marketplace. Members must avoid the impulse to retaliate against analysts who lower stock ratings, in order to preserve independence and objectivity of those analysts.
To avoid violation of Standard I(B) – Independence and Objectivity, CFA members are encouraged to create a restricted list of analysts and rating agencies who refuse to distribute appropriately negative research for certain companies. Also, CFA members should restrict travel cost arrangements by third-parties in order to avoid ethical conflict, limit gifts, restrict employees’ investment in IPOs to limit conflict of loyalty, establish a formal independence and objectivity policy and appoint an officer to oversee compliance with these concerns.
Grey Gordon, CFA, is a securities analyst who is assigned to K-Trail Flatbeds, a major producer of trailers for the trucking industry. K-Trail’s headquarters are located in Meadow Lake, Saskatchewan, approximately four hours by automobile from the nearest airport. When Gordon contacts K-Trail’s management to gather information for a report he is preparing, the chief financial officer invites Gordon to meet the management team at K-Trail, indicating that he will send the company’s private jet to fly Gordon to Meadow Lake and return him home the same day.
Gordon estimates that it would require 18 hours for him to make the visit to K-Trail using commercial travel. If Gordon accepts the offer and makes the trip to K-Trail’s headquarters on the corporate jet, Gordon:
A. Has not violated Standard I(B) – Independence and Objectivity.
B. Has violated the Standard I(B) – Independence and Objectivity unless he discloses the trip and the payment of his travel expenses in his report on K-Trail.
C. Has violated Standard I(B) – Independence and Objectivity unless he reimburses K-Trail for the cost of the trip.
Standard I(B) – Independence and Objectivity requires members to maintain independence and objectivity. Members should encourage clients to limit the use of corporate aircraft, but exceptions can be made if transportation would not otherwise be available or would be inefficient. This exception to the rule is of major importance.
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