Standard I(C) – Misrepresentation

Members and Candidates must not make any false statements about investment analysis, recommendations, actions, or other professional activity with the intent to deceive.

Members and candidates are prohibited from making any claims that promise or guarantee a certain rate of return on volatile assets under this criterion.

Application 1: Non-correction of Errors

Salma Farak is the CFO of a multinational insurance firm. The new promotional material created by the marketing department states that she is a CFA Charterholder. She just sat the Level III CFA Exam and is awaiting her result. Farak is aware of the misstatement and does not inform the marketing department of the error. The marketing department distributes the material to current and prospective clients over the next financial year.

Has Farak violated Standard I(C) – Misrepresentation?

1. No.
2. Yes, because she does not make the error known to the marketing department.
3. Yes, because she is responsible for making sure the marketing department understands her qualifications.

Solution

The correct answer is B. 

Although Farak is not directly responsible for the misrepresentation of the qualifications, she allowed this material to be disseminated over some time.

Application 2: Plagiarism

Jessica Klein is preparing an investor briefing for her clients. She would like to briefly explain various financial concepts, such as price-to-sales (P/S) and real returns. She finds these descriptions on a popular finance website and copies these explanations (verbatim) without acknowledging the authors.

Has Klein violated Standard I(C) – Misrepresentation?

1. No, because these concepts are popular finance jargon – all the explanations are identical regardless of the source.
2. Yes, because she failed to reference the original authors.
3. No, because she does not need to acknowledge the original authors.

Solution

The correct answer is B. 

Klein has violated Standard I(C) – Misrepresentation. For Klein to be compliant, she should always acknowledge the original author of any reference material.

Application 3: Guaranteeing Returns

Joseph Aphaja, CFA, is a portfolio manager at Invenco Inc., managing funds mostly made up of government bonds. Joseph has advertised his firm’s services on a tv ad by claiming that their returns are guaranteed at a risk-free rate since they invest mostly in government securities. Which of the following is most likely correct regarding Joseph’s claim? Joseph

1. should not claim to offer a guaranteed return.
2. is fully compliant with the CFA Institute Code and Standards.
3. is justified to claim the guaranteed return since the firm majorly invests in government securities.

A is correct. Joseph should not guarantee investors a certain return even if his firm invests in risk-free securities like government bonds. Additionally, the fund does not invest 100% in risk-free securities, and therefore there is a possibility that the fund’s return will not be equal to the risk-free rate. According to Standard I(C), members and candidates are prohibited from making any claims that promise or guarantee a certain rate of return on volatile assets under this criterion.

B is incorrect. Joseph is not in compliance with the CFA Institute Code and Standards because he should not promise or guarantee a certain rate of return on volatile assets.

C is incorrect. Joseph should not claim to offer a guaranteed return even if it was investing 100% in government securities which it does not.

LOS 3(a): Evaluate practices, policies, and conduct relative to the CFA Institute Code of Ethics and Standards of Professional Conduct.

LOS 3(b): Explain how the practices, policies, or conduct does or does not violate the CFA Institute Code of Ethics and Standards of Professional Conduct.