Standard I (C) – Misrepresentation

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

Trust is paramount in the investment profession. Misrepresentation is broadly defined as making any false statements or deliberate omission of facts. Members and Candidates should not omit, misrepresent, or give false information on a firm or security in oral or digital communications and written materials – whether publicly disseminated or not.

Standard I(C) – Misrepresentation prohibits Members and Candidates from guaranteeing clients’ returns on investments or implying a guarantee of capital preservation. Many investments are characterized by some element of risk. Members and Candidates should avoid making statements such as “You can never lose money investing in this product” or “I can guarantee you a minimum 10% return on your investment over the year.” These statements can be misleading to investors.

Plagiarism

Standard I(C) – Misrepresentation prohibits plagiarism. Members and Candidates should always acknowledge the materials and ideas that are not their own.

Examples of plagiarism include, but are not limited to:

• Taking credit for a research report that has been written by another analyst or firm.
• Copying excerpts from a report or article without acknowledging the author.
• Using graphs or charts without acknowledging the source.
• Copying proprietary models or spreadsheets without seeking permission from the firm or creators.
• Weak attribution when citing a particular text. For example, the following quote is attributed to “a leading expert,” “a financial guru.” Members and Candidates should acknowledge the authors directly.

Investment Practice

Members and Candidates should not misrepresent their academic qualifications, personal or firm performance history, credentials, or services offered by their firm. Members should exercise care when using third-party information; they will bear the ultimate responsibility for any misrepresentations resulting from the use of third-party information.

Performance Reporting

Members and Candidates should ensure that they select a benchmark that is comparable to the strategies used by the fund or for a particular client. Transparent reporting of the approved benchmark is crucial in providing clients useful information when making investment decisions.

Social Media

Members and Candidates should ensure that they distribute the same information to clients and potential clients through “social media” and traditional communication methods. Members and Candidates should make sure that all communications disseminated through social media comply with the Codes and Standards.

Omissions

Members and Candidates have become increasingly reliant on financial modeling techniques and technical analysis to find new investment opportunities and to reach investment recommendations. As a result, Members and Candidates should avoid knowingly omitting any inputs that could mislead those making investment decisions from these models. Additionally, conclusions from these models cannot be presented as fact because the results of the models are dependent on the inputs and techniques applied.

Members and Candidates should encourage firms to create policies that guide composite construction. There should be a clear understanding of how and what is included in reporting performance. This is to avoid a situation in which Members and Candidates pick and choose what accounts to are representative of the firm or individual performance. A well-defined composite should aid in mitigating any misrepresentation of performance.

Work Completed for Employer

Members and Candidates are permitted to use research or models created by other employees at the firm. All work, product, research, and models developed at the firm are the property of the firm. The firm is allowed to use the work completed by an analyst after they have left the firm. However, a member or candidate cannot re-publish reports or analyses after leaving the firm without express permission from his/her former employer.

Compliance Recommendations

Factual Presentation

• Firms can assist employees who communicate to clients and potential clients by providing an extensive list of the services offered and qualifications.
• Firms can designate specific employees to speak on behalf of the firm.
• Members and Candidates should understand the services and qualifications offered by the firm.

Qualification Summary

• Members and Candidates should create a summary of his or her qualifications, experiences, and services that are capable of providing.
• Firms should aid Members and Candidates by implementing reviews on employee correspondence and documentation that relate to the firm or individual’s qualifications.

Verify Outside Information

Members and Candidates share the responsibility for the accuracy of third-party material that they provide to clients. Members and Candidates should encourage their employers to set up procedures for verifying third-party information.

Maintain Webpages

Members and Candidates who are responsible for publishing material on web pages should ensure that the site contains current information. Members and Candidates should make reasonable attempts to protect the site’s integrity, confidentiality, and to ensure there are full disclosures and no misrepresentations.

Plagiarism Policy

To avoid plagiarism, Members and Candidates should take the following steps

• Maintain copies: Keep copies of all the information and sources used when preparing a research report.
• Attribute quotations: Attribute to their sources all data that is not prepared by persons other than financial and statistical reporting services.
• Attribute summaries: Attribute to their sources any summaries or paraphrases.

Application 1: Correcting Unintentional Errors

Peter Abasolo is responsible for maintaining ZXY Partners webpage and promotional material. Abasolo is updating the firm’s webpage and states that ZXY’s Money Market Fund has £10 billion in assets. Abasolo made a typographical error; the fund has £10 billion in assets. Abasolo goes on to publish “£10 billion in assets” on the company website and brochures without identifying his error.

Has Abasolo violated Standard I(C) – Misrepresentation?

    A. Yes, because he disseminated information that misstated the assets under management in the money market fund.

    B. No, because he did not knowingly misrepresent the assets under management in the money market fund.

    C. Yes, because any misrepresentation is in direct conflict with Standard I(C) –         Misrepresentation.

Solution

The correct answer is B. 

Abasolo has not violated Standard I(C) – Misrepresentation because he did not knowingly make the error. Once Abasolo finds his mistake, he should take steps to stop the distribution of any material that contains the error and inform those who have received the inaccurate information.

Application 2: Noncorrection 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 goes on to distribute the material to current and prospective clients over the next financial year.

Has Farak violated Standard I(C) – Misrepresentation?

     A. No.

     B. Yes, because she does not make the error known to the marketing department.

     C. Yes, because she is responsible for making sure her qualifications are understood by the marketing department.

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 3: Plagiarism

Jessica Klein is preparing an investor briefing for her clients. She would like to include some brief explanations of 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?

      A. No, because these concepts are popular finance jargon – all the explanations are identical regardless of the source.

      B. Yes, because she failed to reference the original authors.

      C. 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 4: Misrepresentation of Information

Michael Kato and Blake Thomas run a small investment advisory firm. They subscribe to a service offered by a large research company that provides detailed financial reports and macro research. The large research firm allows subscribers of the premium subscription to repackage the reports. Kato and Blake share these reports with their clients as their work.

Have Kato and Blake violated Standard I(C) – Misrepresentation?

      A. No, because they have permission from the research company to repackage the research.

      B. Yes, because they still need to acknowledge the original authors of the research – even if they have permission to repackage the information.

      C. No, because they paid for the research and retain the right to use it at their discretion.

Solution

The correct answer is B. 

Kato and Blake are allowed to use third-party research but cannot claim the material as their own. By doing so, Kato and Blake may misrepresent their capabilities to current and future clients.

Application 5: Issuer Paid Research

Amy Field is an issuer-paid securities analyst. She is hired by companies to create research reports and publish her recommendations on her popular website. Field completes her independent analysis on PayTech and publishes her “Strong Buy” recommendation on her website. Field fails to disclose the relationship with PayTech on her website and internet forums.

 Is Field in violation of Standard I(C) – Misrepresentation?

         A. No, because she arrived at her “Strong Buy” recommendation after conducting her independent analysis.

         B. Yes, because she is not allowed to be compensated for research coverage that is disseminated to the public.

         C. Yes, because she fails to disclose the relationship between PayTech and herself.

Solution

The correct answer is C. 

Field has violated Standard I(C) – Misrepresentation. Although Fields conducted her research independently, her lack of disclosure may mislead potential investors. Field is allowed to be compensated for issuer paid research but has to disclose the agreement and nature of compensation on her website and internet forums.

Application 6: Plagiarism

Jorley Khan is a senior quantitative analyst at Quant Touch. He recently attended the annual Quantitative Forum – which brings together the top quantitative specialists in the world. Khan, inspired by the event, builds upon the thorough notes he compiled on a breakthrough stock selection algorithm that was presented by the keynote speaker. Khan works to refine the algorithm and adds his inputs and achieves superior results.

How has Khan violated Standard I(C) – Misrepresentation?

        A. Khan failed to attribute the algorithm to the keynote speaker.

        B. Khan cannot draw inspiration from others; all his work should be original.

        C. Khan’s modifications to the algorithm are not material enough to make the work his own.

Solution

The correct answer is A. 

Although he can make changes to the algorithm, Khan must acknowledge the speaker for his initial work. Khan is allowed to build on the ideas or concepts of others but must acknowledge their contribution.

Reading 46: Guidance for The Standards of Professional Conduct (I-VII)

LOS 46 (a) Demonstrate a thorough knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations.