3.1) Professionalism I (B): Independence and Objectivity

Question 1

What does the standard 1(B): Independence and objectivity suggest? (3)

Answer 1

• Take reasonable care to maintain independence and objectivity.
• May not offer, solicit or accept a gift, compensation, offer etc. which
  can compromise own or other’s independence and objectivity.
• Perception is key.

Question 2

How is independence and objectivity implemented for members, for benefits? (5)

Answer 2

• Small gifts from clients permitted (token gifts) but not from outside entities
  (e.g. vendors) if they can or be perceived to possibly influence investment decisions.
• Don’t need permission to accept the gift but disclosure is recommended.
• Disclosure allows employer to monitor interactions with the client.
• But, may want to obtain approval before accepting gift esp. if market value of the gift is above what would be considered nominal in the market.
• Shares from oversubscribed IPOs cannot be transferred to personal accounts

Question 3

How is independence and objectivity implemented for members, for research? (5)

Answer 3

• Not to be done because of pressure from companies to attract potential clients for investment banking divisions.
• Paid research – must not be influenced by paying party.
• Not to be influenced by employer/ supervisor.
• Company paying for expenses on research visit acceptable if not excessive or out of the ordinary (but still best to limit/ avoid such payments, if possible).
• Avoid pressure from public companies’ management to issue favourable reports.

Question 4

What is the recommendation for members?

Answer 4

• Limit payment of expenses by outside parties.

Question 5

What is the recommendation for firms? (5)

Answer 5

• Restrict employee participation in IPOs and private placements, require pre-approval for participation.
• Appoint a compliance officer, have written policies on independence and objectivity and clear procedures for reporting violations.
• Limit gifts from clients to token gifts.
• Integrity of opinions – protect, state in the reports, remunerate in a way
  that supports this.
• Restricted list – if cannot be objective about client firm – remove from the research list.

Question 6

Example 3: Holly, an equities analyst, is invited by Chart Inc. to join a group of investment analysts on a visit to its operations in Mozambique. A special flight is paid for by Chart, as there are no regular flights to the part of the country where its operations are. Chart also pays for accommodation for the analysts in the local 3* hotel. Thabiso, a fellow analyst, is the only one who insists on paying for his hotel accommodation. At the end of the trip each of the analysts is given a Chart flash disk, which they all accept. Which one of the following statements is most correct with regards to the Standards of Professional Conduct?

A. Neither Holly nor Thabiso is in violation.
B. Holly is in violation but Thabiso is not.
C. Both Holly and Thabiso are in violation.

Answer 6

Solution: A.

• Although Thabiso is probably most correct in avoiding even the appearance of a lack of independence and objectivity, the other analysts are not necessarily violating Standard I(B). But, this is a judgement call, as long as independence and objectivity is not compromised. In this case, there was no alternative to the chartered flights and the accommodation was not excessively lavish.
• Token gifts are allowed under the CFA Code of Ethics. But it is a judgement call about the ‘nature of the gift’ but in this case, a flash disk can be reasonably considered a token.

Question 7

Example 4: Portia Ncube manages a client’s private portfolio, and has over a period of five years consistently managed to beat the required benchmark. As
a reward, the client offers Ncube the exclusive use of her luxury mountain
mansion for two weeks. Ncube informs her supervisor of the offer.

Should she accept or not?

Answer 7

Solution: The key is that Ncube disclosed the gift to her supervisor, in compliance with Standard I(B). This is required so that supervisors can monitor employees to avoid preferential treatment of the gift-giving clients (e.g., selectively buying the best shares for the client portfolio). However, Ncube is free to accept the offer, as it is considered a lower risk situation when clients
offer gifts than in other situations (less likely to affect objectivity and
independence).

Question 8

Example 5: Thabo Siya, an independent equities analyst, is offered a contract by an investor relations firm to write a report on one of its clients. Over and above
a fixed fee, Siya stands to be paid a bonus if the percentage of institutional investors in the company increases by more than 10% within three months of his
report being disseminated.

Should Siya accept or not?

Answer 8

Example 5: Thabo Siya, an independent equities analyst, is offered a contract by
an investor relations firm to write a report on one of its clients. Over and above a fixed fee, Siya stands to be paid a bonus if the percentage of institutional investors in the company increases by more than 10% within three months of his
report being disseminated. Should

Siya accept or not?

Question 9

Solution: No. This contract has a violation of independence and objectivity built in that will, at the very least, create the perception of Siya not being independent and objective. Institutional investors will likely be the ones to read his report (which may well be sent to them only), and the more positive the report is on the company, the more likely that the institutional stake in the company will increase. Siya therefore clearly stands to gain financially by writing a positive report, and this has the potential to compromise his objectivity. If he accepts the contract he will therefore contravene Standard I(B).