3.1) Professionalism I (C): Misrepresentation

Question 1

What does sub-standard 1(C) misrepresentation suggest about professionalism?

Answer 1

Must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities

Question 2

What does misrepresentation include?

Answer 2

This includes omitting relevant info, presenting selective data to mislead investors, and plagiarism.

Question 3

BUT: _____________ the source is not required when using projections, statistics, and tables from recognised financial and statistical reporting services (e.g. Reuters).

Answer 3

crediting

Question 4

How is misrepresentation implemented for members? (6)

Answer 4

• Do not present third-party research as your own, without attribution to the source. Give all relevant info (e.g. be specific about who the experts are and include original caveats and qualifying statements).
• Do not guarantee a specific return on securities that do not have an explicit guarantee from a government body or financial institution.
• Do not select a performance benchmark that is not comparable to the investment strategy.
• Do not present performance data that omits relevant variables.
• Do not offer false or misleading info about the analyst’s or firm’s capabilities, expertise, or experience (including through omission) and the services that can be performed.
• Do not use marketing materials from a third party (outside advisor) that are misleading

Question 5

What are the recommendations under misrepresentation for members? (6)

Answer 5

• Prepare a summary of experience, qualifications, and services a member is able to perform.
• Provide a list, in writing, of the firm’s available services and qualifications.
• Periodically review documents, websites and communications of members for any misrepresentation of employee or firm qualifications and capabilities.
• Encourage employers to develop procedures for verifying marketing materials provided by third parties concerning their capabilities, products, and services.
• Cite all sources used and summaries of materials provided by others (except recognised financial or statistical reporting services).
• Keep copies of all reports, articles, or other materials used in the preparation of research reports.

Question 6

Example 6: Zaheer Khan is an analyst paid by companies to promote their shares. He releases reports on these companies in which he fails to disclose his
relationship with them. He also discusses them on the Internet, again without disclosure. Discuss Zaheer’s situation

Answer 6

Solution: Zaheer is clearly in contravention of Standard I(C), as he is misleading potential investors. Even if he is being objective and his research is good, he is
still misleading by not making his relationship with the companies he discusses known. He is likely also violating Standard 1(B) as he is not maintaining independence and objectivity by being paid by companies to promote their
shares.

Question 7

Example 7: Frank Kruger suggests to a retired client that she invests 70% of her wealth in an interest bearing bank deposit, which he says is risk-free, and the remaining 30% in the stock exchange, which he says is higher risk but has more growth potential. Is Kruger in compliance with Standard I(C)?

Answer 7

Solution: No, Kruger is misrepresenting the interest bearing bank deposit which, although it is far less risky than equity, is not completely risk-free.

Question 9

Example 8: Nick Jonas, an equities analyst, writes a research report on Torpedo Catalyst, an automotive business. As one of the sources of his report, he uses a research report by Michelle Naidoo, an analyst employed by A&C Securities, which states that if Torpedo can maintain their current productivity, their production figures are likely to double next year. In his report Jonas writes: “According to Michelle Naidoo, automotive analyst at A&C Securities, Torpedo Catalyst’s production is likely to double next year”. Is Jonas in compliance with Standard I(C)?

Answer 9

Solution: No, even though he acknowledged the source of his information and was thus not directly plagiarising, he did not present the information together with the original caveat raised by Naidoo (“… if Torpedo can maintain their current productivity…”).

Question 10

Example 9: Kavesh Pillay is a quantitative analyst at Triple Crown Asset Management. In a discussion with a foreign quantitative analyst he finds out about a newly developed theoretical quantitative model for bond yield predictions. After extensive testing of the model on “real” data and
making substantial changes to adapt it to the local
environment, Pillay goes to his supervisor with his new
model and announces that he has come up with a
model that will “put Triple Crown on the map”. Is Pillay in
compliance with Standard I(C)?

Answer 10

Solution: No, even though he had tested and modified the model (for which he may take credit), the original idea was not Pillay’s. He still has to acknowledge the foreign quantitative analyst or the original inventor of the model.