B. Independence and Objectivity.
Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity.
Every member must avoid situations that may result in a potential conflict of interest. External sources may try to influence the investment process by offering investment managers a variety of perks. Excessive gifts or lavish investor relation functions could prejudice a member's opinions about a sponsor. One type of benefit is the allocation of shares in oversubscribed IPOs to investment managers for their personal accounts. Every member shall avoid situations that might cause or be perceived to cause a loss of independence or objectivity in recommending investments or taking investment action.
Modest gifts and entertainment are acceptable. For example, gifts that do not exceed $100 may be accepted, as well as entertainment.
Gifts from clients can be distinguished from gifts given by other parties seeking to influence a member to the detriment of clients. Gifts from clients are deemed less likely to impair a member's independence than gifts from other parties seeking to influence the member's outlook. Members and candidates must disclose to their employers any such benefits from clients.
You are an analyst for the banking industry. The head of investor relations for one of the larger firms in this industry offers to take you to dinner at a posh restaurant and discuss the upcoming quarterly earnings figures. He provides you with a new state-of-the-art titanium golf club as his limo drops you off at the end of the evening. He calls you the next day to ask if your report on his firm is progressing and indicates that there is a job waiting for you at the bank if you decide to leave your current position. First, the bank officer may have violated his fiduciary duty to his shareholders if he provided you with material nonpublic information. Regardless, you have been wined and dined and received a gift and a job offer from a senior officer of a firm you evaluate. Even if these inducements do not compromise your independence and objectivity, they may provide that perception. This violates the standard.
An analyst follows the stock of company XYZ. He is invited by XYZ for a visit to the company. XYZ pays all travel expenses for him. In general, when allowing companies to pay for expenses, analysts should ensure that such arrangements do not impinge on their independence and objectivity. In this case, as long as the trip is strictly for business without lavish hospitality, such payment is acceptable.
An analyst is asked by a firm's executives to issue favorable recommendations to secure the client's business. The analyst should conduct the review and make the recommendation based on his or her own independent and objective view. Note that members may experience pressure from their own firms to issue favorable reviews of certain companies. In a full-service investment house, the corporate finance department may be an underwriter for a company's securities and be loath to antagonize that company by publishing negative research reports.
Steve, a portfolio manager, directs a large amount of his commission business to a London brokerage house. In appreciation for all the business, the London brokerage house gives Steve two tickets to travel anywhere in Europe. Steve fails to disclose receiving this package to his supervisor. Steve has violated the standard because accepting these perks, worth more than $100, may hinder his independence and objectivity.
Procedures for compliance
Members should follow certain practices and should encourage their firms to establish certain procedures to avoid violations of this standard.
- Protect integrity of opinions. Members and their firms should establish policies stating that every research report on issuers by a corporate client reflects the unbiased opinion of the analyst. Firms should also design compensation systems that protect the integrity of the investment decision process by maintaining the independence and objectivity of analysts.
- Create a restricted list. If the senior managers at a member's firm are unwilling to permit dissemination of adverse opinions about a corporate client, the firm should remove the controversial company from the research universe and put it on a restricted list so that the firm disseminates only factual information about the company.
- Restrict special cost arrangements. When attending meetings at an issuer's headquarters, a member should pay for commercial transportation and hotel charges. No corporate issuer should reimburse a member for transportation. Members should encourage issuers to limit the use of corporate aircraft to situations in which commercial transportation is not available or in which efficient movement could not otherwise be arranged. Members should take particular care that when frequent meetings are held between an individual issuer and an individual member the issuer is not always the host of the member.
- Limit gifts. Members should limit the acceptance of gratuities and/or gifts to token items. The standard does not preclude customary, ordinary, business-related entertainment so long as its purpose is not to influence or reward members.
- Review procedures. Members should implement (or encourage their firms to implement) effective supervisory and review procedures to ensure that analysts and portfolio managers comply with policies relating to their personal investment activities.