Chapter 1 Standards of professional Conduct

Several employees are planning to depart their current employer within a few weeks and have been careful to not engage in any activities that would conflict with their duty to their current employer. They have just learned that one of their employer's clients has undertaken a request for proposal (RFP) to review and possibly hire a new investment consultant. The RFP has been sent to the employer and all of its competitors. The group believes that the new entity to be formed would be qualified to respond to the RFP and eligible for the business. The RFP submission period is likely to conclude before the employees' resignations are effective. Is it permissible for the group of departing employees to respond to the RFP under their anticipated new firm?

A group of employees responding to an RFP that their employer is also responding to would lead to direct competition between the employees and the employer. Such conduct violates Standard IV(A) unless the group of employees receives permission from their employer as well as the entity sending out the RFP.

A member received an advance copy of a stock recommendation that will appear in a widely read national newspaper column the next day and purchases the stock

A recommendation in a widely read newspaper column will likely cause the stock price to rise, so this is material nonpublic information. The member has violated the Standard.

Claude Browning, a quantitative analyst for Double Alpha, Inc., returns in great excitement from a seminar. In that seminar, Jack Jorrely, a well-publicized quantitative analyst at a national brokerage firm, discussed one of his new models in great detail, and Browning is intrigued by the new concepts. He proceeds to test the model, making some minor mechanical changes but retaining the concepts, until he produces some very positive results. Browning quickly announces to his supervisors at Double Alpha that he has discovered a new model and that clients and prospective clients should be informed of this positive finding as ongoing proof of Double Alpha's continuing innovation and ability to add value.

Although Browning tested Jorrely's model on his own and even slightly modified it, he must still acknowledge the original source of the idea. Browning can certainly take credit for the final, practical results; he can also support his conclusions with his own test. The credit for the innovative thinking, however, must be awarded to Jorrely.

May & Associates is an aggressive-growth manager that has represented itself since its inception as a specialist at investing in small-capitalization U.S. stocks. One of May's selection criteria is a maximum capitalization of $250 million for any given company. After a string of successful years of superior relative performance, May expanded its client base significantly, to the point at which assets under management now exceed $3 billion. For liquidity purposes, May's chief investment officer (CIO) decides to lift the maximum permissible market-cap ceiling to $500 million and change the firm's sales and marketing literature accordingly to inform prospective clients and third-party consultants.

Although May's CIO is correct about informing potentially interested parties as to the change in investment process, he must also notify May's existing clients. Among the latter group might be a number of clients who not only retained May as a small-cap manager, but also retained mid-cap and large-cap specialists in a multiple-manager approach. Such clients could regard May's change of criteria as a style change that could distort their overall asset allocations.

Tom Wayne is the investment manager of the Franklin City Employees Pension Plan. He recently completed a successful search for firms to manage the foreign equity allocation of the plan's diversified portfolio. He followed the plan's standard procedure of seeking presentations from a number of qualified firms and recommended that his board select Penguin Advisors because of its experience, well-defined investment strategy, and performance record. The firm claims compliance with the Global Investment Performance Standards (GIPS) and has been verified. Following the selection of Penguin, a reporter from the Franklin City Record calls to ask if there was any connection between this action and the fact that Penguin was one of the sponsors of an "investment fact-finding trip to Asia" that Wayne made earlier in the year. The trip was one of several conducted by the Pension Investment Academy, which had arranged the itinerary of meetings with economic, government, and corporate officials in major cities in several Asian countries. The Pension Investment Academy obtains support for the cost of these trips from a number of investment managers, including Penguin Advisors; the Academy then pays the travel expenses of the various pension plan managers on the trip and provides all meals and accommodations. The president of Penguin Advisors was also one of the travelers on the trip.

Although Wayne can probably put to good use the knowledge he gained from the trip in selecting portfolio managers and in other areas of managing the pension plan, his recommendation of Penguin Advisors may be tainted by the possible conflict incurred when he participated in a trip partly paid for by Penguin Advisors and when he was in the daily company of the president of Penguin Advisors. To avoid violating Standard I(B), Wayne's basic expenses for travel and accommodations should have been paid by his employer or the pension plan; contact with the president of Penguin Advisors should have been limited to informational or educational events only; and the trip, the organizer, and the sponsor should have been made a matter of public record. Even if his actions were not in violation of Standard I(B), Wayne should have been sensitive to the public perception of the trip when reported in the newspaper and the extent to which the subjective elements of his decision might have been affected by the familiarity that the daily contact of such a trip would encourage. This advantage would probably not be shared by firms competing with Penguin Advisors.

Michael Allen works for a brokerage firm and is responsible for an underwriting of securities. A company official gives Allen information indicating that the financial statements Allen filed with the regulator overstate the issuer's earnings. Allen seeks the advice of the brokerage firm's general counsel, who states that it would be difficult for the regulator to prove that Allen has been involved in any wrongdoing.

Although it is recommended that members and candidates seek the advice of legal counsel, the reliance on such advice does not absolve a member or candidate from the requirement to comply with the law or regulation. Allen should report this situation to his supervisor, seek an independent legal opinion, and determine whether the regulator should be notified of the error

Do not let the investment process be influenced by

Any external sources. Modest gifts are permitted. Allocation of shares in oversubscribed IPOs to personal accounts is not permitted. Distinguish between gifts from clients and gifts from entities seeking influence to the detriment of the client. Gifts must be disclosed to the member's employer in any case, either before acceptance if possible, or subsequently.

Dennis Elliot hired Sam Chisolm, who previously worked for a competing firm. Chisolm left his former firm after 18 years of employment. When Chisolm begins working for Elliot, he wants to contact his former clients because he knows them well and is certain that many will follow him to his new employer. Is Chisolm in violation of the Standard IV(A) if he contacts his former clients?

Because client records are the property of the firm, contacting former clients for any reason through the use of client lists or other information taken from a former employer without permission would be a violation of Standard IV(A). In addition, the nature and extent of the contact with former clients may be governed by the terms of any non-compete agreement signed by the employee and the former employer that covers contact with former clients after employment. Simple knowledge of the name and existence of former clients is not confidential information, just as skills or experience that an employee obtains while employed is not confidential or privileged information. The Standards do not impose a prohibition on the use of experience or knowledge gained at one employer from being used at another employer. The Standards also do not prohibit former employees from contacting clients of their previous firm, absent a non-compete agreement. Members and candidates are free to use public information about their former firm after departing to contact former clients without violating Standard IV(A). In the absence of a non-compete agreement, as long as Chisolm maintains his duty of loyalty to his employer before joining Elliot's firm, does not take steps to solicit clients until he has left his former firm, and does not make use of material from his former employer without its permission after he has left, he would not be in violation of the Standards.

A member is on the board of directors of a company whose shares he purchases for client accounts. As a member of the board, he receives the company's product at no charge.

Because receiving the company's product constitutes compensation for his service, he is in violation of the Standard if he does not disclose this additional compensation to his employer.

Travel

Best practice is for analysts to pay for their own commercial travel when attending information events or tours sponsored by the firm being analyzed.

David Bradford manages money for a family-owned real estate development corporation. He also manages the individual portfolios of several of the family members and officers of the corporation, including the chief financial officer (CFO). Based on the financial records from the corporation and some questionable practices of the CFO that Bradford has observed, Bradford believes that the CFO is embezzling money from the corporation and putting it into his personal investment account.

Bradford should check with his firm's compliance department or appropriate legal counsel to determine whether applicable securities regulations require reporting the CFO's financial records.

Trust is a foundation in the investment profession.

Do not make any misrepresentations or give false impressions. This includes oral, electronic, and social media communications. Misrepresentations include guaranteeing investment performance and plagiarism. Plagiarism encompasses using someone else's work (reports, forecasts, charts, graphs, and spreadsheet models) without giving them credit. Knowingly omitting information that could affect an investment decision is considered misrepresentation. Models and analysis developed by others at a member's firm are the property of the firm and can be used without attribution. A report written by another analyst employed by the firm cannot be released as another analyst's work.

James Hightower has been employed by Jason Investment Management Corporation for 15 years. He began as an analyst but assumed increasing responsibilities and is now a senior portfolio manager and a member of the firm's investment policy committee. Hightower has decided to leave Jason Investment and start his own investment management business. He has been careful not to tell any of Jason's clients that he is leaving because he does not want to be accused of breaching his duty to Jason by soliciting Jason's clients before his departure. Hightower is planning to copy and take with him the following documents and information he developed or worked on while at Jason: (1) the client list, with addresses, telephone numbers, and other pertinent client information; (2) client account statements; (3) sample marketing presentations to prospective clients containing Jason's performance record; (4) Jason's recommended list of securities; (5) computer models to determine asset allocations for accounts with different objectives; (6) computer models for stock selection; and (7) personal computer spreadsheets for Hightower's major corporate recommendations, which he developed when he was an analyst.

Except with the consent of their employer, departing employees may not take employer property, which includes books, records, reports, and other materials, and may not interfere with their employer's business opportunities. Taking any employer records, even those the member or candidate prepared, violates Standard IV(A). Employer records include items stored in hard copy or any other medium (e.g., home computers, portable storage devices, cell phones).

One of Nikolas Lindstrom's clients is upset by the negative investment returns in his equity portfolio. The investment policy statement for the client requires that the portfolio manager follow a benchmark-oriented approach. The benchmark for the client included a 35% investment allocation in the technology sector. The client acknowledges that this allocation was appropriate, but over the past three years, technology stocks have suffered severe losses. The client complains to the investment manager that so much money was allocated to this sector.

For Lindstrom, having appropriate records is important to show that over the past three years the percentage of technology stocks in the benchmark index was 35% as called for in the IPS. Lindstrom should also have the IPS for the client stating that the benchmark was appropriate for the client's investment objectives. He should also have records indicating that the investment has been explained appropriately to the client and that the IPS was updated on a regular basis. Taking these actions, Lindstrom would be in compliance with Standard V(C).

Walter Fritz is an equity analyst with Hilton Brokerage who covers the mining industry. He has concluded that the stock of Metals & Mining is overpriced at its current level, but he is concerned that a negative research report will hurt the good relationship between Metals & Mining and the investment-banking division of his firm. In fact, a senior manager of Hilton Brokerage has just sent him a copy of a proposal his firm has made to Metals & Mining to underwrite a debt offering. Fritz needs to produce a report right away and is concerned about issuing a less-than-favorable rating.

Fritz's analysis of Metals & Mining must be objective and based solely on consideration of company fundamentals. Any pressure from other divisions of his firm is inappropriate. This conflict could have been eliminated if, in anticipation of the offering, Hilton Brokerage had placed Metals & Mining on a restricted list for its sales force.

Carmen Garcia manages a mutual fund dedicated to socially responsible investing. She is also an environmental activist. As the result of her participation in nonviolent protests, Garcia has been arrested on numerous occasions for trespassing on the property of a large petrochemical plant that is accused of damaging the environment.

Generally, Standard I(D) is not meant to cover legal transgressions resulting from acts of civil disobedience in support of personal beliefs because such conduct does not reflect poorly on the member or candidate's professional reputation, integrity, or competence.

Max Gubler, chief investment officer of a property/casualty insurance subsidiary of a large financial conglomerate, wants to improve the diversification of the subsidiary's investment portfolio and increase its returns. The subsidiary's investment policy statement provides for highly liquid investments, such as large-cap equities and government, supranational, and corporate bonds with a minimum credit rating of AA and maturity of no more than five years. In a recent presentation, a venture capital group offered very attractive prospective returns on some of its private equity funds that provide seed capital to ventures. An exit strategy was already contemplated, but investors would have to observe a minimum three-year lock-up period and a subsequent laddered exit option for a maximum of one-third of their shares per year. Gubler does not want to miss this opportunity. After extensive analysis, with the intent to optimize the return on the equity assets within the subsidiary's current portfolio, he invests 4% in this seed fund, leaving the portfolio's total equity exposure still well below its upper limit.

Gubler is violating Standard III(A): Loyalty, Prudence, and Care as well as Standard III(C). His new investment locks up part of the subsidiary's assets for at least three years and up to as many as five years and possibly beyond. The IPS requires investments in highly liquid investments and describes accepted asset classes; private equity investments with a lock-up period certainly do not qualify. Even without a lock-up period, an asset class with only an occasional, and thus implicitly illiquid, market may not be suitable for the portfolio. Although an IPS typically describes objectives and constraints in great detail, the manager must also make every effort to understand the client's business and circumstances. Doing so should enable the manager to recognize, understand, and discuss with the client other factors that may be or may become material in the investment management process.

Richard Dox is a mining analyst for East Bank Securities. He has just finished his report on Boisy Bay Minerals. Included in his report is his own assessment of the geological extent of mineral reserves likely to be found on the company's land. Dox completed this calculation based on the core samples from the company's latest drilling. According to Dox's calculations, the company has in excess of 500,000 ounces of gold on the property. Dox concludes his research report as follows: "Based on the fact that the company has 500,000 ounces of gold to be mined, I recommend a strong BUY."

If Dox issues the report as written, he will violate Standard V(B). His calculation of the total gold reserves for the property is an opinion, not a fact. Opinion must be distinguished from fact in research reports.

Jagdish Teja is a buy-side analyst covering the furniture industry. Looking for an attractive company to recommend as a buy, he analyzes several furniture makers by studying their financial reports and visiting their operations. He also talks to some designers and retailers to find out which furniture styles are trendy and popular. Although none of the companies that he analyzes are a clear buy, he discovers that one of them, Swan Furniture Company (SFC), may be in trouble financially. Swan's extravagant new designs have been introduced at substantial cost. Even though these designs initially attracted attention, in the long run, the public is buying more conservative furniture from other makers. Based on this information and on a profit-and-loss analysis, Teja believes that Swan's next quarter's earnings will drop substantially. He issues a sell recommendation for SFC. Immediately after receiving that recommendation, investment managers start reducing the SFC stock in their portfolios.

Information on quarterly earnings figures is material and nonpublic. Teja arrived at his conclusion about the earnings drop based on public information and on pieces of nonmaterial nonpublic information (such as opinions of designers and retailers). Therefore, trading based on Teja's correct conclusion is not prohibited by Standard II(A).

Public Companies. Analysts should not be pressured to

Issue favorable research by the companies they follow. Do not confine research to discussions with company management, but rather use a variety of sources, including suppliers, customers, and competitors.

Laura Jameson, a U.S. citizen, works for an investment advisor based in the United States and works in a country where investment managers are prohibited from participating in IPOs for their own accounts.

Jameson must comply with the strictest requirements among U.S. law (where her firm is based), the CFA Institute Code and Standards, and the laws of the country where she is doing business. In this case that means she must not participate in any IPOs for her personal account.

Elizabeth Levenson is based in Taipei and covers the Taiwanese market for her firm, which is based in Singapore. She is invited, together with the other 10 largest shareholders of a manufacturing company, to meet the finance director of that company. During the meeting, the finance director states that the company expects its workforce to strike next Friday, which will cripple productivity and distribution. Can Levenson use this information as a basis to change her rating on the company from "buy" to "sell"?

Levenson must first determine whether the material information is public. If the company has not made this information public (a small group forum does not qualify as a method of public dissemination), she cannot use the information.

Jane Mattock, senior vice president and head of the research department of H&V, Inc., a regional brokerage firm, has decided to change her recommendation for Timber Products from buy to sell. In line with H&V's procedures, she orally advises certain other H&V executives of her proposed actions before the report is prepared for publication. As a result of his conversation with Mattock, Dieter Frampton, one of the executives of H&V accountable to Mattock, immediately sells Timber's stock from his own account and from certain discretionary client accounts. In addition, other personnel inform certain institutional customers of the changed recommendation before it is printed and disseminated to all H&V customers who have received previous Timber reports.

Mattock has violated Standard IV(C) by failing to reasonably and adequately supervise the actions of those accountable to her. She did not prevent or establish reasonable procedures designed to prevent dissemination of, or trading on, the information by those who knew of her changed recommendation. She must ensure that her firm has procedures for reviewing or recording trading in the stock of any corporation that has been the subject of an unpublished change in recommendation. Adequate procedures would have informed the subordinates of their duties and detected sales by Frampton and selected customers.

Aaron McCoy is vice president and managing partner of the equity investment group of Mastermind Financial Advisors, a new business. Mastermind recruited McCoy because he had a proven 6-year track record with G&P Financial. In developing Mastermind's advertising and marketing campaign, McCoy prepares an advertisement that includes the equity investment performance he achieved at G&P Financial. The advertisement for Mastermind does not identify the equity performance as being earned while at G&P. The advertisement is distributed to existing clients and prospective clients of Mastermind.

McCoy violated Standard III(D) by distributing an advertisement that contained material misrepresentations regarding the historical performance of Mastermind. Standard III(D) requires that members and candidates make every reasonable effort to ensure that performance information is a fair, accurate, and complete representation of an individual or firm's performance. As a general matter, this standard does not prohibit showing past performance of funds managed at a prior firm as part of a performance track record so long as it is accompanied by appropriate disclosures detailing where the performance comes from and the person's specific role in achieving that performance. If McCoy chooses to use his past performance from G&P in Mastermind's advertising, he should make full disclosure as to the source of the historical performance.

Anthony McGuire is an issuer-paid analyst hired by publicly traded companies to electronically promote their stocks. McGuire creates a website that promotes his research efforts as a seemingly independent analyst. McGuire posts a profile and a strong buy recommendation for each company on the website indicating that the stock is expected to increase in value. He does not disclose the contractual relationships with the companies he covers on his website, in the research reports he issues, or in the statements he makes about the companies in internet chat rooms.

McGuire has violated Standard I(C) because the internet site is misleading to potential investors. Even if the recommendations are valid and supported with thorough research, his omissions regarding the true relationship between himself and the companies he covers constitute a misrepresentation. McGuire has also violated Standard VI(A): Disclosure of Conflicts by not disclosing the existence of an arrangement with the companies through which he receives compensation in exchange for his services.

III(B) Fair Dealing

Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities. Guidance

III(E) Preservation of Confidentiality

Members and Candidates must keep information about current, former, and prospective clients confidential unless: The information concerns illegal activities on the part of the client, Disclosure is required by law, or The client or prospective client permits disclosure of the information.

VI(A) Disclosure of Conflicts

Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.

IV(C) Responsibilities of Supervisors

Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.

IV(B) Additional Compensation Arrangements

Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer's interest unless they obtain written consent from all parties involved.

Misconduct

Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence

I(D) Misconduct

Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.

II(B) Market Manipulation

Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

I(C) Misrepresentation

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

Misrepresentation

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

Knowledge of the Law

Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations.

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.

V(B) Communication With Clients and Prospective Clients

Members and Candidates must: Disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes. Disclose to clients and prospective clients significant limitations and risks associated with the investment process. Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients. Distinguish between fact and opinion in the presentation of investment analyses and recommendations.

Credit Rating Agencies

Members employed by credit rating firms should make sure that procedures prevent undue influence by the firm issuing the securities. Members who use credit ratings should be aware of this potential conflict of interest and consider whether independent analysis is warranted.

Leaving an Employer

Members must continue to act in their employer's best interests until the resignation is effective. Activities that may constitute a violation include the following: Misappropriation of trade secrets Misuse of confidential information Soliciting employer's clients prior to leaving Self-dealing Misappropriation of client lists Employer records on any medium (e.g., home computer, PDA, cell phone) are the property of the firm. Once an employee has left a firm, simple knowledge of names and existence of former clients is generally not confidential. There is also no prohibition on the use of experience or knowledge gained while with a former employer. If an agreement exists among employers (e.g., the U.S. "Protocol for Broker Recruiting") that permits a broker to take certain client information when leaving a firm, a member or candidate may act within the terms of the agreement without violating the Standard.

Standards vs. Local Law

Members must know the laws and regulations relating to their professional activities in all countries in which they conduct business. Members must comply with applicable laws and regulations relating to their professional activity. Always adhere to the most strict rules and requirements (law or CFA Institute Standards) that apply (i.e., do not violate Standards even if the activity is otherwise legal).

Participation or Association With Violations by Others

Members should disassociate, or separate themselves, from any ongoing client, employer, or employee activity that is illegal or unethical, even if it involves leaving an employer (an extreme case). While a member may first confront the involved individual, he must approach his supervisor or compliance department. Inaction with continued association may be construed as knowing participation.

Recommended Procedures for Compliance—Firms

Members should encourage their firms to do all of the following: Develop and/or adopt a code of ethics. Make available to employees information that highlights applicable laws and regulations. Establish written procedures for reporting suspected violations of laws, regulations, or company policies. Members who supervise the creation and maintenance of investment services and products should be aware of and comply with the regulations and laws regarding such services and products both in their country of origin and the countries where they will be sold.

Recommended Procedures for Compliance—Members

Members should have procedures to keep up with changes in applicable laws, rules, and regulations. Compliance procedures should be reviewed on an ongoing basis to ensure that they abide by current laws, CFA Institute Standards, and regulations. Members should maintain current reference materials for employees to access in order to keep up to date on laws, rules, and regulations. Members should seek advice of counsel or their compliance department when in doubt. Members should document any violations when they disassociate themselves from prohibited activity and encourage their employers to bring an end to such activity. There is no requirement under the Standards to report violations to governmental authorities, but this may be advisable in some circumstances and required by law in others. Members are strongly encouraged to report other members' violations of the Code and Standards.

Deion Miller is the research director for Jamestown Investment Programs. The portfolio managers have become critical of Miller and his staff because the Jamestown portfolios do not include any stock that has been the subject of a merger or tender offer. Georgia Ginn, a member of Miller's staff, tells Miller that she has been studying a local company, Excelsior, Inc., and recommends its purchase. Ginn adds that the company has been widely rumored to be the subject of a merger study by a well-known conglomerate and discussions between them are under way. At Miller's request, Ginn prepares a memo recommending the stock. Miller passes along Ginn's memo to the portfolio managers prior to leaving for vacation, noting that he has not reviewed the memo. As a result of the memo, the portfolio managers buy Excelsior stock immediately. The day Miller returns to the office, Miller learns that Ginn's only sources for the report were her brother, who is an acquisitions analyst with Acme Industries and the "well-known conglomerate" and that the merger discussions were planned but not held

Miller violated Standard IV(C) by not exercising reasonable supervision when he disseminated the memo without checking to ensure that Ginn had a reasonable and adequate basis for her recommendations and that Ginn was not relying on material nonpublic information.

Kamisha Washington's firm advertises its past performance record by showing the 10-year return of a composite of its client accounts. Washington discovers, however, that the composite omits the performance of accounts that have left the firm during the 10-year period, whereas the description of the composite indicates the inclusion of all firm accounts. This omission has led to an inflated performance figure. Washington is asked to use promotional material that includes the erroneous performance number when soliciting business for the firm

Misrepresenting performance is a violation of the Standards. Although she did not calculate the performance herself, Washington would be assisting in violating this standard if she were to use the inflated performance number when soliciting clients. She must dissociate herself from the activity. If discussing the misleading number with the person responsible is not an option for correcting the problem, she can bring the situation to the attention of her supervisor or the compliance department at her firm. If her firm is unwilling to recalculate performance, she must refrain from using the misleading promotional material and should notify the firm of her reasons. If the firm insists that she use the material, she should consider whether her obligation to dissociate from the activity would require her to seek other employment.

Matthew Murphy is an analyst at Divisadero Securities & Co., which has a significant number of hedge funds among its most important brokerage clients. Some of the hedge funds hold short positions on Wirewolf Semiconductor. Two trading days before the publication of the quarter-end report, Murphy alerts his sales force that he is about to issue a research report on Wirewolf that will include the following opinion: Quarterly revenues are likely to fall short of management's guidance. Earnings will be as much as 5 cents per share (or more than 10%) below consensus. Wirewolf's highly respected chief financial officer may be about to join another company. Knowing that Wirewolf had already entered its declared quarter-end "quiet period" before reporting earnings (and thus would be reluctant to respond to rumors, etc.), Murphy times the release of his research report specifically to sensationalize the negative aspects of the message to create significant downward pressure on Wirewolf's stock to the distinct advantage of Divisadero's hedge fund clients. The report's conclusions are based on speculation, not on fact. The next day, the research report is broadcast to all of Divisadero's clients and to the usual newswire services. Before Wirewolf's investor relations department can assess its damage on the final trading day of the quarter and refute Murphy's report, its stock opens trading sharply lower, allowing Divisadero's clients to cover their short positions at substantial gains.

Murphy violated Standard II(B) by aiming to create artificial price volatility designed to have material impact on the price of an issuer's stock. Moreover, by lacking an adequate basis for the recommendation, Murphy also violated Standard V(A): Diligence and Reasonable Basis.

A money manager receives a gift of significant value from a client as a reward for good performance over the prior period and informs her employer of the gift.

No violation here because the gift is from a client and is not based on performance going forward, but the gift must be disclosed to her employer. If the gift were contingent on future performance, the money manager would have to obtain permission from her employer. The reason for both the disclosure and permission requirements is that the employer must ensure that the money manager does not give advantage to the client giving or offering additional compensation, to the detriment of other clients.

A member whose firm is seeking to become an investment manager for a labor union contributes a large sum to the union leader's re-election campaign. After the union hires the member's firm, the member continues to spend significant amounts on entertainment for the union leader and his family.

Offering gifts or other compensation to influence a decision to hire an investment manager is a violation of Standard I(B).

Paul Ostrowski runs a two-person investment management firm. Ostrowski's firm subscribes to a service from a large investment research firm that provides research reports that can be repackaged by smaller firms for those firms' clients. Ostrowski's firm distributes these reports to clients as original work.

Ostrowski can rely on third-party research that has a reasonable and adequate basis, but he cannot imply that he is the author of the report. Otherwise, Ostrowski would misrepresent the extent of his work in a way that would mislead the firm's clients or prospective clients.

Samuel Peter, an analyst with Scotland and Pierce Incorporated, is assisting his firm with a secondary offering for Bright Ideas Lamp Company. Peter participates, via telephone conference call, in a meeting with Scotland and Pierce investment-banking employees and Bright Ideas' CEO. Peter is advised that the company's earnings projections for the next year have significantly dropped. Throughout the telephone conference call, several Scotland and Pierce salespeople and portfolio managers walk in and out of Peter's office, where the telephone call is taking place. As a result, they are aware of the drop in projected earnings for Bright Ideas. Before the conference call is concluded, the salespeople trade the stock of the company on behalf of the firm's clients, and other firm personnel trade the stock in a firm proprietary account and in employee personal accounts.

Peter violated Standard II(A) because he failed to prevent the transfer and misuse of material nonpublic information to others in his firm. Peter's firm should have adopted information barriers to prevent the communication of nonpublic information between departments of the firm. The salespeople and portfolio managers who traded on the information have also violated Standard II(A) by trading on inside information.

Buy-side clients may try to pressure sell-side analysts.

Portfolio managers may have large positions in a particular security, and a rating downgrade may have an effect on the portfolio performance. Portfolio managers have a responsibility to respect and foster the intellectual honesty of sell-side research.

An employee's boss tells him to assume coverage of a stock and maintain a buy rating.

Research opinions and recommendations must be objective and arrived at independently. Following the boss's instructions would be a violation if the analyst determined a buy rating is inappropriate.

Emilie Rome is a trust officer for Paget Trust Company. Rome's supervisor is responsible for reviewing Rome's trust account transactions and her monthly reports of personal stock transactions. Rome has been using Nathan Gray, a broker, almost exclusively for trust account brokerage transactions. Where Gray makes a market in stocks, he has been giving Rome a lower price for personal purchases and a higher price for sales than he gives to Rome's trust accounts and other investors.

Rome is violating her duty of loyalty to the bank's trust accounts by using Gray for brokerage transactions simply because Gray trades Rome's personal account on favorable terms. Rome is placing her own interests before those of her clients.

Helen Hawke manages the corporate finance department of Sarkozi Securities, Ltd. The firm is anticipating that the government will soon close a tax loophole that currently allows oil and gas exploration companies to pass on drilling expenses to holders of a certain class of shares. Because market demand for this tax-advantaged class of stock is currently high, Sarkozi convinces several companies to undertake new equity financings at once before the loophole closes. Time is of the essence, but Sarkozi lacks sufficient resources to conduct adequate research on all the prospective issuing companies. Hawke decides to estimate the IPO prices based on the relative size of each company and to justify the pricing later when her staff has time.

Sarkozi should have taken on only the work that it could adequately handle. By categorizing the issuers as to general size, Hawke has bypassed researching all the other relevant aspects that should be considered when pricing new issues and thus has not performed sufficient due diligence. Such an omission can result in investors purchasing shares at prices that have no actual basis. Hawke has violated Standard V(A).

Simon Sasserman is a trust investment officer at a bank in a small affluent town. He enjoys lunching every day with friends at the country club, where his clients have observed him having numerous drinks. Back at work after lunch, he clearly is intoxicated while making investment decisions. His colleagues make a point of handling any business with Sasserman in the morning because they distrust his judgment after lunch.

Sasserman's excessive drinking at lunch and subsequent intoxication at work constitute a violation of Standard I(D) because this conduct has raised questions about his professionalism and competence. His behavior thus reflects poorly on him, his employer, and the investment industry.

Investment-Banking Relationships. Do not be pressured by

Sell-side firms to issue favorable research on current or prospective investment-banking clients. It is appropriate to have analysts work with investment bankers in "road shows" only when the conflicts are adequately and effectively managed and disclosed. Be sure there are effective "firewalls" between research/investment management and investment-banking activities.

A member is writing a research report on a company as a contract worker for Employer A (using Employer A's premises and materials) with the understanding that Employer A does not claim exclusive rights to the outcome of her research. As she is finishing the report, she is offered a full-time job by Employer B and sends Employer B a copy of a draft of her report for publication.

She has violated the Standard by not giving Employer A the first rights to act on her research. She must also be careful not to take any materials used in preparing the report from Employer A's premises.

First Country Bank serves as trustee for the Miller Company's pension plan. Miller is the target of a hostile takeover attempt by Newton, Inc. In attempting to ward off Newton, Miller's managers persuade Julian Wiley, an investment manager at First Country Bank, to purchase Miller common stock in the open market for the employee pension plan. Miller's officials indicate that such action would be favorably received and probably result in other accounts being placed with the bank. Although Wiley believes the stock to be overvalued and would not ordinarily buy it, he purchases the stock to support Miller's managers, to maintain the company's good favor, and to realize additional new business. The heavy stock purchases cause Miller's market price to rise to such a level that Newton retracts its takeover bid.

Standard III(A) requires that a member or candidate, in evaluating a takeover bid, act prudently and solely in the interests of plan participants and beneficiaries. To meet this requirement, a member or candidate must carefully evaluate the long-term prospects of the company against the short-term prospects presented by the takeover offer and by the ability to invest elsewhere. In this instance, Wiley, acting on behalf of his employer, which was the trustee for a pension plan, clearly violated Standard III(A). He used the pension plan to perpetuate existing management, perhaps to the detriment of plan participants and the company's shareholders, and to benefit himself. Wiley's responsibilities to the plan participants and beneficiaries should have taken precedence over any ties to corporate managers and self-interest. Wiley had a duty to examine the takeover offer on its own merits and to make an independent decision. The guiding principle is the appropriateness of the investment decision to the pension plan, not whether the decision benefitted Wiley or the company that hired him.

Kyle Taylor of Taylor Trust Company, noting the performance of Taylor's common trust fund for the past two years, states in the brochure sent to his potential clients, "You can expect steady 25% annual compound growth of the value of your investments over the year." Taylor Trust's common trust fund did increase at the rate of 25% per annum for the past year, which mirrored the increase of the entire market. The fund has never averaged that growth for more than one year, however, and the average rate of growth of all of its trust accounts for five years is 5% per year.

Taylor's brochure is in violation of Standard III(D). Taylor should have disclosed that the 25% growth occurred only in one year. Additionally, Taylor did not include client accounts other than those in the firm's common trust fund. A general claim of firm performance should take into account the performance of all categories of accounts. Finally, by stating that clients can expect a steady 25% annual compound growth rate, Taylor also violated Standard I(C): Misrepresentation, which prohibits statements of assurances or guarantees regarding an investment.

Spencer Rivers, president of XYZ Corporation, moves his company's growth-oriented pension fund to a particular bank primarily because of the excellent investment performance achieved by the bank's commingled fund for the prior five-year period. Later, Rivers compares the results of his pension fund with those of the bank's commingled fund. He is startled to learn that, even though the two accounts have the same investment objectives and similar portfolios, his company's pension fund has significantly underperformed the bank's commingled fund. Questioning this result at his next meeting with the pension fund's manager, Rivers is told that, as a matter of policy, when a new security is placed on the recommended list, Morgan Jackson, the pension fund manager, first purchases the security for the commingled account and then purchases it on a pro rata basis for all other pension fund accounts. Similarly, when a sale is recommended, the security is first sold from the commingled account and then sold on a pro rata basis from all other accounts. Rivers also learns that if the bank cannot get enough shares (especially the hot issues) to be meaningful to all the accounts, its policy is to place the new issues only in the commingled account. Seeing that Rivers is neither satisfied nor pleased by the explanation, Jackson quickly adds that nondiscretionary pension accounts and personal trust accounts have a lower priority on purchase and sale recommendations than discretionary pension fund accounts. Furthermore, Jackson states, the company's pension fund had the opportunity to invest up to 5% in the commingled fund.

The bank's policy did not treat all customers fairly, and Jackson violated her duty to her clients by giving priority to the growth-oriented commingled fund over all other funds and to discretionary accounts over nondiscretionary accounts. Jackson must execute orders on a systematic basis that is fair to all clients. In addition, trade allocation procedures should be disclosed to all clients when they become clients. Of course, in this case, disclosure of the bank's policy would not change the fact that the policy is unfair.

Acme Futures Exchange is launching a new bond futures contract. To convince investors, traders, arbitrageurs, hedgers, and so on, to use its contract, the exchange attempts to demonstrate that it has the best liquidity. To do so, it enters into agreements with members so they commit to a substantial minimum trading volume on the new contract over a specific period in exchange for substantial reductions on their regular commissions.

The formal liquidity of a market is determined by the obligations set on market makers, but the actual liquidity of a market is better estimated by the actual trading volume and bid-ask spreads. Attempts to mislead participants on the actual liquidity of the market constitute a violation of Standard II(B). In this example, investors have been intentionally misled to believe they chose the most liquid instrument for some specific purpose, but they could eventually see the actual liquidity of the contract significantly reduced after the term of the agreement expires. If Acme Futures Exchange fully discloses its agreement with members to boost transactions over some initial launch period, it does not violate Standard II(B). Acme's intent is not to harm investors but on the contrary, to give them a better service. For that purpose, it may engage in a liquidity-pumping strategy, but the strategy must be disclosed.

A member tells a client that he can get her a good deal on a car through his father-in-law, but instead gets her a poor deal and accepts part of the commission on the car purchase.

The member has been dishonest and misrepresented the facts of the situation and has, therefore, violated the Standard.

A member has learned from his client that one of his goals is to give more of his portfolio income to charity. The member tells this to a friend who is on the board of a worthy charity and suggests that he should contact the client about a donation.

The member has violated the Standard by disclosing information he has learned from the client in the course of their business relationship.

A member puts simulated results of an investment strategy in a sales brochure without disclosing that the results are not actual performance numbers.

The member has violated the Standard.

A member gets options for his part in an IPO from the subject firm. The IPO is oversubscribed and the member fills his own and other individuals' orders but has to reduce allocations to his institutional clients.

The member has violated the Standard. He must disclose to his employer and to his clients that he has accepted options for putting together the IPO. He should not take any shares of a hot IPO for himself and should have distributed his allocated shares of the IPO to all clients in proportion to their original order amounts.

A member bases his research reports on interviews, his own analysis, and industry reports from third parties on his industry and related industries.

The member must keep records of all the information that went into the research on which his reports and recommendations are based.

A member who is a performance analyst notices that one of her firm's top investment managers has changed his composite construction, removing a poorly performing large account and placing it in a different composite. Knowing that the investment manager is important to the firm and a close friend of the firm's CEO, the member does not disclose this change in her performance report

The member violated Standard I(B) by failing to exercise independence and objectivity in her analysis. Altering composites to conceal poor performance also violates Standard III(D) Performance Presentation and may violate Standard I(C) Misrepresentation.

A member discovers that an error in one of his firm's quantitative models led to a number of trades in one portfolio that should not have been made. The member corrects the error in the model and rebalances the portfolio to reverse the erroneous trades but does not report the issue.

The member violated the Standard by failing to disclose the error and the corrective action to clients. V(C) Record Retention Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients.

Steven Taylor, a mining analyst with Bronson Brokers, is invited by Precision Metals to join a group of his peers in a tour of mining facilities in several western U.S. states. The company arranges for chartered group flights from site to site and for accommodations in Spartan Motels, the only chain with accommodations near the mines, for three nights. Taylor allows Precision Metals to pick up his tab, as do the other analysts, with one exception—John Adams, an employee of a large trust company who insists on following his company's policy and paying for his hotel room himself.

The policy of the company where Adams works complies closely with Standard I(B) by avoiding even the appearance of a conflict of interest, but Taylor and the other analysts were not necessarily violating Standard I(B). In general, when allowing companies to pay for travel and/or accommodations under these circumstances, members and candidates must use their judgment, keeping in mind that such arrangements must not impinge upon a member or candidate's independence and objectivity. In this example, the trip was strictly for business, and Taylor was not accepting unnecessary or lavish hospitality. The itinerary required chartered flights, for which analysts were not expected to pay. The accommodations were modest. These arrangements are not unusual and did not violate Standard I(B) as long as Taylor's independence and objectivity were not compromised. In the final analysis, members and candidates should consider both whether they can remain objective and whether their integrity might be perceived by their clients to have been compromised.

A member writes a report in which she estimates mortgage rates. After reviewing it, a majority of the investment committee vote to change the report to reflect a different interest rate forecast. Must the member dissociate herself from the report?

The same facts may give rise to different opinions and as long as the committee has a reasonable and adequate basis for their (differing) opinion, the member is under no obligation to ask that her name be removed from the report or to disassociate from issuing the report.

A member is seeking to sell a large position in a fairly illiquid stock from a fund he manages. He buys and sells shares of the stock between that fund and another he also manages, to create an appearance of activity and stock price appreciation, so that the sale of the whole position will have less market impact and he will realize a better return for the fund's shareholders.

The trading activity is meant to mislead market participants and is, therefore, a violation of the Standard. The fact that his fund shareholders gain by this action does not change the fact that it is a violation.

Sally Connor, a financial analyst employed by Johnson Investment Counselors, Inc., provides investment advice to the trustees of City Medical Center. The trustees have given her a number of internal reports concerning City Medical's needs for a physical plant renovation and expansion. They have asked Connor to recommend investments that would generate capital appreciation in endowment funds to meet projected capital expenditures. Connor is approached by a local businessman, Thomas Kasey, who is considering a substantial contribution either to City Medical Center or to another local hospital. Kasey wants to find out the building plans of both institutions before making a decision, but he does not want to speak to the trustees.

The trustees gave Connor the internal reports so she could advise them on how to manage their endowment funds. Because the information in the reports is clearly both confidential and within the scope of the confidential relationship, Standard III(E) requires that Connor refuse to divulge information to Kasey.

Two employees discuss joining with others in an employee-led buyout of their employer's emerging markets investment management business.

There is no violation here. Their employer can decide how to respond to any buyout offer. If such a buyout takes place, clients should be informed of the nature of the changes in a timely manner.

Mosaic Theory

There is no violation when a perceptive analyst reaches an investment conclusion about a corporate action or event through an analysis of public information together with items of nonmaterial, nonpublic information. It's a style of financial research in which the analyst uses a variety of resources to determine the value of a company, stock or other security.

Whistleblowing

There may be isolated cases where a duty to one's employer may be violated in order to protect clients or the integrity of the market, and not for personal gain.

A member trades based on information he gets by seeing an advance copy of an article that will be published in an influential magazine next week.

This is a violation as this is material nonpublic information until the article has been published.

A member describes an interest-only collateralized mortgage obligation as guaranteed by the U.S. government because it is a claim against the cash flows of a pool of guaranteed mortgages, although the payment stream and the market value of the security are not guaranteed.

This is a violation because of the misrepresentation.

In return for receiving account management business from Broker X, a member directs trades to Broker X on the accounts referred to her by Broker X, as well as on other accounts as an incentive to Broker X to send her more account business.

This is a violation if Broker X does not offer the best price and execution or if the practice of directing trades to Broker X is not disclosed to clients. The obligation to seek best price and execution is always required unless clients provide a written statement that the member is not to seek best price and execution and that they are aware of the impact of this decision on their accounts.

A member selects an outside advisor for international equities based solely on the fact that the selected firm has the lowest fees for managing the international equities accounts.

This is a violation of Standard V(A). The member must consider performance and service, not just fees, in selecting an outside advisor for client accounts.

In materials for prospective clients, a member uses performance figures for a large-cap growth composite she has created by choosing accounts that have done relatively well and including some accounts with significant mid-cap exposure.

This is a violation of the Standard as the member has attempted to mislead clients and has misrepresented her performance.

At a firm where individual portfolio managers have been responsible for security selection, a new policy is implemented whereby only stocks on an approved list constructed by the firm's senior managers may be purchased in client accounts. A member who is a portfolio manager does not inform his clients.

This is a violation of the Standard because it represents a significant change in the investment process.

A member uses a broker for client account trades that has relatively high prices and average research and execution. In return, the broker pays for the rent and other overhead expenses for the member's firm.

This is a violation of the Standard because the member used client brokerage for services that do not benefit clients and failed to get the best price and execution for the clients.

A member is delayed in allocating some trades to client accounts. When she allocates the trades, she puts some positions that have appreciated in a preferred client's account and puts trades that have not done as well in other client accounts.

This is a violation of the Standard. The member should have allocated the trades to specific accounts prior to the trades or should have allocated the trades proportionally to suitable accounts in a timely fashion.

A member responsible for compliance by the firm's trading desk notices a high level of trading activity in a stock that is not on the firm's recommended list. Most of this trading is being done by a trainee, and the member does not investigate this trading.

This is a violation of the member's responsibilities as supervisor. She must take steps to monitor the activities of traders in training, as well as investigate the reason for the heavy trading of the security by her firm's trading desk.

A member sends a report to his investment management firm's clients describing a strategy his firm offers in terms of the high returns it will generate in the event interest rate volatility decreases. The report does not provide details of the strategy because they are deemed proprietary. The report does not consider the possible returns if interest rate volatility actually increases.

This is a violation on two counts. The basic nature of the strategy must be disclosed, including the extent to which leverage is used to generate the high returns when volatility falls. Further, the report must include how the strategy will perform if volatility rises, as well as if it falls.

A member screens a database of investment managers and sends a recommendation of five of them to a client. Subsequently, but before the client receives the report, one of the recommended firms loses its head of research and several key portfolio managers. The member does not update her report.

This is a violation, as the member should have notified the client of the change in key personnel at the management firm.

Issuer-Paid Research

This type of research is fraught with potential conflicts. Analysts' compensation for preparing such research should be limited, and the preference is for a flat fee, without regard to conclusions or the report's recommendations.

A member changes his firm's performance attribution method to one he believes is more consistent with the strategies used by the firm's investment managers.

To avoid a violation of the Standard, the member must disclose this change to existing and new clients. He should explain the reasons for changing the method and report the managers' performance attribution using both the old and new methods so that clients may compare them.

A candidate reads about a research paper in a financial publication and includes the information in a research report, citing the original research report but not the financial publication.

To the extent that the candidate used information and interpretation from the financial publication without citing it, the candidate is in violation of the Standard. The candidate should either obtain the report and reference it directly or, if he relies solely on the financial publication, should cite both sources.

A member makes a presentation for an offering his firm is underwriting, using maximum production levels as his estimate in order to justify the price of the shares he is recommending for purchase.

Using the maximum possible production without acknowledging that this is not the expected level of production (or without presenting a range of possible outcomes and their relative probabilities) does not provide a reasonable basis for the purchase recommendation and is a violation of the Standard.

Hunter Weiss is a research analyst with Farmington Company, a broker and investment-banking firm. Farmington's merger and acquisition department has represented Vimco, a conglomerate, in all of its acquisitions for 20 years. From time to time, Farmington officers sit on the boards of directors of various Vimco subsidiaries. Weiss is writing a research report on Vimco.

Weiss must disclose in his research report Farmington's special relationship with Vimco. Broker-dealer management of and participation in public offerings must be disclosed in research reports. Because the position of underwriter to a company entails a special past and potential future relationship with a company that is the subject of investment advice, it threatens the independence and objectivity of the report writer and must be disclosed.

III(C) Suitability

When Members and Candidates are in an advisory relationship with a client, they must:Make a reasonable inquiry into a client's or prospective client's investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly.Determine that an investment is suitable to the client's financial situation and consistent with the client's written objectives, mandates, and constraints before making an investment recommendation or taking investment action.Judge the suitability of investments in the context of the client's total portfolio. When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make only investment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio.

III(D) Performance Presentation

When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.

Jessica McDowell, an investment advisor, suggests to Brian Crosby, a risk-averse client, that covered call options be used in his equity portfolio. The purpose would be to enhance Crosby's income and partially offset any untimely depreciation in value should the stock market or other circumstances affect his holdings unfavorably. McDowell educates Crosby about all possible outcomes, including the risk of incurring an added tax liability if a stock rises in price and is called away and, conversely, the risk of his holdings losing protection on the downside if prices drop sharply.

When determining suitability of an investment, the primary focus should be on the characteristics of the client's entire portfolio, the characteristics of single securities on an issue-by-issue basis. The basic characteristics of the entire portfolio will largely determine whether the investment recommendations are taking client factors into account. Therefore, the most important aspects of a particular investment are those that will affect the characteristics of the total portfolio. In this case, McDowell properly considers the investment in the context of the entire portfolio and thoroughly explains the investment to the client.

Geoff Whitman, a portfolio analyst for Adams Trust Company, manages the account of Carol Cochran, a client. Whitman is paid a salary by his employer, and Cochran pays the trust company a standard fee based on the market value of assets in her portfolio. Cochran proposes to Whitman that "any year that my portfolio achieves at least a 15% return before taxes, you and your wife can fly to Monaco at my expense and use my condominium during the third week of January." Whitman does not inform his employer of the arrangement and vacations in Monaco the following January as Cochran's guest.

Whitman violated Standard IV(B) by failing to inform his employer in writing of this supplemental, contingent compensation arrangement. The nature of the arrangement could have resulted in partiality to Cochran's account, which could have detracted from Whitman's performance with respect to other accounts he handles for Adams Trust. Whitman must obtain the consent of his employer to accept such a supplemental benefit.

Sarah Williamson, director of marketing for Country Technicians, Inc., is convinced that she has found the perfect formula for increasing Country Technician's income and diversifying its product base. Williamson plans to build on Country Technician's reputation as a leading money manager by marketing an exclusive and expensive investment advice letter to high-net-worth individuals. One hitch in the plan is the complexity of Country Technician's investment system—a combination of technical trading rules (based on historical price and volume fluctuations) and portfolio-construction rules designed to minimize risk. To simplify the newsletter, she decides to include only each week's top five buy and sell recommendations and leave out details of the valuation models and the portfolio-structuring scheme.

Williamson's plans for the newsletter violate Standard V(B). Williamson need not describe the investment system in detail in order to implement the advice effectively, but she must inform clients of Country Technician's basic process and logic. Without understanding the basis for a recommendation, clients cannot possibly understand its limitations or its inherent risks.

Members responsible for selecting outside managers should not

accept gifts, entertainment, or travel that might be perceived as impairing their objectivity.

Firms can avoid misrepresentation by providing employees who deal with clients or prospects with a written list of the firm's available services and a description of the firm's qualifications. Employee qualifications should also be accurately presented. To avoid plagiarism,

maintain records of all materials used to generate reports or other firm products and properly cite sources (quotes and summaries) in work products. Information from recognized financial and statistical reporting services need not be cited. Members should encourage their firms to establish procedures for verifying marketing claims of third parties whose information the firm provides to clients.

Performance analysts may experience pressure from investment managers

who have produced poor results or acted outside their mandate. Members and candidates who analyze performance must not let such influences affect their analysis.