Standard I (B) Professionalism - Independence and Objectivity

The members and candidates must act with independence and objectivity while performing their professional activities. They should not take any gifts or benefits of any kind that could hamper their independence and objectivity in performing their duties.

This standard tries to maintain the integrity of the investment business. The investment analysts and portfolio managers are making recommendations about stocks, and buying stocks of companies in the larger interest of their clients. In such a situation, if an analyst is given hefty gifts (implicit or explicit), it may force him to recommend in the company’s favour, even though he may not have recommended their stock if he had acted objectively.

Guidance

• As long as the gift or the benefit doesn’t interfere with the analyst’s independence and objectivity, the gift/benefit is not in violation of the standards.
• Modest gifts are okay. The member should distinguish between gifts from clients and gifts from entities trying to influence their decisions.
• If a member accepts a gift from a client, he must disclose the gift to the employer.
• While maintaining investment banking relationships with the companies they follow, the members should not bow to any pressure to issue favourable research.
• For issuer-paid research, the compensation paid to the researcher should be limited and a flat fee structure is preferred, irrespective of the recommendations from the report.
• As far as possible, the members should pay for their own travel for attending events and tours that are sponsored by the company they are analyzing.

Examples

Suppose a financial analyst covers the research of a company’s stock in return of a future business relationship. As long as the analyst’s firm is not expected to recommend the stock and is just providing research coverage, it’s not a violation of the standard.

In another situation, an analyst in an investment firm receives free vacation passes from a company in return of recommending their stock. This will be a violation of the standard.

In another situation, Steve has accepted a one-year membership to a health club from a firm to which he directs trades. He does not notify his employer about this gift. This will be a violation of the Code and Standards as he must disclose the gift to the employer.