1. IV(A.1) Recommendations and representations should have a reasonable basis
Required conduct
(1) Be diligent and thorough in investigations, when making recommendations, or when undertaking investment actions for others.
(2) Have a reasonable and adequate basis, supported by appropriate research, for recommendations and investments.
(3) Avoid material misrepresentation in any research report or investment recommendations.
(4) Maintain files and records to support the reasonableness of recommendations and investment decisions.
Members must make reasonable and diligent efforts to ensure any research report is accurate. Members should not use any information from a source he or she has reason to suspect is not accurate.
2. IV(A.2) research Reports
Required conduct
(1) Include all relevant factors in research reports.
(2) Distinguish between facts and opinions in research reports.
(3) Indicate the basic characteristics of the investment for any research reports containing an investment recommendation.
Research report encompasses all means of communicating an investment recommendation. These includes:
(1) Traditional research reports on the market, a class of investments, asset allocation, or a specific secuirity in paper form.
(2) IN-person or telephone recommendations.
(3) Media broadcasts
(4) Computer transmissions (e.g., the Internet)
Capsule recommendations (such as a “buy” or “sell” lists) must be supported by background reports or data that are available to interested members.
(5) A supervisory analyst should check research reports to assure compliance with these standards.
3. IV(A.3) Maintaining Independence 0and Objectivity
Required conduct
Every member should avoid situations that might cause, or be perceived to cause, a loss of independence and objectivity in recommending investments or taking investment action.
Analysts and portfolio managers violate this standard if they:
(1) Take an allocation of shares in oversubscribed IPOs for their personal account.
(2) Accept expensive gifts or entertainment from corporations (corporations that are not clients)
(3) Allow their firm’s business relationships with a company to affect a research review or investment decision.
(4) Allow compensation schedules to affect judgment.
4. IV(B.1) fiduciary Duties
The member has the responsibility to understand and comply with his or her fiduciary duties. This standard relates primarily to those who have discretionary authority in managing clients’ assets, or have other relationships of special trust. It is especially important in cases of managing trust and pension funds.
To satisfy this standard, members have an affirmative obligation to determine what their fiduciary duties are:
a. Required Conduct of Fiduciaries in General
(1) The duties of fiduciaries are to be found in :
(2) The general duties of fiduciaries are:
(a) Loyalty
(b) Care
(c) Prudence
(d) Impartiality
(e) Discretion
(3) Members with control over client assets should
b. Required Conduct of Trustees
(1) the Prudent Man Rule requires that every investment undertaken for a trust, standing alone, must be made prudently, i.e., with the prime directive of preserving the value of the corpus of the trust and secondarily, providing a safe return on the capital invested.
More recently, states have moved towards a Prudent Investor rule.
(a) Under the Prudent Man Rule, certain asset classes might be interpreted to be inherently imprudent (e.g., options), whereas no asset class is considered inherently imprudent under the Prudent Investor Rule. The riskiness of assets must be considered within a portfolio context in P.I.R.
(b) Under the P.M.R., the standard of prudence is applied to each asset held in trust, standing alone. Under the P.I.R. the standard of prudence is applied to the overall portfolio. The prime directive is to achieve a return/risk objective that is reasonable, without exceeding a level of overall portfolio risk that an investment professional would deem suitable to the trust under the prevailing circumstances. Employing overly conservative strategies may be subjected to less criticism under the traditional P.M.R. Under the P.I.R., overly conservative investment strategies may not be justified if they result in generating significantly inferior returns.
(c) The P.I.R. requires that trust investments be reasonably diversified.
(d) Under Traditional P.M.R. trustees were usually not permitted to delegate the authority to make investments. Under P.I.R. trustees may delegate the authority to make investment decisions to qualified investment managers, as long as those managers are selected prudently.
(e) Paying above average commissions for research or other services provided by a broker is permitted if the fiduciary comes to a bona fide conclusion that the services rendered are worth the extra cost.
(f) The modern P.I.R. standards generally impose a professional standard of care and prudence (Prudent Expert Standard).
(g) Other fiduciary duties that must be followed under U.S. law are:
(1) All of the beneficiaries of a trust should be treated equally.
(2) Best efforts must be applied to maximizing after-tax returns.
(3) Legal requirements, such as the filing of periodic financial statements and tax returns required by law, must be known and satisfied.
c. Required conduct for Managing Private Retirement Plans Governed by ERISA
Under ERISA, fiduciaries of retirement plans have the following affirmative duties:
(1) Loyalty: Loyalty, under ERISA, require them to act solely in the interest of the plan participants and beneficiaries with the exclusive purpose of: (a) Providing plan benefits. (b) Defraying reasonable plan expenses.
(2) Care: Care requires them to use all of the skills of a professional in carrying out their responsibilities. Thus ERISA applies a Prudent Expert standard.
(3) Prudence: Prudence requires them to take no risks that are likely to endanger the ability of the plan to provide promised benefits and earn a reasonable return commensurate with the risk taken.
(4) Know and Carry out their Responsibilities as Defined by the Plan’s Trust Documents
(5) ERISA prohibits fiduciaries from
(a) Self-Dealing
(b) Permitting conflicts of interest
(c) Receiving “Kickbacks”
(d) Dealing with Parties in Interest.
d. Legal Rights and Beneficiaries and participants under ERISA
Under ERISA, plan participants and beneficiaries who believe that their retirement trust is not being operated solely for their best interests may bring civil action again the plan fiduciaries. If victorious, they have the right to recover both the losses the court decides they have suffered as a result of breaches of duty by the plan fiduciaries and their attorney(s) fees.
e. Required Conduct for Fiduciaries Associated with Public Pension Plans
f. Required Conduct for Fiduciaries of Charitable Organizations and Endowments
(1) In the U.S. fiduciary duties of fiduciaries of charitable organizations and endowments are primarily contained in the Uniform Management of Institutional Funds Act (UMIFA), which embodies most of the same standards as those found in the Prudent Man and Prudent Investor Standards.
UMIFA does impose some unique affirmative duties on institutional fiduciaries. These are:
(a) Fiduciaries must formulate policies for the investment program of the organization’s assets. Such policies should be based on:
(1) the amount of funds needed on a long- and short term basis, to carry out the work of the institution.
(2) The current and probable future resources of the organization.
(3) The expected return on its assets.
(4) Probable future economic trends.
(b) to follow spending and investment policies adopted by the institution.
g. Required Conduct for Money Managers
(1) Money managers can look to the Investment Advisors Act of 1940 for some behavioral guidance. This act prohibits investment advisors from
(2) Some general principles that should guide a money manager are
(a) be honest and loyal to the client, acting always in the clients best interest.
(b) Use care and independent professional judgment in investment matters.
(c) Have a reasonable basis for investment decisions.
(d) Avoid conflicts of interest or make full disclosure of facts and circumstances that could be construed as a conflict of interest.
(e) Make sure investment actions and advice are suitable for the client.
(f) Obtain the best executions’ on trades for clients. Make sure that commissions and other expenses are reasonable for the service rendered.
(g) Avoid misrepresentations of all kinds, particularly with respect to performance presentations.
h. Required Conduct for Brokers and Dealers
In particular, brokers and dealers:
(1) Should not churn customer accounts.
(2) Should not accept funds when their firms are insolvent
(3) Should not engage in fraudulent, deceptive or manipulative practices.
(4) Should not exploit their customers’ trust or ignorance
(5) Should deal fairly with their clients.
i. Required Conduct for Security Analysts
Research analyst must:
(1) Do the best job they can for their employers and their employers’ clients.
(2) Se independent judgment.
(3) Have an adequate basis for their recommendations
(4) Deal fairly with clients and fellow professionals.
j. Other Issues Regarding the Required Conduct of Fiduciaries
(1) Social Investing: Social investing is permitted under most fiduciary laws and guidelines only if:
(a) The portfolio’s return and risk are not compromised.
(b) Diversification is still adequate
(c) Excessive costs are not incurred.
(2) Relationship Investing
(3) Proxy voting
The U.S. Dept of Labor has set forth specific regulations for proxy voting of shares held by qualified retirement plans governed by ERISA.
(a) The investment manager has the fiduciary responsibility of voting proxies arising form the retirement plans under his or her control, unless the plan documents designate some other person)s) as the responsible Party(s)
(4) Soft Dollars
When an investment manager pays for goods or services that benefit the manager by channeling security transactions through specific brokers who are paid commissions for those transactions, the funds paid are called “soft dollars.” When managers use their own funds to pay for goods and services, such payments are called “hard dollars.”
(a) The primary rule is that brokerage belongs to the client. Fiduciaries must not use client funds for their own benefit. However transactions involving soft dollars are permitted under the following circumstances:
(1) the goods or services purchased help the manager make a better investment decision.
(b) ERISA imposes a sole benefit test of loyalty for the management of pension plans.
5. IV(B.2) Portfolio Investment Recommendations and Actions
a. required conduct
Members shall:
(1) Inquire as to client’s financial situation, investment experience, and investment objectives before any investment recommendations or action are made. Update this information at least once a year.
(2) Before making a recommendation or taking investment action, determine the appropriateness and suitability of the action by considering:
(a) The client’s needs and circumstances
(b) The basic characteristics of the investment
(c) The client’s investment experience and objectives.
(3) Distiniguish between facts and opinions in presenting investment recommendations.
(4) Disclose to clients and prospects the basic format and general principles by which securities are selected and portfolios are constructed. Promptly disclose to clients and prospects any changes that might significantly affect this process.
(5) Obtain written authorization from the client to make changes.
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