Standard I(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.

Guidance

External parties may offer incentives to influence the investment process. Such incentives could include gifts, tickets, or job referrals. Standard I(B) allows members to receive small gifts but bans IPO allocations and are encouraged to reject any gift that could be expected to threaten their independence and objectivity. Gifts from clients are an exception, because there is already a compensation arrangement established, but members should notify their employer before accepting such gifts.

Threats to independence and objectivity may include:

• Buy-side clients whose positions in a security could lead to losses following a rating change
• Outside managers and custodians who may wish to be hired
• Investment banking relationships who desire a favorable rating for deals they underwrite
• Public companies that desire a favorable rating on their securities
• Issuers paying for security coverage

Compliance

Members and their firms should ensure that their systems and compensation arrangements permit independence and objectivity for analysts. If a firm is unwilling to produce adverse opinions regarding corporate clients, these clients should be put on a restricted list, and only factual information about them should be distributed.

When visiting companies, members should pay for their own travel and accommodations. Corporate aircraft should not be used unless commercial travel is unavailable.

Limits should be set on gifts and business-related entertainment. Rules should be established regarding employee participation in IPOs and private security placements.

Firms should establish a policy to ensure independence, and review it frequently. A compliance officer should oversee all issues.

Application

The Standards of Practice Handbook provides several examples to help members understand how Standard I(B) is applied.

In one example, analysts accept travel on chartered flights and accommodations at reasonably priced hotels when visiting remote mines. The chartered flights are acceptable because commercial travel to the locations is unavailable. The accommodations may be accepted because they are reasonable and business-related, but best practice would dictate the analyst paying for their own accommodations.

An investment banking analyst can promise that a client company will receive research coverage, but not that it will be favorable.

A research analyst cannot allow potential investment banking business, pressure from the trading desk, or retaliation from companies receiving unfavorable ratings to influence his rating on a company’s securities.

Gifts such as resort stays, hard-to-get tickets, etc. may be acceptable from clients if disclosed. However, they should not be accepted from other entities because they could be seen as compromising the analyst’s independence and objectivity.

Issuer-paid research may be provided on a fee-only basis. There should be no compensation tied to the performance of the securities in question.