Standard I(C) Misrepresentation
Updated April 2024
CFA Institute
The Standard
Members and candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.
Guidance
Trust is the foundation of the investment profession. Investors must be able to rely on the statements and information provided to them by those with whom the investors have trusted their financial well-being. Honest communication is critical for capital markets to work efficiently. Investment professionals who make false or misleading statements not only harm investors but also reduce the level of investor confidence in the investment profession and threaten the integrity of capital markets as a whole.
Members and candidates must not misrepresent any aspect of their professional activities or investment practice, including, but not limited to, their qualifications or credentials, the qualifications or services provided by their firm, their performance record and the record of their firm, and the characteristics of an investment. Any misrepresentation made by a member or candidate relating to the member’s or candidate’s professional activities is a breach of this standard.
When communicating information about their professional activities, members and candidates must provide information and make disclosures that are accurate, timely, complete, and in plain language. The term “plain language” means language that is clear and concise, uses common words, and is not dominated by technical or obscure wording or jargon. Accurate language is truthful, free from error, and precise and is not incomplete, vague, or misleading. Timely communication means the statements are made or given with sufficient notice to allow those receiving the material to act on the information. Complete communications contain all facts and elements necessary and customary to convey the information.
A misrepresentation is any untrue statement or omission of a fact or any statement that is otherwise false or misleading. A member or candidate must not knowingly omit or misrepresent information or give a false impression about their professional activities in any communication, whether in written, electronic, or verbal form. In this context, “knowingly” means that the member or candidate either knows or should have known that the misrepresentation was being made or that omitted information could alter the investment decision-making process.
Written materials include but are not limited to research reports, underwriting documents, company financial reports, advertising material, market letters, newspaper articles, and books. Electronic communications include emails, texts, and information posted on the internet. Members and candidates should regularly monitor materials posted on websites and social media to ensure the information complies with this standard.
Use of Third-Party Information
Members and candidates rely on models to identify new investment opportunities, develop investment vehicles, and produce investment recommendations and ratings. Although not every model can test for every factor or outcome, members and candidates must ensure that their analyses incorporate a broad range of assumptions—from very positive scenarios to extremely negative scenarios. The omission from the analysis of potentially negative outcomes or of levels of risk outside the norm may misrepresent the true economic value of the investment.
Members and candidates must exercise care and diligence when incorporating third-party information into their own work. Misrepresentations that result from using materials produced by outside parties become the responsibility of members and candidates when they incorporate that material into or make it part of their work. When providing information to clients from third parties, members and candidates share a responsibility for the accuracy of the marketing and distribution materials that pertain to the third party’s capabilities, services, and products.
Members and candidates must disclose their intended use of external third parties and must not represent the work of others as their own. Although the level of involvement of external third parties may change over time, appropriate disclosures by members and candidates are important to avoiding misrepresentations.
Investment Performance
Most investments contain some element of risk that makes their return inherently unpredictable. Standard I(C) prohibits members and candidates from stating or implying that clients will obtain or achieve a rate of return that was generated in the past. Guaranteeing either a particular rate of return or preservation of investment capital (e.g., “I can guarantee that you will earn 8% on equities this year” or “I can guarantee that you will not lose money on this investment”) is also misleading to investors and a violation of this standard. Standard I(C) does not prohibit members and candidates from providing clients with information on investment products that have guarantees built into the structure of the product itself or for which an institution has agreed to cover any losses.
The performance benchmark selection process is another area where misrepresentations may occur. Members and candidates may misrepresent the success of their performance record through presenting benchmarks that are not comparable to their strategies. Further, clients can be misled if the benchmark’s results are not reported on a basis comparable to that of the fund’s or client’s results. Best practice is selecting the most appropriate available benchmark from a universe of available options. The transparent presentation of appropriate performance benchmarks is an important aspect in providing clients with information that is useful in making investment decisions.
However, Standard I(C) does not require that a benchmark always be provided in order to comply. Some investment strategies may not lend themselves to displaying an appropriate benchmark because of the complexity or diversity of the investments included. Furthermore, some investment strategies may use reference indexes that do not reflect the opportunity set of the invested assets—for example, a hedge fund comparing its performance with a “cash plus” basis. When such a benchmark is used, members and candidates must make reasonable efforts to ensure that they disclose the reasons behind the use of this reference index to avoid misrepresentations of their performance. Members and candidates should discuss with clients on a continuous basis the appropriate benchmark to be used for performance evaluations and any related fee calculations.
Reporting misrepresentations may also occur when valuations for illiquid or nontraded securities are available from more than one source. When different options are available, members and candidates may be tempted to switch providers to obtain higher security valuations. The process of shopping for values may misrepresent a security’s worth, lead to misinformed decisions to sell or hold an investment, and result in overcharging clients for advisory fees.
Members and candidates must take reasonable steps to provide accurate and reliable security pricing information to clients on a consistent basis. Changing pricing providers must not be based solely on the justification that the new provider reports a higher current value of a security. Consistency in the valuation process will improve the value of the security pricing information. Clients will likely have additional confidence that they were able to make an informed decision about continuing to hold these securities in their portfolios.
Social Media
Members and candidates must ensure that all communications on social media regarding their professional activities adhere to the requirements of the Code and Standards. The perceived anonymity granted through these platforms may entice individuals to misrepresent their qualifications or abilities or those of their employer. Actions undertaken through social media that knowingly misrepresent investment recommendations or professional activities are violations of Standard I(C).
Omissions
The omission of a fact or outcome can be misleading, especially in the use of models and technical analysis processes. Members and candidates may rely on such models and processes to look for new investment opportunities, to develop investment vehicles, and to produce investment recommendations and ratings. When inputs are knowingly omitted, the resulting outcomes may provide misleading information to those who rely on information for making investment decisions. Additionally, the outcomes from models must not be presented as fact, because they represent the expected results based on the inputs and analysis process incorporated.
Omissions in the performance measurement and attribution process can also misrepresent a manager’s performance and skill. Members and candidates must not misrepresent performance history by engaging in practices that distort past investment performance (e.g., cherry-picking the highest-performing accounts and presenting them as representative of a strategy).
Plagiarism
Standard I(C) also prohibits plagiarism in the preparation of material for distribution to employers, associates, clients, prospects, or the general public. Plagiarism is defined as copying or using in substantially the same form materials prepared by others without acknowledging the source of the material or identifying the author and publisher of such material. Members and candidates must not copy (or represent as their own) original ideas or material without permission and must acknowledge and identify the source of ideas or material that is not their own.
The investment profession uses a myriad of financial, economic, and statistical data in the investment decision-making process. Through various publications and presentations, the investment professional is constantly exposed to the work of others and to the temptation to use that work without proper acknowledgment.
Misrepresentation through plagiarism in investment management can take various forms. The simplest and most flagrant example is to take a research report or study done by another firm or person, change the names, and release the material as one’s own original analysis. This action is a clear violation of Standard I(C). Other practices include (1) using excerpts from articles or reports prepared by others either verbatim or with only slight changes in wording without acknowledgment, (2) citing specific quotations as attributable to “leading analysts” and “investment experts” without naming the specific references, (3) presenting statistical estimates of forecasts prepared by others and identifying the sources but without including the qualifying statements or caveats that may have been used, (4) using charts and graphs without stating their sources, and (5) copying proprietary spreadsheets or algorithms without seeking the cooperation or authorization of their creators.
In the case of distributing third-party, outsourced research, members and candidates may use and distribute these reports as long as they do not represent themselves as the authors of such reports. Indeed, the member or candidate may add value for the client by sifting through research and repackaging it for clients. In such cases, clients should be fully informed that they are paying for the ability of the member or candidate to find the best research from a wide variety of sources. Members and candidates must not misrepresent their abilities, the extent of their expertise, or the extent of their work in a way that would mislead their clients or prospective clients. Members and candidates should disclose whether the research being presented to clients comes from another source, from either within or outside the member’s or candidate’s firm. Such disclosure allows clients to understand who has the expertise behind the report or whether the work is being done by the analyst, other members of the firm, or an outside party.
The preparation of research reports based on multiple sources of information without acknowledging the sources is a violation of this standard. Examples of information from such sources include ideas, statistical compilations, and forecasts combined to give the appearance of original work. Although there is no monopoly on ideas, members and candidates must give credit where it is clearly due. Sources must be revealed to bring the responsibility directly back to the author of the report or the firm involved.
In some situations, however, members or candidates may use research conducted or models developed by others within the same firm without committing a violation. The most common example relates to the situation in which one (or more) of the original analysts is no longer with the firm. Research and models developed while employed by a firm are the property of the firm. The firm retains the right to continue using the work completed after a member or candidate has left the organization. The firm may issue future reports without providing attribution to the prior analysts. A member or candidate must not, however, reissue a previously released report solely under his or her name.
Compliance Practices
Description of Qualifications and Services
Members and candidates can prevent unintentional misrepresentations of the qualifications or services they or their firms provide if each member and candidate understands the limit of the firm’s or individual’s capabilities and the need to be accurate and complete in presentations.
Whether or not their employer provides guidance, members and candidates must make certain that they understand the services the firm performs and its qualifications and disclose that information without misrepresentation. Each member and candidate should prepare a summary of his or her own qualifications and experience and a list of the services the member or candidate is capable of performing.
Monitor Online Content
Members and candidates should regularly monitor materials and content posted online or through social media to ensure that they contain current information. Members and candidates who publish content through websites should also ensure that all reasonable precautions have been taken to protect the website’s integrity, confidentiality, and security and that the website does not misrepresent any information and provides full disclosure.
Avoiding Plagiarism
To avoid plagiarism in preparing research reports or conclusions of analysis, members and candidates should take the following steps:
- Maintain copies: Keep copies of all research reports, articles containing research ideas, material with new statistical methodologies, and other materials that were relied on in preparing the research report.
- Attribute quotations: Attribute to their sources any direct quotations, including projections, tables, statistics, model/product ideas, and new methodologies prepared by persons other than recognized financial and statistical reporting services or similar sources.
- Attribute summaries: Attribute to their sources any paraphrases or summaries of material prepared by others.
Application of the Standard
- Example 1 (Representing the Firm’s Abilities)
- Example 2 (Disclosure of Issuer-Paid Research)
- Example 3 (Correction of Unintentional Errors)
- Example 4 (Not Correcting Known Errors)
- Example 5 (Plagiarism)
- Example 6 (Misrepresentation of Information)
- Example 7 (Potential Information Misrepresentation)
- Example 8 (Plagiarism)
- Example 9 (Plagiarism)
- Example 10 (Plagiarism)
- Example 11 (Plagiarism)
- Example 12 (Misrepresentation of Information)
- Example 13 (Misrepresentation of Information)
- Example 14 (Misrepresenting Composite Construction)
- Example 15 (Presenting Out-of-Date Information)
- Example 16 (Overstating ESG Claims)
- Example 17 (Misleading Description of Services)
- Example 18 (Inaccurate, Dated Performance History)
- Example 19 (Insufficient, Omitted Information)
- Example 20 (Misleading Description of Service, Misrepresenting Knowledge)