STUDY SESSION 1 ETHICAL AND PROFESSIONAL STANDARDS READING ASSIGNMENTS Reading 1 Code of Ethics and Standards of Professional Conduct

Reading 2 Guidance for Standards I VII Reading 3 Introduction to the Global Investment Performance Standards (GIPS) Reading 4 Global Investment Performance Standards (GIPS) I Introduction II Provisions of the Global Investment Performance Standards II ! "undamentals of Com#liance $he readin%s in this stud& session #resent a frame'or( for ethical conduct in the investment #rofession b& focusin% on the C") Institute Code of Ethics and Standards of Professional Conduct as 'ell as the Global Investment Performance Standards (GIPS)* $he #rinci#les and %uidance #resented in the C") Institute Standards of Practice Handbook (S+P,) form the basis for the C") Institute self re%ulator& #ro%ram to maintain the hi%hest #rofessional standards amon% investment #ractitioners* Guidance in the S+P, addresses the #ractical a##lication of the Code of Ethics and Standards of Professional Conduct* $he %uidance revie's the #ur#ose and sco#e of each standard- #resents recommended #rocedures for com#liance- and #rovides e.am#les of the standard in #ractice* $he Global Investment Performance Standards (GIPS) facilitate efficient com#arison of investment #erformance across investment mana%ers and countr& borders b& #rescribin% methodolo%& and standards that are consistent 'ith a clear and honest #resentation of returns* ,avin% a %lobal standard for re#ortin% investment #erformance minimi/es the #otential for ambi%uous or misleadin% #resentations* 3 4 Stud& Session 0 LEARNING OUTCOMES Reading 1: Code o E!"i#$ and S!anda%d$ o P%o e$$iona& Cond'#! $he candidate should be able to1 a( state the si. com#onents of the Code of Ethics and the seven Standards of Professional Conduct2 )( e.#lain the ethical res#onsibilities re3uired b& the Code and Standards- includin% the multi#le sub sections of each Standard* Reading 2: *G'idan#e+ o% S!anda%d$ I , -II $he candidate should be able to1 a( demonstrate a thorou%h (no'led%e of the Code of Ethics and Standards of Professional Conduct b& a##l&in% the Code and Standards to s#ecific situations #resentin% multi#le issues of 3uestionable #rofessional conduct2 )( recommend #ractices and #rocedures desi%ned to #revent violations of the Code of Ethics and Standards of Professional Conduct* Reading 3: In!%od'#!ion !o !"e G&o)a& In.e$!/en! Pe% o%/an#e S!anda%d$ 0GIPS12 and Reading 4: G&o)a& In.e$!/en! Pe% o%/an#e S!anda%d$ 0GIPS12

$he candidate should be able to1 a( e.#lain 'h& the GIPS standards 'ere created- 'hat #arties the GIPS standards a##l& to and 'ho is served b& the standards2 )( describe the (e& characteristics of the GIPS standards and the fundamentals of com#liance2 #( e.#lain the construction and #ur#ose of com#osites in #erformance re#ortin%2 d( describe the sco#e of the GIPS standards 'ith res#ect to an investment firm4s definition and historical #erformance record2 e( e.#lain ho' the GIPS standards are im#lemented in countries 'ith e.istin% standards for #erformance re#ortin% and describe the a##ro#riate res#onse 'hen the GIPS standards and local re%ulations are in conflict2 ( name and characteri/e the ei%ht ma5or sections of the GIPS standards2 g( e.#lain the re3uirements for verification of com#liance 'ith GIPS standards* 3 PREFACE $he #ur#ose of the Code and Standards is to #rovide u# to date %uidance to the #eo#le 'ho %ra##le 'ith real ethical #roblems in the in.e$!/en! #rofession'here theor& meets #ractice and ethics %ain meanin%* $he Code and Standards are intended for a diverse and %lobal audience1 C") Institute members navi%atin% ambi%uous ethical situations2 su#ervisors and subordinates determinin% the nature of their res#onsibilities to one another- to clients and #otential clientsand to the securities mar(ets2 and candidates #re#arin% for the Chartered "inancial )nal&st e.aminations* E!"i#$ in !"e In.e$!/en! P%o e$$ion Ethical #ractices b& investment #rofessionals benefit all mar(et #artici#ants and sta(eholders and lead to increased investor confidence in %lobal ca#ital mar(ets* Clients are reassured that the investment #rofessionals the& hire have the clients4 best interest in mind and investment #rofessionals benefit from the re#utational ca#ital such inte%rit& %enerates* Ethical #ractices instill a #ublic trust in the fairness of mar(ets- allo'in% them to function efficientl&* In short- %ood ethics is a fundamental re3uirement of the investment #rofession* )n im#ortant %oal of C") Institute is to ensure that the or%ani/ation and its members develo#- #romote- and follo' the hi%hest ethical standards in the investment industr&* $he C") Institute Code of Ethics and Standards of Professional LEARNING OUTCOMES $he candidate should be able to1 a( state the si. com#onents of the Code of Ethics and the seven Standards of Professional Conduct2 )( e.#lain the ethical res#onsibilities re3uired b& the Code and Standards- includin% the multi#le sub sections of each Standard* READING 1 CODE OF ETHICS AND STANDARDS OF PROFESSIONAL CONDUCT Co#&ri%ht 6 7!!8- C") Institute* 9e#rinted 'ith #ermission* Conduct (Code and Standards) are the foundation su##ortin% the or%ani/ation4s 3uest to advance the interests of the %lobal investment communit& b& establishin% and maintainin% the hi%hest standards of #rofessional e.cellence and inte%rit&* $he Code of Ethics is a set of #rinci#les that define the #rofessional conduct C")

Institute e.#ects from its members and candidates in the C") Pro%ram* $he Code 'or(s in tandem 'ith the Standards of Professional Conduct 'hich outlines conduct that constitutes fair and ethical business #ractices* "or more than :! &ears- C") Institute members and candidates in the C") Pro%ram have been re3uired to abide b& the or%ani/ation4s Code and Standards* Periodicall&- C") Institute has revised and u#dated its Code and Standards to ensure that the& remain relevant to the chan%in% nature of the investment #rofession and re#resentative of the hi%hest standard of #rofessional conduct* )s the investment #rofession evolves- the list of ethical issues len%thens- from #ersonal investin% and soft commissions to misleadin% advice and the need to se#arate ob5ective anal&sis from com#an& #romotion* ;e' challen%es are al'a&s emer%in%* )s economies become more so#histicated and interconnected- ne' investment o##ortunities are constantl& bein% created- alon% 'ith ne' financial instruments to ma(e the most of those o##ortunities for clients* )lthou%h the investment 'orld has become a far more com#le. #lace since this ,andboo( 'as first #ublished- distin%uishin% ri%ht from 'ron% remains the #aramount #rinci#le of the Code of Ethics and Standards of Professional Conduct* E.o&'!ion o !"e CFA In$!i!'!e Code o E!"i#$ and S!anda%d$ o P%o e$$iona& Cond'#! Generall& the chan%es to the Code and Standards- over the &ears- have been minor* C") Institute revised the lan%ua%e of the Standards and occasionall& tac(ed on a ne' standard addressin% #rominent issues of the da&* "or instancein 0<<7- C") Institute added the standard addressin% #erformance #resentation to the e.istin% list of standards* $he last ma5or chan%es came in 0<<= and 'ere mostl& structural in nature* C") Institute or%ani/ed them to coincide 'ith the constituencies of investment #rofessionals>clients- em#lo&ers- investors- the #ublic- and the #rofession* )fter a lon% revie' #rocess- several revisions- solicitation and careful consideration of #ublic comment from its members- candidates- and investment #rofessionalsC") Institute has ado#ted the ne' and revised version of the Code and Standards included in this boo(* $he chan%es include a reor%ani/ation of the standards- ado#tion of ne' standards- and revisions to e.istin% standards* C") Institute believes that the revisions clarif& the re3uirements of the Code and Standards and effectivel& conve& to its %lobal membershi# 'hat constitutes best #ractice in a number of areas relatin% to the investment #rofession* $hese ne' standards are effective 0 ?anuar& 7!!=* C") Institute has #ublished the <th edition of the Standards of Practice Handbook to offer %uidanceinter#retation- a##lications- and recommended #rocedures for com#liance for the ne' standards* S'//a%4 o C"ange$ Reorganization of Standards* $he or%ani/ation of #ast versions of the Standards 'ere based on the C") Institute member or candidate4s res#onsibilities to various constituencies1 the #ublic- the client- the em#lo&er- and the #rofession* $his led to the re#etition of conce#ts in an attem#t to fit broad substantive ideas into s#ecific cate%ories even thou%h those ideas have %eneral a##lication* "or e.am 5 9eadin% 0 @ Code of Ethics and Standards of Professional Conduct 6EGINS OPTIONAL

SEGMENT #le- disclosure of conflicts of interest 'as addressed in t'o se#arate standardsone dealin% 'ith disclosure of conflicts to em#lo&ers- the other dealin% 'ith disclosure of conflicts to clients* )lso- misre#resentation 'as addressed in several standards relatin% to investment recommendations- #erformance and credentials* Aulti#le references to similar ideas detracted from clarit& and com#rehension of the ethical conce#ts contained in the Code and Standards* $he revised Standards are or%ani/ed b& to#ic to streamline the structure and im#rove com#rehension* Instead of five standards that discuss member and candidate conduct as it relates to various %rou#s- the ne' Standards are or%ani/ed into seven %eneral to#ics1 I* Professionalism II* Inte%rit& of Ca#ital Aar(ets III* Buties to Clients IV* Buties to Em#lo&ers V* Investment )nal&sis- 9ecommendations- and )ction VI* Conflicts of Interest VII* 9es#onsibilities as C") Institute Aembers or C") Candidates Revising Current Standards. C") Institute has e.#anded the Standards (e*%*- misre#resentationdut& to em#lo&er- suitabilit&- dut& of lo&alt& to clients- disclosure of conflicts- and material non#ublic information) to better address the state of the investment #rofession and establish clear best #ractices in these areas* Clarifying Requirements. In some instances- the %uidance in #rior versions of the ,andboo( included re3uirements 'ith 'hich all members and candidates had to com#l&- even thou%h this conduct 'as not s#ecificall& set forth in the Standards themselves* "or e.am#le- the #rior %uidance #rohibited acce#tance of %ifts over a s#ecific dollar amount- even thou%h the s#ecific #rohibition 'as not found in the Standards* C") Institute has eliminated or incor#orated these re3uirements into the ne' Standards as a##ro#riate so that members and candidates are clearl& on notice about 'hat conduct the Code and Standards re3uires or #rohibits* $he %uidance included in the <th edition of the ,andboo( e.#ands on the re3uirements set forth in the Code and Standards and does not introduce ne' re3uirements* New Standards. C") Institute added standards relatin% to mar(et mani#ulation and record retention to better address the state of the investment #rofession and establish clear best #ractices in these areas* Eliminating t e Requirement to !nform Em"loyers of t e Code and Standards* Previousl& the Standards of Professional Conduct included a re3uirement that members and candidates notif& their em#lo&er of their res#onsibilit& to abide b& the Code and Standards* )lthou%h it is in the member or candidate4s best interest to notif& their em#lo&er- and thereb& #otentiall& avoid bein% #laced in a com#romisin% #osition- C") Institute believes that notification $"o'&d be a recommendation rather than a re3uirement in the Standards* Such a recommendation is included in the Preamble to the Code of Ethics* #aintaining Relevance to a $lobal #embers i"* In some areas (e*%*- use of material non#ublic in o%/a!ion and id'#ia%4 dut&) the #rior versions of the Code and Standards 'ere based on C*S* la' and %eg'&a!ion and ma& not have reflected best #ractice in the %lobal investment industr&* $herefore- C") Institute has

revised the Standards to ma(e them less C*S* centric to maintain the hi%hest ethical standard on a %lobal basis* %e&t Revisions. )s the investment industr& and- as a result- C") Institute membershi# has become more %lobal- it is critical for the Code and Standards to use 7 Preface OPTIONAL SEGMENT lan%ua%e that- to the e.tent #ossible- can be easil& understood and translated into different lan%ua%es* $herefore- in some instances C") Institute has eliminatedmodified- or added lan%ua%e for clarit&- even thou%h it is not the intent to chan%e the meanin% of a #articular #rovision* Chan%es to the Code and Standards have far reachin% im#lications for C") Institute membershi#- the C") Pro%ram- and the investment industr& as a 'hole* Cnli(e other voluntar& ethical standards #romul%ated b& the or%ani/ation throu%h the C") Centre for "inancial Aar(et Inte%rit& (e*%*- the GIPS standardsSoft Bollar Standards- $rade Aana%ement Guidelines- 9esearch +b5ectivit& Standards- Dest Practice Guidelines Governin% )nal&st and Cor#orate Issuer 9elations- )sset Aana%er Code of Professional Conduct)- members and C") Candidates are re3uired to adhere to the Code and Standards* In addition- the Code and Standards are increasin%l& bein% ado#ted- in 'hole or in #art- b& firms and re%ulator& authorities* $heir relevance %oes 'ell be&ond C") Institute members and C") candidates* It is im#erative that the Code and Standards be u#dated if the& are to be effective and re#resent the hi%hest ethical standards in the %lobal investment industr&* C") Institute stron%l& believes that the revisions and reor%ani/ation of the Code and Standards are not underta(en for cosmetic chan%e but add value b& addressin% le%itimate concerns and im#rovin% com#rehension* S!anda%d$ o P%a#!i#e Hand)oo8 $he #eriodic revisions to the Code and Standards have come in con5unction 'ith the u#date of the Standards of Practice Handbook* $he ,andboo( is the fundamental element of the ethics education effort of C") Institute and the #rimar& resource for %uidance in inter#retin% and im#lementin% the Code and Standards* $he ,andboo( see(s to educate members and candidates on ho' to a##l& the Code and Standards to their #rofessional lives and thereb& benefit their clients- em#lo&ers- and the investin% #ublic in %eneral* $he ,andboo( e.#lains the #ur#ose of the Standards and ho' the& a##l& in a variet& of situations* $he %uidance discusses and am#lifies each Standard and su%%ests #rocedures to #revent violations* E.am#les in the )##lication of the Standard section are meant to illustrate ho' the Standard a##lies to h&#othetical factual situations* $he names contained in the e.am#les are fictional and are not meant to refer to an& actual #erson or entit&* Cnless other'ise stated- individuals in each e.am#le are C") Institute members andEor holders of the Chartered "inancial )nal&st desi%nation* Decause factual circumstances var& so 'idel& and often involve %ra& areasthe e.#lanator& material and e.am#les are not intended to be all inclusive* Aan& e.am#les set forth in the )##lication of the Standard section involve Standards that have le%al counter#arts2 members are stron%l& ur%ed to discuss 'ith their su#ervisors and le%al and com#liance de#artments the content of the Code and

Standards and the members4 %eneral obli%ations under the Code and Standards* C") Institute reco%ni/es that the #resence of an& set of ethical standards can create a false sense of securit& unless the documents are full& understoodenforced- and made a meanin%ful #art of ever&da& #rofessional activities* $he ,andboo( is intended to #rovide a useful frame of reference that lends substance to the understandin% of #rofessional behavior in the investment decision ma(in% #rocess* $his boo( cannot cover ever& contin%enc& or circumstanceand it does not attem#t to do so* $he develo#ment and inter#retation of the Code and Standards is an evolvin% #rocess and 'ill be sub5ect to continuin% refinement* 9 9eadin% 0 @ Code of Ethics and Standards of Professional Conduct ENDS OPTIONAL SEGMENT CFA In$!i!'!e P%o e$$iona& Cond'#! P%og%a/ )ll C") Institute members and candidates enrolled in the C") Pro%ram are re3uired to com#l& 'ith the Code and Standards* $he C") Institute D&la's and 9ules of Procedure for Proceedin%s 9elated to Professional Conduct (9ules of Procedure) form the basic structure for enforcin% the Code and Standards* $he 9ules of Procedure are based on t'o #rimar& #rinci#les1 (0) fair #rocess to the member and candidate and (7) confidentialit& of #roceedin%s* $he C") Institute Doard of Governors maintains oversi%ht and res#onsibilit& for the Professional Conduct Pro%ram (PCP) throu%h the Bisci#linar& 9evie' Committee (B9C)'hich is res#onsible for the enforcement of the Code and Standards* Professional Conduct staff- under the direction of the C") Institute Besi%nated +fficer- conducts #rofessional conduct in3uiries* Several circumstances can #rom#t an in3uir&* Aembers and candidates must self disclose on the annual Professional Conduct Statement all matters that 3uestion their #rofessional conduct- such as involvement in civil liti%ation- a criminal investi%ation- or bein% the sub5ect of a 'ritten com#laint* Secondl&- 'ritten com#laints received b& Professional Conduct staff can brin% about an investi%ation* $hird- C") Institute staff ma& become a'are of 3uestionable conduct b& a member or candidate throu%h the media or other #ublic source* "ourth- C") e.amination #roctors can submit a violation re#ort for an& candidate sus#ected to have com#romised his or her #rofessional conduct durin% the e.amination* Fhen an in3uir& is initiated- the Professional Conduct staff conducts an investi%ation that ma& include re3uestin% a 'ritten e.#lanation from the member or candidate2 intervie'in% the member or candidate- com#lainin% #artiesand third #arties2 and collectin% documents and records in su##ort of its investi%ation* $he Besi%nated +fficer- u#on revie'in% the material obtained durin% the investi%ation- ma& conclude the in3uir& 'ith no disci#linar& sanction- issue a cautionar& letter- or continue #roceedin%s to disci#line the member or candidate* If the Besi%nated +fficer finds that a violation of the Code and Standards occurred- the Besi%nated +fficer #ro#oses a disci#linar& sanction- 'hich ma& be re5ected or acce#ted b& the member or candidate* If the member or candidate re5ects the #ro#osed sanction- the matter is referred to a hearin% b& a #anel of C") Institute members* Sanctions im#osed b& C") Institute ma& have si%nificant conse3uences-

includin% condemnation b& the sanctioned members4 #eers and #ossible ramifications for em#lo&ment* Candidates enrolled in the C") Pro%ram 'ho have violated the Code and Standards ma& be sus#ended from further #artici#ation in the C") #ro%ram* Ado:!ion o !"e Code and S!anda%d$ $he C") Institute Code and Standards a##lies to individual members of C") Institute and candidates for the C") desi%nation* ,o'ever- C") Institute does encoura%e firms to ado#t the Code of Ethics and Standards of Professional Conduct as #art of their i%/ code of ethics* $here are no formal #rocedures for ado#tin% the Code and Standards but those 'ho claim com#liance should full& understand the re3uirements of the Code and Standards* )lthou%h C") Institute 'elcomes #ublic ac(no'led%ement- 'hen a##ro#riatethat firms are usin% the C") Institute Code and Standards- no attribution is necessar&* "or firms that 'ould li(e to distribute the Code and Standards to clients and #otential clients- attractive- one #a%e co#ies of the Code and Standards- includin% translations- are available on the C") Institute 'ebsite ('''*cfainstitute*or%)* ; Preface 6EGINS OPTIONAL SEGMENT C") Institute- throu%h its C") Centre for "inancial Aar(et Inte%rit&- has also #ublished an )sset Aana%er Code of Professional Conduct ()AC) that is desi%ned- in #art- to hel# C*S* firms com#l& 'ith the re%ulations mandatin% codes of ethics for investment advisers* $he )AC #rovides s#ecific- #ractical %uidelines for asset mana%ers in si. areas1 lo&alt& to clients- the investment #rocess- tradin%- com#liance- #erformance evaluation and disclosure* )lthou%h the Code and Standards are aimed at individual investment #rofessionals 'ho are members of the C") Institute or candidates for the C") desi%nation- the )sset Aana%er Code of Professional Conduct has been drafted for firms* $he )AC is included as an a##endi. and also can be found on the C") Institute Febsite* C") Institute encoura%es firms ado#tin% either the Code and Standards or the )sset Aana%er Code of Conduct to notif& C") Institute that the& have ado#ted or are incor#oratin% these standards as #art of their firm codes of ethics* A#8no<&edge/en!$ Decause C") Institute is a volunteer or%ani/ation- its 'or( to #romote ethical #ractice in the investment #rofession relies to a %reat de%ree on the %ood'ill of its members to devote their time on the or%ani/ation4s behalf* Such %ood'ill is also in abundance amon% C") Institute members actin% in an individual ca#acit& to e.tend ethical inte%rit&* $he C") Institute Standards of Practice Council (SPC)- a %rou# currentl& consistin% of 08 C") Charterholder volunteers from nine different countries- is char%ed 'ith maintainin% and inter#retin% the Code and Standards and ensurin% that the& are effective* $he SPC dra's its membershi# from a broad s#ectrum of or%ani/ations in the securities field- includin% bro(ers- investment advisors- ban(s- and insurance com#anies* In most instances- the SPC members also have im#ortant su#ervisor& res#onsibilities 'ithin their firms* $he SPC continuall& evaluates the Code and Standards- as 'ell as the %uidance in the ,andboo(- to ensure that the& are1

G 9e#resentative of the hi%hest standard of #rofessional conductG 9elevant to the chan%in% nature of the investment #rofessionG Globall& a##licableG Sufficientl& com#rehensive- #ractical- and s#ecificG Enforceable- and G $estable for the C") Pro%ram* +ver the last t'o &ears- the SPC has s#ent countless hours revie'in% and discussin% revisions to the Code and Standards and u#dates to the %uidance that ma(es u# this <th edition of the ,andboo(* Delo' is a list of the current members of the SPC 'ho %enerousl& donated their time and ener%& to this effort* Hee Price- C")- Chair Aario Eichenber%er- C") 9oss E* ,allett- C") $oshihi(o Saito- C") Samuel D* ?ones- C") 9ichard Fa&man- C") H&nn S* Aander- C") Aartha +berndorfer- C") $odd P* Ho'e- C") Aar( Sinsheimer- C") Sunil Sin%hania- C") Drian +4Ieefe- C") Airosla' Pane(- C") 1= 9eadin% 0 @ Code of Ethics and Standards of Professional Conduct OPTIONAL SEGMENT "inall&- this boo( is dedicated to the late ?ules ,uot- C")- a lon% time member of the SPC and volunteer for C") Institute 'ho tirelessl& advocated for ethics in the investment #rofession and constantl& 'or(ed to #romote ethics and inte%rit& 'ithin the industr&* CFA INSTITUTE CODE OF ETHICS AND STANDARDS OF PROFESSIONAL CONDUCT P%ea/)&e !o !"e CFA In$!i!'!e Code o E!"i#$ and S!anda%d$ o P%o e$$iona& Cond'#! $he C") Institute Code of Ethics and Standards of Professional Conduct (Code and Standards) are fundamental to the values of C") Institute and essential to achievin% its mission to lead the investment #rofession %loball& b& settin% hi%h standards of education- inte%rit&- and #rofessional e.cellence* ,i%h ethical standards are critical to maintainin% the #ublic4s trust in financial mar(ets and in the investment #rofession* Since their creation in the 0<=!s- the Code and Standards have #romoted the inte%rit& of C") Institute members and served as a model for measurin% the ethics of investment #rofessionals %loball&- re%ardless of 5ob function- cultural differences- or local la's and re%ulations* )ll C") Institute members (includin% holders of the Chartered "inancial )nal&st (C")) desi%nation) and C") candidates must abide b& the Code and Standards and are encoura%ed to notif& their em#lo&er of this res#onsibilit&* Violations ma& result in disci#linar& sanctions b& C") Institute* Sanctions can include revocation of membershi#candidac& in the C") Pro%ram- and the ri%ht to use the C") desi%nation* T"e Code o E!"i#$ Aembers of C") Institute (includin% Chartered "inancial )nal&st JC")K charterholders) and candidates for the C") desi%nation (members and candidates) must1 G )ct 'ith inte%rit&- com#etence- dili%ence- res#ect- and in an ethical manner 'ith the #ublic- clients- #ros#ective clients- em#lo&ers- em#lo&ees- collea%ues

in the investment #rofession- and other #artici#ants in the %lobal ca#ital mar(ets* G Place the inte%rit& of the investment #rofession and the interests of clients above their o'n #ersonal interests* G Cse reasonable care and e.ercise inde:enden! #rofessional 5ud%ment 'hen conductin% investment anal&sis- ma(in% investment recommendations- ta(in% investment actions- and en%a%in% in other #rofessional activities* G Practice and encoura%e others to #ractice in a #rofessional and ethical manner that 'ill reflect credit on themselves and the #rofession* G Promote the inte%rit& of- and u#hold the rules %overnin%- ca#ital mar(ets* G Aaintain and im#rove their #rofessional com#etence and strive to maintain and im#rove the com#etence of other investment #rofessionals* 11 C") Institute Code of Ethics and Standards of Professional Conduct ENDS OPTIONAL SEGMENT S!anda%d$ o P%o e$$iona& Cond'#! I( PROFESSIONALISM A( >no<&edge o !"e La<( Aembers and candidates must understand and com#l& 'ith all a##licable la's- rules- and re%ulations (includin% the C") Institute Code of Ethics and Standards of Professional Conduct) of an& %overnment- re%ulator& or%ani/ation- licensin% a%enc&- or #rofessional association %overnin% their #rofessional activities* In the event of conflict- members and candidates must com#l& 'ith the more strict la'rule- or re%ulation* Aembers and candidates must not (no'in%l& #artici#ate or assist in and must dissociate from an& violation of such la'srules- or re%ulations* 6( Inde:enden#e and O)?e#!i.i!4( Aembers and candidates must use reasonable care and 5ud%ment to achieve and maintain inde#endence and ob5ectivit& in their #rofessional activities* Aembers and candidates must not offer- solicit- or acce#t an& %ift- benefit- com#ensation- or consideration that reasonabl& could be e.#ected to com#romise their o'n or another4s inde#endence and ob5ectivit&* C( Mi$%e:%e$en!a!ion( Aembers and candidates must not (no'in%l& ma(e an& misre#resentations relatin% to investment anal&sis- recommendationsactions- or other #rofessional activities* D( Mi$#ond'#!( Aembers and candidates must not en%a%e in an& #rofessional conduct involvin% dishonest&- fraud- or deceit or commit an& act that reflects adversel& on their #rofessional re#utation- inte%rit&- or com#etence* II( INTEGRITY OF CAPITAL MAR>ETS A( Ma!e%ia& Non:')&i# In o%/a!ion( Aembers and candidates 'ho #ossess material non#ublic information that could affect the value of an investment must not act or cause others to act on the information* 6( Ma%8e! Mani:'&a!ion( Aembers and candidates must not en%a%e in #ractices that distort #rices or artificiall& inflate tradin% volume 'ith the intent to mislead /a%8e! #artici#ants* III( DUTIES TO CLIENTS

A( Lo4a&!4@ P%'den#e@ and Ca%e( Aembers and candidates have a dut& of lo&alt& to their clients and must act 'ith reasonable care and e.ercise #rudent 5ud%ment* Aembers and candidates must act for the benefit of their clients and #lace their clients4 interests before their em#lo&er4s or their o'n interests* In relationshi#s 'ith clients- members and candidates must determine a##licable fiduciar& dut& and must com#l& 'ith such dut& to #ersons and interests to 'hom it is o'ed* 6( Fai% Dea&ing( Aembers and candidates must deal fairl& and ob5ectivel& 'ith all clients 'hen #rovidin% investment anal&sis- ma(in% investment recommendations- ta(in% investment action- or en%a%in% in other #rofessional activities* C( S'i!a)i&i!4( 0* Fhen members and candidates are in an advisor& relationshi# 'ith a client- the& must1 a* Aa(e a reasonable in3uir& into a client or #ros#ective client4s investment e.#erience- ris( and return ob5ectives- and financial constraints #rior to ma(in% an& investment recommendation or ta(in% investment action and must reassess and u#date this information re%ularl&* 12 9eadin% 0 @ Code of Ethics and Standards of Professional Conduct b* Betermine that an investment is suitable to the client4s financial situation and consistent 'ith the client4s 'ritten ob5ectives- mandatesand constraints before ma(in% an investment recommendation or ta(in% investment action* c* ?ud%e the suitabilit& of investments in the conte.t of the client4s total #ortfolio* 7* Fhen members and candidates are res#onsible for mana%in% a #ortfolio to a s#ecific mandate- strate%&- or st&le- the& must onl& ma(e investment recommendations or ta(e investment actions that are consistent 'ith the stated ob5ectives and constraints of the #ortfolio* D( Pe% o%/an#e P%e$en!a!ion( Fhen communicatin% investment #erformance information- members or candidates must ma(e reasonable efforts to ensure that it is fair- accurate- and com#lete* E( P%e$e%.a!ion o Con iden!ia&i!4( Aembers and candidates must (ee# information about current- former- and #ros#ective clients confidential unless1 0* $he information concerns ille%al activities on the #art of the client or #ros#ective client7* Bisclosure is re3uired b& la'- or L* $he client or #ros#ective client #ermits disclosure of the information* I-( DUTIES TO EMPLOYERS A( Lo4a&!4( In matters related to their em#lo&ment- members and candidates must act for the benefit of their em#lo&er and not de#rive their em#lo&er of the advanta%e of their s(ills and abilities- divul%e confidential information- or other'ise cause harm to their em#lo&er* 6( Addi!iona& Co/:en$a!ion A%%ange/en!$( Aembers and candidates must not acce#t %ifts- benefits- com#ensation- or consideration that com#etes 'ith- or mi%ht reasonabl& be e.#ected to create a conflict of interest

'ith- their em#lo&er4s interest unless the& obtain 'ritten consent from all #arties involved* C( Re$:on$i)i&i!ie$ o S':e%.i$o%$( Aembers and candidates must ma(e reasonable efforts to detect and #revent violations of a##licable la'srules- re%ulations- and the Code and Standards b& an&one sub5ect to their su#ervision or authorit&* -( IN-ESTMENT ANALYSIS@ RECOMMENDATIONS@ AND ACTIONS A( Di&igen#e and Rea$ona)&e 6a$i$( Aembers and candidates must1 0* E.ercise dili%ence- inde#endence- and thorou%hness in anal&/in% investments- ma(in% investment recommendations- and ta(in% investment actions* 7* ,ave a reasonable and ade3uate basis- su##orted b& a##ro#riate research and investi%ation- for an& investment anal&sis- recommendationor action* 6( Co//'ni#a!ion <i!" C&ien!$ and P%o$:e#!i.e C&ien!$( Aembers and candidates must1 0* Bisclose to clients and #ros#ective clients the basic format and %eneral #rinci#les of the investment #rocesses used to anal&/e investmentsselect securities- and construct #ortfolios and must #rom#tl& disclose an& chan%es that mi%ht materiall& affect those #rocesses* 7* Cse reasonable 5ud%ment in identif&in% 'hich factors are im#ortant to their investment anal&ses- recommendations- or actions and 13 C") Institute Code of Ethics and Standards of Professional Conduct include those factors in communications 'ith clients and #ros#ective clients* L* Bistin%uish bet'een fact and o#inion in the #resentation of investment anal&sis and recommendations* C( Re#o%d Re!en!ion( Aembers and candidates must develo# and maintain a##ro#riate records to su##ort their investment anal&sis- recommendationsactions- and other investment related communications 'ith clients and #ros#ective clients* -I( CONFLICTS OF INTEREST A( Di$#&o$'%e o Con &i#!$( Aembers and candidates must ma(e full and fair disclosure of all matters that could reasonabl& be e.#ected to im#air their inde#endence and ob5ectivit& or interfere 'ith res#ective duties to their clients- #ros#ective clients- and em#lo&er* Aembers and candidates must ensure that such disclosures are #rominent- are delivered in #lain lan%ua%e- and communicate the relevant information effectivel&* 6( P%io%i!4 o T%an$a#!ion$( Investment transactions for clients and em#lo&ers must have #riorit& over investment transactions in 'hich a member or candidate is the beneficial o'ner* C( Re e%%a& Fee$( Aembers and candidates must disclose to their em#lo&erclients- and #ros#ective clients- as a##ro#riate- an& com#ensation- considerationor benefit received from- or #aid to- others for the recommendation of #roducts or services* -II( RESPONSI6ILITIES AS A CFA INSTITUTE MEM6ER OR CFA CANDIDATE A( Cond'#! a$ /e/)e%$ and #andida!e$ in !"e CFA P%og%a/( Aembers and

candidates must not en%a%e in an& conduct that com#romises the re#utation or inte%rit& of C") Institute or the C") desi%nation or the inte%rit&validit&- or securit& of the C") e.aminations* 6( Re e%en#e !o CFA In$!i!'!e@ !"e CFA de$igna!ion@ and !"e CFA P%og%a/( Fhen referrin% to C") Institute- C") Institute membershi#- the C") desi%nation- or candidac& in the C") Pro%ram- members and candidates must not misre#resent or e.a%%erate the meanin% or im#lications of membershi# in C") Institute- holdin% the C") desi%nation- or candidac& in the C") #ro%ram* 14 9eadin% 0 @ Code of Ethics and Standards of Professional Conduct 13 $he Guidance statements address the a##lication of the Standards of Professional Conduct* "or each standard- the Guidance discusses the #ur#ose and sco#e of the standard- #resents recommended #rocedures for com#liance- and %ives e.am#les of a##lication of the standard* STANDARD IAPROFESSIONALISM A( >no<&edge o !"e La< Me/)e%$ and #andida!e$ /'$! 'nde%$!and and #o/:&4 <i!" a&& a::&i#a)&e &a<$@ %'&e$@ and %eg'&a!ion$ 0in#&'ding !"e CFA In$!i!'!e Code o E!"i#$ and S!anda%d$ o P%o e$$iona& Cond'#!2 o an4 go.e%n/en!@ %eg'&a!o%4 o%ganiBa!ion@ &i#en$ing agen#4@ o% :%o e$$iona& a$$o#ia!ion go.e%ning !"ei% :%o e$$iona& a#!i.i!ie$( In !"e e.en! o #on &i#!@ /e/)e%$ and #andida!e$ /'$! #o/:&4 <i!" !"e /o%e $!%i#! &a<@ %'&e@ o% %eg'&a!ion( Me/)e%$ and #andida!e$ /'$! no! 8no<ing&4 :a%!i#i:a!e o% a$$i$! in and /'$! di$$o#ia!e %o/ an4 .io&a!ion o $'#" &a<$@ %'&e$@ o% %eg'&a!ion$( Aembers and candidates must have an understandin% of a##licable la's and re%ulations of all countries in 'hich the& trade securities or #rovide investment advice or other investment services* $his standard does not re3uire members and LEARNING OUTCOMES $he candidate should be able to1 a( demonstrate a thorou%h (no'led%e of the Code of Ethics and Standards of Professional Conduct b& a##l&in% the Code and Standards to s#ecific situations #resentin% multi#le issues of 3uestionable #rofessional conduct2 )( recommend #ractices and #rocedures desi%ned to #revent violations of the Code of Ethics and Standards of Professional Conduct* READING 2 *GUIDANCE+ FOR STANDARDS I,-II Co#&ri%ht 6 7!!8- C") Institute* 9e#rinted 'ith #ermission* candidates to become e.#erts in com#liance* Investment #rofessionals are not re3uired to have detailed (no'led%e of or be e.#erts on all la's that could #otentiall& %overn the member or candidate4s activities* ,o'ever- members and candidates must com#l& 'ith the la's and re%ulations that directl& %overn their 'or(* Relations i" between t e Code and Standards and 'ocal 'aw Some members or candidates ma& live- 'or(- or #rovide investment services to clients livin% in a countr& that has no la' or re%ulation %overnin% a #articular action or that has la's or re%ulations that differ from the re3uirements of the Code and Standards* Fhen a##licable la' and the Code and Standards re3uire different conduct- members and candidates must follo' the more strict of the

a##licable la' or the Code and Standards* )##licable la' is the la' that %overns the member or candidate4s conduct* Fhich la' a##lies 'ill de#end on the #articular facts and circumstances of each case* $he more strict la' or re%ulation is the la' or re%ulation that im#oses %reater restrictions on the action of the member or candidate or calls for the member or candidate to e.ert a %reater de%ree of action that #rotects the interests of investors* "or e.am#le- a##licable la' or re%ulation ma& not re3uire members and candidates to disclose referral fees received from or #aid to others for the recommendation of investment #roducts or services* ,o'ever- because the Code and Standards im#ose this obli%ation- members and candidates must disclose the e.istence of such fees* Aembers and candidates must adhere to the follo'in% #rinci#les1 G Aembers and candidates must com#l& 'ith a##licable la' or re%ulation related to their #rofessional activities* G Aembers and candidates must not en%a%e in conduct that constitutes a violation of the Code and Standards- even thou%h it ma& other'ise be le%al* G In the absence of an& a##licable la' or re%ulation or 'hen the Code and Standards im#ose a hi%her de%ree of res#onsibilit& than a##licable la's and re%ulations- members and candidates must adhere to the Code and Standards* )##lications of these #rinci#les are outlined in EC"i)i! 2D1( C") Institute members are obli%ated to abide b& the C") Institute )rticles of Incor#oration- D&la's- Code of Ethics- Standards of Professional Conduct- 9ules of Procedure for Proceedin%s 9elated to Professional Conduct- Aembershi# )%reement- and other a##licable rules #romul%ated b& C") Institute- all as amended from time to time* C") candidates 'ho are not members must also abide b& these documents (e.ce#t for the Aembershi# )%reement)- as 'ell as rules and re%ulations related to the administration of the C") e.amination- the Candidate 9es#onsibilit& Statement- and the Candidate Pled%e* Partici"ation or (ssociation wit )iolations by *t ers Aembers and candidates are res#onsible for violations in 'hich the& knowingly #artici#ate or assist* )lthou%h members and candidates are #resumed to have (no'led%e of all a##licable la's- rules- and re%ulations- C") Institute ac(no'led%es that members ma& not reco%ni/e violations if the& are not a'are of all the facts %ivin% rise to the violations* Standard I a##lies 'hen members and candidates (no' or should (no' that their conduct ma& contribute to a violation of a##licable la's- rules- re%ulations- or the Code and Standards* 15 9eadin% 7 @ Guidance for Standards IVII If a member or candidate has reasonable %rounds to believe that imminent or on%oin% client or em#lo&ee activities are ille%al or unethical- the member or candidate must dissociate- or se#arate- from the activit&* In e.treme casesdissociation ma& re3uire a member or candidate to leave his or her em#lo&er* ,o'ever- there are intermediate ste#s that members and candidates ma& ta(e to dissociate from ethical violations of others* $he first ste# should be to attem#t to sto# the behavior b& brin%in% it to the attention of the em#lo&er throu%h a su#ervisor or the com#liance de#artment* Aembers and candidates ma& consider directl& confrontin% the #erson or #ersons committin% the violation* If these attem#ts are unsuccessful- then members and candidates have a res#onsibilit& to

ste# a'a& and dissociate from the activit& b& ta(in% such ste#s as removin% their name from 'ritten re#orts or recommendations or as(in% for a different assi%nment* Inaction combined 'ith continuin% association 'ith those involved in ille%al or unethical conduct ma& be construed as #artici#ation or assistance in the ille%al or unethical conduct* )lthou%h the Code and Standards do not re3uire that members and candidates re#ort violations to the a##ro#riate %overnmental or re%ulator& or%ani/ationssuch disclosure ma& be #rudent in certain circumstances- and mandated if re3uired b& a##licable la'* Similarl&- the Code and Standards do not re3uire that members and candidates re#ort to C") Institute #otential violations of the Code and Standards b& fello' members and candidates* ,o'ever- C") Institute encoura%es members- nonmembers- clients- and the investin% #ublic to re#ort violations of the Code and Standards b& C") Institute members or C") candidates b& submittin% a com#laint in 'ritin% to the C") Institute Professional Conduct Pro%ram1 E mail #conductMcfainstitute*or% or visit the C") Institute 'ebsite at '''*cfainstitute*or%* RECOMMENDED PROCEDURES FOR COMPLIANCE Members and Candidates Su%%ested methods b& 'hich members and candidates can ac3uire and maintain understandin% of a##licable la's- rules- and re%ulations include the follo'in%1 G Sta& informed* Aembers and candidates should establish or encoura%e their em#lo&ers to establish a #rocedure b& 'hich em#lo&ees are re%ularl& informed about chan%es in a##licable la's- rules- re%ulations- and case la'* In man& instances- the em#lo&er4s com#liance de#artment or le%al counsel can #rovide such information in the form of memorandums distributed to em#lo&ees in the or%ani/ation* )lso- #artici#ation in an internal or e.ternal continuin% education #ro%ram is a #ractical method of sta&in% current* G 9evie' #rocedures* Aembers and candidates should revie' or encoura%e their em#lo&ers to revie' 'ritten com#liance #rocedures on a re%ular basis in order to ensure that the& reflect current la' and #rovide ade3uate %uidance to em#lo&ees concernin% 'hat is #ermissible conduct under the la' andEor the C") Institute Code and Standards* 9ecommended com#liance #rocedures for s#ecific items of the C") Institute Code and Standards are discussed 'ithin the %uidance associated 'ith each standard* G Aaintain current files* Aembers and candidates should maintain or encoura%e their em#lo&ers to maintain readil& accessible current reference co#ies of a##licable statutes- rules- re%ulations- and im#ortant cases* Fhen in doubt- it is recommended that a member or candidate see( the advice of com#liance #ersonnel or le%al counsel concernin% le%al re3uirements* 17 Standard I>Professionalism If the #otential violation is committed b& a fello' em#lo&ee- it ma& also be #rudent for the member or candidate to see( the advice of the firm4s com#liance de#artment or le%al counsel* Fhen dissociatin% from an activit& that violates the Code and Standardsmembers and candidates should document an& violations and ur%e their firms to attem#t to #ersuade the #er#etrator(s) to cease such conduct* It ma& be necessar& for a member or candidate to resi%n his or her em#lo&ment to dissociate from the conduct*

Firms $he formalit& and com#le.it& of com#liance #rocedures for firms de#end on the nature and si/e of the or%ani/ation and the nature of its investment o#erations* Aembers and candidates should encoura%e their firms to consider the follo'in% #olicies and #rocedures to su##ort the #rinci#les of Standard I1 G Bevelo# andEor ado#t a code of ethics* $he ethical culture of an or%ani/ation starts at the to#* Aembers and candidates should encoura%e their su#ervisors or mana%ement to ado#t a code of ethics* )dherin% to a code of ethics facilitates solutions 'hen faced 'ith ethical dilemmas and can #revent the need of em#lo&ees to resort to a 'histle blo'in% solution* G Aa(e available andEor distribute to em#lo&ees #ertinent information that hi%hli%hts a##licable la's and re%ulations* Information sources ma& include #rimar& information develo#ed b& the relevant %overnment- %overnmental a%encies- re%ulator& or%ani/ations- licensin% a%encies- and #rofessional associations (e*%*- from their 'ebsites)2 la' firm memorandums or ne'sletters2 and association memorandums or #ublications (e*%*- C+( #agazine)* G Establish 'ritten #rotocols for re#ortin% sus#ected violations of la's- re%ulationsand com#an& #olicies*

A::&i#a!ion o !"e S!anda%d Example 1: Aichael )llen 'or(s for a bro(era%e firm and is res#onsible for an under'ritin% of securities* ) com#an& official %ives )llen information indicatin% that the financial statements )llen filed 'ith the re%ulator overstate the issuer4s earnin%s* )llen see(s the advice of the bro(era%e firm4s %eneral counsel- 'ho states that it 'ould be difficult for the re%ulator to #rove that )llen has been involved in an& 'ron%doin%* Comment, )lthou%h it is recommended that members and candidates see( the advice of le%al counsel- the reliance on such advice does not absolve a member or candidate from the re3uirement to com#l& 'ith the la' or re%ulation* )llen should re#ort this situation to his su#ervisor- see( an inde#endent le%al o#inion- and determine 'hether the re%ulator should be notified of the error* Example 2: Ha'rence Dro'n4s em#lo&er- an investment ban(in% firm- is the #rinci#al under'riter for an issue of convertible de)en!'%e$ b& the Courtne& Com#an&* Dro'n discovers that Courtne& Com#an& has concealed severe third 3uarter losses in its forei%n o#erations* $he #reliminar& #ros#ectus has alread& been distributed* Comment, Ino'in% that the #reliminar& #ros#ectus is misleadin%- Dro'n should re#ort his findin%s to the a##ro#riate su#ervisor& #ersons in his firm* If the matter is not remedied and Dro'n4s em#lo&er does not dissociate from the under'ritin%- Dro'n should sever all his connections 'ith the under'ritin%* Dro'n should also see( le%al advice to determine 'hether additional re#ortin% or other action should be ta(en* Example 3: Iamisha Fashin%ton4s firm advertises its #ast #erformance record b& sho'in% the 0! &ear return of a #o/:o$i!e of its client accounts* ,o'ever- Fashin%ton discovers that the com#osite omits the #erformance of accounts that have left the firm durin% the 0! &ear #eriod and that this omission has led to an inflated #erformance fi%ure* Fashin%ton is as(ed to use #romotional material that includes the erroneous #erformance number 'hen solicitin% business for the firm* Comment, Aisre#resentin% #erformance is a violation of the Code and Standards* )lthou%h she did not calculate the #erformance herself- Fashin%ton 'ould be assistin% in violatin% this standard if she 'ere to use the inflated #erformance number 'hen solicitin% clients* She must dissociate herself from the activit&* She can brin% the misleadin% number to the attention of the #erson res#onsible for calculatin% #erformance- her su#ervisor- or the com#liance de#artment at her firm* If her firm is un'illin% to recalculate #erformance- she must refrain from usin% the misleadin% #romotional material and should notif& the firm of her reasons* If the firm insists that she use the material- she should consider 'hether her obli%ation to dissociate from the activit& 'ould re3uire her to see( other em#lo&ment* Example 4: ?ames Collins is an investment anal&st for a ma5or Fall Street bro(era%e firm* ,e 'or(s in a develo#in% countr& 'ith a ra#idl& moderni/in% econom& and a %ro'in% ca#ital mar(et* Hocal securities la's are minimal>in form and content>and include no #unitive #rohibitions a%ainst insider tradin%* Comment, Collins should be a'are of the ris(s that a small mar(et and the absence of a fairl& re%ulated flo' of information to the mar(et re#resent to his abilit& to obtain information and

ma(e timel& 5ud%ments* ,e should include this factor in formulatin% his advice to clients* In handlin% material non#ublic information that accidentall& comes into his #ossession- he must follo' Standard II())* Example 5: Haura ?ameson 'or(s for a multinational investment advisor based in the Cnited States* ?ameson lives and 'or(s as a re%istered investment advisor in the tin&- but 'ealth&- island nation of Iarramba* Iarramba4s securities la's state that no in.e$!/en! ad.i$o% re%istered and 'or(in% in that countr& can #artici#ate in initial #ublic offerin%s (IP+s) for the advisor4s #ersonal account* ?ameson- believin% that as a C*S* citi/en 'or(in% for a C*S* based com#an& she need com#l& onl& 'ith C*S* la'- has i%nored this Iarrambian la'* In addition- ?ameson believes that- as a charterholder- as lon% as she adheres to the Code and Standards re3uirement that she disclose her #artici#ation in an& IP+ to her em#lo&er and clients 'hen such o'nershi# creates a conflict of interest- she is o#eratin% on ethical hi%h %round* Comment, ?ameson is in violation of Standard I())* )s a re%istered investment advisor in Iarramba- ?ameson is #revented b& Iarrambian securities la' from #artici#atin% in IP+s re%ardless of the la' of her home countr&* In addition- because the la' of the countr& 'here she is 'or(in% is stricter than the Code and Standards- she must follo' the stricter re3uirements of the local la' rather than the re3uirements of the Code and Standards* EEHI6IT 2D1 G&o)a& A::&i#a!ion o !"e Code and S!anda%d$ Aembers and candidates 'ho #ractice in multi#le 5urisdictions ma& be sub5ect to varied securities la's and re%ulations* If a##licable la' is stricter than the re3uirements of the Code and Standardsmembers and candidates must adhere to a##licable la'2 other'ise- the& must adhere to the Code and Standards* $he follo'in% chart #rovides illustrations involvin% a member 'ho ma& be sub5ect to the securities la's and re%ulations of three different t&#es of countries1 Countries 'ith ;SH N no securities la's or re%ulations HS N less strict securities la's and re%ulations than the Code and Standards AS N more strict securities la's and re%ulations than the Code and Standards A::&i#a)&e La< Aember resides in ;SH countr&- does business in HS countr&2 HS la' a##lies Aember resides in ;SH countr&- does business in AS countr&2 AS la' a##lies Aember resides in HS countr&- does business in ;SH countr&2 HS la' a##lies* Aember resides in HS countr&- does business in AS countr&2 AS la' a##lies* D'!ie$ Aember /'$! adhere to the Code and Standards* Aember must adhere to the la' of AS countr&* Aember must adhere to the Code and Standards* EC:&ana!ion Decause a##licable la' is less strict than the Code and Standards- the member must adhere to the Code and Standards* Decause a##licable la' is stricter than the Code and Standards- member must adhere to the more strict a##licable la'* Decause a##licable la' is less strict than the Code and Standards- the member must adhere to the Code and Standards*

Aember must adhere Decause a##licable la' is stricter than the to the la' of AS Code and Standards- the member must countr&* adhere to the more strict a##licable la'*

A::&i#a)&e La< Aember resides in HS countr&- does business in ;SH countr&2 HS la' a##lies- but it states that la' of localit& 'here business is conducted %overns* Aember resides in HS countr&- does business in AS countr&2 HS la' a##liesbut it states that la' of localit& 'here business is conducted %overns* Aember resides in AS countr&- does business in HS countr&2 AS la' a##lies* Aember resides in AS countr&- does business in HS countr&2 AS la' a##liesbut it states that la' of localit& 'here business is conducted %overns* Aember resides in AS countr&- does business in HS countr& 'ith a client 'ho is a citi/en of HS countr&2 AS la' a##lies- but it states that the la' of the client4s home countr& %overns* Aember resides in AS countr&- does business in HS countr& 'ith a client 'ho is a citi/en of AS countr&2 AS la' a##lies- but it states that the la' of the client4s home countr& %overns*

D'!ie$ Aember must adhere to the Code and Standards*

EC:&ana!ion Decause a##licable la' states that the la' of the localit& 'here the business is conducted %overns and there is no local la'- the member must adhere to the Code and Standards*

Aember must adhere Decause a##licable la' of the localit& 'here to the la' of AS the business is conducted %overns and local countr&* la' is stricter than the Code and Standardsthe member must adhere to the more strict a##licable la'* Aember must adhere to the la' of AS countr&* Aember must adhere to the Code and Standards* Decause a##licable la' is stricter than the Code and Standards- member must adhere to the more strict a##licable la'* Decause a##licable la' states that the la' of the localit& 'here the business is conducted %overns and local la' is less strict than the Code and Standards- the member must adhere to the Code and Standards*

Aember must adhere Decause a##licable la' states that the la' of to the Code and the client4s home countr& %overns ('hich is Standards* less strict than the Code and Standards)- the member must adhere to the Code and Standards* Aember must adhere to the la' of AS countr&* Decause a##licable la' states that the la' of the client4s home countr& %overns and the la' of the client4s home countr& is stricter than the Code and Standards- the member must adhere to the more strict a##licable la'*

6( Inde:enden#e and O)?e#!i.i!4 Me/)e%$ and #andida!e$ /'$! '$e %ea$ona)&e #a%e and ?'dg/en! !o a#"ie.e and /ain!ain inde:enden#e and o)?e#!i.i!4 in !"ei% :%o e$$iona& a#!i.i!ie$( Me/)e%$ and #andida!e$ /'$! no! o e%@ $o&i#i!@ o% a##e:! an4 gi !@ )ene i!@ #o/:en$a!ion@ o% #on$ide%a!ion !"a! %ea$ona)&4 #o'&d )e eC:e#!ed !o #o/:%o/i$e !"ei% o<n o% ano!"e%F$ inde:enden#e and o)?e#!i.i!4( Standard I(D) states the res#onsibilit& of C") Institute members and candidates in the C") Pro%ram to maintain inde#endence and ob5ectivit& so that their clients 'ill have the benefit of their 'or( and o#inions unaffected b& an& #otential conflict of interest or other circumstance adversel& affectin% their 5ud%ment* Ever& member and candidate should endeavor to avoid situations that could cause or

be #erceived to cause a loss of inde#endence or ob5ectivit& in recommendin% investments or ta(in% investment action* E.ternal sources ma& tr& to influence the investment #rocess b& offerin% anal&sts and :o%! o&io mana%ers a variet& of benefits* Cor#orations ma& see( e.#anded research covera%e2 issuers and under'riters ma& 'ish to #romote ne' securities offerin%s2 bro(ers ma& 'ant to increase commission business* Denefits ma& include %ifts- invitations to lavish functions- tic(ets- favors- 5ob referrals- and so on* +ne t&#e of benefit is the allocation of shares in oversubscribed IP+s to investment mana%ers for their #ersonal accounts* $his #ractice affords mana%ers the o##ortunit& to ma(e 3uic( #rofits that ma& not be available to their clients* Such a #ractice is #rohibited under Standard I(D)* Aodest %ifts and entertainment are acce#table- but s#ecial care must be ta(en b& members and candidates to resist subtle and notso subtle #ressures to act in conflict 'ith the interests of their clients* Dest #ractice dictates that members and candidates must re5ect an& offer of %ift or entertainment that could be e.#ected to threaten their inde#endence and ob5ectivit&* 9eceivin% a %ift- benefit- or consideration from a client can be distin%uished from %ifts %iven b& entities see(in% to influence a member or candidate to the detriment of other clients* In a client relationshi#- the client has alread& entered some t&#e of com#ensation arran%ement 'ith the member- candidate- or his or her firm* ) %ift from a client could be considered su##lementar& com#ensation* $he #otential for obtainin% influence to the detriment of other clients- althou%h #resent- is not as %reat as in situations 'here no com#ensation arran%ement e.ists* $hereforemembers and candidates ma& acce#t bonuses or %ifts from clients but must disclose to their em#lo&ers such benefits from clients* Bisclosure allo's the em#lo&er of a member or candidate to ma(e an inde#endent determination about the e.tent to 'hich the %ift ma& affect the member or candidate4s inde#endence and ob5ectivit&* Aembers and candidates ma& also come under #ressure from their o'n firms to- for e.am#le- issue favorable research re#orts or recommendations for certain com#anies* $he commercial side of a ban( ma& derive substantial revenue from its lendin%Ede#osit relationshi#s 'ith a com#an&- and ban( mana%ers ma& be tem#ted to influence the 'or( of anal&sts in the investment de#artment* $he situation ma& be a%%ravated if the head of the com#an& sits on the ban( or investment firm4s board and attem#ts to interfere in investment decision ma(in%* Aembers and candidates actin% in a sales or mar(etin% ca#acit& must be es#eciall& certain of their ob5ectivit& in selectin% a##ro#riate investments for their clients* Heft unmana%ed- #ressures that threaten inde#endence #lace research anal&sts in a difficult #osition and ma& 5eo#ardi/e their abilit& to act inde#endentl& and ob5ectivel&* +ne of the 'a&s that research anal&sts have co#ed 'ith these #ressures in the #ast is to use subtle and ambi%uous lan%ua%e in their recommendations or to tem#er the tone of their research re#orts* Such subtleties are lost on some investors 'ho reasonabl& e.#ect research re#orts and recommendations to be strai%htfor'ard and trans#arent and to communicate clearl& an anal&st4s vie's based on unbiased anal&sis and inde#endent 5ud%ment* Aembers and candidates are #ersonall& res#onsible for maintainin% inde#endence and ob5ectivit& 'hen #re#arin% research re#orts- ma(in% investment recommendations- and ta(in% investment action on behalf of clients* 9ecommendations must conve& the member or candidate4s true o#inions- free of bias from internal or e.ternal #ressures- and be stated in clear and unambi%uous lan%ua%e*

Aembers and candidates also should be a'are that some of their #rofessional or social activities 'ithin C") Institute or its member societies ma& subtl& threaten their inde#endence or ob5ectivit&* Fhen see(in% cor#orate financial su##ort for conventions- seminars- or even 'ee(l& societ& luncheons- the members or candidates res#onsible for the activities should evaluate both the actual effect of such solicitations on their inde#endence and 'hether their ob5ectivit& mi%ht be #erceived to be com#romised in the e&es of their clients* !nvestment-.anking Relations i"s Some sell side firms ma& e.ert #ressure on their anal&sts to issue favorable research on current or #ros#ective investment ban(in% clients* "or man& of these firms- income from investment ban(in% has become increasin%l& im#ortant to overall firm #rofitabilit& because bro(era%e income has declined as a result of #rice com#etition* Conse3uentl&- firms offerin% investment ban(in% services 'or( hard to develo# and maintain relationshi#s 'ith investment ban(in% clients and #ros#ects* $hese com#anies are often covered b& the firm4s research anal&sts because com#anies often select their investment ban( based on the re#utation of its research anal&sts- the 3ualit& of their 'or(- and their standin% in the industr&* 9esearch anal&sts fre3uentl& 'or( closel& 'ith their investment ban(in% collea%ues to hel# evaluate #ros#ective investment ban(in% clients* )lthou%h this #ractice benefits the firm and enhances mar(et e i#ien#4 (e*%*- b& allo'in% firms to assess ris(s more accuratel& and ma(e better #ricin% assum#tions)- it re3uires firms to carefull& balance the conflicts of interest inherent in the collaboration of research and investment ban(in%* ,avin% anal&sts 'or( 'ith investment ban(ers is a##ro#riate onl& 'hen the conflicts are ade3uatel& and effectivel& mana%ed and disclosed* "irm mana%ement has a res#onsibilit& to #rovide an environment in 'hich anal&sts are neither coerced nor enticed into issuin% research that does not reflect their true o#inions* "irms should re3uire #ublic disclosure of actual conflicts of interest to investors* Given the s&mbiotic relationshi# bet'een research and investment ban(in%- the traditional a##roach to buildin% fire'alls bet'een these t'o functions must be mana%ed to minimi/e resultin% conflicts of interest* It is critical that sell side firms foster and maintain a cor#orate culture that full& su##orts inde#endence and ob5ectivit& and #rotects anal&sts from undue #ressure b& their investment ban(in% collea%ues* ) (e& element of an enhanced fire'all is se#arate re#ortin% structures for #ersonnel 'ithin the research and investment ban(in% functions* "or e.am#le- investment ban(in% #ersonnel should not have an& authorit& to a##rove- disa##rove- or ma(e chan%es to research re#orts or recommendations* )nother element should be a com#ensation arran%ement that minimi/es the #ressures and re'ards ob5ectivit& and accurac&* Com#ensation arran%ements should not lin( anal&st remuneration directl& to investment ban(in% assi%nments on 'hich the anal&st ma& #artici#ate as a team member* "irms should also re%ularl& revie' their #olicies and #rocedures to determine 'hether anal&sts are ade3uatel& safe%uarded and to im#rove the trans#arenc& of disclosures relatin% to conflicts of interest* $he hi%hest level of trans#arenc& is achieved 'hen disclosures are #rominent and s#ecific- rather than mar%inali/ed and %eneric* Public Com"anies )nal&sts can also be #ressured to issue favorable re#orts and recommendations b& the com#anies the& follo'* Com#an& mana%ement often believes that the com#an&4s $!o#8 is undervalued and ma& find it difficult to acce#t critical research re#orts or ratin%s do'n%rades* Aana%ement com#ensation ma& also be de:enden! on stoc( #erformance* ;ot ever& stoc( is a bu& and not ever& research re#ort is favorable>for man& reasons- includin% the c&clical nature of man& business activities and

mar(et fluctuations* "or instance- a %ood com#an& does not al'a&s translate into a %ood stoc( ratin% if the current stoc( #rice is full& valued* In ma(in% an investment recommendation- the anal&st is res#onsible for antici#atin%- inter#retin%- and assessin% a com#an&4s #ros#ects and stoc( #rice #erformance in a factual manner* Bue dili%ence in financial research and anal&sis involves %atherin% information from a 'ide variet& of sources- includin% com#an& mana%ement and investor relations #ersonnel- su##liers- customerscom#etitors- and other relevant sources in addition to #ublic disclosure documents- such as #ro.& statements- annual re#orts- and other re%ulator& filin%s* 9esearch anal&sts ma& 5ustifiabl& fear that com#anies 'ill limit their abilit& to conduct thorou%h research b& den&in% ne%ative anal&sts direct access to com#an& mana%ement andEor barrin% them from conference calls and other communication venues* 9etaliator& #ractices include com#anies brin%in% le%al action a%ainst anal&sts #ersonall& andEor their firms to see( monetar& dama%es for the economic effects of ne%ative re#orts and recommendations* )lthou%h fe' com#anies en%a%e in such behavior- the #erce#tion that a re#risal is #ossible is a reasonable concern for anal&sts* $his concern ma& ma(e it difficult for them to conduct the com#rehensive research needed to ma(e ob5ective recommendations* "or further information and %uidance- members and candidates should refer to the C") Institute .est Practice $uidelines Covering (nalyst/Cor"orate !ssuer Relations ('''*cfainstitute*or%)* .uy-Side Clients ) third source of #ressure on sell side anal&sts ma& come from bu& side clients* Institutional clients are traditionall& the #rimar& users of sell side research- either directl& or 'ith soft dollar bro(era%e* Portfolio mana%ers ma& have si%nificant #ositions in the securit& of a com#an& under revie'* ) ratin% do'n%rade ma& adversel& affect the #ortfolio4s #erformance- #articularl& in the short termbecause the sensitivit& of stoc( #rices to ratin%s chan%es has increased in recent &ears* ) do'n%rade ma& also im#act the mana%er4s com#ensation- 'hich is usuall& tied to #ortfolio #erformance* Aoreover- #ortfolio #erformance is sub5ect to media and #ublic scrutin&- 'hich ma& affect the mana%er4s #rofessional re#utation* Conse3uentl&- some #ortfolio mana%ers ma& im#licitl& or e.#licitl& su##ort sell side ratin%s in &a!ion* Portfolio mana%ers have a res#onsibilit& to res#ect and foster the intellectual honest& of sell side research* $herefore- it is im#ro#er for #ortfolio mana%ers to threaten or en%a%e in retaliator& #ractices- such as re#ortin% sell side anal&sts to the covered com#an& to insti%ate ne%ative cor#orate reactions* )lthou%h most #ortfolio mana%ers do not en%a%e in such #ractices- the #erce#tion b& the research anal&st that a re#risal is #ossible ma& cause concern- ma(in% it difficult to maintain inde#endence and ob5ectivit&* !ssuer-Paid Researc In li%ht of the recent reduction of sell side research covera%e- man& com#anies- see(in% to increase visibilit& both in the financial mar(ets and 'ith #otential investors- hire anal&sts to #roduce research re#orts anal&/in% their com#anies* $hese re#orts brid%e the %a# created b& the lac( of covera%e and can be an effective method of communicatin% 'ith investors* Issuer #aid research- ho'ever- is frau%ht 'ith #otential conflicts* Be#endin% on ho' the research is 'ritten and distributed- investors can be misled into believin% that research a##ears to be from an inde#endent source 'hen- in realit&- it has been #aid for b& the sub5ect com#an&*

It is critical that research anal&sts adhere to strict standards of conduct that %overn ho' the research is to be conducted and 'hat disclosures must be madein the re#ort* )nal&sts must en%a%e in thorou%h- inde#endent- and unbiased anal&sis and must full& disclose #otential conflicts- includin% the nature of their com#ensation* +ther'ise- anal&sts ris( misleadin% investors b& becomin% an e.tension of an issuer4s #ublic relations de#artment 'hile a##earin% to #roduce inde#endent anal&sis* Investors need clear- credible- and thorou%h information about com#anies and research based on inde#endent thou%ht* )t a minimum- research should include a thorou%h anal&sis of the com#an&4s financial statements based on #ublicl& disclosed information- benchmar(in% 'ithin a #eer %rou#- and industr& anal&sis* )nal&sts must e.ercise dili%ence- inde#endence- and thorou%hness in conductin% their research in an ob5ective manner* )nal&sts must distin%uish bet'een fact and o#inion in their re#orts* Conclusions must have a reasonable and ade3uate basis- and must be su##orted b& a##ro#riate research* )nal&sts must also strictl& limit the t&#e of com#ensation that the& acce#t for conductin% research* +ther'ise- the content and conclusions of the re#orts could reasonabl& be e.#ected to be determined or affected b& com#ensation from the s#onsorin% com#anies* $his com#ensation can be direct- such as #a&ment based on the conclusions of the re#ort or more indirect- such as stoc( <a%%an!$ or other e3uit& instruments that could increase in value based on #ositive covera%e in the re#ort* In those instances- anal&sts 'ould have an in#en!i.e to avoid ne%ative information or conclusions that 'ould diminish their #otential com#ensation* Dest #ractice is for anal&sts to acce#t onl& a flat fee for their 'or( #rior to 'ritin% the re#ort- 'ithout re%ard to their conclusions or the re#ort4s recommendations* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e Aembers and candidates should follo' certain #ractices and should encoura%e their firms to establish certain #rocedures to avoid violations of Standard I(D)1 Protect inte%rit& of o#inions* Aembers- candidates- and their firms should establish #olicies statin% that ever& research re#ort on issues b& a cor#orate client reflects the unbiased o#inion of the anal&st* "irms should also desi%n com#ensation s&stems that #rotect the inte%rit& of the in.e$!/en! de#i$ion :%o#e$$ b& maintainin% the inde#endence and ob5ectivit& of anal&sts* Create a restricted list* If the firm is un'illin% to #ermit dissemination of adverse o#inions about a cor#orate client- members and candidates should encoura%e the firm to remove the controversial com#an& from the research universe and #ut it on a restricted list so that the firm disseminates onl& factual information about the com#an&* 9estrict s#ecial cost arran%ements* Fhen attendin% meetin%s at an issuer4s head3uartersmembers or candidates should #a& for commercial trans#ortation and hotel char%es* ;o cor#orate issuer should reimburse members or candidates for air trans#ortation* Aembers and candidates should encoura%e issuers to limit the use of cor#orate aircraft to situations in 'hich commercial trans#ortation is not available or in 'hich efficient movement could not other'ise be arran%ed* Aembers and candidates should ta(e #articular care that 'hen fre3uent meetin%s are held bet'een an individual issuer and an individual member or candidate- the issuer should not al'a&s host the member or candidate*

 Himit %ifts* Aembers and candidates must limit the acce#tance of %ratuities andEor %ifts to to(en items* Standard I(D) does not #reclude customar&- ordinar&- business related entertainment so lon% as its #ur#ose is not to influence or re'ard members or candidates* 9estrict investments* Aembers and candidates should restrict (or encoura%e their investment firms to restrict) em#lo&ee #urchases of e3uit& or e3uit& related IP+s* Strict limits should be im#osed on investment #ersonnel ac3uirin% securities in #rivate #lacements* 9evie' #rocedures* Aembers and candidates should im#lement (or encoura%e their firms to im#lement) effective su#ervisor& and revie' #rocedures to ensure that anal&sts and #ortfolio mana%ers com#l& 'ith #olicies relatin% to their #ersonal investment activities* "irms should establish a formal 'ritten #olic& on the inde#endence and ob5ectivit& of research and im#lement re#ortin% structures and revie' #rocedures to ensure that research anal&sts do not re#ort to and are not su#ervised or controlled b& an& de#artment of the firm that could com#romise the inde#endence of the anal&st* Aore detailed recommendations related to a firm4s #olicies re%ardin% research ob5ectivit& are set forth in the C") Institute 9esearch +b5ectivit& Standards* ('''*cfainstitute*or%) A::&i#a!ion o !"e S!anda%d Example 1: Steven $a&lor- a minin% anal&st 'ith Dronson Dro(ers- is invited b& Precision Aetals to 5oin a %rou# of his #eers in a tour of minin% facilities in several 'estern C*S* states* $he com#an& arran%es for chartered %rou# fli%hts from site to site and for accommodations in S#artan Aotels- the onl& chain 'ith accommodations near the mines- for three ni%hts* $a&lor allo's Precision Aetals to #ic( u# his tab- as do the other anal&sts- 'ith one e.ce#tion>?ohn )dams- an em#lo&ee of a lar%e trust com#an& 'ho insists on follo'in% his com#an&4s #olic& and #a&in% for his hotel room himself* Comment, $he #olic& of )dams4s com#an& com#lies closel& 'ith Standard I(D) b& avoidin% even the a##earance of a conflict of interest- but $a&lor and the other anal&sts 'ere not necessaril& violatin% Standard I(D)* In %eneral- 'hen allo'in% com#anies to #a& for travel andEor accommodations under these circumstances- members and candidates must use their 5ud%ment> (ee#in% in mind that such arran%ements must not im#in%e on a member or candidate4s inde#endence and ob5ectivit&* In this e.am#le- the tri# 'as strictl& for business and $a&lor 'as not acce#tin% irrelevant or lavish hos#italit&* $he itinerar& re3uired chartered fli%hts- for 'hich anal&sts 'ere not e.#ected to #a&* $he accommodations 'ere modest* $hese arran%ements are not unusual and did not violate Standard I(D) so lon% as $a&lor4s inde#endence and ob5ectivit& 'ere not com#romised* In the final anal&sis- members and candidates should consider both 'hether the& can remain ob5ective and 'hether their inte%rit& mi%ht be #erceived b& their clients to have been com#romised* Example 2: Susan Billon- an anal&st in the cor#orate finance de#artment of an investment services firm- is ma(in% a #resentation to a #otential ne' business client that includes the #romise that her firm 'ill #rovide full research covera%e of the #otential client* Comment, Billon ma& a%ree to #rovide research covera%e- but she must not commit her firm4s research de#artment to #rovidin% a favorable recommendation* $he firm4s recommendation (favorable- neutral- or unfavorable) must be based on an inde#endent and ob5ective investi%ation and anal&sis of the com#an& and its securities*

Example 3: Falter "rit/ is an e3uit& anal&st 'ith ,ilton Dro(era%e 'ho covers the minin% industr&* ,e has concluded that the stoc( of Aetals O Ainin% is over#riced at its current level- but he is concerned that a ne%ative research re#ort 'ill hurt the %ood relationshi# bet'een Aetals O Ainin% and the investment ban(in% division of his firm* In fact- a senior mana%er of ,ilton Dro(era%e has 5ust sent him a co#& of a #ro#osal his firm has made to Aetals O Ainin% to under'rite a debt offerin%* "rit/ needs to #roduce a re#ort ri%ht a'a& and is concerned about issuin% a less than favorable ratin%* Comment, "rit/4s anal&sis of Aetals O Ainin% must be ob5ective and based solel& on consideration of com#an& fundamentals* )n& #ressure from other divisions of his firm is ina##ro#riate* $his conflict could have been eliminated if- in antici#ation of the offerin%- ,ilton Dro(era%e had #laced Aetals O Ainin% on a restricted list for its sales force* Example 4: )s su##ort for the sales effort of her cor#orate bond de#artment- Hindse& Farner offers credit %uidance to #urchasers of fi.ed income securities* ,er com#ensation is closel& lin(ed to the #erformance of the cor#orate bond de#artment* ;ear the 3uarter4s end- Farner4s firm has a lar%e inventor& #osition in the bonds of Ailton- Htd*- and has been unable to sell the bonds because of Ailton4s recent announcement of an o#eratin% #roblem* Sales#eo#le have as(ed her to contact lar%e clients to #ush the )ond$* Comment, Cnethical sales #ractices create si%nificant #otential violations of the Code and Standards* Farner4s o#inion of the Ailton bonds must not be affected b& internal #ressure or com#ensation* In this case- Farner must refuse to #ush the Ailton bonds unless she is able to 5ustif& that the mar(et #rice has alread& ad5usted for the o#eratin% #roblem* Example 5: ?ill ?orund is a securities anal&st follo'in% airline stoc(s and a risin% star at her firm* ,er boss has been carr&in% a bu& recommendation on International )irlines and as(s ?orund to ta(e over covera%e of that airline* ,e tells ?orund that under no circumstances should the #revailin% bu& recommendation be chan%ed* Comment, ?orund must be inde#endent and ob5ective in her anal&sis of International )irlines* If she believes that her boss4s instructions have com#romised her- she has t'o o#tions1 $ell her boss that she cannot cover the com#an& under these constraints- or #ic( u# covera%e of the com#an&- reach her o'n inde#endent conclusions- and if the& conflict 'ith her boss4s o#inionshare the conclusions 'ith her boss or other su#ervisors in the firm so that the& can ma(e a##ro#riate recommendations* ?orund must onl& issue recommendations that reflect onl& her inde#endent and ob5ective o#inion* Example 6: Ed'ard Grant directs a lar%e amount of his commission business to a ;e' Por( based bro(era%e house* In a##reciation for all the business- the bro(era%e house %ives Grant t'o tic(ets to the Forld Cu# in South )frica- t'o ni%hts at a nearb& resort- several meals- and trans#ortation via limousine to the %ame* Grant fails to disclose receivin% this #ac(a%e to his su#ervisor* Comment, Grant has violated Standard I(D) because acce#tin% these substantial %ifts ma& im#ede his inde#endence and ob5ectivit&* Ever& member and candidate should endeavor to avoid situations that mi%ht cause or be #erceived to cause a loss of inde#endence or ob5ectivit& in recommendin% investments or ta(in% investment action* D& acce#tin% the tri#- Grant has o#ened himself u# to the accusation that he ma& %ive the )%o8e% favored treatment in return*

Example 7: $heresa Green mana%es the #ortfolio of Ian Ino'lden- a client of $isbur& Investments* Green achieves an annual return for Ino'lden that is consistentl& better than that of the )en#"/a%8 she and the client #reviousl& a%reed to* )s a re'ard- Ino'lden offers Green t'o tic(ets to Fimbledon and the use of Ino'lden4s flat in Hondon for a 'ee(* Green discloses this %ift to her su#ervisor at $isbur&* Comment, Green is in com#liance 'ith Standard I(D) because she disclosed the %ift from one of her clients* Aembers and candidates ma& acce#t bonuses or %ifts from clients so lon% as the& disclose them to their em#lo&ers- because %ifts in a client relationshi# are deemed less li(el& to affect a member or candidate4s ob5ectivit& and inde#endence than %ifts in other situations* Bisclosure is re3uired- ho'ever- so that su#ervisors can monitor such situations to %uard a%ainst em#lo&ees favorin% a %ift %ivin% client to the detriment of other fee #a&in% clients (such as b& allocatin% a %reater #ro#ortion of IP+ stoc( to the %ift %ivin% client4s #ortfolio)* Example 8: $om Fa&ne is the investment mana%er of the "ran(lin Cit& Em#lo&ees Pension Plan* ,e recentl& com#leted a successful search for a firm to mana%e the forei%n e3uit& allocation of the #lan4s diversified #ortfolio* ,e follo'ed the #lan4s standard #rocedure of see(in% #resentations from a number of 3ualified firms and recommended that his board select Pen%uin )dvisors because of its e.#erience- 'ell defined in.e$!/en! $!%a!eg4- and #erformance record- 'hich 'as com#iled and verified in accordance 'ith the C") Institute Global Investment Performance Standards* "ollo'in% the #lan selection of Pen%uin- a re#orter from the "ran(lin Cit& 9ecord called to as( if there 'as an& connection bet'een this action and the fact that Pen%uin 'as one of the s#onsors of an investment fact findin% tri# to )sia that Fa&ne made earlier in the &ear* $he tri# 'as one of several conducted b& the Pension Investment )cadem&- 'hich had arran%ed the itinerar& of meetin%s 'ith economic%overnment- and cor#orate officials in ma5or cities in several )sian countries* $he Pension Investment )cadem& obtains su##ort for the cost of these tri#s from a number of investment mana%ers- includin% Pen%uin )dvisors2 the )cadem& then #a&s the travel e.#enses of the various #ension #lan mana%ers on the tri# and #rovides all meals and accommodations* $he #resident of Pen%uin )dvisors 'as one of the travelers on the tri#* Comment, )lthou%h Fa&ne can #robabl& #ut to %ood use the (no'led%e he %ained from the tri# in selectin% #ortfolio mana%ers and in other areas of mana%in% the #ension #lan- his recommendation of Pen%uin )dvisors ma& be tainted b& the #ossible conflict incurred 'hen he #artici#ated in a tri# #aid #artl& for b& Pen%uin )dvisors and 'hen he 'as in the dail& com#an& of the #resident of Pen%uin )dvisors* $o avoid violatin% Standard I(D)- Fa&ne4s basic e.#enses for travel and accommodations should have been #aid b& his em#lo&er or the #ension #lan2 contact 'ith the #resident of Pen%uin )dvisors should have been limited to informational or educational events onl&2 and the tri#- the or%ani/er- and the s#onsor should have been made a matter of #ublic record* Even if his actions 'ere not in violation of Standard I(D)- Fa&ne should been sensitive to the #ublic #erce#tion of the tri# 'hen re#orted in the ne's#a#er and the e.tent to 'hich the sub5ective elements of his decision mi%ht have been affected b& the familiarit& that the dail& contact of such a tri# 'ould encoura%e* $his advanta%e 'ould #robabl& not be shared b& com#etin% firms* Example 9: ?avier ,errero recentl& left his 5ob as a research anal&st for a lar%e investment advisor* Fhile loo(in% for a ne' #osition- he is hired b& an investor relations firm to 'rite a research re#ort on one of its clients- a small educational soft'are com#an&* $he investor relations firm ho#es to

%enerate investor interest in the technolo%& com#an&* $he firm 'ill #a& ,errero a flat fee #lus a bonus if an& ne' investors bu& stoc( in the com#an& as a result of ,errero4s re#ort* Comment, If ,errero acce#ts this #a&ment arran%ement- he 'ill be in violation of Standard I(D) because the com#ensation can reasonabl& be e.#ected to com#romise his inde#endence and ob5ectivit&* ,errero 'ill receive a bonus for attractin% investors- 'hich is an over'helmin% incentive to draft a #ositive re#ort re%ardless of the facts and to i%nore or #la& do'n an& ne%ative information about the com#an&* ,errero should acce#t for his 'or( onl& a flat fee that is not tied to the conclusions or recommendations of the re#ort* Issuer #aid research that is ob5ective and unbiased can be done under the ri%ht circumstances so lon% as the anal&st ta(es ste#s to maintain his or her ob5ectivit& and includes in the re#ort #ro#er disclosures re%ardin% #otential conflicts of interest* C( Mi$%e:%e$en!a!ion Me/)e%$ and #andida!e$ /'$! no! 8no<ing&4 /a8e an4 /i$%e:%e$en!a!ion$ %e&a!ing !o in.e$!/en! ana&4$i$@ %e#o//enda!ion$@ a#!ion$@ o% o!"e% :%o e$$iona& a#!i.i!ie$( $rust is the foundation of the investment #rofession* Investors must be able to rel& on the statements and information #rovided to them b& those 'ith 'hom investors trust their financial 'ell bein%* Investment #rofessionals 'ho ma(e false or misleadin% statements not onl& harm investors but also reduce the level of investor confidence in the investment #rofession and threaten the inte%rit& of ca#ital mar(ets as a 'hole* ) misre#resentation is an& untrue statement or omission of a fact or an& statement that is other'ise false or misleadin%* ) member or candidate must not (no'in%l& misre#resent or %ive a false im#ression in oral re#resentations- advertisin% ('hether in the #ress or throu%h brochures)- electronic communications- or 'ritten materials ('hether #ublicl& disseminated or not)* In this conte.t(no'in%l& means that a member or candidate either (no's or should have (no'n that the misre#resentation 'as bein% made* Fritten materials for a %eneral audience include- but are not limited to- research re#orts- mar(et letters- ne's#a#er columns- and boo(s* Electronic communications include- but are not limited toInternet communications- Feb #a%es- chat rooms- and e mail* Aembers and candidates must not misre#resent an& as#ect of their #ractice- includin% (but not limited to) their 3ualifications or credentials- the 3ualifications or services #rovided b& their firmtheir #erformance record or the record of their firm- or the characteristics of an investment* )n& misre#resentation made b& the member or candidate relatin% to the member or candidate4s #rofessional activities is a breach of this standard* Standard I (C) #rohibits members and candidates from %uaranteein% clients s#ecific return on investments that are inherentl& volatile* (I can %uarantee that &ou 'ill earn Q #ercent on e3uities this &ear- or I can %uarantee that &ou 'ill not lose /one4 on this investment)* "or the most #art- the ma5orit& of investments contain some element of %i$8 that ma(es their return inherentl& un#redictable* In those situations- %uaranteein% either a #articular rate of return or a %uaranteed #reservation of investment #a:i!a& is misleadin% to investors* Standard I(C) does not #rohibit members and candidates from #rovidin% clients 'ith information on investment #roducts that have %uarantees built in to the structure of the #roduct itself or for 'hich an institution has a%reed to cover an& losses

Standard I(C) also #rohibits #la%iarism in the #re#aration of material for distribution to em#lo&ersassociates- clients- #ros#ects- or the %eneral #ublic* Pla%iarism is defined as co#&in% or usin% in substantiall& the same form materials #re#ared b& others 'ithout ac(no'led%in% the source of the material or identif&in% the author and #ublisher of such material* Aembers and candidates must not co#&- or re#resent as their o'n- ori%inal ideas or material 'ithout #ermission and must ac(no'led%e and identif& the source of ideas or material that is not their o'n* $he investment #rofession uses a m&riad of financial- economic- and statistical data in the investment decision ma(in% #rocess* $hrou%h various #ublications and #resentations- the investment #rofessional is constantl& e.#osed to the 'or( of others and to the tem#tation to use that 'or( 'ithout #ro#er ac(no'led%ment* Aisre#resentation throu%h #la%iarism in investment mana%ement can ta(e various forms* $he sim#lest and most fla%rant e.am#le is to ta(e a research re#ort or stud& done b& another firm or #erson- chan%e the names- and release the material as one4s o'n ori%inal anal&sis* $his action is a clear violation of Standard I(C)* +ther #ractices include (0) usin% e.cer#ts from articles or re#orts #re#ared b& others either verbatim or 'ith onl& sli%ht chan%es in 'ordin% 'ithout ac(no'led%ment(7) citin% s#ecific 3uotations su##osedl& attributable to leadin% anal&sts and investment e.#erts 'ithout s#ecific reference- (L) #resentin% statistical estimates of forecasts #re#ared b& others 'ith the source identified but 'ithout 3ualif&in% statements or caveats that ma& have been used- (:) usin% charts and %ra#hs 'ithout statin% their sources- and (8) co#&in% #ro#rietar& com#uteri/ed s#readsheets or al%orithms 'ithout see(in% the coo#eration or authori/ation of their creators* In the case of distributin% third #art&- outsourced research- members and candidates can use and distribute these re#orts so lon% as the& do not re#resent themselves as the author of the re#ort* $he member or candidate ma& add value to the client b& siftin% throu%h research and re#ac(a%in% it for clients* $he client should full& understand that he or she is #a&in% for the abilit& of the member or candidate to find the best research from a 'ide variet& of sources* ,o'ever- members and candidates must not misre#resent their abilities- the e.tent of their e.#ertise- or the e.tent of their 'or( in a 'a& that 'ould mislead their clients or #ros#ective clients* Aembers and candidates should consider disclosin% 'hether the research bein% #resented to clients comes from an outside source- from either 'ithin or outside the member or candidate4s firm* Clients should (no' 'ho has the e.#ertise behind the re#ort or if the 'or( is bein% done b& the anal&st- other members of the firm- or an outside #art&* $he standard also a##lies to #la%iarism in oral communications- such as throu%h %rou# meetin%s2 visits 'ith associates- clients- and customers2 use of audioEvideo media ('hich is ra#idl& increasin%)2 and telecommunications- such as throu%h electronic data transfer and the outri%ht co#&in% of electronic media* +ne of the most e%re%ious #ractices in violation of this standard is the #re#aration of research re#orts based on multi#le sources of information 'ithout ac(no'led%in% the sources* Such information 'ould include- for e.am#le- ideas- statistical com#ilations- and forecasts combined to %ive the a##earance of ori%inal 'or(* )lthou%h there is no mono#ol& on ideas- members and candidates must %ive credit 'hen it is clearl& due* )nal&sts should not use undocumented forecasts- earnin%s #ro5ections- asset values- and so on* Sources must be revealed to brin% the res#onsibilit& directl& bac( to the author of the re#ort or the firm involved*

Re#o//ended P%o#ed'%e$ o% Co/:&ian#e Aembers and candidates can #revent unintentional misre#resentations of the 3ualifications or services the& or their firms #rovide if each member and candidate understands the limit of the firm or individual4s ca#abilities and the need to be accurate and com#lete in #resentations* "irms can #rovide %uidance for em#lo&ees 'ho ma(e 'ritten or oral #resentations to clients or #otential clients b& #rovidin% a 'ritten list of the firm4s available services and a descri#tion of the firm4s 3ualifications* $his list should su%%est 'a&s of describin% the firm4s services- 3ualifications- and com#ensation that are both accurate and suitable for client or customer #resentations* "irms can also hel# #revent misre#resentation b& s#ecificall& desi%natin% 'hich em#lo&ees are authori/ed to s#ea( on behalf of the firm* Fhether or not the firm #rovides %uidance- members and candidates should ma(e certain the& understand the services the firm can #erform and its 3ualifications* In addition- in order to ensure accurate #resentations to clients- each member and candidate should #re#are a summar& of his or her o'n 3ualifications and e.#erience as 'ell as a list of the services the member or candidate is ca#able of #erformin%* "irms can assist member and candidate com#liance b& #eriodicall& revie'in% em#lo&ee corres#ondence and documents that contain re#resentations of individual or firm 3ualifications* Aembers and candidates 'ho #ublish Feb #a%es should re%ularl& monitor materials #osted to the site to ensure the site maintains current information* Aembers and candidates should also ensure that all reasonable #recautions have been ta(en to #rotect the site4s inte%rit&- confidentialit&- and securit&- and that the site does not misre#resent an& information and #rovides full disclosure* $o avoid #la%iarism in #re#arin% research re#orts or conclusions of anal&sis- members and candidates should ta(e the follo'in% ste#s1 Aaintain co#ies* Iee# co#ies of all research re#orts- articles containin% research ideasmaterial 'ith ne' statistical methodolo%&- and other materials that 'ere relied on in #re#arin% the research re#ort* )ttribute 3uotations* )ttribute to their sources an& direct 3uotations- includin% #ro5ectionstables- $!a!i$!i#$- modelE#roduct ideas- and ne' methodolo%ies #re#ared b& #ersons other than reco%ni/ed financial and statistical re#ortin% services or similar sources* )ttribute summaries* )ttribute to their sources #ara#hrases or summaries of material #re#ared b& others* "or e.am#le- to su##ort his anal&sis of Dro'n4s com#etitive #osition- the author of a research re#ort on Dro'n Com#an& ma& summari/e another anal&st4s re#ort of Dro'n4s chief com#etitor- but the author of the Dro'n re#ort must ac(no'led%e in his o'n re#ort his reliance on the other anal&st4s re#ort*

A::&i#a!ion o !"e S!anda%d Example 1: )llison 9o%ers is a #artner in the firm of 9o%ers and Dlac(- a small firm offerin% investment advisor& services* She assures a #ros#ective client 'ho has 5ust inherited R0 million that 'e can #erform all the financial and investment services &ou need* 9o%ers and Dlac( is 'ell e3ui##ed to #rovide investment advice but- in fact- cannot #rovide a$$e! a&&o#a!ion assistance or a full arra& of financial and investment services*

Comment, 9o%ers has violated Standard I(C) b& orall& misre#resentin% the services her firm can #erform for the #ros#ective client* She must limit herself to describin% the ran%e of investment advisor& services 9o%ers and Dlac( can #rovide and offer to hel# the client obtain else'here the financial and investment services that her firm cannot #rovide* Example 2: )nthon& AcGuire is an issuer #aid anal&st hired b& #ublicl& traded com#anies to electronicall& #romote their stoc(s* AcGuire creates a 'ebsite that #romotes his research efforts as a seemin%l& inde#endent anal&st* AcGuire #osts a #rofile and a stron% bu& recommendation for each com#an& on the 'ebsite indicatin% that the stoc( is e.#ected to increase in value* ,e does not disclose the contractual relationshi#s 'ith the com#anies he covers on his 'ebsite- in the research re#orts he issues- or in the statements he ma(es about the com#anies on Internet chat rooms* Comment, AcGuire has violated Standard I(C) because the Internet site and e mails are misleadin% to #otential investors* Even if the recommendations are valid and su##orted 'ith thorou%h research- his omissions re%ardin% the true relationshi# bet'een himself and the com#anies he covers constitute a misre#resentation* AcGuire has also violated Standard VI()) b& not disclosin% the e.istence of an arran%ement 'ith the com#anies throu%h 'hich he receives com#ensation in e.chan%e for his services* Example 3: ,i5an Pao is res#onsible for the creation and distribution of the mar(etin% material for his firm* Pao creates and distributes a #erformance #resentation for the firm4s )sian e3uit& com#osite that com#lies 'ith GIPS and states that the com#osite has L8! billion &en in assets* In fact- the com#osite has onl& L8 billion &en in assets- and the hi%her fi%ure on the #resentation is a result of a t&#o%ra#hical error* ;evertheless- the erroneous material is distributed to a number of clients before Pao catches the mista(e* Comment, +nce the error is discovered- Pao must ta(e ste#s to cease distribution of the incorrect material and correct the error b& informin% those 'ho have received the erroneous information* ,o'ever- because Pao did not (no'in%l& ma(e the misre#resentation- he did not violate the Code and Standards* Example 4: S&ed Auhammad is the #resident of an investment mana%ement firm* $he #romotional material for the firm- created b& the firm4s mar(etin% de#artment- incorrectl& claims that Auhammad has an advanced de%ree in finance from a #resti%ious business school in addition to the C") desi%nation* )lthou%h Auhammad attended the school for a short #eriod of time- he did not receive a de%ree* +ver the &ears- Auhammad and others in the firm have distributed this material to numerous #ros#ective clients and consultants* Comment, Even thou%h Auhammad ma& not have been directl& res#onsible for the misre#resentation about his credentials contained in the firm4s #romotional material- he used this material numerous times over an e.tended #eriod and should have (no'n of the misre#resentation* $hus- Auhammad has violated Standard I(C)* Example 5: Cind& Grant- a research anal&st for a Canadian bro(era%e firm- has s#eciali/ed in the Canadian minin% industr& for the #ast 0! &ears* She recentl& read an e.tensive research re#ort on ?efferson Ainin%- Htd*- b& ?erem& Darton- another anal&st* Darton #rovided e.tensive statistics on the mineral reserves- #roduction ca#acit&- sellin% rates- and mar(etin% factors affectin% ?efferson4s o#erations* ,e also noted that initial drillin% results on a ne' ore bod&- 'hich had not been made

#ublic- mi%ht sho' the e.istence of mineral /ones that could increase the life of ?efferson4s main mines- but Darton cited no s#ecific data as to the initial drillin% results* Grant called an officer of ?efferson- 'ho %ave her the initial drillin% results over the tele#hone* $he data indicated that the e.#ected life of the main mines 'ould be tri#led* Grant added these statistics to Darton4s re#ort and circulated it as her o'n re#ort 'ithin her firm* Comment, Grant #la%iari/ed Darton4s re#ort b& re#roducin% lar%e #arts of it in her o'n re#ort 'ithout ac(no'led%ment* Example 6: Fhen 9ic(i Aar(s sells mort%a%e bac(ed de%i.a!i.e$ called interest onl& stri#s (I+s) to her #ublic #ension #lan clients- she describes them as %uaranteed b& the C*S* %overnment* Purchasers of the I+s- ho'ever- are entitled onl& to the interest stream %enerated b& the mort%a%es not the no!iona& :%in#i:a& itself* $he munici#alit&4s investment #olicies and local la' re3uire that securities #urchased b& the #ublic #ension #lans be %uaranteed b& the C*S* %overnment* )lthou%h the underl&in% mort%a%es are %uaranteed- neither the investor4s investment nor the interest stream on the I+s is %uaranteed* Fhen in!e%e$! rates decline- causin% an increase in #re#a&ment of mort%a%esthe interest #a&ments to the clients decline- and the clients lose a #ortion of their investment* Comment, Aar(s violated Standard I(C) b& misre#resentin% the terms and character of the investment* Example 7: Ihalouc( )bdrabbo mana%es the investments of several hi%h net 'orth individuals in the Cnited States 'ho are a##roachin% retirement* )bdrabbo advises that a #ortion of their investments be moved from e3uit& to #e%!i i#a!e$ o de:o$i! and mone& mar(et accounts so the #rinci#al 'ill be %uaranteed u# to a certain amount* $he interest is not %uaranteed* Comment, Fhile there is ris( that the institution offerin% the certificates of de#osits and mone& mar(et accounts could %o ban(ru#t- in the C*S*- these accounts are insured b& the Cnited States %overnment throu%h the "ederal Be#osit Insurance Cor#oration* $herefore- usin% the term %uaranteed in this conte.t is not ina##ro#riate as lon% as the amount is 'ithin the %overnment insured limit* )bdrabbo should e.#lain these facts to the clients* Example 8: Steve S'anson is a senior anal&st in the investment research de#artment of Dallard and Com#an&* )#e. Cor#oration has as(ed Dallard to assist in ac3uirin% the ma5orit& o'nershi# in stoc( of Cam#bell Com#an&- a financial consultin% firm- and to #re#are a re#ort recommendin% that stoc(holders of Cam#bell a%ree to the ac3uisition* )nother investment firm- Bavis and Com#an&had alread& #re#ared a re#ort for )#e. anal&/in% both )#e. and Cam#bell and recommendin% an e.chan%e ratio* )#e. has %iven the Bavis re#ort to Dallard officers- 'ho have #assed it on to S'anson- 'ho then revie'ed the Bavis re#ort alon% 'ith other available material on )#e. and Cam#bell com#anies* "rom his anal&sis- he concludes that the common stoc(s of Cam#bell and )#e. re#resent %ood value at their current #rices2 he believes- ho'ever- that the Bavis re#ort does not consider all the factors a Cam#bell stoc(holder 'ould need to (no' to ma(e a decision* S'anson re#orts his conclusions to the #artner in char%e- 'ho tells him to use the Bavis re#ortchan%e a fe' 'ords- si%n &our name- and %et it out* Comment, If S'anson does as re3uested- he 'ill violate Standard I(C)* ,e could refer to those #ortions of the Bavis re#ort that he a%rees 'ith if he identifies Bavis as the source2 he could then add his o'n anal&sis and conclusions to the re#ort before si%nin% and distributin% it*

Example 9: Claude Dro'nin%- a 3uantitative anal&st for Bouble )l#ha- Inc*- returns in %reat e.citement from a seminar* In that seminar- ?ac( ?orrel&- a 'ell #ublici/ed 3uantitative anal&st at a national bro(era%e firm- discussed one of his ne' models in %reat detail- and Dro'nin% is intri%ued b& the ne' conce#ts* ,e #roceeds to test this model- ma(in% some minor mechanical chan%es but retainin% the conce#t- until he #roduces some ver& #ositive results* Dro'nin% 3uic(l& announces to his su#ervisors at Bouble )l#ha that he has discovered a ne' model and that clients and #ros#ective clients ali(e should be informed of this #ositive findin% as on%oin% #roof of Bouble )l#ha4s continuin% innovation and abilit& to add value* Comment, )lthou%h Dro'nin% tested ?orrel&4s model on his o'n and even sli%htl& modified ithe must still ac(no'led%e the ori%inal source of the idea* Dro'nin% can certainl& ta(e credit for the final- #ractical results2 he can also su##ort his conclusions 'ith his o'n test* $he credit for the innovative thin(in%- ho'ever- must be a'arded to ?orrel&* Example 10: "ernando Subia 'ould li(e to include in his firm4s mar(etin% materials #lain lan%ua%e descri#tions of various conce#ts- such as the #rice to earnin%s multi#le and 'h& $!anda%d de.ia!ion is used as a measure of ris(- that are ta(en from other sources 'ithout reference to the ori%inal author* Is this a violation of Standard I(C)T Comment, Co#&in% verbatim an& material 'ithout ac(no'led%ement- includin% #lain lan%ua%e descri#tions of the #rice to earnin%s multi#le and standard deviation- violates Standard I(C)* Even thou%h these are %eneral conce#ts- best #ractice 'ould be for Subia to describe them in his o'n 'ords or cite the source from 'hich the descri#tions are 3uoted* Aembers and candidates res#onsible for creatin% mar(etin% materials and those 'ho (no'in%l& use #la%iari/ed materials could #otentiall& be sanctioned if the matter 'as brou%ht to the attention of the C") Institute Professional Conduct Pro%ram* Example 11: $hrou%h a mainstream media outlet- Eri(a Schneider learns about a stud& that she 'ould li(e to cite in her research* Should she cite both the mainstream intermediar& source as 'ell as the author of the stud& itself 'hen usin% that informationT Comment, In all instances- it is necessar& to cite the actual source of the information* Dest #ractice 'ould be to obtain the information directl& from the author and revie' it before citin% it in a re#ort* In that instance- Schneider 'ould not need to re#ort ho' she found out about the information* "or e.am#le- su##ose Schneider reads in the +inancial %imes about a stud& issued b& C") Institute2 best #ractice for Schneider 'ould be to obtain a co#& of the stud& from C") Institute- revie' it- and then cite it in her re#ort* If she does not use an& inter#retation from the +inancial %imes and it is not addin% value to the re#ort itself- the ne's#a#er is merel& a conduit to the ori%inal information she 'ants to use in the re#ort and it need not be cited* If she does not obtain the re#ort and revie' the information- Schneider runs the ris( of rel&in% on second hand information that ma& misstate the source* If- for e.am#le- the +inancial %imes erroneousl& re#orted the information from the ori%inal C") Institute stud& and Schneider co#ied that erroneous information 'ithout ac(no'led%in% C") Institute- she 'ould o#en herself to com#laint* Dest #ractice 'ould be either to obtain the com#lete stud& from its ori%inal author and cite onl& that author or to use the information #rovided b& the intermediar& and cite both sources* Example 12: Gar& +stro's(i runs a small- t'o #erson investment mana%ement firm* +stro's(i4s firm subscribes to a service from a lar%e investment research firm that #rovides research re#orts that

can be re#ac(a%ed as in house research from smaller firms* +stro's(i4s firm distributes these re#orts to clients as its o'n 'or(* Comment, +stro's(i can rel& on third #art& research that has a reasonable and ade3uate basisbut he cannot im#l& that he is the author of the re#ort* +ther'ise- +stro's(i 'ould misre#resent the e.tent of his 'or( in a 'a& that 'ould mislead the firm4s clients or #ros#ective clients* D( Mi$#ond'#! Me/)e%$ and #andida!e$ /'$! no! engage in an4 :%o e$$iona& #ond'#! in.o&.ing di$"one$!4@ %a'd@ o% de#ei! o% #o//i! an4 a#! !"a! %e &e#!$ ad.e%$e&4 on !"ei% :%o e$$iona& %e:'!a!ion@ in!eg%i!4@ o% #o/:e!en#e( Fhereas Standard I()) addresses the obli%ation of members and candidates to com#l& 'ith a##licable la' that %overns their #rofessional activities- Standard I(B) addresses conduct that reflects #oorl& on the #rofessional inte%rit&- %ood re#utation- or com#etence of members and candidates* )lthou%h C") Institute discoura%es an& sort of unethical behavior b& members and candidates- the Code and Standards are aimed at conduct related to a member or candidate4s #rofessional life* )n& act that involves l&in%- cheatin%- stealin%- or other dishonest conduct that reflects adversel& on a member or candidate4s #rofessional activities- 'ould violate this standard* Conduct that dama%es trust'orthiness or com#etence can include behavior that ma& not be ille%al but could ne%ativel& affect a member or candidate4s abilit& to #erform his or her res#onsibilities* "or e.am#le- abusin% alcohol durin% business hours could constitute a violation of this standard because it could have a detrimental effect on the member or candidate4s abilit& to fulfill his or her #rofessional res#onsibilities* Personal ban(ru#tc& ma& not reflect on the inte%rit& or trust'orthiness of the #erson declarin% ban(ru#tc&- but if the circumstances of the ban(ru#tc& involve fraudulent or deceitful business conduct- it ma& be a violation of this standard* Individuals ma& attem#t to abuse the C") Institute Professional Conduct Pro%ram b& activel& see(in% C") Institute enforcement of the Code and Standards- and Standard I(B) in #articular- as a method to settle #ersonal- #olitical- or other dis#utes unrelated to #rofessional ethics* C") Institute is a'are of this issue- and a##ro#riate disci#linar& #olicies- #rocedures- and enforcement mechanisms are in #lace to address misuse of the Code and Standards and the Professional Conduct Pro%ram in this 'a&* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e $o #revent %eneral misconduct- members and candidates should encoura%e their firms to ado#t the follo'in% #olicies and #rocedures to su##ort the #rinci#les of Standard I(B)1 Bevelo# andEor ado#t a code of ethics to 'hich ever& em#lo&ee must subscribe and ma(e clear that an& #ersonal behavior that reflects #oorl& on the individual involved- the institution as a 'hole- or the investment industr& 'ill not be tolerated* Bisseminate to all em#lo&ees a list of #otential violations and associated disci#linar& sanctions- u# to and includin% dismissal from the firm*

Chec( references of #otential em#lo&ees to ensure that the& are of %ood character and not ineli%ible to 'or( in the investment industr& because of #ast infractions of the la'*

A::&i#a!ion o !"e S!anda%d Example 1: Simon Sasserman is a trust investment officer at a ban( in a small affluent to'n* ,e en5o&s lunchin% ever& da& 'ith friends at the countr& club- 'here his clients have observed him havin% numerous drin(s* Dac( at 'or( after lunch- he clearl& is into.icated 'hile ma(in% investment decisions* ,is collea%ues ma(e a #oint of handlin% an& business 'ith Sasserman in the mornin% because the& distrust his 5ud%ment after lunch* Comment, Sasserman4s e.cessive drin(in% at lunch and subse3uent into.ication at 'or( constitute a violation of Standard I(B) because this conduct has raised 3uestions about his #rofessionalism and com#etence* ,is behavior thus reflects #oorl& on him- his em#lo&er- and the investment industr&* Example 2: ,o'ard ,offman- a securit& anal&st at )$S Drothers- Inc*- a lar%e bro(era%e housesubmits reimbursement forms over a t'o &ear #eriod to )$S4s self funded health insurance #ro%ram for more than t'o do/en bills- most of 'hich have been altered to increase the amount due* )n investi%ation b& the firm4s director of em#lo&ee benefits uncovers the conduct* )$S subse3uentl& terminates ,offman4s em#lo&ment and notifies C") Institute* Comment, ,offman violated Standard I(B) because he en%a%ed in intentional conduct involvin% fraud and deceit in the 'or(#lace that adversel& reflected on his honest&* Example 3: ?od& Drin(- an anal&st coverin% the automotive industr&- volunteers much of her s#are time to local charities* $he board of one of the charitable institutions decides to bu& five ne' vans to deliver hot lunches to lo' income elderl& #eo#le* Drin( offers to donate her time to handle #urchasin% a%reements* $o #a& a lon% standin% debt to a friend 'ho o#erates an automobile dealershi#>and to com#ensate herself for her trouble>she a%rees to a #rice 7! #ercent hi%her than normal and s#lits the surchar%e 'ith her friend* $he director of the charit& ultimatel& discovers the scheme and tells Drin( that her services- donated or other'ise- are no lon%er re3uired* Comment, Drin( en%a%ed in conduct involvin% dishonest&- fraud- and misre#resentation and has violated Standard I(B)* Example 4: Carmen Garcia mana%es a /'!'a& 'nd dedicated to sociall& res#onsible investin%* She is also an environmental activist* )s the result of her #artici#ation at nonviolent #rotests- Garcia has been arrested on numerous occasions for tres#assin% on the #ro#ert& of a lar%e #etrochemical #lant that is accused of dama%in% the environment* Comment, Generall&- Standard I(B) is not meant to cover le%al trans%ressions resultin% from acts of civil disobedience in su##ort of #ersonal beliefs because such conduct does not reflect #oorl& on the member or candidate4s #rofessional re#utation- inte%rit&- or com#etence* STANDARD IIAINTEGRITY OF CAPITAL MAR>ETS A( Ma!e%ia& Non:')&i# In o%/a!ion

Me/)e%$ and #andida!e$ <"o :o$$e$$ /a!e%ia& non:')&i# in o%/a!ion !"a! #o'&d a e#! !"e .a&'e o an in.e$!/en! /'$! no! a#! o% #a'$e o!"e%$ !o a#! on !"e in o%/a!ion( $radin% on material non#ublic information erodes confidence in ca#ital mar(ets- institutions- and investment #rofessionals b& su##ortin% the idea that those 'ith inside information and s#ecial access can ta(e unfair advanta%e of the %eneral investin% #ublic* )lthou%h tradin% on inside information ma& lead to short term #rofits- in the &ong %'n- individuals and the #rofession as a 'hole 'ill suffer as investors avoid ca#ital mar(ets #erceived to be ri%%ed in favor of the (no'led%eable insider* Standard II()) #romotes and maintains a hi%h level of confidence in mar(et inte%rit&- 'hich is one of the foundations of the investment #rofession* Information is material if its disclosure 'ould li(el& have an im#act on the #rice of a securit& or if reasonable investors 'ould 'ant to (no' the information before ma(in% an investment decision* In other 'ords- information is material if it 'ould si%nificantl& alter the total mi. of information currentl& available re%ardin% a securit& such that the #rice of the securit& 'ould be affected* $he s#ecificit& of the information- the e.tent of its difference from #ublic information- its natureand its reliabilit& are (e& factors in determinin% 'hether a #articular #iece of information fits the definition of material* "or e.am#le- material information ma& include- but is not limited toinformation on the follo'in%1 earnin%s2 mer%ers- ac3uisitions- tender offers- or 5oint ventures2 chan%es in assets2 innovative #roducts- #rocesses- or discoveries2 ne' licenses- #atents- re%istered trademar(s- or re%ulator& a##rovalEre5ection of a #roduct2 develo#ments re%ardin% customers or su##liers (e*%*- the ac3uisition or loss of a contract)2 chan%es in mana%ement2 chan%e in auditor notification or the fact that the issuer ma& no lon%er rel& on an auditor4s re#ort or 3ualified o#inion2 events re%ardin% the issuer4s securities (e*%*- defaults on senior securities- calls of securities for redem#tion- re#urchase #lans- stoc( s#lits- chan%es in dividends- chan%es to the ri%hts of securit& holders- #ublic or #rivate sales of additional securities- and chan%es in credit ratin%s)2 ban(ru#tcies2 si%nificant le%al dis#utes2 %overnment re#orts of economic trends (em#lo&ment- housin% starts- #'%%en#4 informationetc*)2 orders for lar%e trades before the& are e.ecuted*

In addition to the substance and s#ecificit& of the information- the source or relative reliabilit& of the information also determines materialit&* $he less reliable a source- the less li(el& the information

#rovided 'ould be considered material* "or e.am#le- factual information from a cor#orate insider re%ardin% a si%nificant ne' contract for a com#an& 'ould li(el& be material- 'hile an assum#tion based on s#eculation b& a com#etitor about the same contract mi%ht be less reliable and- thereforenot material* )lso- the more ambi%uous the effect on #rice- the less material the information becomes* If it is unclear 'hether the information 'ill affect the #rice of a securit& and to 'hat e.tent- information ma& not be considered material* $he #assa%e of time ma& also render information that 'as once im#ortant immaterial* Information is non#ublic until it has been disseminated or is available to the mar(et#lace in %eneral (as o##osed to a select %rou# of investors)* Bissemination can be defined as made (no'n to* "or e.am#le- a com#an& re#ort of #rofits that is #osted on the Internet and distributed 'idel& throu%h a #ress release or accom#anied b& a filin% has been effectivel& disseminated to the mar(et#lace* Aembers and candidates must have a reasonable e.#ectation that #eo#le have received the information before it can be considered #ublic* It is not necessar&- ho'ever- to 'ait for the slo'est method of deliver&* +nce the information is disseminated to the mar(et- it is #ublic information that is no lon%er covered b& this standard* Aembers and candidates must be #articularl& a'are of information that is selectivel& disclosed b& cor#orations to a small %rou# of investors- anal&sts- or other mar(et #artici#ants* Information that is made available to anal&sts remains non#ublic until it is made available to investors in %eneral* Cor#orations that disclose information on a limited basis create the #otential for insider tradin% violations* Issues of selective disclosure often arise 'hen a cor#orate insider #rovides material information to anal&sts in a briefin% or conference call before that information is released to the #ublic* )nal&sts must be a'are that a disclosure made to a room full of anal&sts does not necessaril& ma(e the disclosed information #ublic* )nal&sts should also be alert to the #ossibilit& that the& are selectivel& receivin% material non#ublic information 'hen a com#an& #rovides them 'ith %uidance or inter#retation of such #ublicl& available information as financial statements or re%ulator& filin%s* #osaic % eory ) financial anal&st %athers and inter#rets lar%e 3uantities of information from man& sources* $he anal&st ma& use si%nificant conclusions derived from the anal&sis of #ublic and nonmaterial non#ublic information as the basis for investment recommendations and decisions even if those conclusions 'ould have been material inside information had the& been communicated directl& to the anal&st b& a com#an&* Cnder the mosaic theor&- financial anal&sts are free to act on this collection- or mosaic- of information 'ithout ris(in% violation* $he #ractice of financial anal&sis de#ends on the free flo' of information* "or the fair and efficient o#eration of the ca#ital mar(ets- anal&sts and investors must have the %reatest amount of information #ossible to facilitate 'ell informed investment decisions about ho' and 'here to invest ca#ital* )ccurate- timel&- and intelli%ible communication are essential if anal&sts and investors are to obtain the data needed to ma(e informed decisions about ho' and 'here to invest ca#ital* $hese disclosures must %o be&ond the information mandated b& the re#ortin% re3uirements of the securities la's and should include s#ecific business information about items used to %uide a com#an&4s future

%ro'th- such as ne' #roducts- ca#ital #ro5ects- and the #o/:e!i!i.e en.i%on/en!* )nal&sts see( and use such information to com#are and contrast investment alternatives* Auch of the information used b& anal&sts comes directl& from com#anies* )nal&sts often receive such information throu%h contacts 'ith cor#orate insiders- es#eciall& investor relations and finance officers* Information ma& be disseminated in the form of #ress releases- throu%h oral #resentations b& com#an& e.ecutives in anal&sts4 meetin%s or conference calls- or durin% anal&sts4 visits to com#an& #remises* In see(in% to develo# the most accurate and com#lete #icture of a com#an&anal&sts should also reach be&ond contacts 'ith com#anies themselves and collect information from other sources- such as customers- contractors- su##liers- and com#anies4 com#etitors* )nal&sts are in the business of formulatin% o#inions and insi%hts>not obvious to the %eneral investin% #ublic>concernin% the attractiveness of #articular securities* In the course of their 'or(anal&sts activel& see( out cor#orate information not %enerall& (no'n to the mar(et for the e.#ress #ur#ose of anal&/in% that information- formin% an o#inion on its si%nificance- and informin% their clients 'ho can be e.#ected to trade on the basis of the recommendation* )nal&sts4 initiatives to discover and anal&/e information and communicate their findin%s to their clients si%nificantl& enhance mar(et efficienc&- thus benefitin% all investors* )ccordin%l&- violations of Standard II()) 'ill not result 'hen a #erce#tive anal&st reaches a conclusion about a cor#orate action or event throu%h an anal&sis of #ublic information and items of nonmaterial non#ublic information* Investment #rofessionals should note- ho'ever- that althou%h anal&sts are free to use mosaic information in their research re#orts- the& should save and document all their research Jsee Standard V(C)K* Evidence of the anal&st4s (no'led%e of #ublic and nonmaterial non#ublic information about a cor#oration stren%thens the assertion that the anal&st reached his or her conclusions solel& throu%h a##ro#riate methods rather than throu%h the use of material non#ublic information* Fhen a #articularl& 'ell (no'n or res#ected anal&st issues a re#ort or ma(es chan%es to his or her recommendation- that information alone could have an effect on the mar(et and- thus- could be considered material* $heoreticall&- under this standard- such a re#ort 'ould have to be made #ublic before it 'as distributed to clients* ,o'ever- the anal&st is not a com#an& insider and does not have access to inside information* Presumabl&- the anal&st created the re#ort 'ith information available to the #ublic (mosaic theor&) usin% his or her e.#ertise to inter#ret the information* $he anal&st4s hard 'or(- #aid for b& the client- %enerated the conclusions* Sim#l& because the #ublic in %eneral 'ould find the conclusions material does not re3uire that the anal&st ma(e his or her 'or( #ublic* Investors 'ho are not clients of the anal&st can either do the 'or( themselves or become a client of the anal&st if the& 'ant access to the anal&st4s e.#ertise* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e If a member or candidate determines that information is material- the member or candidate should ma(e reasonable efforts to achieve #ublic dissemination of the information* $his effort usuall& entails encoura%in% the issuer com#an& to ma(e the information #ublic* If #ublic dissemination is not #ossible- the member or candidate must communicate the information onl& to the desi%nated su#ervisor& and com#liance #ersonnel 'ithin the member or candidate4s firm and must not ta(e investment action on the basis of the information* Aoreover- members and candidates must not (no'in%l& en%a%e in an& conduct that ma& induce com#an& insiders to #rivatel& disclose material non#ublic information*

Aembers and candidates should encoura%e their firms to ado#t com#liance #rocedures to #revent the misuse of material non#ublic information* Particularl& im#ortant is im#rovin% com#liance in such areas as the revie' of em#lo&ee and #ro#rietar& tradin%- documentation of firm #rocedures- and the su#ervision of interde#artmental communications in multi service firms* Com#liance #rocedures should suit the #articular characteristics of a firm- includin% its si/e and the nature of its business* Aembers and candidates should encoura%e their firms to develo# and follo' disclosure #olicies desi%ned to ensure that information is disseminated to the mar(et#lace in an e3uitable manner* "or e.am#le- anal&sts from small firms should receive the same information and attention from a com#an& as anal&sts from lar%e firms receive* Similarl&- com#anies should not #rovide certain information to bu& side anal&sts but not to sell side anal&sts- or vice versa* "urthermore- a com#an& should not discriminate amon% anal&sts in the #rovision of information or blac(ball #articular anal&sts 'ho have %iven ne%ative re#orts on the com#an& in the #ast* Com#anies should consider issuin% #ress releases #rior to anal&st meetin%s and conference calls and scri#tin% those meetin%s and calls to decrease the chance that further information 'ill be disclosed* If material non#ublic information is disclosed for the first time in an anal&st meetin% or call- the com#an& should #rom#tl& issue a #ress release or other'ise ma(e the information #ublicl& available* )n information barrier commonl& referred to as a fire 'all is the most 'idel& used a##roach to #reventin% the communication of material non#ublic information 'ithin firms* It restricts the flo' of confidential information to those 'ho need to (no' the information to #erform their 5obs effectivel&* $he minimum elements of such a s&stem include- but are not limited to- the follo'in%1 substantial control of relevant interde#artmental communications- #referabl& throu%h a clearance area 'ithin the firm in either the com#liance or le%al de#artment2 revie' of em#lo&ee tradin% throu%h the maintenance of 'atch- restricted- and rumor lists2 documentation of the #rocedures desi%ned to limit the flo' of information bet'een de#artments and of the enforcement actions ta(en #ursuant to those #rocedures2 hei%htened revie' or restriction of #ro#rietar& tradin% 'hile a firm is in #ossession of material non#ublic information* )lthou%h documentation re3uirements must- for #ractical reasons- ta(e into account the differences bet'een the activities of small firms and those of lar%e- multi service firms- firms of all si/es and t&#es benefit b& im#rovin% the documentation of their internal enforcement of fire 'all #rocedures* $herefore- even at small firms- #rocedures concernin% interde#artmental communication- the revie' of tradin% activit&- and the investi%ation of #ossible violations should be com#iled and formali/ed* )s a #ractical matter- to the e.tent #ossible- firms should consider the #h&sical se#aration of de#artments and files to #revent the communication of sensitive information* "or e.am#le- the investment ban(in% and cor#orate finance areas of a bro(era%e firm should be se#arated from the sales and research de#artments- and a ban(4s commercial lendin% de#artment should be se%re%ated from its trust and research de#artments*

$here should be no overla# of #ersonnel bet'een such de#artments* ) sin%le su#ervisor or com#liance officer should have the s#ecific authorit& and res#onsibilit& to decide 'hether or not information is material and 'hether it is sufficientl& #ublic to be used as the basis for investment decisions* Ideall&- the su#ervisor or com#liance officer res#onsible for communicatin% information to a firm4s research or bro(era%e area 'ould not be a member of that area* "or a fire 'all to be effective in a multi service firm- an em#lo&ee can be allo'ed to be on onl& one side of the 'all at an& %iven time* Inside (no'led%e ma& not be limited to information about a s#ecific offerin% or a current financial condition of the com#an&* )nal&sts ma& be e.#osed to a host of information about the com#an&- includin% ne' #roduct develo#ments or future bud%et #ro5ections that clearl& constitute inside (no'led%e and thus #reclude the anal&st from returnin% to his or her research function* "or e.am#le- an anal&st 'ho follo's a #articular com#an& ma& #rovide limited assistance to the investment ban(ers under carefull& controlled circumstances 'hen the firm4s investment ban(in% de#artment is involved in a deal 'ith the com#an&* $hat anal&st must then be treated as thou%h he or she 'ere an investment ban(er2 the anal&st must remain on the investment ban(in% side of the 'all until an& information he or she learns is #ublicl& disclosed* In short- the anal&st cannot use an& information learned in the course of the #ro5ect for research #ur#oses and cannot share that information 'ith collea%ues in the research de#artment* ) #rimar& ob5ective of an effective fire 'all #rocedure is to establish a re#ortin% s&stem in 'hich authori/ed #eo#le revie' and a##rove communications bet'een de#artments* If an em#lo&ee behind a fire 'all believes that he or she needs to share confidential information 'ith someone on the other side of the 'all- the em#lo&ee should consult a desi%nated com#liance officer to determine 'hether sharin% the information is necessar& and ho' much information should be shared* If the sharin% is necessar&- the com#liance officer should coordinate the #rocess of loo(in% over the 'all so that the necessar& information 'ill be shared and the inte%rit& of the #rocedure 'ill be maintained* )n information barrier is the minimum #rocedure a firm should have in #lace to #rotect itself from liabilit&* "irms should also consider restrictions or #rohibitions on #ersonal tradin% b& em#lo&ees and should carefull& monitor both #ro#rietar& tradin% and #ersonal tradin% b& em#lo&ees* "irms should re3uire em#lo&ees to ma(e #eriodic re#orts (to the e.tent that such re#ortin% is not alread& re3uired b& securities la's) of their o'n transactions and transactions made for the benefit of famil& members* Securities should be #laced on a restricted list 'hen a firm has or ma& have material non#ublic information* $he broad distribution of a restricted list often tri%%ers the sort of tradin% the list 'as develo#ed to avoid* $herefore- a 'atch list sho'n to onl& the fe' #eo#le res#onsible for com#liance should be used to monitor transactions in s#ecified securities* $he use of a 'atch list in combination 'ith a restricted list is an increasin%l& common means of ensurin% an effective #rocedure* Aulti service firms should maintain 'ritten records of the communications bet'een various de#artments* "irms should #lace a hi%h #riorit& on trainin% and should consider institutin% com#rehensive trainin% #ro%rams- #articularl& for em#lo&ees in sensitive areas* Procedures concernin% the restriction or revie' of a firm4s #ro#rietar& tradin% 'hile it is in the #ossession of material non#ublic information 'ill necessaril& var& de#endin% on the t&#es of #ro#rietar& tradin% in 'hich a firm ma& en%a%e* ) #rohibition on all t&#es of #ro#rietar& activit& 'hen a firm comes into #ossession of material non#ublic information is not a##ro#riate* "or

e.am#le- 'hen a firm acts as a mar(et ma(er- a #ro#rietar& tradin% #rohibition ma& be counter#roductive to the %oals of maintainin% the confidentialit& of information and mar(et &iG'idi!4* $his concern is #articularl& (een in the relationshi#s bet'een small- re%ional bro(erEdealers and small issuers* In man& situations- a firm 'ill ta(e a small issuer #ublic 'ith the understandin% that the firm 'ill continue to be a mar(et ma(er in the stoc(* In such instances- a 'ithdra'al b& the firm from mar(et ma(in% acts 'ould be a clear ti# to outsiders* ,o'ever- firms that continue mar(et ma(in% activit& 'hile in the #ossession of material non#ublic information should instruct their mar(et ma(ers to remain #assive to the mar(et>that is- ta(e onl& the contra side of unsolicited customer trades* In ris( arbitra%e tradin%- the case for a tradin% #rohibition is more com#ellin%* In contrast to mar(et ma(in%- the im#etus for arbitra%e tradin% is neither #assive nor reactive and the #otential for ille%al #rofits is %reater* $he most #rudent course for firms is to sus#end a%)i!%age activit& 'hen a securit& is #laced on the 'atch list* $hose firms that do continue arbitra%e activit& face a hi%h hurdle in #rovin% the ade3uac& of their internal #rocedures and must demonstrate strin%ent revie' and documentation of firm trades* Fritten com#liance #olicies and %uidelines should be circulated to all em#lo&ees of a firm* Policies and %uidelines should be used in con5unction 'ith trainin% #ro%rams aimed at enablin% em#lo&ees to reco%ni/e material non#ublic information* )s noted- material non#ublic information is not al'a&s clearl& identifiable as such* Em#lo&ees must be %iven sufficient trainin% to either ma(e an informed decision or consult a su#ervisor or com#liance officer before en%a%in% in 3uestionable transactions* A::&i#a!ion o !"e S!anda%d Example 1: "ran( Darnes- the #resident and controllin% shareholder of the Smart$o'n clothin% chain- decides to acce#t a #ro#osed tender offer and sell the famil& business at a #rice almost double the mar(et #rice of its shares* ,e describes this decision to his sister (Smart$o'n4s treasurer)- 'ho conve&s it to her dau%hter ('ho o'ns no stoc( in the famil& com#an& at #resent)- 'ho tells her husband- Sta#le* Sta#le- ho'ever- tells his stoc(bro(er- )le. ,alse&- 'ho immediatel& bu&s Smart $o'n stoc( for himself* Comment, $he information re%ardin% the #endin% sale is both material and non#ublic* Sta#le has violated Standard II()) b& communicatin% the inside information to his bro(er* )lso- ,alse& has violated the standard b& initiatin% the transaction to bu& the shares based on material non#ublic information* Example 2: ?ose#hine Falsh is ridin% an elevator u# to her office 'hen she overhears the chief financial officer (C"+) for the S'an "urniture Com#an& tell the #resident of S'an that he has 5ust calculated the com#an&4s earnin%s for the #ast 3uarter and the& have une.#ectedl& and si%nificantl& dro##ed* $he C"+ adds that this dro# 'ill not be released to the #ublic until ne.t 'ee(* Falsh immediatel& calls her bro(er and tells him to sell her S'an stoc(* Comment, Falsh has sufficient information to determine that the information is both material and non#ublic* D& tradin% the inside information- she has violated Standard II())* Example 3: Samuel Peter- an anal&st 'ith Scotland and Pierce Incor#orated- is assistin% his firm 'ith a secondar& offerin% for Dri%ht Ideas Ham# Com#an&* Peter #artici#ates- via tele#hone conference call- in a meetin% 'ith Scotland and Pierce investment ban(in% em#lo&ees and Dri%ht

Ideas4 CE+* Peter is advised that the com#an&4s earnin%s #ro5ections for the ne.t &ear have si%nificantl& dro##ed* $hrou%hout the tele#hone conference call- several Scotland and Pierce sales#eo#le and #ortfolio mana%ers 'al( in and out of Peter4s office- 'here the tele#hone call is ta(in% #lace* )s a result- the& are a'are of the dro# in #ro5ected earnin%s for Dri%ht Ideas* Defore the conference call is concluded- the sales#eo#le trade the stoc( of the com#an& on behalf of the firm4s clients and other firm #ersonnel trade the stoc( in a firm #ro#rietar& account and in em#lo&ee #ersonal accounts* Comment, Peter violated Standard II()) because he failed to #revent the transfer and misuse of material non#ublic information to others in his firm* Peter4s firm should have ado#ted information barriers to #revent the communication of non#ublic information bet'een de#artments of the firm* $he sales#eo#le and #ortfolio mana%ers 'ho traded on the information have also violated Standard II()) b& tradin% on inside information* Example 4: Aadison O Hambeau- a 'ell res#ected bro(erEdealer- submits a 'ee(l& column to Securities 0eekly ma%a/ine* +nce #ublished- the column usuall& affects the value of the stoc(s discussed* 9on Geor%e- an em#lo&ee of Aadison O Hambeau- (no's that Securities 0eekly is #ublished b& Sie%ler Publishin%- for 'hich his ne#he' is the ni%ht foreman* Geor%e4s ne#he' fa.es him an advance co#& of the 'ee(l& column before it is #rinted* Geor%e re%ularl& trades in the securities mentioned in the Aadison O Hambeau column #rior to its distribution- and to date- he has reali/ed a #ersonal :%o i! of R:7-!!! as 'ell as si%nificant #rofits for his clients* Comment1 Geor%e has violated Standard II()) b& tradin% on material non#ublic information* Geor%e4s ne#he' has also violated the standard b& communicatin% the information that causes Geor%e to trade* Example 5: Gre% ;e'man and his 'ife volunteer at a local charitable or%ani/ation that delivers meals to the elderl&* +ne mornin%- ;e'man4s 'ife receives a tele#hone call from Dets& Sterlin%another volunteer- 'ho as(s if ;e'man and his 'ife can fill in for her and her husband that afternoon* Ars* Sterlin% indicates that her husband is bus& at 'or( because his com#an& has 5ust fired its chief financial officer for misa##ro#riation of funds* Ars* ;e'man a%rees to #erform the volunteer 'or( for the Sterlin%s and advises her husband of the situation* ;e'man (no's that Ar* Sterlin% is the CE+ at +4,ara Drothers Incor#orated* ;e'man determines that this information is not #ublic and then sells his entire holdin% of L-!!! shares of +4,ara Drothers* $hree da&s later- the firin% is announced and +4,ara Drothers stoc( dro#s in value* Comment, Decause the information is material and non#ublic- ;e'man has violated Standard II()) b& tradin% on this information* Example 6: Eli/abeth Hevenson is based in $ai#ei and covers the $ai'anese mar(et for her firm'hich is based in Sin%a#ore* She is invited to meet the finance director of a manufacturin% com#an& alon% 'ith the other 0! lar%est shareholders of the com#an&* Burin% the meetin%- the finance director states that the com#an& e.#ects its 'or(force to stri(e ne.t "rida&- 'hich 'ill cri##le #roductivit& and distribution* Can Hevenson use this information as a basis to chan%e her ratin% on the com#an& from bu& to sellT

Comment, Hevenson must first determine 'hether the material information is #ublic* If the com#an& has not made this information #ublic (a small %rou# forum does not 3ualif& as a method of #ublic dissemination)- she cannot use the information accordin% to Standard II())* Example 7: Heah "echtman is tr&in% to decide 'hether to hold or sell shares of an oil and %as e.#loration com#an& that she o'ns in several of the funds she mana%es* )lthou%h the com#an& has under#erformed the inde. for some time alread&- the trends in the industr& sector si%nal that com#anies of this t&#e mi%ht become ta(eover tar%ets* In the midst of the decision- her doctor- 'ho casuall& follo's the mar(ets- mentions that she thin(s that the com#an& in 3uestion 'ill soon be bou%ht out b& a lar%e multinational con%lomerate and that it 'ould be a %ood idea to bu& the stoc( ri%ht no'* )fter tal(in% to various investment #rofessionals and chec(in% their o#inions on the com#an& as 'ell as industr& trends- "echtman decides the ne.t da& to accumulate more com#an& stoc(* Comment, )lthou%h information on an e.#ected ta(eover bid ma& be of the t&#e that is %enerall& material and non#ublic- in this case- the source of information is unreliable and could not be considered material* $herefore- "echtman is not #rohibited from tradin% the stoc( based on this information* Example 8: ?a%dish $e5a is a bu& side anal&st coverin% the furniture industr&* Hoo(in% for an attractive com#an& to recommend as a bu&- he anal&/ed several furniture ma(ers b& stud&in% their financial re#orts and visitin% their o#erations* ,e also tal(ed to some desi%ners and retailers to find out 'hich furniture st&les are trend& and #o#ular* )lthou%h none of the com#anies that he anal&/ed turned out to be a clear bu&- he discovered that one of them- S'an "urniture Com#an& (S"C)- mi%ht be in trouble* S'an4s e.trava%ant ne' desi%ns 'ere introduced at substantial costs* Even thou%h these desi%ns initiall& attracted attention- in the lon% run- the #ublic is bu&in% more conservative furniture from other ma(ers* Dased on that and on POH anal&sis- $e5a believes that S'an4s ne.t 3uarter earnin%s 'ill dro# substantiall&* ,e then issues a sell recommendation for S"C* Immediatel& after receivin% that recommendation- investment mana%ers start reducin% the stoc( in their #ortfolios* Comment, Information on 3uarterl& earnin%s fi%ures is material and non#ublic* ,o'ever- $e5a arrived at his conclusion about the earnin%s dro# based on #ublic information and on #ieces of nonmaterial non#ublic information (such as o#inions of desi%ners and retailers)* $hereforetradin% based on $e5a4s correct conclusion is not #rohibited b& Standard II())* Example 9: 9o%er Clement is a senior financial anal&st 'ho s#eciali/es in the Euro#ean automobile sector at 9ivoli Ca#ital* Decause he has been re#eatedl& nominated b& man& leadin% industr& ma%a/ines and ne'sletters as best anal&st for the automobile industr&- he is 'idel& re%arded as an authorit& on the sector* )fter s#ea(in% 'ith re#resentatives of $ur%ot Chariots- a Euro#ean auto manufacturer 'ith sales #rimaril& in Iorea- as 'ell as sales#eo#le- &a)o% leaders- his firm4s Iorean currenc& anal&sts- and ban(in% officials- Clement revie'ed his anal&sis of $ur%ot Chariots and concluded that (0) its ne'l& introduced model 'ill #robabl& not meet sales antici#ation- (7) its cor#orate restructurin% strate%& mi%ht 'ell face serious o##osition from the unions- (L) the de:%e#ia!ion of the Iorean 'on should lead to #ressure on mar%ins for the industr& in %eneral and $ur%ot4s mar(et se%ment in #articular- and (:) ban(s could ta(e a tou%her than e.#ected stance in the soon to come round of credit rene%otiations* "or these reasons- he chan%ed his recommendation from mar(et over #erform to under #erform*

Comment, $o reach a conclusion about the value of the com#an&- Clement has #ieced to%ether a number of nonmaterial or #ublic bits of information that affect $ur%ot Chariots* $herefore- under the mosaic theor&- Clement has not violated Standard II()) in draftin% the re#ort* Example 10: $he ne.t da&- Clement is #re#arin% to be intervie'ed on a %lobal financial ne's television #ro%ram 'here he 'ill discuss his chan%ed recommendation on $ur%ot Chariots for the first time in #ublic* Fhile #re#arin% for the #ro%ram- he mentions to the sho'4s #roducers and Aar& Sito- the 5ournalist 'ho 'ill be intervie'in% him- the information he 'ill be discussin%* ?ust #rior to %oin% on the air- Sito sells her holdin%s in $ur%ot Chariots* Comment, Sito (no's that Clement4s o#inions 'ill have a stron% influence on the stoc(4s behavior- so 'hen she receives advanced notice of Clement4s chan%e of o#inion- she (no's it 'ill have a material im#act on the stoc( #rice- even if she is not totall& a'are of Clement4s underl&in% reasonin%* She is not a client of Clement but obtains earl& access to the material non#ublic information #rior to #ublication* ,er actions are thus trades based on material non#ublic information and violate Standard II())* Example 11: $imoth& ,olt is a #ortfolio mana%er for the $oro )%%ressive Gro'th "und- a lar%e mutual fund 'ith an a%%ressive %ro'th mandate* )s a result- the fund is heavil& invested in small ca# com#anies 'ith stron% %ro'th #otential* Dased on an unfavorable anal&sis of AcCardell Industries b& his research de#artment- ,olt decides to li3uidate the fund4s holdin%s in the com#an&* ,olt (no's that this action 'ill be 'idel& vie'ed as ne%ative b& the mar(et and that the com#an&4s stoc( is li(el& to #lun%e* ,e contacts several famil& members to tell them to li3uidate an& of their holdin%s before $oro4s holdin%s are sold* Comment, ,olt (no's that $oro4s trades have a stron% influence on the mar(et* $herefore- 'hen he tells his famil& to sell stoc( in advance of $oro4s trade- he has violated Standard II()) b& causin% others to trade on material non#ublic information* Example 12: ,olt e.ecutes his sell order of AcCardell Industries 'ith $oro4s bro(er- Iarim )hmed* )hmed immediatel& reco%ni/es the li(el& effect this order 'ill have on the stoc( #rice of AcCardell and sells his o'n holdin%s in the com#an& #rior to #lacin% the order* Comment, )hmed has violated Standard II()) b& tradin% on material non#ublic information* 6( Ma%8e! Mani:'&a!ion Me/)e%$ and #andida!e$ /'$! no! engage in :%a#!i#e$ !"a! di$!o%! :%i#e$ o% a%!i i#ia&&4 in &a!e !%ading .o&'/e <i!" !"e in!en! !o /i$&ead /a%8e! :a%!i#i:an!$( Standard II(D) re3uires that members and candidates u#hold mar(et inte%rit& b& #rohibitin% mar(et mani#ulation* Aar(et mani#ulation includes #ractices that distort securit& #rices or tradin% volume 'ith the intent to deceive #eo#le or entities that rel& on information in the mar(et* Aar(et mani#ulation dama%es the interests of all investors b& disru#tin% the smooth functionin% of financial mar(ets and dama%in% investor confidence* )lthou%h it ma& be less li(el& to occur in more mature financial mar(ets- cross border investin% increasin%l& e.#oses all %lobal investors to the #otential for such #ractices* Aar(et mani#ulation can be related to (0) transactions that deceive mar(et #artici#ants b& distortin% the #rice settin% mechanism of financial instruments or (7) the dissemination of false or misleadin%

information* $he develo#ment of ne' #roducts and technolo%ies enhances the incentives- meansand o##ortunities for mar(et mani#ulation* $ransaction based mani#ulation includes- but is not limited to1 transactions that artificiall& distort #rices or volume to %ive the im#ression of activit& or #rice movement in a financial instrument and securin% a controllin%- dominant #osition in a financial instrument to e.#loit and mani#ulate the #rice of a related derivative andEor the 'nde%&4ing asset* D& re3uirin% that violations include the intent to mislead b& creatin% artificial #rice or volume levelsthis standard is not meant to #rohibit le%itimate tradin% $!%a!egie$ that e.#loit a difference in /a%8e! :o<e%- information- or other mar(et inefficiencies* He%itimate orders in a thinl& traded securit& could over'helm the li3uidit& for that securit&- 'hich 'ould be different from efforts to artificiall& affect the #rice of the securit& at the close of tradin%* In addition- this standard is not meant to #rohibit transactions done for ta. #ur#oses- such as sellin% and immediatel& bu&in% bac( a #articular stoc(* $he intent of the action is critical to determinin% 'hether it is a violation of this standard* Information based mani#ulation includes- but is not limited to- s#readin% false rumors to induce tradin% b& others* "or e.am#le- members and candidates must refrain from #um#in% u# the #rice of an investment b& issuin% misleadin% #ositive information or overl& o#timistic #ro5ections of a securit&4s 'orth onl& to later dum# o'nershi# in the investment once the #rice of the stoc(- fueled b& the misleadin% information4s effect on other mar(et #artici#ants- reaches an artificiall& hi%h level* A::&i#a!ion o !"e S!anda%d Example 1: $he #rinci#al o'ner of "inancial Information Services ("IS) entered into an a%reement 'ith t'o microca# com#anies to #romote the com#anies4 stoc( in e.chan%e for stoc( and #a$" com#ensation* $he #rinci#al o'ner caused "IS to disseminate e mails- desi%n and maintain several Internet 'ebsites- and distribute an on line investment ne'sletter>all of 'hich recommended investment in the t'o com#anies* $he s&stematic #ublication of #ur#ortedl& inde#endent anal&sis and recommendations containin% inaccurate and hi%hl& #romotional and s#eculative statements increased #ublic investment in the com#anies and led to dramaticall& hi%her stoc( #rices* Comment, $he #rinci#al o'ner of "IS violated Standard II(D) b& usin% inaccurate re#ortin% and misleadin% information under the %uise of inde#endent anal&sis to artificiall& increase the stoc( #rice of the com#anies* "urthermore- the #rinci#al o'ner violated Standard V()) b& not havin% a reasonable and ade3uate basis for recommendin% the t'o com#anies and violated Standard VI()) b& not disclosin% to investors the com#ensation a%reements ('hich constituted a conflict of interest)* Example 2: )n em#lo&ee of a bro(erEdealer ac3uired a si%nificant o'nershi# interest in several #ublicl& traded microca# stoc(s and held that stoc( in various bro(era%e accounts in 'hich the bro(erEdealer had a controllin% interest* $he em#lo&ee orchestrated the mani#ulation of the stoc( #rice b& artificiall& increasin% the bid #rice for the stoc( throu%h transactions amon% the various accounts*

Comment, $he em#lo&ee of the bro(erEdealer violated Standard II(D) b& distortin% the #rice of the stoc( throu%h false tradin% and mani#ulative sales #ractices* Example 3: Aatthe' Aur#h& is an anal&st at Bivisadero Securities O Co*- 'hich has a si%nificant number of "edge funds amon% its most im#ortant bro(era%e clients* $'o tradin% da&s before the #ublication of the 3uarter end re#ort- Aur#h& alerts his sales force that he is about to issue a research re#ort on Fire'olf Semiconductor- 'hich 'ill include his o#inion that1 3uarterl& revenues are li(el& to fall short of mana%ement4s %uidance earnin%s 'ill be as much as 8 cents #er share (or more than 0! #ercent) belo' consensus- and Fire'olf4s hi%hl& res#ected chief financial officer ma& be about to 5oin another com#an&* Ino'in% that Fire'olf had alread& entered its declared 3uarter end 3uiet #eriod before re#ortin% earnin%s (and thus 'ould be reluctant to res#ond to rumors- etc*)- Aur#h& times the release of his research re#ort s#ecificall& to sensationali/e the ne%ative as#ects of the messa%e to create si%nificant do'n'ard #ressure on Fire'olf4s stoc( to the distinct advanta%e of Bivisadero4s "edge 'nd clients* $he re#ort4s conclusions are based on s#eculation- not on fact* $he ne.t da&- the research re#ort is broadcast to all of Bivisadero4s clients and to the usual ne's'ire services* Defore Fire'olf4s investor relations de#artment can assess its dama%e on the final tradin% da& of the 3uarter and refute Aur#h&4s re#ort- its stoc( o#ens tradin% shar#l& lo'er- allo'in% Bivisadero4s clients to cover their short #ositions at substantial %ains* Comment, Aur#h& violated Standard II(D) b& tr&in% to create artificial #rice .o&a!i&i!4 desi%ned to have material im#act on the #rice of an issuer4s stoc(* Aoreover- b& lac(in% an ade3uate basis for the recommendation- Aur#h& also violated Standard V())* Example 4: 9a5esh Se(ar mana%es t'o funds>an e3uit& fund and a )a&an#ed 'nd>'hose e3uit& com#onents are su##osed to be mana%ed follo'in% the same model* )ccordin% to that model- the funds4 holdin%s in stoc( CB are e.cessive* 9eduction of CB holdin%s 'ould not be eas& because the stoc( has lo' li3uidit& in the stoc( mar(et* Se(ar decides to start tradin% lar%er #ortions of CB stoc( bac( and forth bet'een his t'o funds to slo'l& increase the #rice- believin% that mar(et #artici#ants 'ould see %ro'in% volume and increasin% #rice and become interested in the stoc(* If other investors are 'illin% to bu& the CB stoc( because of such interest- then Se(ar 'ould be able to %et rid of at least some #art of his over'ei%ht #osition 'ithout inducin% #rice decreases- so the 'hole transaction 'ould be for the benefit of fund #artici#ants- even if additional bro(ers4 commissions are accounted for* Comment, Se(ar4s #lan 'ould be beneficial for his funds4 #artici#ants but is based on artificial distortion of both tradin% volume and #rice of CB stoc( and therefore constitutes a violation of Standard II(D)* Example 5: Ser%ei Gonchar is the chairman of the )CAE "utures E.chan%e- 'hich see(s to launch a ne' bond '!'%e$ #on!%a#!* In order to convince investors- traders- arbitra%ers- hed%ers- and so on

to use its contract- the e.chan%e attem#ts to demonstrate that it has the best li3uidit&* $o do so- it enters into a%reements 'ith members so that the& commit to a substantial minimum tradin% volume on the ne' contract over a s#ecific #eriod in e.chan%e for substantial reductions on their re%ular commissions* Comment, "ormal li3uidit& on a mar(et is determined b& the obli%ations set on mar(et ma(ersbut the actual li3uidit& of a mar(et is better estimated b& the actual tradin% volume and bid as( s#reads* )ttem#ts to mislead #artici#ants on the actual li3uidit& of the mar(et constitute a violation of Standard II(D)* In this e.am#le- investors have been intentionall& misled to believe the& chose the most li3uid instrument for some s#ecific #ur#ose and could eventuall& see the actual li3uidit& of the contract dr& u# suddenl& after the term of the a%reement if the #um# #rimin% strate%& fails* If )CAE full& discloses its a%reement 'ith members to boost transactions over some initial launch #eriod- it does not violate Standard II(D)* )CAE4s intent is not to harm investors but on the contrar& to %ive them a better service* "or that #ur#ose- it ma& en%a%e in a li3uidit& #um#in% strate%&- but it must be disclosed* Example 6: Emil& Gordon is a household #roducts anal&st em#lo&ed b& a research bouti3uePicador O Co* Dased on information that she has #ic(ed u# durin% a tri# throu%h Hatin )merica- she believes that ,&%ene- Inc*- a ma5or mar(eter of #ersonal care #roducts- has %enerated better than e.#ected sales from its ne' #roduct initiatives in South )merica* )fter modestl& boostin% her revenue and %ross #rofit /a%gin #ro5ections in her 'or(sheet models for ,&%ene- Gordon estimates that her earnin%s #ro5ection of R7*!! #er diluted share for the current &ear ma& be as much as 8 #ercent too lo'* She contacts the C"+ of ,&%ene to tr& to %ain confirmation of her findin%s from her tri# and to %et some feedbac( re%ardin% her revised models* $he C"+ declines to comment and reiterates mana%ement4s most recent %uidance of R0*<8 to R7*!8 for the &ear* Gordon decides to tr& to force a comment from the com#an& b& tellin% Picador O Co* clients 'ho follo' a momentum investment st&le that consensus earnin%s #ro5ections for ,&%ene are much too lo'- and that she4s considerin% raisin% her #ublished e$!i/a!e b& an ambitious R!*08 to R7*08 #er share* She believes that- 'hen 'ord of an unrealisticall& hi%h earnin%s #ro5ection filters bac( to ,&%ene4s investor relations de#artment- the com#an& 'ill feel com#elled to u#date its earnin%s %uidance* Aean'hileGordon ho#es that she is at least correct 'ith res#ect to the earnin%s direction and that she 'ill hel# clients that act on her insi%hts to #rofit from a 3uic( %ain tradin% on her advice* Comment, D& e.a%%eratin% her earnin%s #ro5ections in order to tr& to fuel a 3uic( %ain in ,&%ene4s stoc( #rice- Gordon is in violation of Standard II(D)* "urthermore- b& virtue of #revie'in% to onl& a select %rou# of clients her intentions of revisin% u#'ard her earnin%s #ro5ections- she is in violation of Standard III(D)* It 'ould have been acce#table for Gordon to have instead 'ritten a re#ort that framed her earnin%s #ro5ection in a ran%e of #ossible outcomes outlined clearl& her assum#tions used in her ,&%ene models that too( into consideration the findin%s from her tri# throu%h Hatin )merica- and distributed the re#ort to all Picador O Co* clients in an e3uitable manner*U Example 7: In an effort to #um# u# the #rice of his holdin%s in Aoosehead O Delfast 9ailroad Com#an&- Steve Feinber% lo%s on to several investor chat rooms on the Internet to start rumors that

the com#an& is about to e.#and its rail net'or( in antici#ation of receivin% a lar%e contract for shi##in% lumber* Comment, Feinber% has violated Standard II(D) b& disseminatin% false information about Aoosehead O Delfast 'ith the intent to mislead mar(et #artici#ants* STANDARD IIIADUTIES TO CLIENTS A( Lo4a&!4@ P%'den#e@ and Ca%e Me/)e%$ and #andida!e$ "a.e a d'!4 o &o4a&!4 !o !"ei% #&ien!$ and /'$! a#! <i!" %ea$ona)&e #a%e and eCe%#i$e :%'den! ?'dg/en!( Me/)e%$ and #andida!e$ /'$! a#! o% !"e )ene i! o !"ei% #&ien!$ and :&a#e !"ei% #&ien!$F in!e%e$!$ )e o%e !"ei% e/:&o4e%F$ o% !"ei% o<n in!e%e$!$( In %e&a!ion$"i:$ <i!" #&ien!$@ /e/)e%$ and #andida!e$ /'$! de!e%/ine a::&i#a)&e id'#ia%4 d'!4 and /'$! #o/:&4 <i!" $'#" d'!4 !o :e%$on$ and in!e%e$!$ !o <"o/ i! i$ o<ed( Standard III()) clarifies that client interests are #aramount* ) member or candidate4s res#onsibilit& to a client includes a dut& of lo&alt& and a dut& to e.ercise reasonable care* Investment actions must be carried out for the sole benefit of the client and in a manner the mana%er believes to be in the best interest of the client- %iven the (no'n facts and circumstances* Aembers and candidates must e.ercise the same level of #rudence- 5ud%ment- and care that the& 'ould a##l& in the mana%ement and dis#osition of their o'n interests under similar circumstances* Prudence re3uires caution and discretion* $he e.ercise of #rudence b& an investment #rofessional re3uires that the& must act 'ith the care- s(ill- and dili%ence under the circumstances that a reasonable #erson actin% in a li(e ca#acit& and familiar 'ith such matters 'ould use* In the conte.t of mana%in% a client4s #ortfolio- #rudence re3uires follo'in% the investment #arameters set forth b& the client and balancin% ris( and return* )ctin% 'ith care re3uires members and candidates to act in a #rudent and 5udicious manner in avoidin% harm to clients* Standard III()) also re3uires members and candidates to understand and adhere to an& le%all& im#osed fiduciar& res#onsibilit& the& assume 'ith each client* "iduciar& duties are often im#osed b& la' or re%ulation 'hen an individual or institution is char%ed 'ith the dut& of actin% for the benefit of another #art&- such as mana%in% of investment assets* $he dut& re3uired in fiduciar& relationshi#s e.ceeds 'hat is acce#table in man& other business relationshi#s because the fiduciar& is in an enhanced #osition of trust* Aembers and candidates must abide b& an& fiduciar& dut& le%all& im#osed on them* $he first ste# for members and candidates in fulfillin% their dut& of lo&alt& to clients is to determine the identit& of the client to 'hom the dut& of lo&alt& is o'ed* In the conte.t of an investment mana%er mana%in% the #ersonal assets of an individual- the client is easil& identified* Fhen the mana%er is res#onsible for the #ortfolios of #ension #lans or trusts- ho'ever- the client is not the #erson or entit& 'ho hires the mana%er but- rather- the beneficiaries of the #lan or trust* $he dut& of lo&alt& is o'ed to the ultimate beneficiaries and not 5ust the client* Aembers and candidates must also be a'are of 'hether the& have custod& or effective control of client assets* If so- a hei%htened level of res#onsibilit& arises* Aembers and candidates are considered to have custod& if the& have an& direct or indirect access to client funds* Aembers and candidates must mana%e an& #ool of assets in their control in accordance 'ith the terms of the %overnin% documents (such as trust documents and investment mana%ement a%reements)- 'hich are

the #rimar& determinant of the mana%er4s #o'ers and duties* Fhenever their actions are contrar& to #rovisions of those instruments or a##licable la'- members and candidates are e.#osed to #otential violations of the standard* Situations involvin% #otential conflicts of interest 'ith res#ect to res#onsibilities to clients can be e.tremel& com#le. because the& can involve a number of com#etin% interests* $he dut& of lo&alt&#rudence- and care a##lies to a lar%e number of #ersons in var&in% ca#acities- but the e.act duties ma& differ in man& res#ects- de#endin% on the nature of the relationshi# 'ith the client or the t&#e of account under 'hich the assets are mana%ed* Aembers and candidates must #ut their obli%ation to clients first in all dealin%s* In addition- members and candidates should endeavor to avoid all real or #otential conflicts of interest and for%o usin% o##ortunities for their o'n benefit at the e.#ense of those to 'hom their dut& of lo&alt& is o'ed* $he dut& of lo&alt&- #rudence- and care o'ed to the individual client is es#eciall& im#ortant because the #rofessional investment mana%er t&#icall& #ossess %reater (no'led%e than the client* $his dis#arit& #laces the individual client in a vulnerable #osition of trust* $he mana%er in these situations should ensure that the client4s ob5ectives and e.#ectations for the #erformance of the account are realistic and suitable to the client4s circumstances and that the ris(s involved are a##ro#riate* In most circumstances- recommended investment strate%ies should relate to the lon% term ob5ectives and circumstances of the client* Particular care must be ta(en to ensure that the %oals of the investment mana%er or the firm in #lacin% business- sellin% #roducts- or e.ecutin% securit& transactions do not conflict 'ith the best interests and o)?e#!i.e$ of the client* Aembers and candidates must follo' an& %uidelines set out b& their clients for the mana%ement of their assets* Some clients- such as charitable or%ani/ations and #ension #lans- have strict investment #olicies that limit investment o#tions to certain t&#es or classes of investments or #rohibit investments in certain securities* +ther or%ani/ations have a%%ressive #olicies that do not #rohibit investments b& t&#e but instead set criteria on the basis of the #ortfolio4s total ris( and return* Investment decisions ma& be 5ud%ed in the conte.t of the total #ortfolio rather than b& individual investments 'ithin the #ortfolio* $he member or candidate4s dut& is satisfied 'ith res#ect to a #articular investment if the& have thorou%hl& considered the investment4s #lace in the overall #ortfolio- the ris( of loss and o##ortunit& for %ains- ta. im#lications- and the diversificationli3uidit&- cash flo'- and overall return re3uirements of the assets or the #ortion of the assets for 'hich the mana%er is res#onsible* $he dut& of lo&alt&- #rudence and care can a##l& in a number of other situations faced b& the investment #rofessional other than 'ith issues related directl& to investin% assets* Part of a member or candidate4s dut& of lo&alt& includes votin% #ro.ies in an informed and res#onsible manner* Pro.ies have economic value to a client- and members and candidates must ensure that the& #ro#erl& safe%uard and ma.imi/e this value* ) fiduciar& 'ho fails to vote- casts a vote 'ithout considerin% the im#act of the 3uestion- or votes blindl& 'ith mana%ement on nonroutine %overnance issues (e*%*- a chan%e in firm ca#itali/ation) ma& violate this standard* Votin% of #ro.ies is an inte%ral #art of the mana%ement of investments* ) cost benefit anal&sis ma& sho' that votin% all #ro.ies ma& not benefit the client- so votin% #ro.ies ma& not be necessar& in all instances* Aembers and candidates should disclose to clients their #ro.& votin% #olicies*

)n investment mana%er often has discretion over the selection of bro(ers e.ecutin% transactions* Conflicts arise 'hen an investment mana%er uses client bro(era%e to #urchase research services that benefit the investment mana%er- a #ractice commonl& called $o ! do&&a%$ or soft commissions* Fhenever a mana%er uses client bro(era%e to #urchase %oods or services that do not benefit the client- the mana%er should disclose to clients the method or #olicies follo'ed b& the mana%er in addressin% the #otential conflict* ) mana%er 'ho #a&s a hi%her commission than he or she 'ould normall& #a& to #urchase %oods or services- 'ithout corres#ondin% benefit to the client- violates the dut& of lo&alt& to the client* "rom time to time- a mana%er4s client 'ill direct the mana%er to use the client4s bro(era%e to #urchase %oods or services for the client- a #ractice that is commonl& called directed bro(era%e* Decause bro(era%e is an asset of the client and is used to benefit that client- not the mana%er- such #ractice does not violate an& dut& of lo&alt&* In such situations- the mana%er is obli%ated to see( best #rice and e.ecution and be assured b& the client that the %oods or services #urchased 'ith bro(era%e 'ill benefit the account beneficiaries and the mana%er should disclose to client that the& ma& not be %ettin% best e.ecution* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e Aembers and candidates 'ith control of client assets should submit to each client- at least 3uarterl&an itemi/ed statement sho'in% the funds and securities in the custod& or #ossession of the member or candidate- #lus all debits- credits- and transactions that occurred durin% the #eriod2 disclose to the client 'here the assets are to be maintained- as 'ell as 'here or 'hen the& are moved2 and se#arate the client4s assets from an& other #art&4s assets- includin% the member or candidate4s o'n assets* Aembers and candidates should revie' investments #eriodicall& to ensure com#liance 'ith the terms of the %overnin% documents* Aembers and candidates should establish #olicies and #rocedures 'ith res#ect to #ro.& votin% and the use of client bro(era%e- includin% soft dollars* If a Aember or candidate is uncertain about the a##ro#riate course of action 'ith res#ect to a clientthe member or candidate should as( 'hat he or she 'ould e.#ect or demand if the member or candidate 'ere the client* If in doubt- a Aember or candidate should disclose the 3uestionable matter in 'ritin% and obtain client a##roval* Aembers and candidates should address and encoura%e their firms to address the follo'in% to#ics 'hen draftin% their #olicies and #rocedures statements or manuals re%ardin% res#onsibilities to clients1 "ollo' all a##licable rules and la's* Aembers and candidates must follo' all le%al re3uirements and a##licable #rovisions of the C") Institute Code of Ethics and Standards of Professional Conduct* Establish the investment ob5ectives of the client* Fhen ta(in% investment actions- members and candidates must consider the a##ro#riateness and suitabilit& of the #ortfolio relative to (0) the client4s needs and circumstances or (7) the investment4s basic characteristics or (L) the basic characteristics of the total #ortfolio*

 Biversif&* Aembers and candidates should diversif& investments to reduce the ris( of lossunless diversification is not consistent 'ith #lan %uidelines or is contrar& to the account ob5ectives* Beal fairl& 'ith all clients 'ith res#ect to investment actions* Aembers and candidates must not favor some clients over others and should establish #olicies for allocatin% trades and disseminatin% investment recommendations* Bisclose conflicts of interest* Aembers and candidates must disclose all actual and #otential conflicts of interest so that clients can evaluate those conflicts* Bisclose com#ensation arran%ements* Aembers and candidates should ma(e their clients a'are of all forms of mana%er com#ensation* Vote #ro.ies* Aembers and candidates should determine 'ho is authori/ed to vote shares and vote #ro.ies in the best interest of the clients and ultimate beneficiaries* Aaintain confidentialit&* Aembers and candidates must #reserve the confidentialit& of client information* See( best e.ecution* Aembers and candidates must see( best e.ecution for their clients* Dest e.ecution refers to the tradin% #rocess firms a##l& that see(s to ma.imi/e the value of a client4s #ortfolio 'ithin the client4s stated investment ob5ectives and constraints* Place client interests first* Aembers and candidates must serve the best interest of the clients* A::&i#a!ion o !"e S!anda%d Example 1, "irst Countr& Dan( serves as trustee for the Ailler Com#an&4s #ension #lan* Ailler is the tar%et of a hostile ta(eover attem#t b& ;e'ton- Inc* In attem#tin% to 'ard off ;e'ton- Ailler4s mana%ers #ersuade ?ulian File&- an investment mana%er at "irst Countr& Dan(- to #urchase Ailler #o//on $!o#8 in the o#en mar(et for the em#lo&ee #ension #lan* Ailler4s officials indicate that such action 'ould be favorabl& received and 'ould #robabl& result in other accounts bein% #laced 'ith the ban(* )lthou%h File& believes the stoc( to be overvalued and 'ould not ordinaril& bu& ithe #urchases the stoc( to su##ort Ailler4s mana%ers- to maintain the com#an&4s %ood favor- and to reali/e additional ne' business* $he heav& stoc( #urchases cause Ailler4s mar(et #rice to rise to such a level that ;e'ton retracts its ta(eover bid* Comment, Standard III()) re3uires that a member or candidate- in evaluatin% a ta(eover bid- act #rudentl& and solel& in the interests of #lan #artici#ants and beneficiaries* $o meet this re3uirement- a member or candidate must carefull& evaluate the lon% term #ros#ects of the com#an& a%ainst the short term #ros#ects #resented b& the ta(eover offer and b& the abilit& to invest else'here* In this instance- File&- actin% on behalf of his em#lo&er- the trustee- clearl& violated Standard III()) b& usin% the #rofit sharin% #lan to #er#etuate e.istin% mana%ement#erha#s to the detriment of #lan #artici#ants and the com#an&4s shareholders- and to benefit himself* File&4s res#onsibilities to the #lan #artici#ants and beneficiaries should ta(e #recedence over an& ties to cor#orate mana%ers and $e& Din!e%e$!* ) dut& e.ists to e.amine such a ta(eover offer on its o'n merits and to ma(e an inde#endent decision* $he %uidin% #rinci#le is the

a##ro#riateness of the investment decision to the #ension #lan- not 'hether the decision benefits File& or the com#an& that hired him* Example 2: ?;I- a successful investment counselin% firm- serves as investment mana%er for the #ension #lans of several lar%e- re%ionall& based com#anies* Its tradin% activities %enerate a si%nificant amount of commission related business* ?;I uses the bro(era%e and research services of man& firms- but most of its tradin% activit& is handled throu%h a lar%e bro(era%e com#an&$hom#son- Inc*- #rinci#all& because of close #ersonal relationshi#s bet'een the e.ecutives of the t'o firms* $hom#son4s commission structure is hi%h in com#arison 'ith char%es for similar bro(era%e services from other firms* ?;I considers $hom#son4s research services and e.ecution ca#abilities avera%e* In e.chan%e for ?;I directin% its bro(era%e to $hom#son- $hom#son absorbs a number of ?;I overhead e.#enses- includin% those for %en!* Comment, ?;I e.ecutives breached their fiduciar& dut& b& usin% client bro(era%e for services that do not benefit ?;I clients and b& not obtainin% best #rice and e.ecution for their clients* Decause ?;I e.ecutives failed to u#hold their dut& of lo&alt&- the& violated Standard III())* Example 3: Charlotte Everett- a stru%%lin% inde#endent investment advisor- serves as investment mana%er for the #ension #lans of several com#anies* +ne of her bro(ers- Scott Com#an&- is close to consummatin% mana%ement a%reements 'ith #ros#ective ne' clients 'hereb& Everett 'ould mana%e the ne' client accounts and trade the accounts e.clusivel& throu%h Scott* +ne of Everett4s e.istin% clients- Cra&ton Cor#oration- has directed Everett to #lace securities transactions for Cra&ton4s account e.clusivel& throu%h Scott* Dut to induce Scott to e.ert efforts to land more ne' accounts for her- Everett also directs transactions to Scott from other clients 'ithout their (no'led%e* Comment, Everett has an obli%ation at all times to see( best #rice and e.ecution on all trades* Everett ma& direct ne' client trades e.clusivel& throu%h Scott Com#an& as lon% as Everett receives best #rice and e.ecution on the trades or receives a 'ritten statement from ne' clients that she is not to see( best #rice and e.ecution and that the& are a'are of the conse3uence for their accounts* Everett ma& trade other accounts throu%h Scott as a re'ard for directin% clients to Everett onl& if the accounts receive best #rice and e.ecution and the #ractice is disclosed to the accounts* Decause Everett did not disclose the directed tradin%- Everett has violated Standard III())* Example 4: Emilie 9ome is a trust officer for Pa%et $rust Com#an&* 9ome4s su#ervisor is res#onsible for revie'in% 9ome4s trust account transactions and her monthl& re#orts of #ersonal stoc( transactions* 9ome has been usin% ;athan Gra&- a bro(er- almost e.clusivel& for trust account bro(era%e transactions* Fhere Gra& ma(es a mar(et in stoc(s- he has been %ivin% 9ome a lo'er #rice for #ersonal #urchases and a hi%her #rice for sales than he %ives to 9ome4s trust accounts and other investors* Comment, 9ome is violatin% her dut& of lo&alt& to the ban(4s trust accounts b& usin% Gra& for bro(era%e transactions sim#l& because Gra& trades 9ome4s #ersonal account on favorable terms* Example 5: Hauren Par(er- an anal&st 'ith Provo )dvisors- covers South )merican e3uities for the firm* She li(es to travel to the mar(ets for 'hich she is res#onsible and decides to %o on a briefin% tri# to Chile- )r%entina- and Dra/il* $he tri# is s#onsored b& South)A- Inc*- a research firm 'ith a

small bro(erEdealer affiliate that uses the clearin% facilities of a lar%er ;e' Por( bro(era%e house* South)A s#eciali/es in arran%in% South )merican tri#s for anal&sts durin% 'hich the& can meet 'ith #en!%a& )an8 officials- %overnment ministers- local economists- and senior e.ecutives of cor#orations* South)A acce#ts commission dollars at a ratio of 7 to 0 a%ainst the hard dollar cost of the research fee for the tri#* Par(er is not sure that South)A4s e.ecution is com#etitive but- 'ithout informin% her su#ervisor- directs the tradin% des( at Provo to start %ivin% commission business to South)A so she can ta(e the tri#* South)A has convenientl& timed the briefin% tri# to coincide 'ith the be%innin% of Carnival season- so Par(er also decides to s#end five da&s of vacation in 9io de ?aneiro at the end of the tri#* Par(er used commission dollars to #a& for the five da&s of hotel e.#enses* Comment, Par(er violated Standard III()) b& not e.ercisin% her dut& of lo&alt& to her clients to determine 'hether the commissions char%ed b& South)A 'ere reasonable in relation to the benefit of the research #rovided b& the tri# and b& not determinin% that best e.ecution and #rices can be received from South)A* In addition- the five e.tra da&s are not #art of the research effort because the& do not assist in the investment decision ma(in% #rocess- and thus should not be #aid for 'ith client assets* Example 6: Vida Inauss mana%es the #ortfolios of a number of hi%h net 'orth individuals* ) ma5or #art of her in.e$!/en! /anage/en! ee is based on tradin% commissions* Inauss en%a%es in e.tensive tradin% for each of her clients to ensure that she attains the minimum commission level set b& her firm* Fhile the securities #urchased and sold for the clients are a##ro#riate and fall 'ithin the acce#table asset classes for the clients- the amount of tradin% for each account e.ceeds 'hat is necessar& to accom#lish the client4s investment ob5ectives* Comment, Inauss has violated Standard III()) because she is usin% the assets of her clients to benefit her firm and herself* 6( Fai% Dea&ing Me/)e%$ and #andida!e$ /'$! dea& ai%&4 and o)?e#!i.e&4 <i!" a&& #&ien!$ <"en :%o.iding in.e$!/en! ana&4$i$@ /a8ing in.e$!/en! %e#o//enda!ion$@ !a8ing in.e$!/en! a#!ion@ o% engaging in o!"e% :%o e$$iona& a#!i.i!ie$( Standard III(D) re3uires members and candidates to treat all clients fairl& 'hen disseminatin% investment recommendations or material chan%es to #rior investment advice or 'hen ta(in% investment action 'ith re%ard to %eneral #urchases- ne' issues- or secondar& offerin%s* +nl& throu%h the fair treatment of all #arties can the investment mana%ement #rofession maintain the confidence of the investin% #ublic* Fhen an investment advisor has multi#le clients- the #otential e.ists for the advisor to favor one client over another* $his favoritism ma& ta(e various forms- from the 3ualit& and timin% of services #rovided to the allocation of investment o##ortunities* $he term fairl& im#lies that the member or candidate must ta(e care not to discriminate a%ainst an& clients 'hen disseminatin% investment recommendations or ta(in% investment action* Standard III(D) does not state e3uall& because members and candidates could not #ossibl& reach all clients at e.actl& the same time>'hether b& mail- tele#hone- com#uter- facsimile- or 'ire* Each client has uni3ue needs- investment criteria- and investment ob5ectives so that not all investment o##ortunities are suitable for all clients* In addition-

members and candidates ma& #rovide more #ersonal- s#eciali/ed- or in de#th service to clients 'illin% to #a& for #remium services throu%h hi%her /anage/en! ee$ or hi%her levels of bro(era%e* Aembers and candidates can differentiate their services to clients- but different levels of service must not disadvanta%e or ne%ativel& affect clients* In addition- the different service levels should be disclosed to clients and #ros#ective clients and be available to ever&one (i*e*- different service levels should not be offered selectivel&)* Standard III (D) covers the conduct relatin% to t'o broadl& defined cate%ories of conduct> investment recommendations and investment action* !nvestment recommendations. $he first t&#e of conduct involves members and candidates 'hose #rimar& function is the #re#aration of investment recommendations to be disseminated either to the #ublic or 'ithin a firm for the use of others in ma(in% investment decisions* $his %rou# includes members and candidates em#lo&ed b& investment counselin%- advisor&- or consultin% firms as 'ell as ban(s- bro(era%e firms- and insurance com#anies if the member or candidate4s #rimar& res#onsibilit& is the #re#aration of recommendations to be acted on b& others- includin% those in the member or candidate4s or%ani/ation* )n investment recommendation is an& o#inion e.#ressed b& a member or candidate in re%ard to #urchasin%- sellin%- or holdin% a %iven securit& or other investment* $his o#inion can be disseminated to customers or clients throu%h an initial detailed research re#ort- throu%h a brief u#date re#ort- b& addition to or deletion from a recommended list- or sim#l& b& oral communication* ) recommendation that is distributed to an&one outside the or%ani/ation is considered a communication for %eneral distribution under Standard III(D)* Standard III(D) addresses the manner in 'hich investment recommendations or chan%es in #rior recommendations are disseminated to clients* Each member or candidate is obli%ated to ensure that information is disseminated in such a manner that all clients have a fair o##ortunit& to act on ever& recommendation* Communicatin% 'ith all clients on a uniform basis #resents #ractical #roblems for members and candidates because of differences in timin% and methods of communication 'ith the various t&#es of customers and clients* Aembers and candidates should encoura%e their firms to desi%n an e3uitable s&stem to #revent selective- discriminator& disclosure and should inform clients of 'hat (ind of communications the& 'ill receive* $he dut& to clients im#osed b& Standard III(D) ma& be more critical 'hen a member or candidate chan%es their recommendation than 'hen the& ma(e an initial recommendation* Aaterial chan%es in a member or candidate4s #rior investment advice arisin% from subse3uent research should be communicated to all current clients- and #articularl& those clients 'ho the member or candidate (no's ma& have acted on or been affected b& the earlier advice* Clients 'ho don4t (no' that the member or candidate has chan%ed a recommendation and 'ho therefore #lace orders contrar& to a current recommendation should be advised of the chan%ed recommendation before the order is acce#ted* !nvestment actions. $he second %rou# includes those members and candidates 'hose #rimar& function is ta(in% investment action (#ortfolio mana%ement) based on research recommendations #re#ared internall& or received from e.ternal sources* Investment action- li(e investment recommendations- can affect /a%8e! .a&'e* Conse3uentl&- Standard III(D) re3uires that members or candidates treat all clients fairl& in li%ht of their investment ob5ectives and circumstances* "or

e.am#le- 'hen ma(in% investments in ne' offerin%s or in secondar& financin%s- members and candidates should distribute the issues to all customers for 'hom the investments are a##ro#riate in a manner consistent 'ith the bloc( allocation #olicies of the firm* If the issue is oversubscribed- then the issue should be #rorated to all subscribers* $his action should be ta(en on a round lot basis to avoid odd lot distributions* In addition- if the issue is oversubscribed- members and candidates should for%o an& sales to themselves or their immediate families to free u# additional shares for clients* Aembers and candidates must ma(e ever& effort to treat all individual and institutional clients in a fair and im#artial manner* ) member or candidate ma& have multi#le relationshi#s 'ith an institution2 for e.am#le- a ban( ma& hold man& #ositions for a mana%er- such as cor#orate trustee#ension fund mana%er- mana%er of funds for individuals em#lo&ed b& the customer- loan ori%inatoror creditor* ) member or candidate must e.ercise care to treat clients fairl&- includin% those 'ith 'hom multi#le relationshi#s do not e.ist* Aembers and candidates should disclose to clients and #ros#ects the 'ritten allocation #rocedures the& or their firms have in #lace and ho' the #rocedures 'ould affect the client or #ros#ect* $he disclosure should be clear and com#lete so that the client can ma(e an informed investment decision* Even 'hen com#lete disclosure is made- ho'ever- members and candidates must #ut client interests ahead of their o'n* ) member or candidate4s dut& of fairness and lo&alt& to clients can never be overridden b& client consent to #atentl& unfair allocation #rocedures* $reatin% clients fairl& also means that members and candidates should not ta(e advanta%e of their #osition in the industr& to the detriment of clients* "or instance- in the conte.t of IP+s- members and candidates must ma(e bona fide #ublic distributions of hot issue securities (defined as securities of a #ublic offerin% that trade at a :%e/i'/ in the $e#onda%4 /a%8e! 'henever such tradin% commences because of the %reat demand for the securities)* Aembers and candidates are #rohibited from 'ithholdin% such securities for their o'n benefit and must not use such securities as a re'ard or incentive to %ain benefit* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e )lthou%h Standard III(D) refers to a member or candidate4s res#onsibilit& to deal fairl& and ob5ectivel& 'ith clients- members and candidates should also encoura%e their firms to establish com#liance #rocedures re3uirin% all em#lo&ees 'ho disseminate investment recommendations or ta(e investment actions to treat customers and clients fairl&* )t the ver& least- a member or candidate should recommend a##ro#riate #rocedures to mana%ement if none are in #lace and ma(e mana%ement a'are of #ossible violations of fair dealin% #ractices 'ithin the firm 'hen the& come to the attention of the member or candidate* $he e.tent of the formalit& and com#le.it& of such com#liance #rocedures de#ends on the nature and si/e of the or%ani/ation and the t&#e of securities involved* )n investment advisor 'ho is a sole #ro#rietor and handles onl& discretionar& accounts mi%ht not disseminate recommendations to the #ublic- but that advisor should have formal 'ritten #rocedures to ensure that all clients receive fair investment action* Good business #ractice dictates that initial recommendations be made available to all customers 'ho indicate an interest* )lthou%h a member or candidate need not communicate a recommendation to all customers- the selection #rocess b& 'hich customers receive information should be based on

suitabilit& and (no'n interest- not on an& #referred or favored status* ) common #ractice to assure fair dealin% is to communicate recommendations both 'ithin the firm and to customers> simultaneousl&* Aembers and candidates should consider the follo'in% #oints 'hen establishin% fair dealin% com#liance #rocedures1 'imit t e number of "eo"le involved. Aembers and candidates should ma(e reasonable efforts to limit the number of #eo#le 'ho are #riv& to the fact that a recommendation is %oin% to be disseminated* S orten t e time frame between decision and dissemination * Aembers and candidates should ma(e reasonable efforts to limit the amount of time that ela#ses bet'een the decision to ma(e an investment recommendation and the time the actual recommendation is disseminated* If a detailed institutional recommendation is in #re#aration that mi%ht ta(e t'o or three 'ee(s to #ublish- a short summar& re#ort includin% the conclusion mi%ht be #ublished in advance* In an or%ani/ation 'here both a research committee and investment #olic& committee must a##rove a recommendation- the meetin%s should be held on the same da& if #ossible* $he #rocess of revie'in%- #rintin%- and mailin% re#orts or fa.in% or distributin% them b& e mail necessaril& involves the #assa%e of time- sometimes lon% #eriods of time* In lar%e firms 'ith e.tensive revie' #rocesses- the time factor is usuall& not 'ithin the control of the anal&st 'ho #re#ares the re#ort* $hus- man& firms and their anal&sts communicate to customers and firm #ersonnel the ne' or chan%ed recommendations b& an u#date or flash re#ort* $he communication techni3ue mi%ht be fa.- e mail- 'ire- or short 'ritten re#ort* Publis "ersonnel guidelines for "re-dissemination* Aembers and candidates should establish %uidelines that #rohibit #ersonnel 'ho have #rior (no'led%e of an investment recommendation from discussin% or ta(in% an& action on the #endin% recommendation* Simultaneous dissemination* Aembers and candidates should establish #rocedures for dissemination of investment recommendations so that all clients are treated fairl&>that is- 'ith the %oal of informin% them at a##ro.imatel& the same time* "or e.am#le- if a firm is %oin% to announce a ne' recommendation- su#ervisor& #ersonnel should time the announcement to avoid #lacin% an& client or %rou# of clients at unfair advanta%e relative to other clients* ) communication to all branch offices should be sent at the time of the %eneral announcement* Fhen a##ro#riate- the firm should accom#an& the announcement of a ne' recommendation 'ith a statement that tradin% restrictions for the firm4s em#lo&ees are no' in effect* $he tradin% restrictions should sta& in effect until the recommendation is 'idel& distributed b& communicatin% the information to all relevant clients* +nce this has occurred- the member or candidate ma& follo' u# se#aratel& 'ith individual clientsbut members and candidates should not %ive favored clients advanced information 'hen such #re notification ma& disadvanta%e other clients* #aintain a list of clients and t eir oldings* Aembers and candidates should maintain a list of all clients and the securities or other investments each client holds in order to facilitate notification of customers or clients of a chan%e in an investment recommendation* If a #articular securit& or other investment is to be sold- such a list could be used to ensure that all holders are treated fairl& in the li3uidation of that #articular investment*

1evelo" written trade allocation "rocedures* Fhen formulatin% #rocedures for allocatin% tradesmembers and candidates should develo# a set of %uidin% #rinci#les that ensure1 fairness to advisor& clients- both in #riorit& of e.ecution of orders and in the allocation of the #rice obtained in e.ecution on bloc( orders or trades2 timeliness and efficienc& in the e.ecution of orders2 accurac& of the member or candidate4s records as to trade orders and client account #ositions* Fith these #rinci#les in mind- members and candidates should develo# or encoura%e their firm to develo# 'ritten allocation #rocedures- 'ith #articular attention to #rocedures for bloc( trades and ne' issues* Aembers and candidates should consider the follo'in% #rocedures1 re3uirin% orders and modifications or cancellations of orders to be in 'ritin% and time stam#ed2 #rocessin% and e.ecutin% orders on a first in- first out basis2 develo#in% a #olic& to address such issues as calculatin% e.ecution #rices and #artial fills 'hen trades are %rou#ed- or bloc(ed- for efficienc& #ur#oses2 %ivin% all client accounts #artici#atin% in a bloc( trade the same e.ecution #rice and char%in% the same commission2 'hen the full amount of the bloc( order is not e.ecuted- allocatin% #artiall& e.ecuted orders amon% the #artici#atin% client accounts #ro rata on the basis of order si/e2 'hen allocatin% trades for ne' issues- obtainin% advance indications of interest- allocatin% securities b& client (rather than #ortfolio mana%er)- and #rovidin% for a method for calculatin% allocations* 1isclose trade allocation "rocedures* Aembers and candidates should disclose to clients and #ros#ective clients ho' the& select accounts to #artici#ate in an order and ho' the& determines the amount of securities each account 'ill bu& or sell* $rade allocation #rocedures must be fair and e3uitable- and disclosure of ine3uitable allocation methods does not relieve this obli%ation* Establis systematic account review* Aember and candidate su#ervisors should revie' each account on a re%ular basis to ensure that no client or customer is bein% %iven #referential treatment and that the investment actions ta(en for each account are suitable for the account4s ob5ectives* Decause investments should be based on individual needs and circumstances- an investment mana%er ma& have %ood reasons for #lacin% a %iven securit& or other investment in one account 'hile sellin% it from another account* ,o'ever- members and candidates should encoura%e firms to establish revie' #rocedures to detect 'hether tradin% in one account is bein% used to benefit a favored client* 1isclose levels of service* Aembers and candidates should disclose to all clients 'hether or not the or%ani/ation offers different levels of service to clients for the same fee or different fees* Bifferent levels of service should not be offered to clients selectivel&*

A::&i#a!ion o !"e S!anda%d Example 1: Dradle& )mes- a 'ell (no'n and res#ected anal&st- follo's the com#uter industr&* In the course of his research- he finds that a small- relativel& un(no'n com#an& 'hose shares are traded over the counter has 5ust si%ned si%nificant contracts 'ith some of the com#anies he follo's* )fter a considerable amount of investi%ation- )mes decides to 'rite a research re#ort on the com#an& and recommend #urchase* Fhile the re#ort is bein% revie'ed b& the com#an& for factual accurac&- )mes schedules a luncheon 'ith several of his best clients to discuss the com#an&* )t the luncheon- he mentions the #urchase recommendation scheduled to be sent earl& the follo'in% 'ee( to all the firm4s clients* Comment, )mes violated Standard III(D) b& disseminatin% the #urchase recommendation to the clients 'ith 'hom he had lunch a 'ee( before the recommendation 'as sent to all clients* Example 2: S#encer 9ivers- #resident of VPS Cor#oration- moves his com#an&4s %ro'th oriented #ension fund to a #articular ban( #rimaril& because of the e.cellent investment #erformance achieved b& the ban(4s commin%led fund for the #rior five &ear #eriod* ) fe' &ears later- 9ivers com#ares the results of his #ension fund 'ith those of the ban(4s commin%led fund* ,e is startled to learn that- even thou%h the t'o accounts have the same investment ob5ectives and similar #ortfolioshis com#an&4s #ension fund has si%nificantl& under#erformed the ban(4s commin%led fund* Wuestionin% this result at his ne.t meetin% 'ith the #ension fund4s mana%er- 9ivers is told that- as a matter of #olic&- 'hen a ne' securit& is #laced on the recommended list- Aor%an ?ac(son- the #ension fund mana%er- first #urchases the securit& for the commin%led account and then #urchases it on a #ro rata basis for all other #ension fund accounts* Similarl&- 'hen a sale is recommended- the securit& is sold first from the commin%led account and then sold on a #ro rata basis from all other accounts* 9ivers also learns that if the ban( cannot %et enou%h shares (es#eciall& the hot issues) to be meanin%ful to all the accounts- its #olic& is to #lace the ne' issues onl& in the commin%led account* Seein% that 9ivers is neither satisfied nor #leased b& the e.#lanation- ?ac(son 3uic(l& adds that nondiscretionar& #ension accounts and :e%$ona& !%'$! accounts have a lo'er #riorit& on #urchase and sale recommendations than discretionar& #ension fund accounts* "urthermore- ?ac(son statesthe com#an&4s #ension fund had the o##ortunit& to invest u# to 8 #ercent in the commin%led fund* Comment, $he ban(4s #olic& did not treat all customers fairl&- and ?ac(son violated her dut& to her clients b& %ivin% #riorit& to the %ro'th oriented commin%led fund over all other funds and to discretionar& accounts over nondiscretionar& accounts* ?ac(son must e.ecute orders on a s&stematic basis that is fair to all clients* In addition- trade allocation #rocedures should be disclosed to all clients from the be%innin%* +f course- in this case- disclosure of the ban(4s #olic& 'ould not chan%e the fact that the #olic& is unfair* Example 3: Bominic Aorris 'or(s for a small re%ional securities firm* ,is 'or( consists of cor#orate finance activities and investin% for institutional clients* )rena- Htd* is #lannin% to %o #ublic* $he #artners have secured ri%hts to bu& a arena football lea%ue %an#"i$e and are #lannin% to use the funds from the issue to com#lete the #urchase* Decause arena football is the current ra%eAorris believes he has a hot issue on his hands* ,e has 3uietl& ne%otiated some o#tions for himself for hel#in% convince )rena to do the financin%* Fhen he see(s e.#ressions of interest- the institutional bu&ers oversubscribe the issue* Aorris- assumin% that the institutions have the financial clout to drive the stoc( u#- then fills all orders (includin% his o'n) and cuts bac( the institutional bloc(s*

Comment, Aorris has violated Standard III(D) b& not treatin% all customers fairl&* ,e should not have ta(en an& shares himself and should have #rorated the shares offered amon% all clients* In addition- he should have disclosed to his firm and to his clients that he had received o#tions as #art of the deal Jsee Standard VI())>Bisclosure of ConflictsK* Example 4: Eleanor Preston- the chief investment officer of Porter Filliams Investments (PFI)- a medium si/ed mone& mana%ement firm- has been tr&in% to retain a difficult client- Colb& Com#an&* Aana%ement at the dis%runtled client- 'hich accounts for almost half of PFI4s revenues- recentl& told Preston that if the #erformance of its account did not im#rove- it 'ould find a ne' mone& mana%er* Shortl& after this threat- Preston #urchases mort%a%e bac(ed securities (ADS) for several accountsincludin% Colb&4s* Preston is bus& 'ith a number of transactions that da&- so she fails to allocate the trades immediatel& or 'rite u# the trade tic(ets* ) fe' da&s later- 'hen Preston is allocatin% tradesshe notes that some of the ADS have si%nificantl& increased in #rice and some have dro##ed* Preston decides to allocate the #rofitable trades to Colb& and s#read the losin% trades amon% several other PFI accounts* Comment, Preston violated Standard III(D) b& failin% to deal fairl& 'ith her clients in ta(in% these investment actions* Preston should have allocated the trades #rior to e.ecutin% the ordersor she should have had a s&stematic a##roach to allocatin% the trades- such as #ro rata- as soon after the& 'ere e.ecuted as #racticable* )mon% other thin%s- Preston must disclose to the client that the advisor ma& act as bro(er for- receive commissions from- and have a #otential conflict of interest re%ardin% both #arties in a%enc& crosstransactions* )fter the disclosure- she should obtain from the client consent authori/in% such transactions in advance* Example 5: Saunders Industrial Faste Aana%ement (SIFA) #ublicl& indicates to anal&sts that it is comfortable 'ith the some'hat disa##ointin% earnin%s #er share #ro5ection of R0*08 for the 3uarter* Dernard 9oberts- an anal&st at Coffe& Investments- is confident that SIFA mana%ement has understated the forecasted earnin%s so that the real announcement 'ould cause an u#side sur#rise and boost the #rice of SIFA stoc(* $he 'his#er number estimate based on e.tensive research and discussed amon% (no'led%eable anal&sts is hi%her than R0*08* 9oberts re#eats the R0*08 fi%ure in his research re#ort to all Coffe& clients but informall& tells his lar%er clients that he e.#ects the earnin%s #er share to be hi%her- ma(in% SIFA a %ood bu&* Comment, D& not sharin% his o#inion re%ardin% the #otential for a si%nificant u#side ea%ning$ $'%:%i$e 'ith all clients- 9oberts is not treatin% all clients fairl& and has violated Standard III(D)* Example 6: ?en#in Fen% uses e mail to issues a ne' recommendation to all his clients* ,e then calls his three bi%%est institutional clients to discuss the recommendation in detail* Comment, Fen% has not violated Standard III(D) because he 'idel& disseminated the recommendation and #rovided the information to all his clients #rior to discussin% it 'ith a select fe'* Fen%4s lar%er clients received additional #ersonal service that the& #resumabl& #a& for throu%h bi%%er fees or because the& have a lar%e amount of assets under Fen%4s mana%ement* Fen% 'ould have violated Standard III(D) if he had discussed the re#ort 'ith a select %rou# of clients #rior to distributin% it to all his clients*

C( S'i!a)i&i!4 1( H"en /e/)e%$ and #andida!e$ a%e in an ad.i$o%4 %e&a!ion$"i: <i!" a #&ien!@ !"e4 /'$!: a( Ma8e a %ea$ona)&e inG'i%4 in!o a #&ien! o% :%o$:e#!i.e #&ien!F$ in.e$!/en! eC:e%ien#e@ %i$8 and %e!'%n o)?e#!i.e$@ and inan#ia& #on$!%ain!$ :%io% !o /a8ing an4 in.e$!/en! %e#o//enda!ion o% !a8ing in.e$!/en! a#!ion and /'$! %ea$$e$$ and ':da!e !"i$ in o%/a!ion %eg'&a%&4( )( De!e%/ine !"a! an in.e$!/en! i$ $'i!a)&e !o !"e #&ien!F$ inan#ia& $i!'a!ion and #on$i$!en! <i!" !"e #&ien!F$ <%i!!en o)?e#!i.e$@ /anda!e$@ and #on$!%ain!$ :%io% !o /a8ing an in.e$!/en! %e#o//enda!ion o% !a8ing in.e$!/en! a#!ion( #( I'dge !"e $'i!a)i&i!4 o in.e$!/en!$ in !"e #on!eC! o !"e #&ien!F$ !o!a& :o%! o&io( 2( H"en /e/)e%$ and #andida!e$ a%e %e$:on$i)&e o% /anaging a :o%! o&io !o a $:e#i i# /anda!e@ $!%a!eg4@ o% $!4&e@ !"e4 /'$! on&4 /a8e in.e$!/en! %e#o//enda!ion$ o% !a8e in.e$!/en! a#!ion$ !"a! a%e #on$i$!en! <i!" !"e $!a!ed o)?e#!i.e$ and #on$!%ain!$ o !"e :o%! o&io( Standard III(C) re3uires that members and candidates 'ho are in an investment advisor& relationshi# 'ith clients consider carefull& the needs- circumstances- and ob5ectives of the clients 'hen determinin% the a##ro#riateness and suitabilit& of a %iven investment or course of investment action* $he res#onsibilities conferred u#on members and candidates to %ather information and ma(e a suitabilit& anal&sis #rior to ma(in% a recommendation or ta(in% investment action falls on those members and candidates 'ho #rovide investment advice in the course of an advisor& relationshi# 'ith a client* +ther members and candidates often are sim#l& e.ecutin% s#ecific instructions for retail clients 'hen bu&in% or sellin% securities- such as shares in mutual funds* $hese members and candidates and others- such as sell side anal&sts- ma& not have the o##ortunit& to 5ud%e the suitabilit& of the #articular investment for the #erson or entit&* In cases of unsolicited trade re3uests that a member or candidate (no's are unsuitable for the client- the member or candidate should refrain from ma(in% the trade or see( an affirmative statement from the client that suitabilit& is not a consideration* Fhen an advisor& relationshi# e.ists- members and candidates must %ather client information at the ince#tion of the relationshi#* Such information includes the client4s financial circumstances#ersonal data (such as a%e and occu#ation) that are relevant to investment decisions- attitudes to'ard ris(- and ob5ectives in investin%* $his information should be incor#orated into a 'ritten investment :o&i#4 $!a!e/en! (IPS) that addresses the client4s ris( tolerance- return re3uirements- and all investment constraints (includin% time hori/on- li3uidit& needs- ta. concerns- le%al and re%ulator& factors- and uni3ue circumstances)* Fithout identif&in% such client factors- members and candidates cannot 5ud%e 'hether a #articular investment or strate%& is suitable for a #articular client* $he IPS also should identif& and describe the roles and res#onsibilities of the #arties to the advisor& relationshi# and investment #rocess- as 'ell as schedules for revie' and evaluation* )fter formulatin% lon% term ca#ital mar(et e.#ectations- members and clients can assist in develo#in% an a##ro#riate strate%ic asset allocation and investment #ro%ram for the client- 'hether these are #resented in se#arate documents or incor#orated in the IPS or in a##endices to the IPS*

Such an in3uir& should be re#eated at least annuall& and #rior to material chan%es to an& s#ecific investment recommendations or decisions on behalf of the client* $he effort to determine the needs and circumstances of each client is not a one time occurrence* Investment recommendations or decisions are usuall& #art of an on%oin% #rocess that ta(es into account the diversit& and chan%in% nature of #ortfolio and client characteristics* $he #assa%e of time is bound to #roduce chan%es that are im#ortant 'ith res#ect to investment ob5ectives* "or an individual client- such chan%es mi%ht include the number of de#endents- #ersonal ta. statushealth- li3uidit& needs- ris( tolerance- the amount of <ea&!" be&ond that re#resented in the #ortfolioand the e.tent to 'hich com#ensation and other income #rovide for #'%%en! in#o/e needs* Fith res#ect to an institutional client- such chan%es mi%ht relate to the ma%nitude of unfunded liabilities in a #ension fund- the 'ithdra'al #rivile%es in an em#lo&ee4s savin%s #lan- or the distribution re3uirements of a charitable foundation* Fithout efforts to u#date information concernin% client factors- one or more factors could chan%e 'ithout the investment mana%er4s (no'led%e* Suitabilit& revie' can be done effectivel& onl& if the client full& discloses his or her com#lete financial #ortfolio- includin% those #ortions not mana%ed b& the member or candidate* If clients 'ithhold information about their financial #ortfolio- the suitabilit& anal&sis conducted b& members and candidates can not be e.#ected to be com#lete but must be done based on the information #rovided* +ne of the most im#ortant factors to be considered in matchin% a##ro#riateness and suitabilit& of an investment 'ith a client4s needs and circumstances is measurin% that client4s tolerance for ris(* $he investment #rofessional must consider the #ossibilities of ra#idl& chan%in% investment environments and their li(el& im#act on a client4s holdin%s- both individual securities and the collective #ortfolio* $he ris( of man& investment strate%ies can and should be anal&/ed and 3uantified in advance* $he use of s&nthetic investment vehicles and derivative investment #roducts has introduced #articular issues of ris(* Aembers and candidates should #a& careful attention to the levera%e often inherent in such vehicles or #roducts 'hen considerin% them for use in a client4s investment #ro%ram* Such levera%e and limited li3uidit&- de#endin% on the de%ree to 'hich the& are hed%edbear directl& on the issue of suitabilit& for the client* $he investment #rofession has lon% reco%ni/ed that the combination of several different investments is li(el& to #rovide a more acce#table level of ris( e.#osure than havin% all assets in a sin%le investment* $he uni3ue characteristics (or ris(s) of an individual investment ma& become #artiall& or entirel& neutrali/ed 'hen combined 'ith other individual investments 'ithin a #ortfolio* Some reasonable amount of diversification is the norm for man& #ortfolios- es#eciall& those mana%ed b& individuals or institutions that have some de%ree of fiduciar& res#onsibilit&* )n investment 'ith hi%h relative ris( on its o'n ma& be a suitable investment in the conte.t of the entire #ortfolio or 'hen the client4s stated ob5ectives contem#late s#eculative or ris(& investments* It ma& be the case that the mana%er is res#onsible for onl& a #ortion of the client4s total #ortfolio or that the client has not #rovided the full financial #icture of the client to the mana%er* Aembers and candidates can be res#onsible onl& for assessin% suitabilit& of an investment %iven the information and criteria #rovided b& the clients* Some members and candidates do not mana%e mone& for individuals but are res#onsible for mana%in% a fund to an inde. or an e.#ected mandate* In those cases- the member or candidate4s

res#onsibilit& is to invest consistent 'ith the stated mandate* "or e.am#le- a member or candidate 'ho serves as the fund mana%er for a lar%e ca# income fund 'ould not be follo'in% the fund mandate b& investin% heavil& in small ca# or start u# com#anies 'hose stoc( is s#eculative in nature* Aembers and candidates 'ho mana%e #ooled assets to a s#ecific mandate are not res#onsible for determinin% the suitabilit& of the fund as an investment for investors 'ho ma& be #urchasin% shares in the fund* $he res#onsibilit& for determinin% the suitabilit& of an investment for clients can onl& be conferred on members and candidates 'ho have an advisor& relationshi# 'ith clients* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e $o fulfill the basic #rovisions of Standard III(C)- a member or candidate should #ut the needs and circumstances of each client and the client4s investment ob5ectives into a 'ritten investment #olic& statement (IPS) for each client* In formulatin% an investment #olic& for the client- the member or candidate should ta(e the follo'in% into consideration1 Client identification>(0) t&#e and nature of clients- (7) the e.istence of se#arate beneficiaries- and (L) a##ro.imate #ortion of total client assets2 Investor ob5ectives>(0) return ob5ectives (income- %ro'th in #rinci#al- maintenance of #urchasin% #o'er) and (7) ris( tolerance (suitabilit&- stabilit& of values)* Investor constraints>(0) li3uidit& needs- (7) e.#ected cash flo's (#atterns of addi!ion$ andEor 'ithdra'als)- (L) investable funds (assets and liabilities or other commitments)- (:) time hori/on- (8) ta. considerations- (=) re%ulator& and le%al circumstances- (X) investor :%e e%en#e$- #rohibitions- circumstances- and uni3ue needs- and (Q) #ro.& votin% res#onsibilities and %uidance* Pe% o%/an#e /ea$'%e/en! benchmar(s* $he investor4s ob5ectives and constraints should be maintained and revie'ed #eriodicall& to reflect an& chan%es in the client4s circumstances* Aembers and candidates should re%ularl& com#are client constraints 'ith ca#ital mar(et e.#ectations to arrive at an a##ro#riate asset allocation* Chan%es in either factor ma& result in a fundamental chan%e in asset allocation* )nnual revie' is reasonable unless business or other reasons- such as a ma5or chan%e in mar(et conditions- dictate more fre3uent revie'* Aembers and candidates should document attem#ts at such a revie' if circumstances #revent it* A::&i#a!ion o !"e S!anda%d Example 1: Caleb Smith- an investment advisor- has t'o clients1 Harr& 9obertson- =! &ears old- and Gabriel Hanai- :! &ears old* Doth clients earn rou%hl& the same salar&- but 9obertson has a much hi%her ris( tolerance because he has a lar%e asset base* 9obertson is 'illin% to invest #art of his assets ver& a%%ressivel&2 Hanai 'ants onl& to achieve a stead& rate of return 'ith lo' volatilit& to #a& for his children4s education* Smith recommends investin% 7! #ercent of both #ortfolios in /ero 4ie&d small ca# hi%h technolo%& issues* Comment, In 9obertson4s case- the investment ma& be a##ro#riate %iven his financial circumstances and a%%ressive investment #osition but- this investment 'ould not be suitable for

Hanai* Smith 'ould violate Standard III(C) b& a##l&in% 9obertson4s investment strate%& to Hanai because Hanai4s financial circumstances and ob5ectives are different* Example 2: ?essica Falters- an investment advisor- su%%ests to Drian Crosb&- a ris(averse clientthat #o.e%ed #a&& o#tions be used in his e3uit& #ortfolio* $he #ur#ose 'ould be to enhance Crosb&4s income and #artiall& offset an& untimel& de#reciation in value should the stoc( mar(et or other circumstances affect his holdin%s unfavorabl&* Falters educates Crosb& about all #ossible outcomesincludin% the ris( of incurrin% an added ta. liabilit& if a stoc( rises in #rice and is called a'a& andconversel&- the ris( of his holdin%s losin% #rotection on the do'nside if #rices dro# shar#l&* Comment, Fhen determinin% suitabilit& of an investment- the #rimar& focus should be on the characteristics of the client4s entire #ortfolio- not on an issue b& issue anal&sis* $he basic characteristics of the entire #ortfolio 'ill lar%el& determine 'hether the investment recommendations are ta(in% client factors into account* $herefore- the most im#ortant as#ects of a #articular investment 'ill be those that 'ill affect the characteristics of the total #ortfolio* In this case- Falters #ro#erl& considered the investment in the conte.t of the entire #ortfolio and thorou%hl& e.#lained the investment to the client* Example 3: In a re%ular meetin% 'ith Seth ?ones- the #ortfolio mana%ers at Dlue Chi# Investment )dvisors are careful to allo' some time to revie' his current needs and circumstances* In doin% sothe& learn that some si%nificant chan%es have recentl& ta(en #lace* ) 'ealth& uncle left ?ones an inheritance that increased his net 'orth fourfold- to R0-!!!-!!!* Comment, $he inheritance si%nificantl& increased ?ones4s abilit& and #ossibl& his 'illin%ness to assume ris( and diminished the avera%e &ield re3uired to meet his current income needs* ?ones financial circumstances have definitel& chan%ed- so Dlue Chi# mana%ers must u#date ?ones4 investment #olic& statement to understand ho' his investment ob5ectives have chan%ed* )ccordin%l&- the Dlue Chi# #ortfolio mana%ers should consider a some'hat hi%her e3uit& ratio for his #ortfolio than 'as called for b& the #revious circumstances- and the mana%ers4 s#ecific common stoc( recommendations mi%ht be heavil& tilted to'ard lo' &ield- %ro'th oriented issues* Example 4: Houis Per(o's(i mana%es a hi%h income mutual fund* ,e #urchases /ero dividend stoc( in a financial services com#an& because he believes the stoc( is undervalued and is in a #otential %ro'th industr&- ma(in% it an attractive investment* Comment, ) /ero dividend stoc( does not seem to fit the mandate of the fund that Per(o's(i is mana%in%* Cnless- Per(o's(i4s investment fits 'ithin the mandate or is 'ithin the realm of investments allo'able under the disclosures of the fund- Per(o's(i has violated Standard III(C)* Example 5: Aa. Gubler- CI+ of a #ro#ert&Ecasualt& insurance subsidiar& of a lar%e financial con%lomerate- 'ants to better diversif& the com#an&4s investment #ortfolio and increase its returns* $he com#an&4s investment #olic& statement (IPS) #rovides for hi%hl& &iG'id investments- such as lar%e ca#s- %overnments- and su#ranationals- as 'ell as cor#orate bonds 'ith a minimum credit ratin% of )) and maturit& of no more than five &ears* In a recent #resentation- a .en!'%e #a:i!a& %rou# offered ver& attractive #ros#ective returns on some of their :%i.a!e eG'i!4 funds #rovidin% seed ca#ital* )n e.it strate%& is alread& contem#lated but investors 'ill first have to observe a minimum three &ear loc( u# #eriod- 'ith a subse3uent laddered e.it o#tion for a ma.imum of one

third of shares #er &ear* Gubler does not 'ant to miss this o##ortunit& and after an e.tensive anal&sis and o#timi/ation of this a$$e! #&a$$ 'ith the com#an&4s current #ortfolio- he invests : #ercent in this seed fund- leavin% the #ortfolio4s total e3uit& e.#osure still 'ell belo' its u##er limit* Comment, Gubler violates standards III()) and III(C)* ,is ne' investment loc(s u# #art of the com#an&4s assets for at least three and for u# to as man& as five &ears and #ossibl& be&ond* Since the IPS re3uires investments in hi%hl& li3uid investments and describes acce#ted asset classes#rivate e3uit& investments 'ith a loc( u# #eriod certainl& do not 3ualif&* Even 'ithout such loc( u# #eriod- an asset class 'ith onl& an occasional- and thus im#licitl& illi3uid mar(et- ma& not be suitable* )lthou%h an IPS t&#icall& describes ob5ectives and constraints in %reat detail- the mana%er must ma(e ever& effort to understand the client4s business and circumstances* Boin% so should also enable the mana%er to reco%ni/e- understand- and discuss 'ith the client other factors that ma& be or ma& become material in the investment mana%ement #rocess* D( Pe% o%/an#e P%e$en!a!ion H"en #o//'ni#a!ing in.e$!/en! :e% o%/an#e in o%/a!ion@ /e/)e%$ and #andida!e$ /'$! /a8e %ea$ona)&e e o%!$ !o /a8e $'%e !"a! i! i$ ai%@ a##'%a!e@ and #o/:&e!e( Standard III(B) re3uires members and candidates to #rovide credible #erformance information to clients and #ros#ective clients and to avoid misstatin% #erformance or misleadin% clients and #ros#ective clients about the investment #erformance of members or candidates or their firms* $his standard encoura%es full disclosure of investment #erformance data to clients and #ros#ective clients* Standard III(B) covers an& #ractice that 'ould lead to misre#resentation of a member or candidate4s #erformance record- 'hether the #ractice involves #erformance #resentation or #erformance measurement* $his standard #rohibits misre#resentations of #ast #erformance or reasonabl& e.#ected #erformance* ) member or candidate must %ive a fair and com#lete #resentation of #erformance information 'henever communicatin% data 'ith res#ect to the #erformance histor& of individual accounts- com#osites of %rou#s of accounts- or com#osites of an anal&st or firm4s #erformance results* "urther- members and candidates should not state or im#l& that clients 'ill obtain or benefit from a rate of return that 'as %enerated in the #ast* $he re3uirements of this standard are not limited to members and candidates mana%in% se#arate accounts* )n&time a member or candidate #rovides #erformance information for 'hich the mana%er is claimin% res#onsibilit&- such as for #ooled funds- the histor& must be accurate* 9esearch anal&sts #romotin% the success or accurac& of their recommendations must ensure that their claims are fairaccurate- and com#lete* If the #resentation is brief- the member or candidate must ma(e available to clients and #ros#ects u#on re3uest- the detailed information su##ortin% that communication* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e "or members and candidates see(in% to sho' the #erformance histor& of the assets the& mana%ecom#liance 'ith the Global Investment Performance Standards (GIPS) is the best method to meet their obli%ations under Standard III(B)* Aembers and candidates should encoura%e their firms to adhere to the GIPS standards*

Aembers and candidates can also meet their obli%ations under Standard III(B) b&1 considerin% the (no'led%e and so#histication of the audience to 'hom a #erformance #resentation is addressed #resentin% the #erformance of the 'ei%hted com#osite of similar #ortfolios rather than usin% a sin%le re#resentative account includin% terminated accounts as #art of #erformance histor& includin% disclosures that 'ould full& e.#lain the #erformance results bein% re#orted (for e.am#le- statin%- 'hen a##ro#riate- that results are simulated 'hen model results are usedclearl& indicatin% 'hen the #erformance record is that of a #rior entit&- or disclosin% 'hether the #erformance is %ross of fees- net of fees- or after ta.) maintainin% the data and records used to calculate the #erformance bein% #resented* A::&i#a!ion o !"e S!anda%d Example 1: I&le $a&lor of $a&lor $rust Com#an&- notin% the #erformance of $a&lor4s common trust fund for the #ast t'o &ears- states in a brochure sent to his #otential clients that Pou can e.#ect stead& 78 #ercent annual com#ound %ro'th of the value of &our investments over the &ear* $a&lor $rust4s common trust fund did increase at the rate of 78 #ercent #er annum for the #ast &ear 'hich mirrored the increase of the entire mar(et* $he fund- ho'ever- never avera%ed that %ro'th for more than one &ear- and the avera%e rate of %ro'th of all of its trust accounts for five &ears 'as 8 #ercent #er annum* Comment, $a&lor4s brochure is in violation of Standard III(B)* $a&lor should have disclosed that the 78 #ercent %ro'th occurred onl& in one &ear* )dditionall&- $a&lor did not include client accounts other than those in the firm4s common trust fund* ) %eneral claim of firm #erformance should ta(e into account the #erformance of all cate%ories of accounts* "inall&- b& statin% that clients can e.#ect a stead& 78 #ercent annual com#ound %ro'th rate- $a&lor also violated Standard I(C)- 'hich #rohibits statements of assurances or %uarantees re%ardin% an investment* Example 2: )nna ?udd- a senior #artner of )le.ander Ca#ital Aana%ement- circulates a #erformance sheet listin% #erformance fi%ures for ca#ital a##reciation accounts for the &ears 0<QQ throu%h 7!!:and claimin% com#liance 'ith the Global Investment Performance Standards (GIPS)* 9eturns are not calculated in accordance 'ith the Global Investment Performance Standards (GIPS) because the com#osites are not asset 'ei%hted- 'hich is a violation of GIPS* Comment, ?udd is in violation of Standard III(B)* Fhen claimin% com#liance 'ith GIPS- firms must meet all the re3uirements and mandator& disclosures and an& other additional re3uirements or disclosures necessar& to that firm4s s#ecific situation* ?udd4s violation is not from an& misuse of the data but from a false claim of GIPS com#liance* Example 3: )aron AcCo& is vice #resident and mana%in% #artner of the e3uit& investment %rou# of Aastermind "inancial )dvisors- a ne' business* Aastermind recruited AcCo& because he had a

#roven si. &ear trac( record 'ith GOP "inancial* In develo#in% Aastermind4s advertisin% and mar(etin% cam#ai%n- AcCo& #re#ared an advertisement that included the e3uit& investment #erformance he achieved at GOP "inancial* $he advertisement for Aastermind did not identif& the e3uit& #erformance as bein% earned 'hile at GOP* $he advertisement 'as distributed to e.istin% clients and #ros#ective clients of Aastermind* Comment, AcCo& violated Standard III(B) b& distributin% an advertisement that contained material misre#resentations re%ardin% the historical #erformance of Aastermind* Standard III(B) re3uires that members and candidates ma(e ever& reasonable effort to ensure that #erformance information is a fair- accurate- and com#lete re#resentation of an individual or firm4s #erformance* )s a %eneral matter- this standard does not #rohibit sho'in% #ast #erformance of funds mana%ed at a #rior firm as #art of a #erformance trac( record so lon% as it is accom#anied b& a##ro#riate disclosures detailin% 'here the #erformance comes from and the #erson4s s#ecific role in achievin% that #erformance* If AcCo& chooses to use his #ast #erformance from GOP in Aastermind4s advertisin%- he should ma(e full disclosure as to the source of the historical #erformance* Example 4: ?ed Bavis develo#ed a mutual fund selection #roduct based on historical information from the 0<<!<8 #eriod* Bavis tested his methodolo%& b& a##l&in% it retroactivel& to data from the 0<<=7!!L #eriod- thus #roducin% simulated #erformance results for those &ears* In ?anuar& 7!!:Bavis4s em#lo&er decided to offer the #roduct and Bavis be%an #romotin% it throu%h trade 5ournal advertisements and direct dissemination to clients* $he advertisements included the #erformance results for the 0<<=7!!L #eriod but did not indicate that the results 'ere simulated* Comment, Bavis violated Standard III(B) b& failin% to clearl& identif& simulated #erformance results* Standard III(B) #rohibits members and candidates from ma(in% an& statements that misre#resent the #erformance achieved b& them or their firms and re3uires members and candidates to ma(e ever& reasonable effort to ensure that #erformance information #resented to clients is fair- accurate- and com#lete* Cse of the simulated results should be accom#anied b& full disclosure as to the source of the #erformance data- includin% the fact that the results from 0<<8 throu%h 7!!L 'ere the result of a##l&in% the model retroactivel& to that time #eriod* Example 5: In a #resentation #re#ared for #ros#ective clients- Filliam Iilmer sho's the rates of return reali/ed over a five &ear #eriod b& a com#osite of his firm4s discretionar& accounts 'ith a balanced ob5ective* $his com#osite- ho'ever- consisted of onl& a fe' of the accounts that met the balanced criteria set b& the firm- e.cluded accounts under a certain asset level 'ithout disclosin% the fact of their e.clusion- and included nonbalanced accounts that 'ould boost investment results* In addition- to achieve better results- Iilmer mani#ulated the narro' ran%e of accounts included in the com#osite b& chan%in% the accounts that made u# the com#osite over time* Comment, Iilmer violated Standard III(B) b& misre#resentin% the facts in the #romotional material sent to #ros#ective clients- distortin% his firm4s #erformance record- and failin% to include disclosure that 'ould have clarified the #resentation* E( P%e$e%.a!ion o Con iden!ia&i!4 Me/)e%$ and #andida!e$ /'$! 8ee: in o%/a!ion a)o'! #'%%en!@ o%/e%@ and :%o$:e#!i.e #&ien!$ #on iden!ia& 'n&e$$:

1( 2( 3(

T"e in o%/a!ion #on#e%n$ i&&ega& a#!i.i!ie$ on !"e :a%! o !"e #&ien!J Di$#&o$'%e i$ %eG'i%ed )4 &a<J o% T"e #&ien! o% :%o$:e#!i.e #&ien! :e%/i!$ di$#&o$'%e o !"e in o%/a!ion(

Standard III(E) re3uires that members and candidates to #reserve the confidentialit& of information communicated to them b& their clients- #ros#ective clients- and former clients* $his standard is a##licable 'hen (0) the member or candidate receives information on the basis of his or her s#ecial abilit& to conduct a #ortion of the client4s business or #ersonal affairs and (7) the member or candidate receives information that arises from or is relevant to that #ortion of the client4s business that is the sub5ect of the s#ecial or confidential relationshi#* If disclosure of the information is re3uired b& la' or the information concerns ille%al activities b& the client- ho'ever- the member or candidate ma& have an obli%ation to re#ort the activities to the a##ro#riate authorities* )s a %eneral matter- members and candidates must com#l& 'ith a##licable la'* If a##licable la' re3uires disclosure of client information in certain circumstances- members and candidates must com#l& 'ith the la'* Similarl&- if a##licable la' re3uires members and candidates to maintain confidentialit&- even if the information concerns ille%al activities on the #art of the client- members and candidates should not disclose such information* Fhen in doubt- members and candidates should consult 'ith their em#lo&er4s com#liance #ersonnel or outside counsel before disclosin% confidential information about clients* $his standard #rotects the confidentialit& of client information even if the #erson or entit& is no lon%er a client of the member or candidate* $herefore- members and candidates must continue to maintain the confidentialit& of client records even after the client relationshi# has ended* ,o'ever- if a client or former client e.#ressl& authori/es the member or candidate to disclose information- the member or candidate ma& follo' the terms of the authori/ation and #rovide the information* Professional Conduct !nvestigations by C+( !nstitute $he re3uirements of Standard III(E) are not intended to #revent members and candidates from coo#eratin% 'ith an investi%ation b& the C") Institute Professional Conduct Pro%ram (PCP)* Fhen #ermissible under a##licable la' members and candidates shall consider the PCP an e.tension of themselves 'hen re3uested to #rovide information about a client in su##ort of a PCP investi%ation into their o'n conduct* Aembers and candidates are encoura%ed to coo#erate 'ith investi%ations into the conduct of others* )n& information turned over to the PCP is (e#t in the strictest confidence* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e $he sim#lest- most conservative- and most effective 'a& to com#l& 'ith Standard III(E) is to avoid disclosin% an& information received from a client e.ce#t to authori/ed fello' em#lo&ees 'ho are also 'or(in% for the client* In some instances- ho'ever- a member or candidate ma& 'ant to disclose information received from clients that is outside the sco#e of the confidential relationshi# and does not involve ille%al activities* Defore ma(in% such a disclosure- a member or candidate should as( the follo'in%1 In 'hat conte.t 'as the information disclosedT If disclosed in a discussion of 'or( bein% #erformed for the client- is the information relevant to the 'or(T

 Is the information bac(%round material that- if disclosed- 'ill enable the member or candidate to im#rove service to the clientT A::&i#a!ion o !"e S!anda%d Example 1: Sarah Connor- a financial anal&st em#lo&ed b& ?ohnson Investment Counselors- Inc*#rovides investment advice to the trustees of Cit& Aedical Center* $he trustees have %iven her a number of internal re#orts concernin% Cit& Aedical4s needs for #h&sical #lant renovation and e.#ansion* $he& have as(ed Connor to recommend investments that 'ould %enerate #a:i!a& a::%e#ia!ion in endo'ment funds to meet #ro5ected ca#ital e.#enditures* Connor is a##roached b& a local businessman- $homas Iase&- 'ho is considerin% a substantial contribution either to Cit& Aedical Center or to another local hos#ital* Iase& 'ants to find out the buildin% #lans of both institutions before ma(in% a decision- but he does not 'ant to s#ea( to the trustees* Comment, $he trustees %ave Connor the internal re#orts so she could advise them on ho' to mana%e their endo'ment funds* Decause the information in the re#orts is clearl& both confidential and 'ithin the sco#e of the confidential relationshi#- Standard III(E) re3uires that Connor refuse to divul%e information to Iase&* Example 2: H&nn Aood& is an investment officer at the Hester $rust Com#an&* She has an advisor& customer 'ho has tal(ed to her about %ivin% a##ro.imatel& R8!-!!! to charit& to reduce her income ta.es* Aood& is also treasurer of the ,ome for Indi%ent Fido's (,IF)- 'hich is #lannin% its annual %ivin% cam#ai%n* ,IF ho#es to e.#and its list of #ros#ects- #articularl& those ca#able of substantial %ifts* Aood& recommends that ,IF4s vice #resident for cor#orate %ifts call on her customer and as( for a donation in the R8!-!!! ran%e* Comment, Even thou%h the attem#t to hel# the ,ome for Indi%ent Fido's 'as 'ell intendedAood& violated Standard III(E) b& revealin% confidential information about her client* Example 3: Government officials a##roach Case& Samuel- the #ortfolio mana%er for Garcia Com#an&4s #ension #lan- to e.amine #ension fund records* $he& tell her that Garcia4s cor#orate ta. returns are bein% audited and the #ension fund revie'ed* $'o da&s earlier Samuel learned in a re%ular investment revie' meetin% 'ith Garcia officers that #otentiall& e.cessive and im#ro#er char%es are bein% made to the #ension #lan b& Garcia* Samuel consults her em#lo&er4s %eneral counsel and is advised that Garcia has #robabl& violated ta. and fiduciar& re%ulations and la's* Comment, Samuel should inform her su#ervisor of these activities- and her em#lo&er should ta(e ste#s- 'ith Garcia- to remed& the violations* If that a##roach is not successful- Samuel and her em#lo&er should see( advice of le%al counsel to determine the a##ro#riate ste#s to be ta(en* Samuel ma& 'ell have a dut& to disclose the evidence she has of the continuin% le%al violations and to resi%n as asset mana%er for Garcia* Example 4: Bavid Dradford mana%es mone& for a famil& o'ned %ea& e$!a!e develo#ment cor#oration* ,e also mana%es the individual #ortfolios of several of the famil& members and officers of the cor#oration- includin% the chief financial officer (C"+)* Dased on the financial records from the cor#oration- as 'ell as some 3uestionable #ractices of the C"+ that he has observed- Dradford believes that the C"+ is embe//lin% mone& from the cor#oration and #uttin% it into his #ersonal investment account*

Comment, Dradford should chec( 'ith his firm4s com#liance de#artment as 'ell as outside counsel to determine 'hether a##licable securities re%ulations re3uire re#ortin% the C"+4s financial records* STANDARD I-ADUTIES TO EMPLOYERS A( Lo4a&!4 In /a!!e%$ %e&a!ed !o !"ei% e/:&o4/en!@ /e/)e%$ and #andida!e$ /'$! a#! o% !"e )ene i! o !"ei% e/:&o4e% and no! de:%i.e !"ei% e/:&o4e% o !"e ad.an!age o !"ei% $8i&&$ and a)i&i!ie$@ di.'&ge #on iden!ia& in o%/a!ion@ o% o!"e%<i$e #a'$e "a%/ !o !"ei% e/:&o4e%( Standard IV()) re3uires members and candidates to #rotect the interests of their firm b& refrainin% from an& conduct that 'ould in5ure the firm- de#rive it of #rofit- or de#rive it of the advanta%e of the member and candidate4s s(ills and abilit&* Aembers and candidates must al'a&s #lace the interests of clients above the interests of their em#lo&er* +ther'ise- in matters related to their em#lo&mentmembers and candidates must not en%a%e in conduct that harms the interests of the em#lo&er* Im#licit in this standard is the obli%ation of members and candidates to com#l& 'ith the #olicies and #rocedures established b& their em#lo&ers that %overn the em#lo&er em#lo&ee relationshi#>to the e.tent that such #olicies and #rocedures do not conflict 'ith a##licable la's- rules- re%ulations- or the Code and Standards. $his standard is not meant to be a blan(et re3uirement to #lace em#lo&er interests ahead of #ersonal interests in all matters* $his standard does not re3uire members and candidates to subordinate im#ortant #ersonal and famil& obli%ations to their 'or(* Aembers and candidates should enter into a dialo%ue 'ith their em#lo&er about balancin% #ersonal and em#lo&ment obli%ations 'hen #ersonal matters ma& interfere 'ith their 'or( on a re%ular or si%nificant basis* In addition- the em#lo&er em#lo&ee relationshi# im#oses duties and res#onsibilities on both #arties* Em#lo&ers must adhere to the duties and res#onsibilities that the& o'e to their em#lo&ees if the& e.#ect to have contented and #roductive em#lo&ees* !nde"endent Practice Included in Standard IV()) is the re3uirement that members and candidates abstain from inde#endent com#etitive activit& that could conflict 'ith the interests of their em#lo&er* )lthou%h standard IV()) does not #reclude members or candidates from enterin% into an inde#endent business 'hile still em#lo&ed- members and candidates 'ho #lan to en%a%e in inde#endent #ractice for com#ensation must #rovide notification to their em#lo&er describin% the t&#es of service the members or candidates 'ill render to #ros#ective inde#endent clients- the e.#ected duration of the services- and the com#ensation for the services* Aembers and candidates should not render services until receivin% consent from their em#lo&er to all of the terms of the arran%ement* Practice means an& service that the em#lo&er currentl& ma(es available for remuneration* Cnderta(in% inde#endent #ractice means en%a%in% in com#etitive business- as o##osed to ma(in% #re#arations to be%in such #ractice* 'eaving an Em"loyer Fhen investment #rofessionals #lan to leave their current em#lo&er- the& must continue to act in the em#lo&er4s best interest- and must not en%a%e in an& activities that 'ould conflict 'ith this dut& until their resi%nation becomes effective* It is difficult to define s#ecific %uidelines for those

members and candidates 'ho #lan to com#ete 'ith their em#lo&er as #art of a ne' venture* $he circumstances of each situation must be revie'ed to distin%uish #ermissible #re#arations from violations of dut&* )ctivities that mi%ht constitute a violation- es#eciall& in combination- include the follo'in%1 misa##ro#riation of trade secrets misuse of confidential information solicitation of em#lo&er4s clients #rior to cessation of em#lo&ment self dealin% (a##ro#riatin% for one4s o'n #ro#ert& a business o##ortunit& or information belon%in% to one4s em#lo&er) misa##ro#riation of clients or client lists* ) de#artin% em#lo&ee is %enerall& free to ma(e arran%ements or #re#arations to %o into a com#etitive business before terminatin% the relationshi# 'ith his or her em#lo&er #rovided that such #re#arations do not breach the em#lo&ee4s dut& of lo&alt&* ,o'ever- members and candidates contem#latin% see(in% other em#lo&ment must not contact e.istin% clients or #otential clients #rior to leavin% their em#lo&er for #ur#oses of solicitin% their business for the ne' em#lo&er* In additionthe& must not ta(e records or files to a ne' em#lo&er 'ithout the 'ritten #ermission of the #revious em#lo&er* +nce an em#lo&ee has left the firm- the s(ills and e.#erience that an em#lo&ee obtains 'hile em#lo&ed are not confidential or #rivile%ed information* Similarl&- sim#le (no'led%e of the names and e.istence of former clients is %enerall& not confidential information unless deemed such b& an a%reement or b& la'* Standard IV()) does not im#ose a #rohibition on the use of e.#erience or (no'led%e %ained at one em#lo&er from bein% used at another em#lo&er* ,o'ever- firm records or 'or( #erformed on behalf of the firm stored on a home com#uter for the member or candidate4s convenience 'hile em#lo&ed should be erased or returned to the em#lo&er unless the firm %ives #ermission to (ee# those records after em#lo&ment ends* ;or does the standard #rohibit former em#lo&ees from contactin% clients of their #revious firm so lon% as the contact information does not come from the records of the former em#lo&er or violate an a##licable non com#ete a%reement* Aembers and candidates are free to use #ublic information about their former firm after de#artin% to contact former clients 'ithout violatin% Standard IV())absent a s#ecific a%reement not to do so* Em#lo&ers often re3uire em#lo&ees to si%n non com#ete a%reements that #reclude a de#artin% em#lo&ee from en%a%in% in certain conduct* Aembers and candidates should ta(e care to revie' the terms of an& such a%reements 'hen leavin% their em#lo&er to determine 'hat- if an&- conduct those a%reements ma& #rohibit* 0 istleblowing ) member or candidate4s #ersonal interests- as 'ell as the interests of his or her em#lo&er- are secondar& to #rotectin% the inte%rit& of ca#ital mar(ets and the interests of the clients* $herefore-

there ma& be circumstances in 'hich members and candidates act contrar& to their em#lo&er interests in an effort to com#l& 'ith their duties to the mar(et and clients (e*%*- 'hen an em#lo&er is en%a%ed in ille%al or unethical activit&)* In such instances- activities that 'ould normall& violate a member or candidate4s dut& to his or her em#lo&er (such as contradictin% em#lo&er instructionsviolatin% certain #olicies and #rocedures- or #reservin% a record b& co#&in% em#lo&er records) ma& be 5ustified* Such action 'ould be #ermitted onl& if the intent is clearl& aimed at #rotectin% clients or the inte%rit& of the mar(et and not for #ersonal %ain* Nature of Em"loyment ) 'ide variet& of business relationshi#s e.ist 'ithin the investment industr&* "or instance- a member or candidate can be retained as an em#lo&ee or inde#endent contractor* Aembers and candidates must determine 'hether the& are em#lo&ees or inde#endent contractors in order to determine the a##licabilit& of Standard IV())* $his issue 'ill be decided lar%el& b& the de%ree of control e.ercised b& the em#lo&in% entit& over the member or candidate* "actors determinin% control include 'hether the member or candidate4s hours- 'or( location- and other #arameters of the 5ob are set2 'hether facilities are #rovided to the member or candidate2 'hether the member or candidate4s e.#enses are reimbursed2 'hether the member or candidate holds himself or herself out to other em#lo&ers for additional 'or(2 and the number of clients or em#lo&ers the member or candidate 'or(s for* ) member or candidate4s duties 'ithin an inde#endent contractor relationshi# are %overned b& the oral or 'ritten a%reement bet'een the member and the client* Aembers and candidates should ta(e care to define clearl& the sco#e of their res#onsibilities and the e.#ectations of each client 'ithin the conte.t of each relationshi#* +nce the member or candidate establishes a relationshi# 'ith a clientthe& have a dut& to abide b& the terms of the a%reement* A::&i#a!ion o !"e S!anda%d Example 1: Samuel Aa%ee mana%es #ension accounts for $rust )ssets- Inc*- but has become frustrated 'ith the 'or(in% environment and has been offered a #osition 'ith "iduciar& Aana%ement* Defore resi%nin% from $rust )ssets- Aa%ee as(s four bi% accounts to leave that firm and o#en accounts 'ith "iduciar&* Aa%ee also #ersuades several #ros#ective clients to si%n a%reements 'ith "iduciar& Aana%ement* Aa%ee had #reviousl& made #resentations to these #ros#ects on behalf of $rust )ssets- Inc* Comment, Aa%ee violated the em#lo&eeem#lo&er #rinci#le re3uirin% him to act solel& for his em#lo&er4s benefit* Aa%ee4s dut& is to $rust )ssets as lon% as he is em#lo&ed there* $he solicitation of $rust )ssets4 current clients and #ros#ective clients is unethical and violates Standard IV())* Example 2: ?ames ,i%hto'er has been em#lo&ed b& ?ason Investment Aana%ement Cor#oration for 08 &ears* ,e be%an as an anal&st but assumed increasin% res#onsibilities and is no' a senior #ortfolio mana%er and a member of the firm4s investment #olic& committee* ,i%hto'er has decided to leave ?ason Investment and start his o'n investment mana%ement business* ,e has been careful not to tell an& of ?ason4s clients that he is leavin%- because he does not 'ant to be accused of breachin% his dut& to ?ason b& solicitin% ?ason4s clients before his de#arture* ,i%hto'er is #lannin% to co#& and ta(e 'ith him the follo'in% documents and information he develo#ed or 'or(ed on 'hile at ?ason1 (0) the client list- 'ith addresses- tele#hone numbers- and other #ertinent client information2 (7) client account statements2 (L) sam#le mar(etin% #resentations to #ros#ective clients

containin% ?ason4s #erformance record2 (:) ?ason4s recommended list of securities2 (8) com#uter models to determine asset allocations for accounts 'ith different ob5ectives2 (=) com#uter models for stoc( selection2 and (X) #ersonal com#uter s#readsheets for ,i%hto'er4s ma5or cor#orate recommendations 'hich he develo#ed 'hen he 'as an anal&st* Comment, E.ce#t 'ith the consent of their em#lo&er- de#artin% em#lo&ees ma& not ta(e em#lo&er #ro#ert&- 'hich includes boo(s- records- re#orts- and other materials- and ma& not interfere 'ith their em#lo&er4s business o##ortunities* $a(in% an& em#lo&er records- even those the member or candidate #re#ared- violates Standard IV())* Example 3: 9ueben Finston mana%es all e3uit& #ortfolios at $ar%et )sset Aana%ement ($)A)- a lar%e- established investment counselor* $en &ears a%o- Phil#ott O Com#an&- 'hich mana%es a famil& of %lobal bond mutual funds- ac3uired $)A in a diversification move* )fter the mer%er- the combined o#erations #ros#ered in the fi.ed income business 'hile the e3uit& mana%ement business at $)A lan%uished* Hatel&- a fe' of the e3uit& #ension accounts that had been 'ith $)A before the mer%er have terminated their relationshi#s 'ith $)A* +ne da&- Finston finds on his voice mail a messa%e from a concerned client- ,e&Y I 5ust heard that Phil#ott is close to announcin% the sale of &our firm4s e3uit& mana%ement business to 9u%%ed Hife* Fhat is %oin% onT ;ot bein% a'are of an& such deal- Finston and his associates are stunned* $heir internal in3uiries are met 'ith denials from Phil#ott mana%ement- but the rumors #ersist* "eelin% left in the dar(- Finston contem#lates leadin% an em#lo&ee bu&out of $)A4s e3uit& mana%ement business* Comment, )n em#lo&ee led bu&out of $)A4s e3uit& asset mana%ement business 'ould be consistent 'ith Standard IV()) because it 'ould rest on the #ermission of the em#lo&er andultimatel&- the clients* In this case- ho'ever- in 'hich em#lo&ees sus#ect the senior mana%ers or #rinci#als are not truthful or forthcomin%- members should consult le%al counsel to determine a##ro#riate action* Example 4: Haura Cla&- 'ho is unem#lo&ed- 'ants #art time consultin% 'or( 'hile see(in% a full time anal&st #osition* Burin% an intervie' at Phere )ssociates- a lar%e institutional asset mana%erCla& is told that the firm has no immediate research o#enin%s but 'ould be 'illin% to #a& her a flat fee to com#lete a stud& of the 'ireless communications industr& 'ithin a %iven #eriod of time* Cla& 'ould be allo'ed unlimited access to Phere4s research files and 'ould be 'elcome to come to the offices and use 'hatever su##ort facilities are available durin% normal 'or(in% hours* Phere4s research director does not see( an& e.clusivit& for Cla&4s out#ut- and the t'o a%ree to the arran%ement on a handsha(e* )s Cla& nears com#letion of the stud&- she is offered an anal&st 5ob in the research de#artment of Bo't O Com#an&- a bro(era%e firm- and she is #onderin% submittin% the draft of her 'ireless stud& for #ublication b& Bo't* Comment, )lthou%h she is under no 'ritten contractual obli%ation to Phere- Cla& has an obli%ation to let Phere act on the out#ut of her stud& before Bo't O Com#an& or Cla& uses the information to its o'n advanta%e* $hat is- unless Phere %ives #ermission to Cla& 'aivin% ri%hts to her 'ireless re#ort- Cla& 'ould be in violation of Standard IV()) if she 'ere to immediatel& recommend to Bo't the same transactions recommended in the re#ort to Phere* "urthermoreCla& must not ta(e from Phere an& research file material or other #ro#ert& that she ma& have used* Example 5: Emma Aadeline- a recent colle%e %raduate and a candidate in the C") Pro%ram- s#ends her summer as an un#aid intern at Aurdoch and Ho'ell* Aurdoch and Ho'ell is attem#tin% to brin%

the firm into com#liance 'ith the GIPS standards- and Aadeline is assi%ned to assist in its efforts* $'o months into her internshi#- Aadeline a##lies for a 5ob at AcAillan O Com#an&- 'hich has #lans to become GIPS com#liant* Aadeline acce#ts the 5ob 'ith AcAillan* Defore leavin% Aurdochshe co#ies the firm4s soft'are that she hel#ed develo#- as she believes this soft'are 'ill assist her in her ne' #osition* Comment, Even thou%h Aadeline does not receive monetar& com#ensation for her services at Aurdoch- she has used firm resources in creatin% the soft'are and she is considered an em#lo&ee because she receives com#ensation and benefits in the form of 'or( e.#erience and (no'led%e* D& co#&in% the soft'are- Aadeline violated Standard IV()) because she misa##ro#riated Aurdoch4s #ro#ert& 'ithout #ermission* Example 6: Bennis Elliot has hired Sam Chisolm 'ho #reviousl& 'or(ed for a com#etin% firm* Chisolm left his former firm after 0Q &ears of em#lo&ment* Fhen Chisolm be%ins 'or(in% for Elliothe 'ants to contact his former clients because he (no's them 'ell and is certain that man& 'ill follo' him to his ne' em#lo&er* Is Chisolm in violation of the standard IV()) if he contacts his former clientsT Comment, Decause client records are the #ro#ert& of the firm- contactin% former clients for an& reason throu%h the use of client lists or other information ta(en from a former em#lo&er 'ithout #ermission 'ould be a violation of Standard IV())* In addition- the nature and e.tent of the contact 'ith former clients ma& be %overned b& the terms of an& non com#ete a%reement si%ned b& the em#lo&ee and the former em#lo&er that covers contact 'ith former clients after em#lo&ment* Dut- sim#le (no'led%e of the names and e.istence of former clients is not confidential information- 5ust as s(ills or e.#erience that an em#lo&ee obtains 'hile em#lo&ed is not confidential or #rivile%ed information* $he Code and Standards do not im#ose a #rohibition on the use of e.#erience or (no'led%e %ained at one em#lo&er from bein% used at another em#lo&er* $he Code and Standards also do not #rohibit former em#lo&ees from contactin% clients of their #revious firm- absent a non com#ete a%reement* Aembers and candidates are free to use #ublic information about their former firm after de#artin% to contact former clients 'ithout violatin% Standard IV())* In the absence of a non com#ete a%reement- as lon% as Chisolm maintains his dut& of lo&alt& to his em#lo&er before 5oinin% Elliot4s firm- does not ta(e ste#s to solicit clients until he has left his former firm- and does not ma(e use of material from his former em#lo&er 'ithout its #ermission after he has left- he 'ould not be in violation of the Code and Standards* Example 7: Gardner )llen currentl& 'or(s at a re%istered investment com#an& as an e3uit& anal&st* Fithout notice to her em#lo&er- she re%isters 'ith %overnment authorities to start an in.e$!/en! #o/:an4 that 'ill com#ete 'ith her em#lo&er* ,o'ever- she has not activel& sou%ht clients* Boes re%istration of this com#etin% com#an& 'ith the a##ro#riate re%ulator& authorities constitute a violation of IV())T Comment, )llen4s #re#arations for the ne' business b& re%isterin% 'ith the re%ulator& authorities do not conflict 'ith the 'or( for her em#lo&er if the #re#arations have been done on

)llen4s o'n time outside of the office and if )llen 'ill not be %ettin% clients for the business or other'ise o#eratin% the ne' com#an& until she has left her current em#lo&er* Example 8: Several em#lo&ees are #lannin% to de#art their current em#lo&er 'ithin a fe' 'ee(s and have been careful to not en%a%e in an& activities that 'ould conflict 'ith their dut& to their current em#lo&er* $he& have 5ust learned that one of their em#lo&er4s clients has underta(en a re3uest for #ro#osal (9"P) to revie' and #ossibl& hire a ne' investment consultant* $he 9"P has been sent to the em#lo&er and all of its com#etitors* $he %rou# believes that the ne' entit& to be formed 'ould be 3ualified to res#ond to the 9"P and eli%ible for the business* $he 9"P submission #eriod is li(el& to conclude before the em#lo&ees4 resi%nations are effective* Is it #ermissible for the %rou# of de#artin% em#lo&ees to res#ond to the 9"P under their antici#ated ne' firmT Comment, ) %rou# of em#lo&ees res#ondin% to an 9"P that their em#lo&er is also res#ondin% to 'ould lead to direct com#etition bet'een the em#lo&ees and the em#lo&er* Such conduct 'ould violate Standard IV()) unless the %rou# of em#lo&ees received #ermission from their em#lo&er as 'ell as the entit& sendin% out the 9"P* Example 9: )lfonso Aota is a research anal&st 'ith $&son Investments* ,e 'or(s #art time as a ma&or for his hometo'n- a #osition for 'hich he receives com#ensation* Aust Aota see( #ermission from $&son to serve as ma&orT Comment, If Aota4s ma&oral duties are so e.tensive and time consumin% that the& mi%ht detract from his abilit& to fulfill his res#onsibilities at $&son- he should discuss his outside activities 'ith his em#lo&er and come to a mutual a%reement re%ardin% ho' to mana%e his #ersonal commitments 'ith his res#onsibilities to his em#lo&er* Example 10: )fter leavin% her em#lo&er- Sha'na AcWuillen establishes her o'n mone& mana%ement business* Fhile 'ith her former em#lo&er- she did not si%n a non com#ete a%reement that 'ould have #revented her from solicitin% former clients* C#on her de#arture- she does not ta(e an& of her client lists or contact information and clears her #ersonal com#uter of an& em#lo&er records- includin% client contact information* She obtains the #hone numbers of her former clients throu%h #ublic records and contacts them to solicit their business* Comment, AcWuillen is not in violation of Standard IV()) because she has not used information or records from her former em#lo&er and is not #revented b& an a%reement 'ith her former em#lo&er from solicitin% her former clients* 6( Addi!iona& Co/:en$a!ion A%%ange/en!$ Me/)e%$ and #andida!e$ /'$! no! a##e:! gi !$@ )ene i!$@ #o/:en$a!ion@ o% #on$ide%a!ion !"a! #o/:e!e$ <i!"@ o% /ig"! %ea$ona)&4 )e eC:e#!ed !o #%ea!e a #on &i#! o in!e%e$! <i!"@ !"ei% e/:&o4e%F$ in!e%e$! 'n&e$$ !"e4 o)!ain <%i!!en #on$en! %o/ a&& :a%!ie$ in.o&.ed( Standard IV(D) re3uires members and candidates to obtain #ermission from their em#lo&er before acce#tin% com#ensation or other benefits from third #arties for the services rendered to the em#lo&er or for an& services that mi%ht create a conflict of interest 'ith their em#lo&er4s interest* Com#ensation and benefits include direct com#ensation b& the client and an& indirect com#ensation

or other benefits received from third #arties* Fritten consent includes an& form of communication that can be documented (for e.am#le- communication via com#uter e mail that can be retrieved and documented)* Aembers and candidates must obtain #ermission for additional com#ensationEbenefits because such arran%ements ma& affect lo&alties and ob5ectivit& and create #otential conflicts of interest* Bisclosure allo's an em#lo&er to consider the outside arran%ements 'hen evaluatin% the actions and motivations of members and candidates* Aoreover- the em#lo&er is entitled to have full (no'led%e of com#ensationEbenefit arran%ements to assess the true cost of the services members or candidates are #rovidin%* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e Aembers and candidates should ma(e an immediate 'ritten re#ort to their em#lo&er s#ecif&in% an& com#ensation the& #ro#ose to receive for services in addition to the com#ensation or benefits received from their em#lo&er* $his 'ritten re#ort should state the terms of an& a%reement under 'hich a member or candidate 'ill receive additional com#ensation2 terms include the nature of the com#ensation- the a##ro.imate amount of com#ensation- and the duration of the a%reement* A::&i#a!ion o !"e S!anda%d Example 1: Geoff Fhitman- a #ortfolio anal&st for )dams $rust Com#an&- mana%es the account of Carol Cochran- a client* Fhitman is #aid a salar& b& his em#lo&er- and Cochran #a&s the trust com#an& a standard fee based on the mar(et value of assets in her #ortfolio* Cochran #ro#oses to Fhitman that an& &ear that m& #ortfolio achieves at least a 08 #ercent return before ta.es- &ou and &our 'ife can fl& to Aonaco at m& e.#ense and use m& condominium durin% the third 'ee( of ?anuar&* Fhitman does not inform his em#lo&er of the arran%ement and vacations in Aonaco the follo'in% ?anuar& as Cochran4s %uest* Comment, Fhitman violated Standard IV(D) b& failin% to inform his em#lo&er in 'ritin% of this su##lemental- contin%ent com#ensation arran%ement* $he nature of the arran%ement could have resulted in #artialit& to Cochran4s account- 'hich could have detracted from Fhitman4s #erformance 'ith res#ect to other accounts he handles for )dams $rust* Fhitman must obtain the consent of his em#lo&er to acce#t such a su##lemental benefit* Example 2: $err& ?ones sits on the board of directors of E.ercise Cnlimited- Inc* In return for his services on the board- ?ones receives unlimited membershi# #rivile%es for his famil& at all E.ercise Cnlimited facilities* ?ones #urchases E.ercise Cnlimited stoc( for the client accounts for 'hich it is a##ro#riate* ?ones does not disclose this arran%ement to his em#lo&er- as he does not receive monetar& com#ensation for his services to the board* Comment, ?ones violated Standard IV(D) b& failin% to disclose to his em#lo&er benefits received in e.chan%e for his services on the board of directors* C( Re$:on$i)i&i!ie$ o S':e%.i$o%$ Me/)e%$ and #andida!e$ /'$! /a8e %ea$ona)&e e o%!$ !o de!e#! and :%e.en! .io&a!ion$ o a::&i#a)&e &a<$@ %'&e$@ %eg'&a!ion$@ and !"e Code and S!anda%d$ )4 an4one $')?e#! !o !"ei% $':e%.i$ion o% a'!"o%i!4(

Standard IV(C) states that members and candidates must ta(e ste#s to #revent #ersons actin% under their su#ervision from violatin% the la'- rules- re%ulations- or the Code and Standards* )n& investment #rofessionals 'ho have em#lo&ees sub5ect to their control or influence>'hether or not the em#lo&ees are C") Institute members- C") charter holders- or candidates in the C") Pro%ram>e.ercise su#ervisor& res#onsibilit&* Aembers and candidates actin% as su#ervisors must have in de#th (no'led%e of the Code and Standards and must a##l& this (no'led%e in dischar%in% their su#ervisor& res#onsibilities* $he conduct that constitutes reasonable su#ervision in a #articular case de#ends on the number of em#lo&ees su#ervised and the 'or( #erformed b& those em#lo&ees* Aembers and candidates 'ho su#ervise lar%e numbers of em#lo&ees cannot #ersonall& evaluate the conduct of their em#lo&ees on a continuin% basis* )lthou%h these members and candidates ma& dele%ate su#ervisor& duties- such dele%ation does not relieve them of their su#ervisor& res#onsibilit&* $heir res#onsibilities under Standard IV(C) include instructin% those subordinates to 'hom su#ervision is dele%ated re%ardin% methods to #revent and detect violations* Aembers and candidates 'ith su#ervisor& res#onsibilit& must ma(e reasonable efforts to detect violations of la's- rules- re%ulations- and the Code and Standards* $he& e.ercise reasonable su#ervision b& establishin% and im#lementin% 'ritten com#liance #rocedures and ensurin% that those #rocedures are follo'ed throu%h #eriodic revie'* If a member or candidate has ado#ted reasonable #rocedures and ta(en ste#s to institute an effective com#liance #ro%ram- then the member or candidate ma& not be in violation of Standard IV(C) if the& do not detect violations that occur des#ite these efforts* $he fact that violations do occur ma& indicate- ho'ever- that the com#liance #rocedures are inade3uate* In addition- in some cases- merel& enactin% such #rocedures ma& not be sufficient to fulfill the dut& re3uired b& Standard IV(C)* ) member or candidate ma& be in violation of Standard IV(C) if he or she (no's or should (no' that the #rocedures desi%ned to detect and #revent violations are not bein% follo'ed* Com"liance Procedures Aembers and candidates 'ith su#ervisor& res#onsibilit& also must understand 'hat constitutes an ade3uate com#liance s&stem for their firms and ma(e reasonable efforts to see that a##ro#riate com#liance #rocedures are established- documented- communicated to covered #ersonnel- and follo'ed* )de3uate #rocedures are those desi%ned to meet industr& standards- re%ulator& re3uirements- the re3uirements of the Code and Standards- and the circumstances of the firm* +nce com#liance #rocedures are established- the su#ervisor must also ma(e reasonable efforts to ensure that the #rocedures are monitored and enforced* $o be effective- com#liance #rocedures must be in #lace #rior to the occurrence of a violation of the la' or the Code and Standards* )lthou%h com#liance #rocedures cannot be desi%ned to antici#ate ever& #otential violation- the& should be desi%ned to antici#ate the activities most li(el& to result in misconduct* Each com#liance #ro%ram must be a##ro#riate for the si/e and nature of the or%ani/ation* Aodel com#liance #rocedures or other industr& #ro%rams should be revie'ed to ensure that #rocedures meet the minimum industr& standards* ) member or candidate 'ith su#ervisor& res#onsibilit& should brin% an inade3uate com#liance s&stem to the attention of the firm4s senior mana%ers and recommend corrective action* If the member or candidate clearl& cannot dischar%e su#ervisor& res#onsibilities because of the absence of

a com#liance s&stem or because of an inade3uate com#liance s&stem- the member or candidate should decline in 'ritin% to acce#t su#ervisor& res#onsibilit& until the firm ado#ts reasonable #rocedures to allo' them to ade3uatel& e.ercise such res#onsibilit&* +nce a su#ervisor learns that an em#lo&ee has violated or ma& have violated the la' or the Code and Standards- the su#ervisor must #rom#tl& initiate an investi%ation to ascertain the e.tent of the 'ron%doin%* 9el&in% on an em#lo&ee4s statements about the e.tent of the violation or assurances that the 'ron%doin% 'ill not reoccur is not enou%h* 9e#ortin% the misconduct u# the chain of command and 'arnin% the em#lo&ee to cease the activit& are also not enou%h* Pendin% the outcome of the investi%ation- a su#ervisor should ta(e ste#s to ensure the violations 'ill not be re#eated- such as #lacin% limits on the em#lo&ee4s activities or increasin% the monitorin% of the em#lo&ee4s activities* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e Aembers and candidates are encoura%ed to recommend that their em#lo&ers ado#t a code of ethics* )do#tion of a code of ethics is critical to establishin% a stron% ethical foundation for investment adviser firms and their em#lo&ees* Codes of ethics formall& em#hasi/e and reinforce the fiduciar& res#onsibilities of investment firm #ersonnel- #rotect investin% clients b& deterrin% misconduct- and #rotect the firm4s re#utation for inte%rit&* $here is a distinction bet'een codes of ethics and the necessar& s#ecific #olicies and #rocedures needed to ensure com#liance 'ith the code of conduct and securities la's and re%ulations* Fhile both are im#ortant- codes of ethics should consist of fundamental- #rinci#le based ethical and fiduciar& conce#ts that are a##licable to all of the firm4s em#lo&ees* In this 'a&- firms can best conve& to em#lo&ees and clients the ethical ideals that investment advisers strive to achieve* $hese conce#ts can then be im#lemented b& detailed- firm 'ide com#liance #olicies and #rocedures* Com#liance #rocedures 'ill assist the firm4s #ersonnel in fulfillin% the res#onsibilities enumerated in the code of ethics and ensure that the ideals e.#ressed in the code of ethics are adhered to in the da& to da& o#eration of the firm* Commin%lin% com#liance #rocedures in the firm4s code of ethics 'ill diminish the %oal of reinforcin% 'ith the firm4s em#lo&ees their ethical obli%ations* Stand alone codes of ethics should be 'ritten in #lain lan%ua%e and address %eneral fiduciar& conce#ts- unencumbered b& numerous detailed #rocedures directed to the da& to da& o#eration of the firm* In this 'a& codes 'ill be most effective in stressin% to em#lo&ees that the& are in #ositions of trust and must act 'ith inte%rit& at all times* Se#aratin% the codes of ethics from com#liance #rocedures 'ill also reduce- if not eliminate- the le%al terminolo%& and boiler#late lan%ua%e that can ma(e the underl&in% ethical #rinci#les incom#rehensible to the avera%e #erson* )bove all- the #rinci#les in the codes of ethics must be accessible and understandable to ever&one in the firm to ensure that a culture of ethics and inte%rit& is created rather than merel& a focus on attention to the rules* In addition- members and candidates should encoura%e their em#lo&ers to #rovide their codes of ethics to clients* Dut onl& sim#lestrai%htfor'ard codes of ethics 'ill be understandable to clients and thus be effective in conve&in% the messa%e that the firm is committed to conductin% business in an ethical manner and in the best interests of the clients*

) su#ervisor com#lies 'ith Standard IV(C) b& identif&in% situations in 'hich le%al violations or violations of the Code and Standards are li(el& to occur and b& establishin% and enforcin% com#liance #rocedures to #revent such violations* )de3uate com#liance #rocedures should1 be contained in a clearl& 'ritten and accessible manual that is tailored to the member or candidate4s o#erations2 be drafted so that the #rocedures are eas& to understand2 desi%nate a com#liance officer 'hose authorit& and res#onsibilit& are clearl& defined and 'ho has the necessar& resources and authorit& to im#lement the firm4s com#liance #rocedures2 describe the hierarch& of su#ervision and assi%n duties amon% su#ervisors2 im#lement a s&stem of chec(s and balances2 outline the sco#e of the #rocedures2 outline #rocedures to document the monitorin% and testin% of com#liance #rocedures2 outline #ermissible conduct2 delineate #rocedures for re#ortin% violations and sanctions* +nce a com#liance #ro%ram is in #lace- a su#ervisor should1 disseminate the contents of the #ro%ram to a##ro#riate #ersonnel2 #eriodicall& u#date #rocedures to ensure that the measures are ade3uate under the la'2 continuall& educate #ersonnel re%ardin% the com#liance #rocedures2 issue #eriodic reminders of the #rocedures to a##ro#riate #ersonnel2 incor#orate a #rofessional conduct evaluation as #art of an em#lo&ee4s #erformance revie'2 revie' the actions of em#lo&ees to ensure com#liance and identif& violators2 ta(e the necessar& ste#s to enforce the #rocedures once a violation has occurred*

+nce a violation is discovered- a su#ervisor should1 res#ond #rom#tl&2 conduct a thorou%h investi%ation of the activities to determine the sco#e of the 'ron%doin%2 increase su#ervision or #lace a##ro#riate limitations on the 'ron%doer #endin% the outcome of the investi%ation* A::&i#a!ion o !"e S!anda%d Example 1: ?ane Aattoc(- senior vice #resident and head of the research de#artment of ,OV- Inc*- a re%ional bro(era%e firm- has decided to chan%e her recommendation for $imber Products from bu& to sell* In line 'ith ,OV4s #rocedures- she orall& advises certain other ,OV e.ecutives of her #ro#osed actions before the re#ort is #re#ared for #ublication* )s a result of his conversation 'ith Aattoc(- Bieter "ram#ton- one of the e.ecutives of ,OV accountable to Aattoc(- immediatel& sells $imber4s stoc( from his o'n account and from certain discretionar& client accounts* In additionother #ersonnel inform certain institutional customers of the chan%ed recommendation before it is #rinted and disseminated to all ,OV customers 'ho have received #revious $imber re#orts*

Comment, Aattoc( failed to su#ervise reasonabl& and ade3uatel& the actions of those accountable to her* She did not #revent or establish reasonable #rocedures desi%ned to #revent dissemination of or tradin% on the information b& those 'ho (ne' of her chan%ed recommendation* She must ensure that her firm has #rocedures for revie'in% or recordin% tradin% in the stoc( of an& cor#oration that has been the sub5ect of an un#ublished chan%e in recommendation* )de3uate #rocedures 'ould have informed the subordinates of their duties and detected sales b& "ram#ton and selected customers* Example 2: Beion Ailler is the research director for ?amesto'n Investment Pro%rams* $he #ortfolio mana%ers have become critical of Ailler and his staff because the ?amesto'n #ortfolios do not include an& stoc( that has been the sub5ect of a mer%er or tender offer* Geor%ia Ginn- a member of Ailler4s staff- tells Ailler that she has been stud&in% a local com#an&- E.celsior- Inc*- and recommends its #urchase* Ginn adds that the com#an& has been 'idel& rumored to be the sub5ect of a mer%er stud& b& a 'ell (no'n con%lomerate and discussions bet'een them are under 'a&* )t Ailler4s re3uest- Ginn #re#ares a memo recommendin% the stoc(* Ailler #asses alon% Ginn4s memo to the #ortfolio mana%ers #rior to leavin% for vacation- notin% that he has not revie'ed the memo* )s a result of the memo- the #ortfolio mana%ers bu& E.celsior stoc( immediatel&* $he da& Ailler returns to the office- Ailler learns that Ginn4s onl& sources for the re#ort 'ere her brother- 'ho is an ac3uisitions anal&st 'ith )cme Industries and the 'ell (no'n con%lomerate and that the mer%er discussions 'ere #lanned but not held* Comment, Ailler violated Standard IV(C) b& not e.ercisin% reasonable su#ervision 'hen he disseminated the memo 'ithout chec(in% to ensure that Ginn had a reasonable and ade3uate basis for her recommendations and that Ginn 'as not rel&in% on material non#ublic information* Example 3: Bavid Ed'ards- a trainee trader at Fheeler O Com#an&- a ma5or national bro(era%e firm- assists a customer in #a&in% for the securities of ,i%hlandInc*- b& usin% antici#ated #rofits from the immediate sale of the same securities* Bes#ite the fact that ,i%hland is not on Fheeler4s recommended list- a lar%e volume of its stoc( is traded throu%h Fheeler in this manner* 9oberta )nn 79 9eadin% 7 @ Guidance for Standards IVII Aason is a Fheeler vice #resident res#onsible for su#ervisin% com#liance 'ith the securities la's in the tradin% de#artment* Part of her com#ensation from Fheeler is based on commission revenues from the tradin% de#artment* )lthou%h she notices the increased tradin% activit&- she does nothin% to investi%ate or halt it* Comment, Aason4s failure to ade3uatel& revie' and investi%ate #urchase orders in ,i%hland stoc( e.ecuted b& Ed'ards and her failure to su#ervise the trainee4s activities violated Standard IV(C)* Su#ervisors should be es#eciall& sensitive to actual or #otential conflicts bet'een their o'n self interests and their su#ervisor& res#onsibilities* Example 4: Samantha $abbin% is senior vice #resident and #ortfolio mana%er for Cro/et- Inc*- a re%istered investment advisor& and re%istered bro(erEdealer firm* She re#orts to Charles ,enr&- the #resident of Cro/et* Cro/et serves as the investment advisor and #rinci#al under'riter for )DC and VPS #ublic mutual funds* $he t'o funds4 #ros#ectuses allo' Cro/et to trade financial futures for the funds

for the limited #ur#ose of hed%in% a%ainst mar(et ris(s* ,enr&- e.tremel& im#ressed 'ith $abbin%4s #erformance in the #ast t'o &ears- directs $abbin% to act as #ortfolio mana%er for the funds* "or the benefit of its em#lo&ees- Cro/et has also or%ani/ed the Cro/et Em#lo&ee Profit Sharin% Plan (CEPSP)- a definedcontribution retirement #lan* ,enr& assi%ns $abbin% to mana%e 7! #ercent of the assets of CEPSP* $abbin%4s investment ob5ective for her #ortion of CEPSP4s assets is a%%ressive %ro'th* Cnbe(no'nst to ,enr&- $abbin% fre3uentl& #laces SOP 8!! Inde. #urchase and sale orders for the funds and the CEPSP 'ithout #rovidin% the '!'%e$ #o//i$$ion /e%#"an!$ 0FCM$2 'ho ta(e the orders 'ith an& #rior or simultaneous desi%nation of the account for 'hich the trade has been #laced* "re3uentl&- neither $abbin% nor an&one else at Cro/et com#letes an internal trade tic(et to record the time an order 'as #laced or the s#ecific account for 'hich the order 'as intended* "CAs often desi%nate a s#ecific account onl& after the trade'hen $abbin% #rovides such desi%nation* Cro/et has no 'ritten o#eratin% #rocedures or com#liance manual concernin% its futures tradin%- and its com#liance de#artment does not revie' such tradin%* )fter observin% the mar(et4s movement$abbin% assi%ns to CEPSP the SOP 8!! #ositions 'ith more favorable e.ecution #rices and assi%ns #ositions 'ith less favorable e.ecution #rices to the funds* Comment, ,enr& violated Standard IV(C) b& failin% to ade3uatel& su#ervise $abbin% 'ith res#ect to her SOP 8!! tradin%* ,enr& further violated Standard IV(C) b& failin% to establish record (ee#in% and re#ortin% #rocedures to #revent or detect $abbin%4s violations* STANDARD -AIN-ESTMENT ANALYSIS@ RECOMMENDATIONS@ AND ACTIONS A( Di&igen#e and Rea$ona)&e 6a$i$ Me/)e%$ and #andida!e$ /'$!: 1( ECe%#i$e di&igen#e@ inde:enden#e@ and !"o%o'g"ne$$ in ana&4Bing in.e$!/en!$@ /a8ing in.e$!/en! %e#o//enda!ion$@ and !a8ing in.e$!/en! a#!ion$( 2( Ha.e a %ea$ona)&e and adeG'a!e )a$i$@ $'::o%!ed )4 a::%o:%ia!e %e$ea%#" and in.e$!iga!ion@ o% an4 in.e$!/en! ana&4$i$@ %e#o//enda!ion@ o% a#!ion( 7; Standard V>Investment )nal&sis- 9ecommendations- and )ctions $he a##lication of Standard V()) is de#endent on the investment #hiloso#h& follo'edthe role of the member or candidate in the investment decision ma(in% #rocess- and the su##ort and resources #rovided b& the member or candidate4s em#lo&er* $hese factors 'ill dictate the nature of the dili%ence- thorou%hness of the research- and level of investi%ation re3uired b& Standard V())* $he re3uirements for issuin% conclusions on research 'ill var& based on the member or candidate4s role in the investment decision ma(in% #rocess- but the member or candidate must ma(e reasonable efforts to cover all #ertinent issues 'hen arrivin% at the recommendation* Aembers and candidates enhance trans#arenc& b& #rovidin% or offerin% to #rovide su##ortin% information to clients 'hen recommendin% a #urchase or sale or 'hen chan%in% a recommendation* 2sing Secondary or % ird-Party Researc If members and candidates rel& on secondar& or third #art& research- the& must ma(e reasonable and dili%ent efforts to determine 'hether such research is

sound* Secondar& research is defined as research conducted b& someone else in the member or candidate4s firm* $hird #art& research is research conducted b& entities outside the member or candidate4s firm- such as a bro(era%e firm- ban(or research firm* If a member or candidate has reason to sus#ect that either secondar& or third #art& research or information comes from a source that lac(s a sound basis- the member or candidate must refrain from rel&in% on that information* $his re3uirement also a##lies in situations involvin% 3uantitativel& oriented research- such as com#uter %enerated screenin% or ran(in% of universes of e3uit& securities based on various sets of #rescribed criteria* E.am#les of criteria that a member or candidate can use in formin% his or her o#inion that research is sound include1 G revie' of the assum#tions usedG ri%or of anal&sis #erformedG dateEtimeliness of the researchG evaluation of the ob5ectivit& and inde#endence of recommendations* Fhen a member or candidate relies on others 'ithin his or her firm to determine 'hether secondar& or third #art& research is sound- the information can be used in %ood faith unless the member or candidate has reason to 3uestion its validit& or the #rocesses and #rocedures used b& those res#onsible for the investi%ation* )n e.am#le of this situation 'ould be a #ortfolio mana%er 'ho does not have a choice over a data source because the firm4s senior mana%ement conducted due dili%ence to determine 'hich vendor 'ould #rovide services* $rou" Researc and 1ecision #aking Commonl&- members and candidates ma& be #art of a %rou# or team that is collectivel& res#onsible for #roducin% investment anal&sis or research* $he conclusions or recommendations of the re#ort re#resent the consensus of the %rou# and are not necessaril& the vie's of the member or candidate- even thou%h the name of the member or candidate is included on the re#ort* $here ma& be man& instances 'hen the member or candidate does not a%ree 'ith the inde#endent and ob5ective vie' of the %rou#* If the member or candidate believes that consensus o#inion has a reasonable and ade3uate basis- then the member or candidate does not necessaril& have to decline to be identified 'ith the re#ort* $here should be a #resum#tion that the %rou# members are inde#endent and ob5ective and have a reasonable basis for the o#inions* If the member or candidate is confident in the #rocess- the member or candidate does not have to dissociate from the re#ort if it does not reflect his or her o#inion* $he member 9= 9eadin% 7 @ Guidance for Standards IVII or candidate should- ho'ever- document his or her difference of o#inion 'ith the team* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e Aembers and candidates should encoura%e their firms to consider the follo'in% #olicies and #rocedures to su##ort the #rinci#les of Standard V())1 G Establish a #olic& re3uirin% that research re#orts and recommendations have a basis that can be substantiated as reasonable and ade3uate* )n individual em#lo&ee (su#ervisor& anal&st) or a %rou# of em#lo&ees (revie' committee) should be a##ointed to revie' and a##rove all research re#orts and recommendations to determine 'hether the& meet the criteria as established in the #olic&*

G Bevelo# detailed- 'ritten %uidance for research anal&sts- su#ervisor& anal&stsand revie' committees that establishes due dili%ence #rocedures for 5ud%in% 'hether a #articular recommendation has a reasonable and ade3uate basis* G Bevelo# measurable criteria for assessin% the 3ualit& of research- includin% the reasonableness and ade3uac& of the basis for an& recommendation and the accurac& of recommendations over time- and im#lement com#ensation arran%ements that de#end on these measurable criteria and that are a##lied consistentl& to all research anal&sts* A::&i#a!ion o !"e S!anda%d Example 1: ,elen ,a'(e mana%es the cor#orate finance de#artment of Sar(o/i Securities- Htd* $he firm is antici#atin% that the %overnment 'ill soon close a ta. loo#hole that currentl& allo's oil and %as e.#loration com#anies to #ass on drillin% e.#enses to holders of a certain class of shares* Decause /a%8e! de/and for this ta. advanta%ed class of stoc( is currentl& hi%h- Sar(o/i convinces several com#anies to underta(e ne' e3uit& financin%s at once before the loo#hole closes* $ime is of the essence- but Sar(o/i lac(s sufficient resources to conduct ade3uate research on all the #ros#ective issuin% com#anies* ,a'(e decides to estimate the IP+ #rices based on the relative si/e of each com#an& and to 5ustif& the #ricin% later 'hen her staff has time* Comment, Sar(o/i should have ta(en on onl& the 'or( that it could ade3uatel& handle* D& cate%ori/in% the issuers as to %eneral si/e- ,a'(e has b&#assed researchin% all the other relevant as#ects that should be considered 'hen #ricin% ne' issues and thus has not #erformed sufficient due dili%ence* Such an omission can result in investors #urchasin% shares at #rices that have no actual basis* ,a'(e has violated Standard V())* Example 2: Dabu Bhali'al 'or(s for ,einrich Dro(era%e in the cor#orate finance %rou#* ,e has 5ust #ersuaded "e%%ans 9esources- Htd*- to allo' his firm to do a secondar& e3uit& financin% at "e%%ans 9esources4 current stoc( #rice* Decause the stoc( has been tradin% at hi%her multi#les than similar com#anies 'ith e3uivalent #roduction- Bhali'al #resses the "e%%ans 9esources mana%ers to #ro5ect 'hat 'ould be the ma.imum #roduction the& could achieve in an o#timal scenario* Dased on these numbers- he is able to 5ustif& the #rice his firm 'ill be as(in% for the secondar& issue* Burin% a sales #itch to the bro(ers- Bhali'al then uses these numbers as the base case #roduction levels that "e%%ans 9esources 'ill achieve* 91 Standard V>Investment )nal&sis- 9ecommendations- and )ctions Comment, Fhen #resentin% information to the bro(ers- Bhali'al should have %iven a ran%e of #roduction scenarios and the :%o)a)i&i!4 of "e%%ans 9esources achievin% each level* D& %ivin% the ma.imum #roduction level as the li(el& level of #roduction- he has misre#resented the chances of achievin% that #roduction level and seriousl& misled the bro(ers* Example 3: Drendan Fitt creates an Internet site 'ith a chat room area to #ublish his stoc( recommendations* ,e vie's the site as a chance to attract ne' clients* In the chat room- he almost al'a&s 'rites #ositivel& about technolo%& stoc(s and recommends #urchasin% based on 'hat the conventional 'isdom of the mar(ets has deemed the hot securities of the da&* Comment, Fitt4s e.uberance about technolo%& and the conventional 'isdom

of the mar(ets- 'ithout more information- do not constitute a reasonable and ade3uate basis- su##orted b& a##ro#riate research and investi%ation- on 'hich to base a recommendation* $herefore- Fitt has violated Standard V())* Example 4: Carsten Bunlo# is an investment consultant in the Hondon office of E"G- a ma5or %lobal investment consultant firm* +ne of her C*I* #ension funds has decided to a##oint a s#ecialist C*S* e3uit& mana%er* E"G4s %lobal mana%er research relies on local consultants to cover mana%ers 'ithin their re%ion andafter conductin% thorou%h due dili%ence- #ost their vie's and ratin%s on E"G4s mana%er database* Bunlo# accesses E"G4s %lobal mana%er research database and conducts a screen of all C*S* e3uit& mana%ers based on the client4s desired match for #hiloso#h&Est&le- #erformance- and trac(in% error tar%ets and those that are rated bu&* She selects the five mana%ers meetin% these criteria and #uts them in a briefin% re#ort that is delivered to the client 0! da&s later* In bet'een the time of Bunlo#4s database search and deliver& of the re#ort to the client- E"G u#dated the database 'ith the information that one of the firms that Bunlo# has recommended for consideration lost its chief investment officerhead of C*S* e3uit& research- and the ma5orit& of #ortfolio mana%ers on the C*S* e3uit& #roduct>all of 'hom have left to establish their o'n firm- and she does not #rovide the client 'ith this u#dated information* )lthou%h E"G has u#dated its database- Bunlo#4s re#ort to the client does not reflect this ne' information* Comment, Bunlo# has failed to satisf& the re3uirement of Standard V()) b& not chec(in% the database in a timel& manner and u#datin% her re#ort to the client* )lthou%h E"G u#dated the mana%er ratin%s to reflect the #ersonnel turnover at the firm- Bunlo# did not u#date her re#ort to reflect the ne' information* Example 5: Evel&n Aasta(is is a 5unior anal&st as(ed b& her firm to 'rite a research re#ort #redictin% the e.#ected interest rate for residential mort%a%es over the ne.t si. months* Aasta(is submits her re#ort to the fi.ed income investment committee of her firm for revie'- as re3uired b& firm #rocedures* )lthou%h some committee members su##ort Aasta(is4s conclusion- the ma5orit& of the committee disa%rees 'ith her conclusion and the re#ort is si%nificantl& chan%ed to indicate that interest rates are li(el& to increase more than ori%inall& #redicted b& Aasta(is* Comment, $he results of research are not al'a&s clear- and different #eo#le ma& have different o#inions based on the same factual evidence* In this casethe ma5orit& of the committee ma& have valid reasons for issuin% a re#ort that differs from the anal&st4s ori%inal research* $he firm can issue a re#ort different from the ori%inal re#ort of the anal&st as lon% as there is a reasonable or ade3uate basis for its conclusions* Generall&- anal&sts must 'rite research re#orts that reflect their o'n o#inion and can as( the firm not to #ut their 92 9eadin% 7 @ Guidance for Standards IVII name on re#orts that ultimatel& differ from that o#inion* Fhen the 'or( is a %rou# effort- ho'ever- not all members of the team ma& a%ree 'ith all as#ects of the re#ort* Cltimatel&- members and candidates can as( to have their names removed from the re#ort- but if the& are satisfied that the #rocess has #roduced results or conclusions that have a reasonable or ade3uate basismembers or candidates do not have to dissociate from the re#ort even 'hen the& do not a%ree 'ith its contents* $he member or candidate should document

the difference of o#inion and an& re3uest to remove his or her name from the re#ort* Example 6: Gar& AcBermott runs a small- t'o #erson investment mana%ement firm* AcBermott4s firm subscribes to a service from a lar%e investment research firm that #rovides research re#orts* AcBermott4s firm ma(es investment recommendations based on these re#orts* Comment, Aembers and candidates can rel& on third #art& research but must ma(e reasonable and dili%ent efforts to determine that such research is sound* If AcBermott underta(es due dili%ence efforts on a re%ular basis to ensure that the research #roduced b& the lar%e firm is ob5ective and reasonabl& based- AcBermott can rel& on that research 'hen ma(in% investment recommendations to clients* 6( Co//'ni#a!ion <i!" C&ien!$ and P%o$:e#!i.e C&ien!$ Me/)e%$ and #andida!e$ /'$!: 1( Di$#&o$e !o #&ien!$ and :%o$:e#!i.e #&ien!$ !"e )a$i# o%/a! and gene%a& :%in#i:&e$ o !"e in.e$!/en! :%o#e$$e$ '$ed !o ana&4Be in.e$!/en!$@ $e&e#! $e#'%i!ie$@ and #on$!%'#! :o%! o&io$ and /'$! :%o/:!&4 di$#&o$e an4 #"ange$ !"a! /ig"! /a!e%ia&&4 a e#! !"o$e :%o#e$$e$( 2( U$e %ea$ona)&e ?'dg/en! in iden!i 4ing <"i#" a#!o%$ a%e i/:o%!an! !o !"ei% in.e$!/en! ana&4$e$@ %e#o//enda!ion$@ o% a#!ion$ and in#&'de !"o$e a#!o%$ in #o//'ni#a!ion$ <i!" #&ien!$ and :%o$:e#!i.e #&ien!$( 3( Di$!ing'i$" )e!<een a#! and o:inion in !"e :%e$en!a!ion o in.e$!/en! ana&4$i$ and %e#o//enda!ion$( Standard V(D) addresses members4 and candidates4 conduct 'ith res#ect to communicatin% 'ith clients* Bevelo#in% and maintainin% clear- fre3uent- and thorou%h communication #ractices is critical to #rovidin% hi%h 3ualit& financial services to clients* Fhen clients can understand the information communicated to them- the& also can understand e.actl& ho' members and candidates are actin% on their behalf- 'hich %ives clients the o##ortunit& to ma(e 'ell informed decisions re%ardin% their investments* Such understandin% can be accom#lished onl& throu%h clear communication* Standard V(D) states the res#onsibilit& of members and candidates to include in their communications those (e& factors that are instrumental to the investment recommendation #resented* ) critical #art of this re3uirement is to distin%uish clearl& bet'een o#inions and facts* In #re#arin% a research re#ortthe member or candidate must #resent the basic characteristics of the securit& bein% anal&/ed- 'hich 'ill allo' the reader to evaluate the re#ort and incor#orate information the reader deems relevant to his or her investment decisionma(in% #rocess* Aembers and candidates must ade3uatel& illustrate to clients and #ros#ective clients the manner in 'hich the member or candidate conducts the investment decision ma(in% #rocess* $he member or candidate must (ee# e.istin% 93 Standard V>Investment )nal&sis- 9ecommendations- and )ctions clients and other interested #arties informed 'ith res#ect to chan%es to the chosen investment #rocess on an on%oin% basis* +nl& b& thorou%hl& understandin% the nature of the investment #roduct or service can a client determine 'hether chan%es to that #roduct or service could materiall& affect the client4s investment ob5ectives*

Cnderstandin% the basic characteristics of the investment is of %reat im#ortance in 5ud%in% the suitabilit& of each investment on a stand alone basis- but it is es#eciall& im#ortant in determinin% the im#act each investment 'ill have on the characteristics of the #ortfolio* "or instance- althou%h the ris( and return characteristics of shares of a common stoc( mi%ht seem to be essentiall& the same for an& investor 'hen the stoc( is vie'ed in isolation- the im#lications of such an investment var& %reatl& de#endin% on the other investments held* If the #articular stoc( re#resents <! #ercent of an individual4s investments- the stoc(4s im#ortance in the #ortfolio is vastl& different from 'hat it 'ould be to an investor 'ho holds the same amount of the stoc( in a hi%hl& diversified #ortfolio in 'hich the stoc( re#resents onl& 7 #ercent of the holdin%s* "or #ur#oses of Standard V(D)- communication is not confined to a 'ritten re#ort of the t&#e traditionall& %enerated b& an anal&st researchin% a #articular securit&- com#an&- or industr&* ) #resentation of information can be made via an& means of communication- includin% in #erson recommendation- tele#hone conversation- media broadcast- or transmission b& com#uter (e*%*- on the Internet)* "urthermore- the nature of these communications is hi%hl& diverse>from one 'ord (bu& or sell) to in de#th re#orts of more than 0!! #a%es* Drief communications must be su##orted b& bac(%round re#orts or data that can be made available to interested #arties on re3uest* ) communication ma& contain a %eneral recommendation about the mar(etasset allocation- or classes of investments (e*%*- stoc(s- bonds- real estate) or relate to a s#ecific securit&* If recommendations are contained in ca#sule form (such as a recommended stoc( list)- members and candidates should notif& clients that addi!iona& in o%/a!ion and anal&ses are available from the #roducer of the re#ort* Investment advice based on 3uantitative research and anal&sis must be su##orted b& readil& available reference material and should be a##lied in a manner consistent 'ith #reviousl& a##lied methodolo%& or 'ith chan%es in methodolo%& hi%hli%hted* Aembers and candidates should outline (no'n limitations of the anal&sis and conclusions contained in their investment anal&sis* In evaluatin% the basic characteristics of the investment bein% recommendedmembers and candidates should consider in the re#ort the #rinci#al ris(s inherent in the e.#ected cash returns- 'hich ma& include credit ris(- financial ris( (s#ecificall& the use of levera%e or financial derivatives)- and overall /a%8e! %i$8* +nce the #rocess has been com#leted- the member or candidate 'ho #re#ares the re#ort must include those elements im#ortant to the anal&sis and conclusions of the re#ort so that the user can follo' and challen%e the re#ort4s reasonin%* ) re#ort 'riter 'ho has done ade3uate investi%ation ma& em#hasi/e certain areas- touch briefl& on others- and omit certain as#ects deemed unim#ortant* "or instance- a re#ort ma& d'ell on a 3uarterl& earnin%s release or ne' #roduct introduction at the sacrifice of e.aminin% other fundamental matters in de#th so lon% as the anal&st clearl& sti#ulates the limits to the sco#e of the re#ort* Standard V(D) re3uires that o#inion be se#arated from fact* Violations are most li(el& to occur 'hen re#orts fail to se#arate the #ast from the future b& not indicatin% that earnin%s estimates- chan%es in the outloo( for dividends- andEor future mar(et #rice information are o#inions sub5ect to future circumstances* In the case of com#le. 3uantitative anal&sis- anal&sts must clearl& se#arate fact from

statistical con5ecture and should identif& the (no'n limitations of the anal&sis* 94 9eadin% 7 @ Guidance for Standards IVII Re#o//ended P%o#ed'%e$ o% Co/:&ian#e Decause the selection of relevant factors is an anal&tical s(ill- determination of 'hether a member or candidate has used reasonable 5ud%ment in e.cludin% and includin% information in research re#orts de#ends heavil& on case b& case revie' rather than a s#ecific chec(list* $o assist in the after the fact revie' of a re#ortthe member or candidate must maintain records indicatin% the nature of the research and should- if as(ed- be able to su##l& additional information to the client (or an& user of the re#ort) coverin% factors not included* A::&i#a!ion o !"e S!anda%d Example 1: Sarah Filliamson- director of mar(etin% for Countr& $echniciansInc*- is convinced that she has found the #erfect formula for increasin% Countr& $echnician4s income and diversif&in% its #roduct base* Filliamson #lans to build on Countr& $echnician4s re#utation as a leadin% mone& mana%er b& mar(etin% an e.clusive and e.#ensive investment advice letter to hi%h net 'orth individuals* +ne hitch in the #lan is the com#le.it& of Countr& $echnician4s investment s&stem>a combination of technical tradin% rules (based on historical #rice and volume fluctuations) and #ortfolio construction rules desi%ned to minimi/e ris(* $o sim#lif& the ne'sletter- she decides to include onl& each 'ee(4s to# five bu& and sell recommendations and to leave out details of the .a&'a!ion models and the #ortfolio structurin% scheme* Comment, Filliamson4s #lans for the ne'sletter violate Standard V(D)* Filliamson need not describe the investment s&stem in detail in order to im#lement the advice effectivel&- clients must be informed of Countr& $echnician4s basic #rocess and lo%ic* Fithout understandin% the basis for a recommendationclients cannot #ossibl& understand its limitations or its inherent ris(s* Example 2: 9ichard Bo. is a minin% anal&st for East Dan( Securities* ,e has 5ust finished his re#ort on Dois& Da& Ainerals* Included in his re#ort is his o'n assessment of the %eolo%ical e.tent of mineral reserves li(el& to be found on the com#an&4s land* Bo. com#leted this calculation based on the core sam#les from the com#an&4s latest drillin%* )ccordin% to Bo.4s calculations- the com#an& has in e.cess of 8!!-!!! ounces of %old on the #ro#ert&* Bo. concludes his research re#ort as follo's1 Dased on the fact that the com#an& has 8!!-!!! ounces of %old to be mined- I recommend a stron% DCP* Comment, If Bo. issues the re#ort as 'ritten- he 'ill violate Standard V(D)* ,is calculation of the total %old reserves for the #ro#ert& is an o#inion- not a fact* +#inion must be distin%uished from fact in research re#orts* Example 3: +livia $homas- an anal&st at Government Dro(ers- Inc*- 'hich is a bro(era%e firm s#eciali/in% in %overnment bond tradin%- has #roduced a re#ort that describes an investment strate%& desi%ned to benefit from an e.#ected decline in C*S* interest rates* $he firm4s derivative #roducts %rou# has desi%ned a structured #roduct that 'ill allo' the firm4s clients to benefit from this strate%&* $homas4s re#ort describin% the strate%& indicates that hi%h returns are #ossible if various scenarios for declinin% interest rates are assumed* Citin% the #ro#rietar& nature of the structured #roduct underl&in% the strate%&- the re#ort does not describe in detail ho' the firm is able to offer such returns in the scenarios- nor

does the re#ort address the li(el& returns of the strate%& if- contrar& to e.#ectationsinterest rates rise* 93 Standard V>Investment )nal&sis- 9ecommendations- and )ctions Comment, $homas has violated Standard V(D) because her re#ort fails to describe #ro#erl& the basic characteristics of the investment strate%&- includin% ho' the structure 'as created and the de%ree to 'hich levera%e 'as embedded in the structure* $he re#ort should include a balanced discussion of ho' the strate%& 'ould #erform in the case of risin% as 'ell as fallin% interest rates* Example 4: Aa& O )ssociates is an a%%ressive %ro'th mana%er that has re#resented itself since its ince#tion as a s#ecialist at investin% in small ca#itali/ation domestic stoc(s* +ne of Aa&4s selection criteria is a ma.imum ca#itali/ation of R78! million for an& %iven com#an&* )fter a strin% of successful &ears of su#erior relative #erformance- Aa& e.#anded its client base si%nificantl&- to the #oint at 'hich a$$e!$ 'nde% /anage/en! no' e.ceed RL billion* "or li3uidit& #ur#osesAa&4s chief investment officer (CI+) decides to lift the ma.imum #ermissible mar(et ca# ceilin% to R8!! million and chan%e the firm4s sales and mar(etin% literature accordin%l& to inform #ros#ective clients and third #art& consultants* Comment, )lthou%h Aa&4s CI+ is correct about informin% #otentiall& interested #arties as to the chan%e in investment #rocess- he must also notif& Aa&4s e.istin% clients* )mon% the latter %rou# mi%ht be a number of clients 'ho not onl& retained Aa& as a small ca# mana%er but also retained mid ca# and lar%e ca# s#ecialists in a multi#le mana%er a##roach* Such clients could re%ard Aa&4s chan%e of criteria as a st&le chan%e that could distort their overall asset allocations* Example 5: 9ather than liftin% the ceilin% for its universe from R78! million to R8!! million- Aa& O )ssociates e.tends its small ca# universe to include a number of non C*S* com#anies* Comment, Standard V(D) re3uires that Aa&4s CI+ advise Aa&4s clients of this chan%e because the firm ma& have been retained b& some clients s#ecificall& for its #ro'ess at investin% in domestic small ca# stoc(s* +ther variations re3uirin% client notification include introducin% derivatives to emulate a certain mar(et sector or rela.in% various other constraints- such as #ortfolio )e!a* In all such cases- members and candidates must disclose chan%es to all interested #arties* Example 6: 9?S Ca#ital Aana%ement is a value st&le active e3uit& mana%er that selects stoc(s usin% a combination of four multifactor models* Decause of favorable results %ained from bac( testin% the most recent 0! &ears of available mar(et datathe #resident of 9?S decides to re#lace its sim#le model of #rice to trailin% 07 months earnin%s 'ith a ne' dividend discount model desi%ned b& the firm that is a function of #ro5ected inflation rates- earnin%s %ro'th rates- and interest rates* Comment, Decause the introduction of a ne' and different valuation model re#resents a material chan%e in the investment #rocess- 9?S4s #resident must communicate the chan%e to the firm4s clients* 9?S is movin% a'a& from a model based on hard data to'ard a ne' model that is at least #artl& de#endent on the firm4s forecastin% s(ills* Clients 'ould li(el& vie' such a model as a si%nificant chan%e rather than a mere refinement of 9?S4s #rocess* Example 7: 9?S Ca#ital Aana%ement loses the chief architect of its multifactor valuation s&stem* Fithout informin% its clients- the #resident of 9?S decides to

redirect the firm4s talents and resources to'ard develo#in% a #roduct for #assive e3uit& mana%ement>a #roduct that 'ill emulate the #erformance of a ma5or mar(et inde.* Comment, $he #resident of 9?S failed to disclose to clients a substantial chan%e to its investment #rocess- 'hich is a violation of Standard V(D)* 95 9eadin% 7 @ Guidance for Standards IVII Example 8: )t "undamental )sset Aana%ement- Inc*- the res#onsibilit& for selectin% stoc(s for addition to the firm4s a##roved list has 5ust shifted from individual securit& anal&sts to a committee consistin% of the research director and three senior #ortfolio mana%ers* Eleanor Aorales- a #ortfolio mana%er 'ith "undamental )sset Aana%ement- fails to notif& her clients of the chan%e* Comment, Aorales must disclose the #rocess chan%e to all her clients* Some of "undamental4s clients mi%ht be concerned about the morale and motivation amon% the firm4s best research anal&sts follo'in% the chan%e* Aoreoverclients mi%ht challen%e the stoc( #ic(in% trac( record of the #ortfolio mana%ers and mi%ht even 'ant to monitor the situation closel&* C( Re#o%d Re!en!ion Me/)e%$ and #andida!e$ /'$! de.e&o: and /ain!ain a::%o:%ia!e %e#o%d$ !o $'::o%! !"ei% in.e$!/en! ana&4$i$@ %e#o//enda!ion$@ a#!ion$@ and o!"e% in.e$!/en!D%e&a!ed #o//'ni#a!ion$ <i!" #&ien!$ and :%o$:e#!i.e #&ien!$( Aembers and candidates must retain records that substantiate the sco#e of their research and reasons for their actions or conclusions* $he records re3uired to su##ort recommendations andEor investment actions de#end on the role of the member or candidate in the investment decision ma(in% #rocess* 9ecords can be maintained either in hard co#& or electronic form* )s a %eneral matter- records created as #art of a member or candidate4s #rofessional activit& on behalf of his or her em#lo&er are the #ro#ert& of the member or candidate4s firm* Fhen a member or candidate leaves a firm to see( other em#lo&ment- the member or candidate cannot ta(e the #ro#ert& of the firmincludin% ori%inals or co#ies of su##ortin% records of the member or candidate4s 'or(- to the ne' em#lo&er 'ithout the e.#ress consent of the #revious em#lo&er Jsee Standard III())K* Fithout re creatin% the records at the ne' firmthe member or candidate cannot use historical recommendations or research re#orts created at the #revious firm because the su##ortin% documentation is unavailable* Hocal re%ulators often im#ose re3uirements on members- candidates- and their firms related to record retention that must be follo'ed* "ulfillin% such re%ulator& re3uirements also ma& satisf& the re3uirements of Standard IV(C)- but members and candidates must e.#licitl& determine 'hether it does* In the absence of re%ulator& %uidance- C") Institute recommends maintainin% records for at least seven &ears* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e $he res#onsibilit& to maintain records that su##ort investment action %enerall& falls 'ith the firm rather than individuals* ,o'ever- members and candidates must retain research notes and other documents su##ortin% current investmentrelated communications to assist their firms in com#l&in% 'ith internal or e.ternal record #reservation re3uirements* A::&i#a!ion o !"e S!anda%d

Example 1: +ne of ;i(olas Hindstrom4s clients is u#set b& the ne%ative investment returns in his e3uit& #ortfolio* $he investment #olic& statement for the client re3uires that the #ortfolio mana%er follo' a benchmar( oriented a##roach* $he 97 Standard V>Investment )nal&sis- 9ecommendations- and )ctions benchmar( for the client included a L8 #ercent investment allocation in the technolo%& sector- 'hich the client ac(no'led%ed 'as a##ro#riate* +ver the #ast three &ears- the #ortion #ut into the se%ment of technolo%& stoc(s suffered severe losses* $he client com#lains to the investment mana%er that so much mone& 'as allocated to this sector* Comment, "or Hindstrom- it is im#ortant to have a##ro#riate records to sho' that over the #ast three &ears the #ercenta%e of technolo%& stoc(s in the benchmar( inde. 'as L8 #ercent* $herefore- the amount of mone& invested in the technolo%& sector 'as a##ro#riate accordin% to the investment #olic& statement* Hindstrom should also have the investment #olic& statement for the client statin% that the benchmar( 'as a##ro#riate for the client4s investment ob5ectives* ,e should also have records indicatin% that the investment had been e.#lained a##ro#riatel& to the client and that the investment #olic& statement 'as u#dated on a re%ular basis* Example 2: Aalcolm Poun% is a research anal&st 'ho 'rites numerous re#orts ratin% com#anies in the lu.ur& retail industr&* ,is re#orts are based on a variet& of sources- includin% intervie's 'ith com#an& mana%ement- manufacturers- and economists2 onsite com#an& visits2 customer surve&s2 and secondar& research from anal&sts coverin% related industries* Comment, Poun% must carefull& document and (ee# co#ies of all the information that %oes into his re#ort- includin% the secondar& or third #art& research of other anal&sts* Example 3: Aartin Dlan( develo#s an anal&tical model 'hile em#lo&ed b& Grosse Point Investment Aana%ement- HHP (GPIA)* Fhile at the firm- he s&stematicall& documents the assum#tions that ma(e u# the model as 'ell has his reasonin% for the assum#tions* )s the result of the success of his model- Dlan( is hired to be the head of the research de#artment of one of GPIA4s com#etitors* Dlan( ta(es co#ies of the records su##ortin% his model to his ne' firm* Comment, $he records created b& Dlan( su##ortin% the research model he develo#ed at GPIA are the records of GPIA* ,e cannot ta(e the documents 'ith him to his ne' em#lo&er 'ithout GPIA4s #ermission Jsee Standard IV())K* Dlan( must re create the records su##ortin% his model at the ne' firm* STANDARD -IACONFLICTS OF INTEREST A( Di$#&o$'%e o Con &i#!$ Me/)e%$ and #andida!e$ /'$! /a8e '&& and ai% di$#&o$'%e o a&& /a!!e%$ !"a! #o'&d %ea$ona)&4 )e eC:e#!ed !o i/:ai% !"ei% inde:enden#e and o)?e#!i.i!4 o% in!e% e%e <i!" %e$:e#!i.e d'!ie$ !o !"ei% #&ien!$@ :%o$:e#!i.e #&ien!$@ and !"ei% e/:&o4e%( Me/)e%$ and #andida!e$ /'$! en$'%e !"a! $'#" di$#&o$'%e$ a%e :%o/inen!@ a%e de&i.e%ed in :&ain &ang'age@ and #o//'ni#a!e !"e %e&e.an! in o%/a!ion e e#!i.e&4( Conflicts of interest often arise in the investment mana%ement #rofession* Conflicts can occur bet'een the interests of clients- the interests of em#lo&ers- and the member or candidate4s o'n #ersonal interest* Aana%in% these conflicts is a

critical #art of 'or(in% in the investment industr& and can ta(e man& forms* Dest 99 9eadin% 7 @ Guidance for Standards IVII #ractice is to avoid conflicts of interest 'hen #ossible* Fhen conflicts cannot be reasonabl& avoided- disclosure of their e.istence is necessar&* Standard VI()) #rotects investors and em#lo&ers b& re3uirin% members and candidates to full& disclose to clients- #otential clients- and em#lo&ers all actual and #otential conflicts of interest* +nce a member or candidate has made full disclosure- the member or candidate4s em#lo&er- clients- and #ros#ects 'ill have the information needed to evaluate the ob5ectivit& of the investment advice or action ta(en on their behalf* $o be effective- disclosures must be #rominent and must be made in #lain lan%ua%e and in a manner desi%ned to effectivel& communicate the information to clients and #ros#ective clients* It is u# to members and candidates to determine ho' often- in 'hat manner- or under 'hat #articular circumstances disclosure of conflicts must be made* Aembers and candidates have the res#onsibilit& to assess 'hen and ho' the& meet their obli%ations under this standard in each #articular case* Aembers and candidates should err on the side of caution or re#etition to ensure that conflicts of interest are effectivel& communicated* 1isclosure to Clients Aembers and candidates must maintain their ob5ectivit& 'hen renderin% investment advice or ta(in% investment action* Investment advice or actions ma& be #erceived to be tainted in numerous situations* Can a member or candidate remain ob5ective if- on behalf of the firm- the member or candidate obtains or assists in obtainin% fees for servicesT Can a member or candidate %ive ob5ective advice if he or she o'ns stoc( in the com#an& that is the sub5ect of an investment recommendation or if the member or candidate has a close #ersonal relationshi# 'ith the com#an& mana%ersT 9e3uirin% members and candidates to disclose all matters that reasonabl& could be e.#ected to im#air the member or candidate4s ob5ectivit& allo's clients and #ros#ects to 5ud%e motives and #ossible biases for themselves* In the investment industr&- a conflict- or the #erce#tion of a conflict- often cannot be avoided* $he most obvious conflicts of interest- 'hich should al'a&s be disclosed- are relationshi#s bet'een the member- candidate- or their firm and an issuer (such as a directorshi# or consultanc&)- investment ban(in%- under'ritin% and financial relationshi#s- bro(erEdealer mar(et ma(in% activities- and material beneficial o'nershi# of stoc(* ) member or candidate must ta(e reasonable ste#s to determine if a conflict of interest e.ists and disclose to clients an& conflicts of the member or candidate4s firm 'hen (no'n* Bisclosure of bro(erEdealer mar(et ma(in% activities alerts clients that a #urchase or sale mi%ht be made from or to the firm4s #rinci#al account and that the firm has a s#ecial interest in the #rice of the stoc(* Service as a director #oses three basic conflicts of interest* "irst- a conflict ma& e.ist bet'een the duties o'ed to clients and the duties o'ed to shareholders of the com#an&* Second- investment #ersonnel 'ho serve as directors ma& receive the securities or the o#tion to #urchase securities of the com#an& as com#ensation for servin% on the board- 'hich could raise 3uestions about tradin% actions that could increase the value of those securities* $hird- board service creates the o##ortunit& to receive material non#ublic information involvin% the com#an&* Even thou%h

the information is confidential- the #erce#tion could be that information not available to the #ublic mi%ht be communicated to a director4s firm>'hether a bro(erinvestment advisor- or other t&#e of or%ani/ation* Fhen members or candidates #rovidin% investment services also serve as directors- the& should be isolated from those ma(in% investment decisions b& the use of fire 'alls or similar restrictions* Aan& other circumstances %ive rise to actual or #otential conflicts of interest* "or instance- a sell side anal&st 'or(in% for a bro(erEdealer ma& be encoura%ed9; Standard VI>Conflicts of Interest not onl& b& members of her or his o'n firm but b& cor#orate issuers themselvesto 'rite research re#orts about #articular com#anies* $he bu& side anal&st is li(el& to be faced 'ith similar conflicts as ban(s e.ercise their under'ritin% and securitiesdealin% #o'ers* $he mar(etin% division ma& as( an anal&st to recommend the stoc( of a certain com#an& in order to obtain business from that com#an&* $he #otential for conflicts of interest also e.ists 'ith bro(er s#onsored limited #artnershi#s formed to invest venture ca#ital* Increasin%l&- members and candidates are e.#ected not onl& to follo' issues from these #artnershi#s once the& are offered to the #ublic but also to #romote the issues in the secondar& mar(et after #ublic offerin%s* Aembers- candidates- and their firms should attem#t to resolve situations #resentin% #otential conflicts of interest or disclose them in accordance 'ith the #rinci#les set forth in Standard VI())* $he most #revalent conflict re3uirin% disclosure under Standard VI()) is a member or candidate4s o'nershi# of stoc( in com#anies that the& recommend to clients andEor that clients hold* Clearl&- the easiest method for #reventin% a conflict is to #rohibit members and candidates from o'nin% an& such securities- but this a##roach is over burdensome and discriminates a%ainst members and candidates* $herefore- sell side members and candidates should disclose an& materiall& beneficial o'nershi# interest in a securit& or other investment that the member or candidate is recommendin%* Du& side members and candidates should disclose their #rocedures for re#ortin% re3uirements for #ersonal transactions* "or the #ur#oses of Standard VI())- members and candidates beneficiall& o'n securities or other investments if the& have a direct or indirect #ecuniar& interest in the securities2 have the #o'er to vote or direct the votin% of the shares of the securities or investments2 or have the #o'er to dis#ose or direct the dis#osition of the securit& or investment* Conflicts arisin% from #ersonal investin% are discussed more full& in the %uidance for Standard VI(D)>Priorit& of $ransactions* 1isclosure of Conflicts to Em"loyers Bisclosure of conflicts to em#lo&ers ma& also be a##ro#riate in man& instances* Fhen re#ortin% conflicts of interest to em#lo&ers- members and candidates should %ive their em#lo&er enou%h information to assess the im#act of the conflict* D& com#l&in% 'ith em#lo&er %uidelines- members and candidates allo' their em#lo&ers to avoid #otentiall& embarrassin% and costl& ethical or re%ulator& violations* 9e#ortable situations include conflicts that 'ould interfere 'ith renderin% unbiased investment advice and conflicts that 'ould cause a member or candidate not to act in the em#lo&er4s best interest* $he same circumstances that %enerate conflicts to be re#orted to clients and #ros#ects also 'ould dictate re#ortin% to em#lo&ers* +'nershi# of stoc(s anal&/ed or recommended- #artici#ation in outside boards- and financial and other #ressures that ma& influence a

decision are to be #rom#tl& re#orted to the em#lo&er so that their im#act can be assessed and a decision made on ho' to resolve the conflict* $he mere a##earance of conflict of interest ma& create #roblems for memberscandidates- and their em#lo&ers* $herefore- man& of the conflicts #reviousl& mentioned could be e.#licitl& #rohibited b& the em#lo&er* "or e.am#leman& em#lo&ers restrict #ersonal tradin%- outside board membershi#- and related activities to #revent situations that mi%ht not normall& be considered #roblematic from a conflict of interest #oint of vie' but that could %ive the a##earance of a conflict of interest* Aembers and candidates must com#l& 'ith these restrictions* Aembers and candidates must ta(e reasonable ste#s to avoid conflicts and- if the& occur inadvertentl&- must re#ort them #rom#tl& so that the em#lo&er and the member or candidate can resolve them as 3uic(l& and effectivel& as #ossible* ;= 9eadin% 7 @ Guidance for Standards IVII Standard VI()) also deals 'ith a member and candidate4s conflicts of interest that mi%ht be detrimental to the em#lo&er4s business* )n& #otential conflict situation that could #revent clear 5ud%ment in or full commitment to the e.ecution of the member or candidate4s duties to the em#lo&er should be re#orted to the member or candidate4s em#lo&er and #rom#tl& resolved* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e Aembers or candidates should disclose s#ecial com#ensation arran%ements 'ith the em#lo&er that mi%ht conflict 'ith client interests- such as bonuses based on short term #erformance criteria- commissions- incentive fees- #erformance feesand referral fees* If the member or candidate4s firm does not #ermit such disclosurethe member or candidate should document the re3uest and ma& consider dissociatin% from the activit&* Aembers or candidates4 firms are encoura%ed to include information on com#ensation #ac(a%es in firms4 #romotional literature* If a member or candidate mana%es a #ortfolio for 'hich the fee is based on a share of ca#ital %ains or ca#ital a##reciation (a #erformance fee)- this information should be disclosed to clients* If a member- candidate- or a member or candidate4s firm has outstandin% a%ent o#tions to bu& stoc( as #art of the com#ensation #ac(a%e for cor#orate inan#ing a#!i.i!ie$- the amount and eC:i%a!ion da!e of these o#tions should be disclosed as a footnote to an& research re#ort #ublished b& the member or candidate4s firm* A::&i#a!ion o !"e S!anda%d Example 1: ,unter Feiss is a research anal&st 'ith "armin%ton Com#an&- a bro(er and investment ban(in% firm* "armin%ton4s mer%er and ac3uisition de#artment has re#resented Vimco- a con%lomerate- in all of its ac3uisitions for 7! &ears* "rom time to time- "armin%ton officers sit on the boards of directors of various Vimco subsidiaries* Feiss is 'ritin% a research re#ort on Vimco* Comment, Feiss must disclose in his research re#ort "armin%ton4s s#ecial relationshi# 'ith Vimco* Dro(erEdealer mana%ement of and #artici#ation in #ublic offerin%s must be disclosed in research re#orts* Decause the #osition of under'riter to a com#an& #resents a s#ecial #ast and #otential future relationshi# 'ith a com#an& that is the sub5ect of investment advice- it threatens the inde#endence and ob5ectivit& of the re#ort and must be disclosed* Example 2: $he investment mana%ement firm of Bover O 9oe sells a 78 #ercent

interest in its #artnershi# to a multinational ban( holdin% com#an&- "irst of ;e' Por(* Immediatel& thereafter- Aar%aret ,obbs- #resident of Bover O 9oechan%es her recommendation of "irst of ;e' Por(4s common stoc( from sell to bu& and adds "irst of ;e' Por(4s #o//e%#ia& :a:e% to Bover O 9oe4s a##roved list for #urchase* Comment, ,obbs must disclose the ne' relationshi# 'ith "irst of ;e' Por( to all Bover O 9oe clients* $his relationshi# must also be disclosed to clients b& the firm4s #ortfolio mana%ers 'hen the& ma(e s#ecific investment recommendations or ta(e investment actions 'ith res#ect to "irst of ;e' Por(4s securities* Example 3: Carl "ar%mon- a research anal&st 'ho follo's firms #roducin% office e3ui#ment- has been recommendin% #urchase of Iincaid Printin% because of its innovative ne' line of co#iers* )fter his initial re#ort on the com#an&;1 Standard VI>Conflicts of Interest "ar%mon4s 'ife inherits from a distant relative RL million of Iincaid stoc(* ,e has been as(ed to 'rite a follo' u# re#ort on Iincaid* Comment, "ar%mon must disclose his 'ife4s o'nershi# of the Iincaid stoc( to his em#lo&er and in his follo' u# re#ort* Dest #ractice 'ould be to avoid the conflict b& as(in% his em#lo&er to assi%n another anal&st to draft the follo' u# re#ort* Example 4: Dett& 9oberts is s#eculatin% in #enn& stoc(s for her o'n account and #urchases 0!!-!!! shares of Bre' Ainin%- Inc*- for L! cents a share* She intends to sell these shares at the si%n of an& substantial u#'ard #rice movement of the stoc(* ) 'ee( later- her em#lo&er as(s her to 'rite a re#ort on #enn& stoc(s in the minin% industr& to be #ublished in t'o 'ee(s* Even 'ithout o'nin% the Bre' stoc(- 9oberts 'ould recommend it in her re#ort as a bu&* ) sur%e of the #rice of the stoc( to the R7 ran%e is li(el& to result once the re#ort is issued* Comment, )lthou%h this holdin% ma& not be material- 9oberts must disclose it in the re#ort and to her em#lo&er before 'ritin% the re#ort because the %ain for her 'ill be substantial if the mar(et res#onds stron%l& to her recommendation* $he fact that she has onl& recentl& #urchased the stoc( adds to the a##earance that she is not entirel& ob5ective* Example 5: Samantha B&son- a #ortfolio mana%er for $homas Investment CounselInc*- s#eciali/es in mana%in% defined benefit #ension #lan accounts- all of 'hich are in the accumulative #hase and have lon% term investment ob5ectives* ) &ear a%o- B&son4s em#lo&er- in an attem#t to motivate and retain (e& investment #rofessionals- introduced a bonus com#ensation s&stem that re'ards #ortfolio mana%ers on the basis of 3uarterl& #erformance relative to their #eers and certain benchmar( inde.es* B&son chan%es her investment strate%& and #urchases several hi%h beta stoc(s for client #ortfolios in an attem#t to im#rove short term #erformance* $hese #urchases are seemin%l& contrar& to the client investment #olic& statement* ;o'- an officer of Griffin Cor#oration- one of B&son4s #ension fund clients- as(s 'h& Griffin Cor#oration4s #ortfolio seems to be dominated b& hi%h beta stoc(s of com#anies that often a##ear amon% the most activel& traded issues* ;o chan%e in ob5ective or strate%& has been recommended b& B&son durin% the &ear* Comment, B&son violated Standard VI()) b& failin% to inform her clients of the chan%es in her com#ensation arran%ement 'ith her em#lo&er that

created a conflict of interest* "irms ma& #a& em#lo&ees on the basis of #erformancebut #ressure b& $homas Investment Counsel to achieve short term #erformance %oals is in basic conflict 'ith the ob5ectives of B&son4s accounts* Example 6: Fa&land Securities 'or(s 'ith small com#anies doin% IP+s andEor secondar& offerin%s* $&#icall&- these deals are in the R0! million to R8! million ran%e and- as a result- the cor#orate finance fees are 3uite small* In order to com#ensate for the small fees- Fa&land Securities usuall& ta(es a%ents o#tions>that is- ri%hts (e.ercisable 'ithin a t'o &ear time frame) to ac3uire u# to an additional 0! #ercent of the current offerin%* "ollo'in% an IP+ #erformed b& Fa&land for "al( 9esources- Htd*- Barc& ,unter- the head of cor#orate finance at Fa&land- is concerned about receivin% value for her "al( 9esources o#tions* $he o#tions are one month from e.#irin%- and the stoc( is not doin% 'ell* She contacts ?ohn "it/#atric( in the research de#artment of Fa&land Securities- reminds him that he is eli%ible for L! #ercent of these o#tions- and indicates that no' 'ould be a %ood time to %ive some additional covera%e to "al( 9esources* "it/#atric( a%rees and immediatel& issues a favorable re#ort* ;2 9eadin% 7 @ Guidance for Standards IVII Comment, In order for "it/#atric( not to be in violation of Standard VI())he must indicate in the re#ort the volume and e.#iration date of a%ent o#tions outstandin%* "urthermore- because he is #ersonall& eli%ible for some of the o#tions- "it/#atric( must disclose the e.tent of this com#ensation* ,e also must be careful that he does not violate his dut& of inde#endence and ob5ectivit& under Standard I(D)* Example 7: Gar& Carter is a re#resentative 'ith Den%al International- a re%istered bro(erEdealer* Carter is a##roached b& a stoc( #romoter for Dad%er Com#an&'ho offers to #a& Carter additional com#ensation for sales to his clients of Dad%er Com#an&4s stoc(* Carter acce#ts the stoc( #romoter4s offer but does not disclose the arran%ements to his clients or to his em#lo&er* Carter sells shares of the stoc( to his clients* Comment, Carter has violated Standard VI()) b& failin% to disclose to clients that he 'as receivin% additional com#ensation for recommendin% and sellin% Dad%er stoc(* Decause he did not disclose the arran%ement 'ith Dad%er to his clients- the clients 'ere unable to evaluate 'hether Carter4s recommendations to bu& Dad%er 'ere affected b& this arran%ement* Carter4s conduct also violated Standard VI()) b& failin% to disclose to his em#lo&er monetar& com#ensation received in addition to the com#ensation and benefits conferred b& his em#lo&er* Carter 'as re3uired b& Standard VI()) to disclose the arran%ement 'ith Dad%er to his em#lo&er so that his em#lo&er could evaluate 'hether the arran%ement affected his ob5ectivit& and lo&alt&* Example 8: Carol Cor(&- a senior #ortfolio mana%er for Cniversal Aana%ementrecentl& became involved as a trustee 'ith the Chelsea "oundation- a ver& lar%e not for #rofit foundation in her hometo'n* Cniversal is a small mone& mana%er ('ith assets under mana%ement of a##ro.imatel& R0!! million) that caters to individual investors* Chelsea has assets in e.cess of R7 billion* Cor(& does not believe informin% Cniversal of her involvement 'ith Chelsea is necessar&* Comment, D& failin% to inform Cniversal of her involvement 'ith ChelseaCor(& violated Standard VI())* Given the lar%e si/e of the endo'ment at

Chelsea- Cor(&4s ne' role as a trustee can reasonabl& be e.#ected to be timeconsumin%to the #ossible detriment of Cor(&4s #ortfolio res#onsibilities 'ith Cniversal* )s a trustee- Cor(& also ma& become involved 'ith the investment decisions at Chelsea* $herefore- Standard VI()) obli%ates Cor(& to discuss becomin% a trustee at Chelsea 'ith her com#liance officer or su#ervisor at Cniversal before acce#tin% the #osition and she should have disclosed the de%ree to 'hich she 'ould be involved in investment decisions at Chelsea* Example 9: Druce Smith covers East Euro#ean e3uities for Aarlborou%h investmentsan investment mana%ement firm 'ith a stron% #resence in emer%in% mar(ets* Fhile on a business tri# to 9ussia- Smith learns that investin% in 9ussian e3uit& directl& is difficult but that e3uit& lin(ed notes that re#licate the #erformance of the underl&in% 9ussian e3uit& can be #urchased from a ;e' Por( based investment ban(* Delievin% that his firm 'ould not be interested in such a securit&- Smith #urchases a note lin(ed to a 9ussian telecommunications com#an& for his o'n account 'ithout informin% Aarlborou%h* ) month laterSmith decides that the firm should consider investin% in 9ussian e3uities usin% e3uit& lin(ed no!e$- and he #re#ares a 'rite u# on the mar(et that concludes 'ith a recommendation to #urchase several of the notes* +ne note recommended is lin(ed to the same 9ussian telecom com#an& that Smith holds in his #ersonal account* ;3 Standard VI>Conflicts of Interest Comment, Smith violated Standard VI()) b& failin% to disclose his o'nershi# of the note lin(ed to the 9ussian telecom com#an&* Smith is re3uired b& the standard to disclose the investment o##ortunit& to his em#lo&er and loo( to his com#an&4s #olicies on #ersonal tradin% to determine 'hether it 'as #ro#er for him to #urchase the note for his o'n account* D& #urchasin% the note- Smith ma& or ma& not have im#aired his abilit& to ma(e an unbiased and ob5ective assessment of the a##ro#riateness of the derivative instrument for his firm- but Smith4s failure to disclose the #urchase to his em#lo&er im#aired his em#lo&er4s abilit& to render an o#inion re%ardin% 'hether the o'nershi# of the securit& constituted a conflict of interest that mi%ht have affected future recommendations* +nce he recommended the notes to his firm- Smith com#ounded his #roblems b& not disclosin% that he o'ned the notes in his #ersonal account>a clear conflict of interest* 6( P%io%i!4 o T%an$a#!ion$ In.e$!/en! !%an$a#!ion$ o% #&ien!$ and e/:&o4e%$ /'$! "a.e :%io%i!4 o.e% in.e$!/en! !%an$a#!ion$ in <"i#" a /e/)e% o% #andida!e i$ !"e )ene i#ia& o<ne%( Standard VI(D) reinforces the res#onsibilit& of members and candidates to %ive the interests of their clients and em#lo&ers #riorit& over their #ersonal financial interests* $his standard is desi%ned to #revent an& #otential conflict of interest or the a##earance of a conflict of interest 'ith res#ect to #ersonal transactions* Client interests have #riorit&* Client transactions must ta(e #recedence over transactions made on behalf of the member or candidate4s firm or #ersonal transactions* Standard VI(D) states that transactions for clients and em#lo&ers must have #riorit& over transactions in securities or other investments of 'hich a member or candidate is the beneficial o'ner so that such #ersonal transactions do not

adversel& affect the interests of their clients or em#lo&ers* "or #ur#oses of the Code and Standards- a member or candidate is a beneficial o'ner if the member or candidate has a direct or indirect #ersonal interest in the securities* ) member or candidate havin% the same investment #ositions or bein% co invested 'ith their clients does not al'a&s create a conflict* Some clients in certain investment situations re3uire members or candidates to have ali%ned interests* ,o'ever#ersonal investment #ositions or transactions of a member or candidate or their firm should never adversel& affect client investments* Conflicts bet'een the client4s interest and an investment #rofessional4s #ersonal interest ma& occur* )lthou%h conflicts of interest e.ist- there is nothin% inherentl& unethical about individual mana%ers- advisors- or mutual fund em#lo&ees ma(in% mone& from #ersonal investments as lon% as (0) the client is not disadvanta%ed b& the trade- (7) the investment #rofessional does not benefit #ersonall& from trades underta(en for clients- and (L) the investment #rofessional com#lies 'ith a##licable re%ulator& re3uirements* Standard VI(D) covers the activities of all members and candidates 'ho have (no'led%e of #endin% transactions that ma& be made on behalf of their clients or em#lo&ers* Standard VI(D) also a##lies to members and candidates 'ho have access to information durin% the normal #re#aration of research recommendations or 'ho ta(e investment actions* Aembers and candidates are #rohibited from conve&in% such information to an& #erson 'hose relationshi# to the member or candidate ma(es the member or candidate a beneficial o'ner of the #erson4s securities* Aembers and candidates must not conve& this information to an& other #erson if the information can be deemed material non#ublic information* ;4 9eadin% 7 @ Guidance for Standards IVII Aembers or candidates ma& underta(e transactions in accounts for 'hich the& are a beneficial o'ner onl& after their clients and em#lo&ers have had an ade3uate o##ortunit& to act on the recommendation* Personal transactions include those made for the member or candidate4s o'n account- for famil& (includin% s#ouse- children- and other immediate famil& members) accountsand for accounts in 'hich the member or candidate has a direct or indirect #ecuniar& interest- such as a trust or retirement account* "amil& accounts that are client accounts should be treated li(e an& other firm account and should neither be %iven s#ecial treatment nor be disadvanta%ed because of an e.istin% famil& relationshi# 'ith the member or candidate* If a member or candidate has a beneficial o'nershi# in the account- ho'ever- the member or candidate ma& still be sub5ect to #re clearance or re#ortin% re3uirements of their em#lo&er or a##licable la'* Re#o//ended P%o#ed'%e$ o% Co/:&ian#e Policies and #rocedures desi%ned to #revent #otential conflicts of interest- or even the a##earance of a conflict of interest- 'ith res#ect to #ersonal transactions are critical to establishin% investor confidence in the securities industr&* Decause investment firms var& %reatl& in assets under mana%ement- t&#es of clients- number of em#lo&ees- and so on- each firm should establish #olicies re%ardin% #ersonal investin% that are best suited to the firm* Aembers and candidates should then #rominentl& disclose those #olicies to clients and #ros#ective clients* $he s#ecific #rovisions of each firm4s standards 'ill var&- but all firms should

ado#t certain basic #rocedures to address the conflict areas created b& #ersonal investin%* $hese include1 'imited "artici"ation in equity !P*s. Some ea%erl& a'aited IP+s ma& si%nificantl& rise in value shortl& after the issue is brou%ht to mar(et* Decause the ne< i$$'e ma& be hi%hl& attractive and sou%ht after- the o##ortunit& to #artici#ate in the IP+ ma& be limited* $herefore- #urchases of IP+s b& investment #ersonnel create conflicts of interest in t'o #rinci#al 'a&s* "irst- #artici#ation in an IP+ ma& have the a##earance of a##ro#riatin% an attractive investment o##ortunit& from clients for #ersonal %ain>a clear breach of the dut& of lo&alt& to clients* Second- because o##ortunities to #artici#ate in IP+s are limited- there ma& be an a##earance that the investment o##ortunit& is bein% besto'ed as an incentive to ma(e future investment decisions for the benefit of the #art& #rovidin% the o##ortunit&* Aembers and candidates can avoid these conflicts or the a##earance of a conflict of interest b& not #artici#atin% in IP+s* 9eliable and s&stematic revie' #rocedures should be established to ensure that conflicts relatin% to IP+s are identified and a##ro#riatel& dealt 'ith b& su#ervisors* Aembers and candidates should #reclear their #artici#ation in IP+s- even in situations 'ere there are no conflicts of interest bet'een a member or candidate4s #artici#ation in an IP+ and the client4s interests* Aembers and candidates should not benefit from the #osition that their clients occu#& in the mar(et#lace>throu%h #referred tradin%- the allocation of limited offerin%sandEor oversubscri#tion* Restrictions on "rivate "lacements* Strict limits should be #laced on investment #ersonnel ac3uirin% securities in #rivate #lacements- and a##ro#riate su#ervisor& and revie' #rocedures should be established to #revent noncom#liance* "irms do not routinel& use #rivate #lacements for clients (e*%*- venture ca#ital deals) because of the hi%h ris( associated 'ith them* Conflicts relatin% to #rivate #lacements are more si%nificant to members and candidates 'ho mana%e ;3 Standard VI>Conflicts of Interest lar%e #ools of assets or act as #lan s#onsors because these mana%ers ma& be offered s#ecial o##ortunities- such as #rivate #lacements- as a re'ard or an enticement for continuin% to do business 'ith a #articular bro(er* Partici#ation in :%i.a!e :&a#e/en!$ raises conflict of interest issues that are similar to issues surroundin% IP+s* Investment #ersonnel should not be involved in transactions- includin% (but not limited to) #rivate #lacements that could be #erceived as favors or %ifts that seem desi%ned to influence future 5ud%ment or to re'ard #ast business deals* Fhether the venture eventuall& #roves to be %ood or bad- mana%ers have an immediate conflict concernin% #rivate #lacement o##ortunities* Partici#ants in #rivate #lacements have an incentive to recommend these investments to clients if and 'hen the& %o #ublic- re%ardless of the suitabilit& of the investments for their clients- in order to increase the value of the #artici#ants4 #ersonal #ortfolios* Establis blackout/restricted "eriods. Investment #ersonnel involved in the investment decision ma(in% #rocess should establish blac(out #eriods #rior to trades for clients so that mana%ers cannot ta(e advanta%e of their (no'led%e of client activit& b& front runnin% client trades* Individual firms must decide 'ho 'ithin the firm should be re3uired to com#l&

'ith the tradin% restrictions* )t a minimum- all individuals 'ho are involved in the investment decision ma(in% #rocess should be sub5ect to the same restricted #eriod* Each firm must determine s#ecific re3uirements relatin% to blac(out and restricted #eriods that are most relevant to the firm 'hile ensurin% that the #rocedures are %overned b& the %uidin% #rinci#les set forth in the Code and Standards* Si/e of firm and t&#e of securities #urchased are relevant factors* "or e.am#le- in a lar%e firm- a blac(out re3uirement is- in effect- a total tradin% ban because the firm is continuall& tradin% in most securities* In a small firm- the blac(out #eriod is more li(el& to #revent the investment mana%er from frontrunnin%* Re"orting requirements. Su#ervisors should establish re#ortin% #rocedures for investment #ersonnel- includin% du#licate confirmations- disclosure of #ersonal holdin%sEbeneficial o'nershi#s- and #reclearance #rocedures* +nce tradin% restrictions are in #lace- the& must be enforced* $he best method for monitorin% and enforcin% #rocedures established to eliminate conflicts of interest relatin% to #ersonal tradin% is throu%h re#ortin% re3uirements- includin% the follo'in%1 G Bisclosure of holdin%s in 'hich the em#lo&ee has a beneficial interest* Bisclosure b& investment #ersonnel to the firm should be made u#on commencement of the em#lo&ment relationshi# and at least annuall& thereafter* $o address #rivac& considerations- disclosure of #ersonal holdin%s should be handled in a confidential manner b& the firm* G Providin% du#licate confirmations of transactions* Investment #ersonnel should be re3uired to direct their bro(ers to su##l& du#licate co#ies or confirmations to their firms of all their #ersonal securities transactions and co#ies of #eriodic statements for all securities accounts* "irms should establish additional re#ortin% re3uirements- includin% the fre3uenc& of such re#ortin%- that em#hasi/e the firm4s intention to #romote full and com#lete disclosure and that e.#lain the role and res#onsibilities of su#ervisors* $he du#licate confirmation re3uirement has t'o #ur#oses1 (0) $he re3uirement sends a messa%e that #eo#le are loo(in% and ma(es it difficult for an individual to act unethicall&- and (7) it enables verification of the accountin% of the flo' of #ersonal investments that cannot be determined from merel& loo(in% at transactions or holdin%s* ;5 9eadin% 7 @ Guidance for Standards IVII G Preclearance #rocedures* Investment #ersonnel should clear all #ersonal investments to identif& #ossible conflicts #rior to the e.ecution of #ersonal trades* Preclearance #rocedures are desi%ned to identif& #ossible conflicts before a #roblem arises* Preclearance #rocedures are consistent 'ith the C") Institute Code and Standards and demonstrate that members- candidatesand their firms #lace the interests of their clients ahead of their o'n #ersonal investin% interests* 1isclosure of "olicies, C#on re3uest- members and candidates should full& disclose to investors their firm4s #ersonal investin% #olicies* $he infusion of information on em#lo&ees4 #ersonal investment activities and #olicies into the mar(et#lace 'ill foster an atmos#here of full and com#lete disclosure and calm the #ublic4s le%itimate concerns about the conflicts of interest #osed b& investment #ersonnel4s #ersonal tradin%* $he disclosure must be hel#ful to investorsho'ever- not sim#l& boiler#late lan%ua%e containin% some va%ue admonition that investment #ersonnel are sub5ect to #olicies and #rocedures re%ardin%

their #ersonal tradin%* A::&i#a!ion o !"e S!anda%d Example 1: ) research anal&st- Aarlon Hon%- does not recommend #urchase of a common stoc( for his em#lo&er4s account because he 'ants to #urchase the stoc( #ersonall& and does not 'ant to 'ait until the recommendation is a##roved and the stoc( #urchased b& his em#lo&er* Comment, Hon% violated Standard VI(D) b& ta(in% advanta%e of his (no'led%e of the stoc(4s value before allo'in% his em#lo&er to benefit from that information* Example 2: Carol Da(er- the #ortfolio mana%er of an a%%ressive %ro'th mutual fund- maintains an account in her husband4s name at several bro(era%e firms 'ith 'hich the fund and a number of Da(er4s other individual clients do a substantial amount of business* Fhenever a ne' hot issue becomes available- she instructs the bro(ers to bu& it for her husband4s account* Decause such issues normall& are scarce- Da(er often ac3uires shares 'hile her clients are not able to #artici#ate* Comment, Da(er must ac3uire shares for her mutual fund first and- onl& after doin% so- ac3uire them for her husband4s account- even thou%h she mi%ht miss out on #artici#atin% in ne' issues via her husband4s account* She also must disclose the tradin% for her husband4s account to her em#lo&er because this activit& creates a conflict bet'een her #ersonal interests and her em#lo&er4s interests JStandard VI())>Bisclosure of ConflictsK* Example 3: Erin $offler- a #ortfolio mana%er at Es#osito Investments- mana%es the retirement account established 'ith the firm b& her #arents* Fhenever IP+s become available- she first allocates shares to all her other clients for 'hom the investment is a##ro#riate2 onl& then does she #lace an& remainin% #ortion in her #arents4 account- if the issue is a##ro#riate for them* She has ado#ted this #rocedure so that no one can accuse her of favorin% her #arents* Comment, $offler has breached her dut& to her #arents b& treatin% them differentl& from her other accounts sim#l& because of the famil& relationshi#* )s fee #a&in% clients of Es#osito Investments- $offler4s #arents are entitled to the same treatment as an& other client of the firm* If $offler has beneficial ;7 Standard VI>Conflicts of Interest o'nershi# in the account- ho'ever- and Es#osito Investments has #reclearance and re#ortin% re3uirements for #ersonal transactions- she ma& have to #reclear the trades and re#ort the transactions to Es#osito* Example 4: Gar& Aichaels is an entr& level em#lo&ee 'ho holds a relativel& lo' #a&in% 5ob servin% both the research and investment mana%ement de#artments of an active in.e$!/en! /anage/en! #o/:an4* ,e #urchases a s#orts car and be%ins to 'ear e.#ensive clothes after onl& a &ear of em#lo&ment 'ith the firm* $he director of the investment mana%ement de#artment- 'ho has res#onsibilit& for monitorin% the #ersonal stoc( transactions of all em#lo&ees- investi%ates and discovers that Aichaels has made substantial investment %ains b& #urchasin% stoc(s 5ust before the& 'ere #ut on the firm4s recommended #urchase list* Aichaels 'as re%ularl& %iven the firm4s 3uarterl& #ersonal transaction form but declined to com#lete it* Comment, Aichaels violated Standard VI(D) b& #lacin% #ersonal transactions ahead of client transactions* In addition- his su#ervisor violated the

Standards b& #ermittin% Aichaels to continue to #erform his assi%ned tas(s 'ithout first havin% si%ned the 3uarterl& #ersonal transaction form JStandard IV(C)>9es#onsibilities of Su#ervisorsK* ;ote also that if Aichaels had communicated information about the firm4s recommendations to a #erson 'ho traded the securit&- that action 'ould be a misa##ro#riation of the information and a violation of Standard II())>Aaterial ;on#ublic Information* Example 5: ) bro(era%e4s insurance anal&st- Benise Filson- ma(es a closedcircuit re#ort to her firm4s branches around the countr&* Burin% the broadcastshe includes ne%ative comments about a ma5or com#an& 'ithin the industr&* $he follo'in% da&- Filson4s re#ort is #rinted and distributed to the sales force and #ublic customers* $he re#ort recommends that both short term traders and intermediate investors ta(e #rofits b& sellin% that com#an&4s stoc(s* Seven minutes after the broadcast- Ellen 9ile&- head of the firm4s tradin% de#artmentcloses out a lon% call #osition in the stoc(* Shortl& thereafter- 9ile& establishes a si/able #ut #osition in the stoc(* 9ile& claims she too( this action to facilitate antici#ated sales b& institutional clients* Comment, 9ile& e.#ected that both the stoc( and o#tion mar(ets 'ould res#ond to the sell recommendation- but she did not %ive customers an o##ortunit& to bu& or sell in the o#tions mar(et before the firm itself did* D& ta(in% action before the re#ort 'as disseminated- 9ile&4s firm could have de#ressed the #rice of the calls and increased the #rice of the #uts* $he firm could have avoided a conflict of interest if it had 'aited to trade for its o'n account until its clients had an o##ortunit& to receive and assimilate Filson4s recommendations* )s it is- 9ile&4s actions violated Standard VI(D)* C( Re e%%a& Fee$ Me/)e%$ and #andida!e$ /'$! di$#&o$e !o !"ei% e/:&o4e%@ #&ien!$@ and :%o$:e#!i.e #&ien!$@ a$ a::%o:%ia!e@ an4 #o/:en$a!ion@ #on$ide%a!ion@ o% )ene i! %e#ei.ed %o/@ o% :aid !o@ o!"e%$ o% !"e %e#o//enda!ion o :%od'#!$ o% $e%.i#e$( Standard VI(C) states the res#onsibilit& of members and candidates to inform em#lo&er- clients- and #ros#ective clients of an& benefit received for referrals of ;9 9eadin% 7 @ Guidance for Standards IVII customers and clients* Such disclosure 'ill allo' the client or em#lo&er to evaluate (0) an& #artialit& sho'n in an& recommendation of services and (7) the full cost of the services* )##ro#riate disclosure means that members and candidates must advise the client or #ros#ective client- before entr& into an& formal a%reement for servicesof an& benefit %iven or received for the recommendation of an& services #rovided b& the member or candidate* In addition- the member or candidate must disclose the nature of the consideration or benefit>for e.am#le- flat fee or #ercenta%e basis2 one time or continuin% benefit2 based on #erformance2 benefit in the form of #rovision of research or other noncash benefit>to%ether 'ith the estimated dollar value* Consideration includes all fees- 'hether #aid in cash- in soft dollars- or in (ind* A::&i#a!ion o !"e S!anda%d Example 1, Drad& Securities- Inc*- a bro(erEdealer- has established a referral

arran%ement 'ith He'is Drothers- Htd*- an investment counselin% firm* Cnder this arran%ement- Drad& Securities refers all #ros#ective ta. e.em#t accountsincludin% #ension- #rofit sharin%- and endo'ment accounts- to He'is Drothers* In return- He'is Drothers ma(es available to Drad& Securities on a re%ular basis the securit& recommendations and re#orts of its research staff- 'hich re%istered re#resentatives of Drad& Securities use in servin% customers* In addition- He'is Drothers conducts monthl& economic and mar(et revie's for Drad& Securities #ersonnel and directs all stoc( commission business %enerated b& referral accounts to Drad& Securities* Fillard Fhite- a #artner in He'is Drothers- calculates that the incremental costs involved in functionin% as the research de#artment of Drad& Securities amount to R7!-!!! annuall&* 9eferrals from Drad& Securities last &ear resulted in fee income of R7!!-!!!- and directin% all stoc( trades throu%h Drad& Securities resulted in additional costs to He'is Drothers4 clients of R0!-!!!* Biane Dranch- the chief financial officer of Aa.'ell Inc*- contacts Fhite and sa&s that she is see(in% an investment mana%er for Aa.'ell4s #rofit sharin% #lan* She adds- A& friend ,arold ,ill at Drad& Securities recommended &our firm 'ithout 3ualification- and that4s %ood enou%h for me* Bo 'e have a dealT Fhite acce#ts the ne' account but does not disclose his firm4s referral arran%ement 'ith Drad& Securities* Comment, Fhite violated Standard VI(C) b& failin% to inform the #ros#ective customer of the referral fee #a&able in services and commissions for an indefinite #eriod to Drad& Securities* Such disclosure could have caused Dranch to reassess ,ill4s recommendation and ma(e a more critical evaluation of He'is Drothers4 services* Example 2: ?ames ,andle& 'or(s for the $rust Be#artment of Central $rust Dan(* ,e receives com#ensation for each referral he ma(es to Central $rust4s bro(era%e and #ersonal financial mana%ement de#artment that results in a sale* ,e refers several of his clients to the #ersonal financial mana%ement de#artment but does not disclose the arran%ement 'ithin Central $rust to his clients* Comment, ,andle& has violated Standard V(C) b& not disclosin% the referral arran%ement at Central $rust Dan( to his clients* $he Standard does not distin%uish bet'een referral fees #aid b& a third #art& for referrin% clients to the third #art& and internal com#ensation arran%ements #aid 'ithin the ;; Standard VI>Conflicts of Interest firm to attract ne' business to a subsidiar&* Aembers and candidates must disclose all such referral fees* $herefore- ,andle& 'ould be re3uired to discloseat the time of referral- an& referral fee a%reement in #lace bet'een Central $rust Dan(4s de#artments* $he disclosure should include the nature and the value of the benefit and should be made in 'ritin%* Example 3: Iatherine 9oberts is a #ortfolio mana%er at Iatama Investments- an advisor& firm s#eciali/in% in mana%in% assets for hi%h net 'orth individuals* Iatama4s tradin% des( uses a variet& of bro(era%e houses to e.ecute trades on behalf of its clients* 9oberts as(s the tradin% des( to direct a lar%e #ortion of its commissions to ;aushon- Inc*- a small bro(erEdealer run b& one of 9obert4s business school classmates* Iatama4s traders have found that ;aushon is not ver& com#etitive on #ricin%- and althou%h ;aushon %enerates some research

for its tradin% clients- Iatama4s other anal&sts have found most of ;aushon4s research not es#eciall& useful* ;evertheless- the traders do as 9oberts as(s- and in return for receivin% a lar%e #ortion of Iatama4s business- ;aushon recommends the investment services of 9oberts and Iatama to its 'ealthiest clients* $his arran%ement is not disclosed to either Iatama or the clients referred b& ;aushon* Comment, 9oberts violated Standard VI(C) b& failin% to inform her em#lo&er of the referral arran%ement* Example 4: Peshao Fen is a #ortfolio mana%er for a ban(* ,e receives additional monetar& com#ensation from his em#lo&er 'hen he is successful in assistin% in the sales #rocess and %eneration of assets under mana%ement* $he assets in 3uestion 'ill be invested in #ro#rietar& #roduct offerin%s such as affiliate com#an& mutual funds* Comment, Standard VI(C) is meant to address instances 'here the investment advice #rovided b& a member or candidate a##ears to be ob5ective and inde#endent but in fact is influenced b& an unseen referral arran%ement* It is not meant to cover com#ensation b& em#lo&ers to em#lo&ees for %eneratin% ne' business 'hen it 'ould be obvious to #otential clients that the em#lo&ees are referrin% #otential clients to the services of their em#lo&ers* If Fen is sellin% the ban(4s investment mana%ement services in %eneralhe does not need to disclose to #otential clients that he 'ill receive a bonus for findin% ne' clients and ac3uirin% ne' assets under mana%ement for the ban(* Potential clients are li(el& a'are that it 'ould be financiall& beneficial both to the #ortfolio mana%er and the mana%er4s firm for the #ortfolio mana%er to sell the services of the firm and attract ne' clients* $herefore- sales efforts attem#tin% to attract ne' investment mana%ement clients need not disclose this fact* ,o'ever- in this e.am#le- the assets 'ill be mana%ed in #ro#rietar& #roduct offerin%s of the mana%er4s com#an& (for e.am#le- an in house mutual fund) and Fen 'ill receive additional com#ensation for sellin% firm #roducts* Some so#histicated investors ma& reali/e that it 'ould be financiall& beneficial to the #ortfolio mana%er and the mana%er4s firm if the investor bu&s the #roduct offerin%s of the firm* Dest #ractice- ho'ever- dictates that the #ortfolio mana%er must disclose to clients that the& are com#ensated for referrin% clients to firm #roducts* Such disclosure 'ill meet the #ur#ose of Standard VI(C)- 'hich is to allo' investors to determine 'hether there is an& #artialit& on the #art of the #ortfolio mana%er 'hen ma(in% investment advice* 1== 9eadin% 7 @ Guidance for Standards IVII STANDARD -IIARESPONSI6ILITIES AS A CFA INSTITUTE MEM6ER OR CFA CANDIDATE A( Cond'#! a$ Me/)e%$ and Candida!e$ in !"e CFA P%og%a/ Me/)e%$ and #andida!e$ /'$! no! engage in an4 #ond'#! !"a! #o/:%o/i$e$ !"e %e:'!a!ion o% in!eg%i!4 o CFA In$!i!'!e o% !"e CFA de$igna!ion o% !"e in!eg%i!4@ .a&idi!4@ o% $e#'%i!4 o !"e CFA eCa/ina!ion$( Standard VII()) covers the conduct of C") Institute members and candidates

involved 'ith the C") Pro%ram and #rohibits an& conduct that undermines the #ublic4s confidence that the C") charter re#resents a level of achievement based on merit and ethical conduct* $he standard4s function is to hold members and candidates to a hi%h ethical standard 'hile the& are #artici#atin% in or involved 'ith the C") Pro%ram* Conduct covered includes- but is not limited to1 G cheatin% on the C") e.amination or an& other e.amination2 G disre%ardin% the rules and #olicies of the C") Pro%ram related to e.amination administration2 G #rovidin% confidential #ro%ram information to candidates or the #ublic2 G disre%ardin% or attem#tin% to circumvent securit& measures established b& C") Institute for the C") e.amination2 G im#ro#erl& usin% the C") desi%nation or other association 'ith C") Institute to further #ersonal or #rofessional %oals2 and G misre#resentin% information on the Professional Conduct Statement or the C") Institute Professional Bevelo#ment Pro%ram* $his standard does not cover e.#ressin% o#inions re%ardin% the C") Pro%ram or C") Institute* Aembers and candidates are free to disa%ree and e.#ress their disa%reement 'ith C") Institute on its #olicies- #rocedures- or an& advocac& #ositions ta(en b& the or%ani/ation* A::&i#a!ion o !"e S!anda%d Example 1: $ravis ;ero serves as a #roctor for the administration of the C") e.amination in his cit&* In the course of his service- he revie's a co#& of the Hevel II e.amination on the evenin% #rior to the e.amination4s administration and #rovides information concernin% the e.amination 3uestions to t'o candidates 'ho use it to #re#are for the e.am* Comment, ;ero and the t'o candidates violated Standard VII())* D& %ivin% information concernin% the e.amination 3uestions to t'o candidates- ;ero #rovided an unfair advanta%e to the t'o candidates and undermined the inte%rit& and validit& of the Hevel II e.amination as an accurate measure of the (no'led%e- s(ills- and abilities necessar& to earn the ri%ht to use the C") desi%nation* D& acce#tin% the information- the candidates also com#romised the inte%rit& and validit& of the Hevel II e.amination and undermined the ethical frame'or( that is a (e& #art of the desi%nation* Example 2: Horen Sullivan is enrolled to ta(e the Hevel II C") e.amination* ,e has been havin% difficult& rememberin% a #articular formula- so #rior to enterin% 1=1 Standard VII>9es#onsibilities as a C") Institute Aember or C") Candidate the e.amination room- he 'rites the formula on the #alm of his hand* Burin% the afternoon section of the e.amination- a #roctor notices Sullivan loo(in% at the #alm of his hand* She as(s to see his hand and finds the formula to be a bit smud%ed but readable* Comment, Decause Sullivan 'rote do'n information from the Candidate Dod& of Ino'led%e and too( that 'ritten information into the e.aminationhis conduct com#romised the validit& of his e.amination- and violated Standard VII())* Sullivan4s conduct 'as also in direct contradiction of the rules and re%ulations of the C") Pro%ram- the Candidate Pled%e- and the C") Institute Code and Standards* Example 3: Prior to #artici#atin% in the C") E.amination Gradin% Pro%ramFesle& Fhitcomb is re3uired to si%n a C") Institute Grader )%reement* )s #art

of the Grader )%reement- Fhitcomb a%rees not to reveal or discuss the e.amination materials 'ith an&one e.ce#t C") Institute staff or other %raders* Several 'ee(s after the conclusion of the C") e.amination %radin%- Fhitcomb tells several collea%ues 'ho are candidates in the C") Pro%ram 'hich 3uestion he %raded* ,e also discusses the %uideline ans'er and adds that fe' candidates scored 'ell on the 3uestion* Comment, Fhitcomb violated Standard VII()) b& brea(in% the Grader )%reement and disclosin% information related to a s#ecific 3uestion on the e.amination- 'hich com#romised the inte%rit& of the e.amination #rocess* Example 4: )t the conclusion of the mornin% section of the Hevel I C") e.aminationthe #roctors announce that all candidates are to sto# 'ritin% immediatel&* ?ohn Bavis has not com#leted the e.amination- so he continues to randoml& fill in ovals on his ans'er sheet* ) #roctor a##roaches Bavis4 des( and reminds him that he should sto# 'ritin% immediatel&2 Bavis- ho'evercontinues to com#lete the ans'er sheet* )fter the #roctor as(s him to sto# 'ritin% t'o additional times- Bavis finall& #uts do'n his #encil* Comment, D& continuin% to com#lete his e.amination after time 'as calledBavis violated Standard VII())* D& continuin% to 'rite- Bavis had an unfair advanta%e over other candidates- and his conduct com#romised the validit& of his e.amination* )dditionall&- b& not heedin% the #roctor4s re#eated instructions- Bavis violated the rules and re%ulations of the C") Pro%ram* Example 5: )shlie ,oc(in% is 'ritin% Hevel II of the C") e.amination in Hondon* )fter com#letin% the e.am- she immediatel& attem#ts to contact her friend in S&dne&- )ustralia- to ti# him off to s#ecific 3uestions on the e.am* Comment, ,oc(in% has violated Standard VII(B) b& attem#tin% to %ive her friend an unfair advanta%e- thereb& com#romisin% the inte%rit& of the C") e.amination #rocess* Example 6: ?ose 9amire/ is an investment relations consultant for several small com#anies that are see(in% %reater e.#osure to investors* ,e is also the #ro%ram chair for the C") Institute societ& in the cit& 'here he 'or(s* $o the e.clusion of other com#anies- 9amire/ onl& schedules com#anies that are his clients to ma(e #resentations to the societ&* Comment, 9amire/- b& usin% his volunteer #osition at C") Institute to benefit himself and his clients- com#romises the re#utation and inte%rit& of C") Institute and- thus- violates Standard VII())* Example 7: Aar%uerite Farrens(i is a member of the C") Institute Investment Performance Council (IPC)- 'hich oversees the creation- im#lementation- and revision of the C") Institute #erformance #resentation standards1 the )IA9 PPS 1=2 9eadin% 7 @ Guidance for Standards IVII and GIPS* )s a member of the IPC- she has advance (no'led%e of confidential information re%ardin% both standards- includin% an& ne' or revised standards the committee is considerin%* She tells her clients that her IPC membershi# 'ill allo' her to assist her clients in (ee#in% u# 'ith chan%es to the standards and facilitatin% their com#liance 'ith the chan%es* Comment, Farrens(i- b& usin% her volunteer #osition at C") Institute to benefit herself and her clients- com#romises the re#utation and inte%rit& of C") Institute and- thus- violates Standard VII())* 6( Re e%en#e !o CFA In$!i!'!e@ !"e CFA De$igna!ion@ and

!"e CFA P%og%a/ H"en %e e%%ing !o CFA In$!i!'!e@ CFA In$!i!'!e /e/)e%$"i:@ !"e CFA de$igna!ion@ o% #andida#4 in !"e CFA P%og%a/@ /e/)e%$ and #andida!e$ /'$! no! /i$%e:%e$en! o% eCagge%a!e !"e /eaning o% i/:&i#a!ion$ o /e/)e%$"i: in CFA In$!i!'!e@ "o&ding !"e CFA de$igna!ion@ o% #andida#4 in !"e CFA P%og%a/( Individuals ma& reference their C") desi%nation- C") Institute membershi#- or candidac& in the C") Pro%ram but must not e.a%%erate the meanin% or im#lications of membershi# in C") Institute- holdin% the C") desi%nation- or candidac& in the C") Pro%ram* $his standard is intended to #revent #romotional efforts that ma(e #romises or %uarantees that are tied to the desi%nation* Statements referencin% C") Institutethe C") desi%nation- or the C") Pro%ram must not G over #romise the com#etenc& of an individual or G over #romise future investment results (e*%*- hi%her #erformance- lo'er ris()* Statements that hi%hli%ht or em#hasi/e the commitment of C") Institute members- C") charterholders- and C") candidates to ethical and #rofessional conduct as 'ell as the thorou%hness and ri%or of the C") Pro%ram are a##ro#riate* Aembers and candidates ma& ma(e claims about the relative merits of C") Institute- the C") Pro%ram- or the Code of Ethics as lon% as those statements are the o#inion of the s#ea(er- 'hether im#licitl& or e.#licitl& stated as o#inion* +ther'ise- statements that do not e.#ress o#inion have to be su##orted b& facts* Standard VII(D) a##lies to an& form of communication- includin% but not limited to that made in electronic or 'ritten form (such as on firm letterheadbusiness cards- #rofessional bio%ra#hies- director& listin%s- #rinted advertisin%firm brochures- or #ersonal resumes) and oral statements made to the #ublicclients- or #ros#ects* C+( !nstitute #embers i" $he term C") Institute members refers to 9e%ular and )ffiliate members of C") Institute 'ho have met the membershi# re3uirements as defined in the C") Institute D&la's* +nce acce#ted as a C") Institute member- the member must satisf& the follo'in% re3uirements to maintain his or her status1 G remit annuall& to C") Institute a com#leted Professional Conduct Statement'hich rene's the commitment to abide b& the re3uirements of the C") Institute Code of Ethics and Standards of Professional Conduct and the C") Institute Professional Conduct Pro%ram- and G #a& a##licable C") Institute membershi# dues on an annual basis* 1=3 Standard VII>9es#onsibilities as a C") Institute Aember or C") Candidate If a C") Institute member fails to meet an& one of the re3uirements listed above- then the individual is no lon%er considered an active member* Cntil their membershi# is reactivated- individuals must not hold themselves out as active members* $he& ma& state- for e.am#le- that the& 'ere C") Institute members in the #ast or reference the &ears 'hen their membershi# 'as active* 2sing t e C artered +inancial (nalyst 1esignation $hose 'ho have earned the ri%ht to use the Chartered "inancial )nal&st desi%nation ma& use the mar(s Chartered "inancial )nal&st or C") and are encoura%ed to do so but onl& in a manner that does not misre#resent or e.a%%erate the meanin% or im#lications of the desi%nation* $he use of the desi%nation

ma& be accom#anied b& an accurate e.#lanation of the re3uirements that have been met to earn the ri%ht to use the desi%nation* C") charterholders are those individuals 'ho have earned the ri%ht to use the Chartered "inancial )nal&st desi%nation %ranted b& C") Institute* $hese are #eo#le 'ho have satisfied certain re3uirements- includin% com#letion of the C") Pro%ram and re3uired &ears of acce#table 'or( e.#erience* +nce %ranted the ri%ht to use the desi%nation- individuals must also satisf& the C") Institute membershi# re3uirements (see above) to maintain their ri%ht to use the desi%nation* If a C") charterholder fails to meet an& one of the membershi# re3uirementshe or she forfeits the ri%ht to use the C") desi%nation* Cntil reactivatedindividuals must not hold themselves out as C") charterholders* $he& ma& statefor e.am#le- that the& 'ere charterholders in the #ast* Referencing Candidacy in t e C+( Program Candidates in the C") Pro%ram ma& reference their #artici#ation in the C") Pro%ram- but the reference must clearl& state that an individual is a candidate in the C") Pro%ram and must not im#l& that the candidate has achieved an& t&#e of #artial desi%nation* ) #erson is a candidate in the C") Pro%ram if1 G the #erson4s a##lication for re%istration in the C") Pro%ram has been acce#ted b& C") Institute- as evidenced b& issuance of a notice of acce#tanceand the #erson is enrolled to sit for a s#ecified e.amination2 or G the re%istered #erson has sat for a s#ecified e.amination but e.am results have not &et been received* If an individual is re%istered for the C") Pro%ram but declines to sit for an e.am or other'ise does not meet the definition of a candidate as described in the C") Institute D&la's- then that individual is no lon%er considered an active candidate* +nce the #erson is enrolled to sit for a future e.amination- his or her C") candidac& resumes* C") candidates must never state or im#l& a #artial desi%nation for #assin% one or more levels or cite an e.#ected com#letion date of an& level of the C") Pro%ram* "inal a'ard of the charter is sub5ect to meetin% the C") Pro%ram re3uirements and a##roval b& the C") Institute Doard* If a candidate #asses each level of the e.am on the first tr& and 'ants to state that he or she did so- that is not a violation of Standard VII(D) because it is a statement of fact* If the candidate then %oes on to claim or im#l& su#erior abilit& b& obtainin% the desi%nation in onl& three &ears- he or she is in violation of the standard* $he follo'in% statements illustrate #ro#er and im#ro#er references to the C") desi%nation1 1=4 9eadin% 7 @ Guidance for Standards IVII !m"ro"er References G C") charterholders achieve better #erformance results* G ?ohn Smith is amon% the elite- havin% #assed all three C") e.aminations in three consecutive attem#ts* G )s a C") charterholder- I am the most 3ualified to mana%e client investments* G C")- Hevel II G C")- E.#ected 7!!8

Pro"er References G Com#letion of the C") Pro%ram has enhanced m& #ortfolio mana%ement s(ills* G ?ohn Smith #assed all three C") e.aminations in three consecutive &ears* G $he C") desi%nation is %loball& reco%ni/ed and attests to a charterholder4s success in a ri%orous and com#rehensive stud& #ro%ram in the field of investment mana%ement and research anal&sis* G $he credibilit& that the C") desi%nation affords and the s(ills the C") Pro%ram cultivates are (e& assets for m& future career develo#ment* G )s a C") charterholder I am committed to the hi%hest ethical standards* G I enrolled in the C") Pro%ram to obtain the hi%hest set of credentials in the %lobal investment mana%ement industr&* G I #assed Hevel I of the C") e.amination* G I am a 7!!L Hevel III C") candidate* G I #assed all three levels of the C") Pro%ram and 'ill be eli%ible for the C") charter u#on com#letion of the re3uired 'or( e.#erience* Pro"er 2sage of t e C+( #arks C#on obtainin% the C") charter from C") Institute- charterholders are %iven the ri%ht to use the C") trademar(s- includin% Chartered "inancial )nal&stC")- and the C") Ho%o (a certification mar()* $hese trademar(s are re%istered b& C") Institute in countries around the 'orld* G $he Chartered "inancial )nal&st and C") mar(s must al'a&s be used either after a charterholder4s name or as ad5ectives (never as nouns) in 'ritten documents or oral conversations* "or e.am#le- to refer to oneself as a C") or a Chartered "inancial )nal&st is im#ro#er* G $he C") Ho%o certification mar( is used b& charterholders as a distinctive visual s&mbol of the C") desi%nation that can be easil& reco%ni/ed b& em#lo&ers- collea%ues- and clients* )s a certification mar(- it must onl& be used to directl& reference an individual charterholder or %rou# of charterholders* C") charterholders should refer to %uidelines #ublished b& C") Institute that #rovide additional information and e.am#les illustratin% #ro#er and im#ro#er use of the C") Ho%o- Chartered "inancial )nal&st- and C") mar(s* $hese %uidelines and the C") Ho%o are available on the C") Institute 'ebsite at '''*cfainstitute*or%EmemservicesEcfa%uide*html* 1=3 Standard VII>9es#onsibilities as a C") Institute Aember or C") Candidate 1=5 9eadin% 7 @ Guidance for Standards IVII EEHI6IT 2D2 Co%%e#! and In#o%%e#! U$e o !"e C"a%!e%ed Finan#ia& Ana&4$! and CFA Ma%8$ In#o%%e#! P%in#i:&e Co%%e#! I have #assed all three levels of the C") Pro%ram and ma& be eli%ible for the C") charter u#on com#letion of the re3uired 'or( e.#erience* ) candidate 'ho has

#assed Hevel III but has not &et received his or her charter cannot use the C") or Chartered "inancial )nal&st desi%nation* C") (Passed "inalist) Passed Hevel I of the C") e.amination in 7!!7* ;o desi%nation e.ists for someone 'ho has #assed Hevel I- Hevel II- or Hevel III of the e.am* $he C") desi%nation should not be referred to as a de%ree* C") Hevel I* C") de%ree e.#ected in 7!!=* Hevel I candidate in the C") Pro%ram* Candidates in the C") Pro%ram must not cite the e.#ected date of e.am com#letion and a'ard of charter* Chartered "inancial )nal&st (C"))Se#tember 7!!X* ?ane Smith- C") ?ohn Boe- Chartered "inancial )nal&st $he C") desi%nation should not be %iven more #rominence (e*%*- lar%erbold) than the charterholder4s name* ?ane Smith- CFA ?ohn Boe- C"a%!e%ed Finan#ia& Ana&4$! ?ohn ?onesChartered "inancial )nal&st $he desi%nation must not be used as #art of the name of a firm* ?ones Chartered "inancial )nal&sts- Inc* ?ohn ?ones- C") Bo not alter the desi%nation to create ne' 'ords

or #hrases* ?ohn- a C") t&#e #ortfolio mana%er* $he focus is on Chartered "inancial )nal&sis* C") e3uivalent #ro%ram* S'iss C") ?ane Smith- C") ;o #eriods* )l'a&s ca#itali/e the letters C") ?ane Smith- C*"*)* ?ohn Boe- cfa ,e is one of t'o C") charterholders in the com#an&* ,e earned the ri%ht to use the Chartered "inancial )nal&st desi%nation* $he C") and Chartered "inancial )nal&st desi%nations must al'a&s be used as ad5ectives- never as nouns or common names* ,e is one of t'o C")s in the com#an&* ,e is a Chartered "inancial )nal&st* 3E& ibit continued on ne&t "age 45 Re#o//ended P%o#ed'%e$ o% Co/:&ian#e It is common for references to a member4s C") desi%nation or C") candidac& to be misused or im#ro#erl& referenced b& others 'ithin a member or candidate4s firm 'ho do not #ossess (no'led%e of the re3uirements of Standard VII(D)* )s an a##ro#riate ste# to reduce this ris(- members and candidates should disseminate 'ritten information on Standard VII(D) and the accom#an&in% %uidance to their firm4s le%al- com#liance- #ublic relations- and mar(etin% de#artments* Information on #ro#er use of the desi%nation can be found on the C") Institute 'ebsite at1 '''*cfainstitute*or%EmemservicesE#dfEtrademar(Gusa%e*#df* "or materials that reference em#lo&ees4 affiliation 'ith C") Institute- members and candidates should encoura%e their firms to create tem#lates that are a##roved b& a central authorit& (such as the com#liance de#artment) as bein% consistent 'ith Standard VII(D)* $his #ractice 'ould #romote consistenc& and accurac& of references to C") Institute membershi#- the C") desi%nation- and C") candidac& 'ithin the firm* A::&i#a!ion o !"e S!anda%d Example 1: )n advertisement for )S Investment )dvisors states that all the firm4s #rinci#als are C") charterholders and all #assed the three e.aminations on their first attem#t* $he advertisement #rominentl& lin(s this fact to the notion that )S4s mutual funds have achieved su#erior #erformance*

Comment, )S ma& state that all #rinci#als #assed the three e.aminations on the first tr& as lon% as this statement is true and is not lin(ed to #erformance or does not im#l& su#erior abilit&* Im#l&in% that (0) C") charterholders achieve better investment results and (7) those 'ho #ass the e.ams on the first tr& ma& be more successful than those 'ho do not violates Standard VII(D)* Example 2: "ive &ears after receivin% his C") charter- Houis Vasseur resi%ns his #osition as an investment anal&st and s#ends the ne.t t'o &ears travelin% abroad* Decause he is not activel& en%a%ed in the investment #rofession- he does not file a com#leted Professional Conduct Statement 'ith C") Institute and does not #a& his C") Institute membershi# dues* )t the conclusion of his travels- Vasseur becomes a self em#lo&ed anal&st- acce#tin% assi%nments as an inde#endent contractor* Fithout reinstatin% his C") Institute membershi# b& filin% his Professional Conduct Statement and #a&in% his dues- he #rints business cards that dis#la& C") after his name* Comment, Vasseur has violated Standard VII(D) because Vasseur4s ri%ht to use the C") desi%nation 'as sus#ended 'hen he failed to file his Professional Conduct Statement and sto##ed #a&in% dues* $herefore- he no lon%er is able 1=7 Standard VII>9es#onsibilities as a C") Institute Aember or C") Candidate EEHI6IT 2D2 0#on!in'ed2 C")- 7!!0- C") Institute- (o#tional1 CharlottesvilleVir%inia- CS)) In citin% the desi%nation in a resume- a charterholder should use the date that he or she received the desi%nation and should cite C") Institute as the conferrin% bod&* C")- 7!!0- CI Societ& of Investment Professionals to state or im#l& that he is an active C") charterholder* Fhen Vasseur files his Professional Conduct Statement and resumes #a&in% C") Institute dues to activate his membershi#- he 'ill be eli%ible to use the C") desi%nation u#on satisfactor& com#letion of C") Institute reinstatement #rocedures* Example 3: )fter a 78 &ear career- ?ames Sim#son retires from his firm* Decause he is not activel& en%a%ed in the investment #rofession- he does not file a com#leted Professional Conduct Statement 'ith C") Institute and does not #a& his C") Institute membershi# dues* Sim#son desi%ns a #lain business card ('ithout a cor#orate lo%o) to hand out to friends 'ith his ne' contact details- and he continues to #ut C") after his name* Comment, Sim#son has violated Standard VII(D)* If he 'ants to obtain retired status in terms of his C") Institute membershi# and C") charter status- he needs to file the a##ro#riate #a#er'or( 'ith C") Institute to be reco%ni/ed as such* D& failin% to file his Professional Conduct Statement and

ceasin% to #a& dues- his membershi# is sus#ended and he %ives u# his ri%ht to use the C") desi%nation* Fhen Sim#son receives his notification from C") Institute that his membershi# has been reclassified as retired and he resumes #a&in% reduced dues- his membershi# 'ill be reactivated and his ri%ht to use the C") desi%nation 'ill be reinstated* Example 4: )sia "utures Htd is a small 3uantitative investment advisor& firm* $he firm ta(es %reat #ride in the fact that all its em#lo&ees are C") charterholders* $o underscore this fact- the firm4s senior #artner is #ro#osin% to chan%e the firm4s letterhead to include the follo'in%1 )sia "utures Htd* Comment, $he C") Ho%o is a certification mar( intended to identif& individual charterholders and must not be incor#orated into a com#an& name- confused 'ith a com#an& lo%o- or #laced in such close #ro.imit& to a com#an& name or lo%o as to %ive the reader the idea that the certification mar( certifies the com#an&* It 'ould onl& be a##ro#riate to use the C") Ho%o on the business card or letterhead of each individual C") charterholder* Example 5: 9honda 9eese has been a C") charterholder since 7!!!* In a conversation 'ith a friend 'ho is considerin% enrollin% in the C") Pro%ram- she states that she has learned a %reat deal from the C") Pro%ram and that man& firms re3uire their em#lo&ees to be C") charterholders* She 'ould recommend the C") Pro%ram to an&one #ursuin% a career in investment mana%ement* Comment, 9eese4s comments com#l& 'ith Standard VII(D)* ,er statements refer to enhanced (no'led%e and the fact that man& firms re3uire the C") desi%nation for their investment #rofessionals* Example 6: $atiana Prittima has earned both her C") desi%nation and a PhB in finance* She 'ould li(e to cite both her accom#lishments on her business card but is unsure of the #ro#er method for doin% so* Comment, $he order of desi%nations cited on such items as resumes and business cards is a matter of #ersonal #reference* Prittima is free to cite the C") desi%nation either before or after listin% her PhB* 1=9 9eadin% 7 @ Guidance for Standards IVII 1=; Problems for 9eadin% 7 PRO6LEMS FOR READING 2 Cnless other'ise stated in the 3uestion- all individuals in the follo'in% 3uestions are C") Institute members or candidates in the C") #ro%ram and- thereforeare sub5ect to the C") Institute Code of Ethics and Standards of Professional Conduct* 1( Smith- a research anal&st 'ith a bro(era%e firm- decides to chan%e his recommendation on the common stoc( of Green Com#an&- Inc*- from a bu& to a sell* ,e mails this chan%e in investment advice to all the firm4s clients on Fednesda&* $he da& after the mailin%- a client calls 'ith a bu& order for 8!! shares of Green Com#an&* In this circumstance- Smith should1 A( )cce#t the order* 6( )dvise the customer of the chan%e in recommendation before acce#tin% the order* C( ;ot acce#t the order until five da&s have ela#sed after the communication of the chan%e in recommendation*

D( ;ot acce#t the order because it is contrar& to the firm4s recommendation* 2( )ll of the follo'in% statements about a mana%er4s use of clients4 bro(era%e commissions are true e&ce"t1 A( Clients ma& direct a mana%er to use that client4s bro(era%e commissions to #urchase good$ and $e%.i#e$ for that client* 6( Client bro(era%e commissions ma& be used b& the mana%er to #a& for securities research used in mana%in% the client4s #ortfolio* C( Client bro(era%e commissions should be used to benefit the client and should be commensurate 'ith the value of the bro(era%e and research services received* D( Client bro(era%e commissions ma& be directed to #a& for the investment mana%er4s o#eratin% e.#enses* 3( ?amison is a 5unior research anal&st 'ith ,o'ard O ,o'ard- a bro(era%e and investment ban(in% firm* ,o'ard O ,o'ard4s mer%ers and ac3uisitions de#artment has re#resented the Dritland Com#an& in all of its ac3uisitions for the #ast 7! &ears* $'o of ,o'ard O ,o'ard4s senior officers are directors of various Dritland subsidiaries* ?amison has been as(ed to 'rite a research re#ort on Dritland* Fhat is the best course of action for her to follo'T A( ?amison ma& 'rite the re#ort but must refrain from e.#ressin% an& o#inions because of the s#ecial relationshi#s bet'een the t'o com#anies* 6( ?amison ma& 'rite the re#ort so lon% as the officers a%ree not to alter it* C( ?amison ma& 'rite the re#ort if she discloses the s#ecial relationshi#s 'ith the com#an& in the re#ort* D( ?amison should not 'rite the re#ort because the t'o ,o'ard officers are constructive insiders* 4( Fhich of the follo'in% statements clearl& conflicts 'ith the recommended #rocedures for com#liance #resented in C") Institute4s Standards of Practice HandbookT A( "irms should disclose to clients the #ersonal investin% #olicies and #rocedures established for their em#lo&ees* 6( Prior a##roval must be obtained for the #ersonal investment transactions of all em#lo&ees* No!e "ormattin% conventions on some of the 3uestions are no lon%er used on C") e.aminations* 11= 9eadin% 7 @ Guidance for Standards IVII C( "or confidentialit& reasons- #ersonal transactions and holdin%s should not be re#orted to em#lo&ers unless mandated b& re%ulator& or%ani/ations* D( Personal transactions should be defined as includin% transactions in securities o'ned b& the em#lo&ee and members of his or her immediate famil& and transactions involvin% securities in 'hich the em#lo&ee has a beneficial interest* 3( Dronson #rovides investment advice to the board of trustees of a #rivate universit& endo'ment fund* $he trustees have #rovided Dronson 'ith the fund4s financial information- includin% #lanned e.#enditures* Dronson receives a #hone call on "rida& afternoon from Aurdoc(- a #rominent

alumnus- re3uestin% that Dronson fa. him com#rehensive financial information about the fund* )ccordin% to Aurdoc(- he has a #otential contributor but needs the information that da& to close the deal and cannot contact an& of the trustees* Dased on C") Institute Standards- Dronson should1 A( Send Aurdoc( the information because disclosure 'ould benefit the client* 6( ;ot send Aurdoc( the information to #reserve confidentialit&* C( Send Aurdoc( the information- #rovided Dronson #rom#tl& notifies the trustees* D( Send Aurdoc( the information because it is not material non#ublic information* 5( Ailler heads the research de#artment of a lar%e bro(era%e firm* $he firm has man& anal&sts- some of 'hom are sub5ect to the Code and Standards* If Ailler dele%ates some su#ervisor& duties- 'hich statement best describes her res#onsibilities under the Code and StandardsT A( Ailler4s su#ervisor& res#onsibilities do not a##l& to those subordinates 'ho are not sub5ect to the Code and Standards* 6( Ailler no lon%er has su#ervisor& res#onsibilit& for those duties dele%ated to her subordinates* C( Ailler retains su#ervisor& res#onsibilit& for all subordinates des#ite her dele%ation of some duties* D( C") Institute4s Standards #revent Ailler from dele%atin% su#ervisor& duties to subordinates* 7( Fillier is the research anal&st res#onsible for follo'in% Com#an& V* )ll the information he has accumulated and documented su%%ests that the outloo( for the firm4s ne' #roducts is #oor- so the stoc( should be rated a 'ea( hold* Burin% lunch- ho'ever- Fillier overhears a financial anal&st from another firm 'hom he res#ects offer o#inions that conflict 'ith Fillier4s forecasts and e.#ectations* C#on returnin% to his office- Fillier releases a stron% bu& recommendation to the #ublic* Fillier1 A( Fas in full com#liance 'ith the Standards* 6( Violated the Standards b& failin% to distin%uish bet'een facts and o#inions in his recommendation* C( Violated the Standards because he did not see( a##roval of the chan%e from his firm4s com#liance de#artment* D( Violated the Standards because he did not have a reasonable and ade3uate basis for his recommendation* 9( )n investment mana%ement firm has been hired b& E$V Cor#oration to 'or( on an initial #ublic offerin% for the com#an&* $he firm4s bro(era%e unit no' has a sell recommendation on E$V- but the head of the investment 111 Problems for 9eadin% 7 ban(in% de#artment has as(ed the head of the bro(era%e unit to chan%e the recommendation from sell to bu&* )ccordin% to the Standards- the head of the bro(era%e unit 'ould be #ermitted to1 A( Increase the recommendation b& no more than one increment (in this case- to a hold recommendation)* 6( Place the com#an& on a restricted list and %ive onl& factual information about the firm*

C( )ssi%n a ne' anal&st to decide if the stoc( deserves a hi%her ratin%* D( 9eassi%n res#onsibilit& for ratin% the stoc( to the head of the investment ban(in% unit* ;( )lbert and $&e- 'ho recentl& started their o'n investment advisor& businesshave re%istered to ta(e the Hevel III C") e.amination* )lbert4s business card reads- ?ud& )lbert- C") Hevel II* $&e has not #ut an&thin% about the C") desi%nation on his business card- but #romotional material that he desi%ned for the business describes the C") re3uirements and indicates that $&e #artici#ates in the C") Pro%ram and has com#leted Hevels I and II* )ccordin% to the Standards1 A( )lbert has violated the Standards but $&e has not* 6( $&e has violated the Standards but )lbert has not* C( Doth )lbert and $&e have violated the Standards* D( ;either )lbert nor $&e has violated the Standards* 1=( Scott 'or(s for a re%ional bro(era%e firm* ,e estimates that Fal(ton Industries 'ill increase its dividend b& R0*8! a share durin% the ne.t &ear* ,e reali/es that this increase is contin%ent on #endin% le%islation that 'ould- if enacted- %ive Fal(ton a substantial ta. brea(* $he C*S* re#resentative for Fal(ton4s home district has told Scott that- althou%h she is lobb&in% hard for the bill and #ros#ects for #assa%e loo( %ood- Con%ress4s concern over the federal deficit could cause the ta. bill to be voted do'n* Fal(ton has not made an& statements re%ardin% a chan%e in dividend #olic&* Scott 'rites in his research re#ort- Fe e.#ect Fal(ton4s stoc( #rice to rise b& at least RQ*!! a share b& the end of the &ear* Decause the dividend 'ill increase b& R0*8! a share- the stoc( #rice %ain 'ill be fueled- in lar%e #art- b& the increase in the dividend* Investors bu&in% the stoc( at the current time should e.#ect to reali/e a !o!a& %e!'%n of at least 08 #ercent on the stoc(* Fhich of the follo'in% isEare trueT I* Scott violated the Standards because he used material inside information* II* Scott violated the Standards because he failed to se#arate o#inion from fact* III* Scott did not violate the Standards* A( I onl&* 6( II onl&* C( I and II onl&* D( III onl&* 11( Fhich one of the follo'in% actions 'ill not hel# to ensure the fair treatment of bro(era%e firm clients 'hen a ne' investment recommendation is madeT A( Himit the number of #eo#le in the firm 'ho are a'are in advance that a recommendation is to be disseminated* 6( Bistribute recommendations to institutional clients #rior to individual accounts* 112 9eadin% 7 @ Guidance for Standards IVII C( Ainimi/e ela#sed time bet'een the decision and the dissemination of a recommendation* D( Aonitor the tradin% activities of firm #ersonnel* 12( $he mosaic theor& holds that an anal&st1 A( Violates the Code and Standards if the anal&st fails to have (no'led%e of

and com#l& 'ith a##licable la's* 6( Can use material #ublic information or nonmaterial non#ublic information in the anal&st4s anal&sis* C( Should use all available and relevant information in su##ort of an investment recommendation* D( Should distin%uish bet'een facts and o#inions in research re#orts* 13( ?ur%ens is a #ortfolio mana%er* +ne of her firm4s clients has told ?ur%ens that he 'ill com#ensate her be&ond that #rovided b& her firm on the basis of the ca#ital a##reciation of his #ortfolio each &ear* ?ur%ens should1 A( $urn do'n the additional com#ensation because it 'ill result in conflicts 'ith the interests of other clients4 accounts* 6( 9eceive #ermission from C") Institute for the com#ensation arran%ement* C( +btain #ermission from her em#lo&er #rior to acce#tin% the com#ensation arran%ement* D( $urn do'n the additional com#ensation because it 'ill create undue #ressure on her to achieve stron% short term #erformance* 14( +ne of the discretionar& accounts mana%ed b& "arns'orth is the ?ones Cor#oration em#lo&ee #rofit sharin% #lan* ?ones- the com#an& #residentrecentl& as(ed "arns'orth to vote the shares in the #rofit sharin% #lan in favor of the com#an& nominated slate of directors and a%ainst the directors s#onsored b& a dissident stoc(holder %rou#* "arns'orth does not 'ant to lose this account because he directs all the account4s trades to a bro(era%e firm that #rovides "arns'orth 'ith useful information about ta. free investments* )lthou%h this information is not of value in mana%in% the ?ones Cor#oration account- it does hel# in mana%in% several other accounts* $he bro(era%e firm #rovidin% this information also offers the lo'est commissions for trades and best e.ecution* "arns'orth investi%ates the director issue- concludes that mana%ement4s slate is better for the lon% run #erformance of the firm than the dissident %rou#4s slate- and votes accordin%l&* "arns'orth1 A( Violated the Standards in votin% the shares in the manner re3uested b& ?ones but not in directin% trades to the bro(era%e firm* 6( Bid not violate the Standards in votin% the shares in the manner re3uested b& ?ones or in directin% trades to the bro(era%e firm* C( Violated the Standards in directin% trades to the bro(era%e firm but not in votin% the shares as re3uested b& ?ones* D( Violated the Standards in votin% the shares in the manner re3uested b& ?ones and in directin% trades to the bro(era%e firm* 13( Dro'n 'or(s for an investment counselin% firm* Green- a ne' client of the firm- is meetin% 'ith Dro'n for the first time* Green used another counselin% firm for financial advice for &ears- but she has s'itched her account to Dro'n4s firm* )fter s#endin% a fe' minutes %ettin% ac3uainted- Dro'n e.#lains to Green that she has discovered a hi%hl& undervalued stoc( that offers lar%e #otential %ains* She recommends that Green #urchase the 113 Problems for 9eadin% 7 stoc(* Dro'n has committed a violation of the Standards* Fhat should she have done differentl&T A( Dro'n should have determined Green4s needs- ob5ectives- and tolerance

for ris( before ma(in% a recommendation for an& t&#e of securit&* 6( Dro'n should have as(ed Green her reasons for chan%in% counselin% firms* If the discover& #rocess indicated that Green had been treated unfairl& at the other firm- Dro'n should have notified C") Institute of an& violation* C( Dro'n should have thorou%hl& e.#lained the characteristics of the com#an& to Green- includin% the characteristics of the industr& in 'hich the com#an& o#erates* D( Dro'n should have e.#lained her 3ualifications- includin% her educationtrainin%- e.#erience- and the meanin% of the C") desi%nation* 15( Gre& recommends the #urchase of a mutual fund that invests solel& in lon%term C*S* $reasur& bonds* ,e ma(es the follo'in% statements to his clients1 I* $he #a&ment of the bonds is %uaranteed b& the C*S* %overnment2 therefore- the default ris( of the bonds is virtuall& /ero* II* If &ou invest in the mutual fund- &ou 'ill earn a 0! #ercent rate of return each &ear for the ne.t several &ears based on historical #erformance of the stoc( mar(et* Bid Gre&4s statements violate the C") Institute Code and StandardsT A( Statement I and II violated the Code and Standards* 6( +nl& statement I violated the Code and Standards* C( +nl& statement II violated the Code and Standards* D( ;either statement violated the Code and Standards* 17( )nderb- a #ortfolio mana%er for VPS Investment Aana%ement Com#an&> a re%istered investment or%ani/ation that advises investment com#anies and #rivate accounts>'as #romoted to that #osition three &ears a%o* Dates- her su#ervisor- is res#onsible for revie'in% )nderb4s #ortfolio account transactions and her re3uired monthl& re#orts of #ersonal stoc( transactions* )nderb has been usin% ?onelli- a bro(er- almost e.clusivel& for #ortfolio account bro(era%e transactions* "or securities in 'hich ?onelli4s firm ma(es a mar(et- ?onelli has been %ivin% )nderb lo'er #rices for #ersonal #urchases and hi%her #rices for #ersonal sales than ?onelli %ives to )nderb4s #ortfolio accounts and other investors* )nderb has been filin% monthl& re#orts 'ith Dates onl& for those months in 'hich she has no #ersonal transactions- 'hich is about ever& fourth month* Fhich of the follo'in% a##liesEa##l&T I* )nderb violated the Code and Standards in that she failed to disclose to her em#lo&er her #ersonal transactions* II* )nderb violated the Code and Standards b& breachin% her fiduciar& res#onsibilit& to her clients* III* Dates violated the Code and Standards b& failin% to enforce reasonable #rocedures for su#ervisin% and monitorin% )nderb4s tradin% for her o'n account* A( I onl&* 6( I and II onl&* C( II and III onl&* D( I- II- and III* 114 9eadin% 7 @ Guidance for Standards IVII 19( Fhich of the follo'in% isEare a correct statement of a member and candidate4s

dut& under the Code and StandardsT I* In the absence of s#ecific a##licable la' or other re%ulator& re3uirementsthe Code and Standards %overn the member and candidate4s actions* II* ) member or candidate is re3uired to com#l& onl& 'ith a##licable local la's- rules- re%ulations- or customs even thou%h the C") Institute Code and Standards ma& im#ose a hi%her de%ree of res#onsibilit& or a hi%her dut& on the member or candidate* III* ) member or candidate 'ho trades securities in a securities mar(et 'here no a##licable local la's or stoc( e.chan%e rules re%ulate the use of material non#ublic information ma& ta(e investment action based on material non#ublic information* A( I onl&* 6( III onl&* C( II and III onl&* D( I and II onl&* 1;( Fard is scheduled to visit the cor#orate head3uarters of Evans Industries* Fard e.#ects to use the information obtained to com#lete his research re#ort on Evans stoc(* Fard learns that Evans #lans to #a& all of Fard4s e.#enses for the tri#- includin% costs of meals- hotel room- and air trans#ortation* Fhich of the follo'in% actions 'ould be the best course for Fard to ta(e under the Code and StandardsT A( )cce#t the e.#ense #aid tri# and 'rite an ob5ective re#ort* 6( Pa& for all travel e.#enses- includin% costs of meals and incidental items* C( )cce#t the e.#ense #aid tri# but disclose the value of the services acce#ted in the re#ort* D( Frite the re#ort 'ithout ta(in% the tri#* 2=( Fhich of the follo'in% statements isEare correct under the Code and StandardsT I* C") Institute members and candidates are #rohibited from underta(in% inde#endent #ractice in com#etition 'ith their em#lo&er* II* Fritten consent from the em#lo&er is necessar& to #ermit inde#endent #ractice that could result in com#ensation or other benefit in com#etition 'ith a member or candidate4s em#lo&er* III* Prior to leavin% an em#lo&er to 'or( for another firm or start an inde#endent #ractice- members and candidates ma& not contact their clients to solicit their business for the ne' venture* IV* Aembers and candidates are #rohibited from ma(in% arran%ements or #re#arations to %o into a com#etitive business before terminatin% their relationshi# 'ith their em#lo&er* A( I and IV onl&* 6( II- III- and IV onl&* C( II and III onl&* D( IV onl&* 113 Problems for 9eadin% 7 21( Smithers is a financial anal&st 'ith VPS Dro(era%e Com#an&* She is #re#arin% a #urchase recommendation on ?;I Cor#oration* Fhich of the follo'in%

situations 'ould re#resent a conflict of interest for Smithers and- therefore'ould have to be disclosedT I* Smith is on retainer as a consultant to ?;I* II* VPS holds for its o'n account a substantial common stoc( #osition in ?;I* III* Smith has material beneficial o'nershi# of ?;I throu%h a famil& trust* IV* Smith4s brother in la' is a su##lier to ?;I* A( II and III onl&* 6( I and IV onl&* C( I- II- and III onl&* D( I- II- and IV onl&* 22( Aichelieu tells a #ros#ective client- I ma& not have a lon% term trac( record &et- but I4m sure that &ou4ll be ver& #leased 'ith m& recommendations and service* In the three &ears that I4ve been in the business- m& e3uit& oriented clients have avera%ed a total return of more than 7= #ercent a &ear* $he statement is true- but Aichelieu onl& has a fe' clients- and one of his clients too( a lar%e #osition in a #enn& stoc( (a%ainst Aichelieu4s advice) and reali/ed a hu%e %ain* $his lar%e return caused the avera%e of all of Aichelieu4s clients to e.ceed 7= #ercent a &ear* Fithout this one investmentthe avera%e %ain 'ould have been Q #ercent a &ear* ,as Aichelieu violated the StandardsT A( Pes- because the statement about return i%nores the ris( #references of his clients* 6( ;o- because Aichelieu is not #romisin% that he can earn a 7= #ercent return in the future* C( ;o- because the statement is a true and accurate descri#tion of Aichelieu4s trac( record* D( Pes- because the statement misre#resents Aichelieu4s trac( record* 23( )n investment ban(in% de#artment of a bro(era%e firm often receives material non#ublic information that could have considerable value if used in advisin% the firm4s bro(era%e clients* In order to conform to the Code and Standards- 'hich one of the follo'in% is the best #olic& for the bro(era%e firmT A( Permanentl& #rohibit both #urchase and sell recommendations of the stoc(s of clients of the investment ban(in% de#artment* 6( Establish #h&sical and informational barriers 'ithin the firm to #revent the e.chan%e of information bet'een the investment ban(in% and bro(era%e o#erations* C( Prohibit #urchase recommendations 'hen the investment ban(in% de#artment has access to material non#ublic information but- in vie' of the fiduciar& obli%ation to clients- allo' sale of current holdin%s* D( Aonitor the e.chan%e of information bet'een the investment ban(in% de#artment and the bro(era%e o#eration* 24( Ste'art has been hired b& Goodner Industries- Inc*- to mana%e its #ension fund* Ste'art4s fiduciar& dut& is o'ed to1 A( $he mana%ement of Goodner* 6( $he shareholders of Goodner* 115 9eadin% 7 @ Guidance for Standards IVII

C( $he #artici#ants and beneficiaries of Goodner4s #ension #lan* D( Each of the above e3uall&* 23( $he stated #ur#oses of Standard VI(C)>Bisclosure of 9eferral "ees- are to1 I* ,el# the customer or client evaluate the full cost of the services* II* ,el# the customer or client evaluate an& #ossible #artialit& sho'n in the recommendation of services* III* ,el# the customer or client evaluate #otential conflicts of interest as a result of the #artici#ation of immediate famil& in transactions* A( I and II onl&* 6( II and III onl&* C( I and III onl&* D( I- II- and III* 117 $he ob5ective of this readin% is to orient the Hevel I candidate a##roachin% the assi%ned sections of the GIPS standards* $he #resent note e.#lains 'h& the GIPS standards 'ere created- 'ho can claim com#liance- and 'ho benefits from com#liance* It also introduces the (e& notion of com#osites- states the #ur#ose of verification- and #revie's the structure of the Standards* I( H"4 He%e !"e GIPS S!anda%d$ C%ea!edK Institutions and individuals are constantl& scrutini/in% #ast investment #erformance returns in search of the best mana%er to achieve their investment ob5ectives* LEARNING OUTCOMES Reading 3: In!%od'#!ion !o !"e G&o)a& In.e$!/en! Pe% o%/an#e S!anda%d$ 0GIPS12 and Reading 4: G&o)a& In.e$!/en! Pe% o%/an#e S!anda%d$ 0GIPS12 $he candidate should be able to1 a( e.#lain 'h& the GIPS standards 'ere created- 'hat #arties the GIPS standards a##l& to and 'ho is served b& the standards2 )( describe the (e& characteristics of the GIPS standards and the fundamentals of com#liance2 #( e.#lain the construction and #ur#ose of com#osites in #erformance re#ortin%2 d( describe the sco#e of the GIPS standards 'ith res#ect to an investment firm4s definition and historical #erformance record2 e( e.#lain ho' the GIPS standards are im#lemented in countries 'ith e.istin% standards for #erformance re#ortin% and describe the a##ro#riate res#onse 'hen the GIPS standards and local re%ulations are in conflict2 ( name and characteri/e the ei%ht ma5or sections of the GIPS standards2 g( e.#lain the re3uirements for verification of com#liance 'ith GIPS standards* READING 3 Co#&ri%ht 6 7!!8- C") Institute* 9e#rinted 'ith #ermission* INTRODUCTION TO THE GLO6AL IN-ESTMENT PERFORMANCE STANDARDS 0GIPS12 In the #ast- the investment communit& had %reat difficult& ma(in% meanin%ful com#arisons on the basis of accurate investment #erformance data* Several #erformance measurement #ractices hindered the com#arabilit& of #erformance returns from one firm to another- 'hile others called into 3uestion the accurac& and credibilit& of #erformance re#ortin% overall* Aisleadin% #ractices

included1 G 9e#resentative )ccounts1 Selectin% a to# #erformin% #ortfolio to re#resent the firm4s overall investment results for a s#ecific mandate* G 1 Presentin% an avera%e #erformance histor& that e&cludes accounts 'hose #oor #erformance 'as 'ea( enou%h to result in termination of the firm* G Var&in% $ime Periods1 Presentin% #erformance for a selected time #eriod durin% 'hich the mandate #roduced e.cellent returns or out #erformed its benchmar(>ma(in% com#arison 'ith other firms4 results im#ossible* Aa(in% a valid com#arison of investment #erformance amon% even the most ethical investment mana%ement firms 'as #roblematic* "or e.am#le- a #ension fund see(in% to hire an investment mana%ement firm mi%ht receive #ro#osals from several firms- all usin% different methodolo%ies for calculatin% their results* $he GIPS standards are a #ractitioner driven set of ethical #rinci#les that establish a standardi/ed- industr& 'ide a##roach for investment firms to follo' in calculatin% and re#ortin% their historical investment results to #ros#ective clients* $he GIPS standards ensure fair re#resentation and full disclosure of #erformance information* In other 'ords- the GIPS standards lead investment mana%ement firms to avoid misre#resentations of #erformance and to communicate all relevant information that #ros#ective clients should (no' in order to evaluate #ast results* II( H"o Can C&ai/ Co/:&ian#eK "irst- an& investment mana%ement firm ma& choose to com#l& 'ith the GIPS standards* Com#l&in% 'ith the GIPS standards is voluntar&* Com#liance 'ith the GIPS standards is not re3uired b& an& le%al or re%ulator& authorities* Second- onl& investment mana%ement firms that actually manage assets can claim com#liance 'ith the Standards* Plan s#onsors and consultants cannot ma(e a claim of com#liance unless the& actuall& mana%e assets for 'hich the& are ma(in% a claim of com#liance* $he& can claim to endorse the Standards andEor re3uire that their investment mana%ers com#l& 'ith the Standards* Similarl&soft'are (and the vendors 'ho su##l& soft'are) cannot be com#liant* Soft'are can assist firms in achievin% GIPS com#liance (e*%*- b& calculatin% #erformance in a manner consistent 'ith the calculation re3uirements of the Standards) but onl& an investment mana%ement firm can claim com#liance once the firm has satisfied all re3uirements of the Standards* $hird- com#liance is a firm 'ide #rocess that cannot be achieved on a sin%le #roduct or com#osite* ) firm has onl& t'o o#tions 'ith re%ard to com#liance 'ith the GIPS standards1 full& com#l& 'ith all re3uirements of the GIPS standards and claim com#liance throu%h the use of the GIPS Com#liance Statement2 or not com#l& 'ith all re3uirements of the GIPS standards and not claim com#liance 'ith- or ma(e an& reference to- the GIPS standards* S'%.i.o%$"i: 6ia$ 119 9eadin% L @ Introduction to the Global Investment Performance Standards (GIPS) III( H"o 6ene i!$ %o/ Co/:&ian#eK $he GIPS standards benefit t'o main %rou#s1 investment mana%ement firms and #ros#ective clients* G D& choosin% to com#l& 'ith the GIPS standards- investment mana%ement firms assure #ros#ective clients that the historical trac( record the& re#ort

is both com#lete and fairl& #resented* Com#liance enables the GIPScom#liant firm to #artici#ate in com#etitive bids a%ainst other com#liant firms throu%hout the 'orld* )chievin% and maintainin% com#liance ma& also stren%then the firm4s internal controls over #erformance related #rocesses and #rocedures* G Investors have a %reater level of confidence in the inte%rit& of #erformance #resentations of a GIPS com#liant firm and can more easil& com#are #erformance #resentations from different investment mana%ement firms* Fhile the GIPS standards certainl& do not eliminate the need for in de#th due dili%ence on the #art of the investor- com#liance 'ith the Standards enhances the credibilit& of investment mana%ement firms that have chosen to underta(e this res#onsibilit&* I-( Co/:o$i!e$ +ne of the (e& conce#ts of the Standards is the re3uired use of com#osites* ) com#osite is an a%%re%ation of discretionar& #ortfolios into a sin%le %rou# that re#resents a #articular investment ob5ective or strate%&* ) com#osite must include all actual- fee #a&in%- discretionar& #ortfolios mana%ed in accordance 'ith the same investment ob5ective or strate%&* "or e.am#le- if a GIPS com#liant firm #resents its trac( record for a Global E3uit& Com#osite- the Com#osite must include all #ortfolios that are mana%ed- or have historicall& been mana%edin the firm4s Global E3uit& strate%&* $he firm ma& not sub5ectivel& select 'hich Global E3uit& #ortfolios 'ill be included in or e.cluded from the calculation and #resentation of the Global E3uit& Com#osite* $he determination of 'hich #ortfolios to include in the Com#osite should be done accordin% to #re established criteria (i*e*- on an eCDan!e basis)- not after the fact* $his #revents a firm from includin% onl& their best #erformin% #ortfolios in the Com#osite* -( -e%i i#a!ion "irms that claim com#liance 'ith the GIPS standards are res#onsible for their claim of com#liance and for maintainin% that com#liance* $hat is- firms selfre%ulate their claim of com#liance* +nce a firm claims com#liance 'ith the Standards- the& ma& voluntaril& hire an inde#endent third #art& to verif& their claim of com#liance to increase confidence in the validit& of the firm4s claim of com#liance* $he #rimar& #ur#ose of verification is to #rovide assurance that a firm claimin% com#liance 'ith the GIPS standards has adhered to the Standards on a firm'ide basis* Verification is #erformed 'ith res#ect to an entire firm- not on s#ecific com#osites* Verification tests1 G Fhether the investment firm has com#lied 'ith all the com#osite construction re3uirements of GIPS on a firm 'ide basis2 and 11; Verification G Fhether the firm4s #rocesses and #rocedures are desi%ned to calculate and #resent #erformance results in com#liance 'ith the GIPS standards* Verification must be #erformed b& an inde#endent third #art&* ) firm cannot #erform its o'n verification* $hird #art& verification brin%s credibilit& to a firm4s claim of com#liance* ) verified firm ma& #rovide a #ros#ective client 'ith %reater assurance about its claim of com#liance 'ith the GIPS standards* )dditionall&- b& voluntaril& under%oin% verification- a firm ma& im#rove its internal #olicies and #rocedures 'ith

re%ard to all as#ects of com#l&in% 'ith the GIPS standards* -I( T"e S!%'#!'%e o !"e GIPS S!anda%d$ $he GIPS standards (as revised b& the Investment Performance Council and ado#ted b& the C") Institute Doard of Governors in "ebruar& 7!!8) are divided into ei%ht sections that reflect the basic elements involved in calculatin% and #resentin% #erformance information1 "undamentals of Com#liance- In#ut BataCalculation Aethodolo%&- Com#osite Construction- Bisclosures- Presentation and 9e#ortin%- 9eal Estate- and Private E3uit&* $here are both re3uirements and recommendations 'ithin the #rovisions of each section* $he GIPS standards are re#roduced in the ne.t readin%- but Hevel I candidates onl& need to #re#are to be tested on the #resent note and on the PrefaceIntroduction- and Provisions of the Global Investment Performance Standards throu%h the end of Section II*!- "undamentals of Com#liance* ;ote that all 'ords a##earin% in ca#ital letters in the assi%ned sections are defined in the Glossar&* 12= 9eadin% L @ Introduction to the Global Investment Performance Standards (GIPS) 121 PREFACE: 6AC>GROUND OF THE GIPS STANDARDS Investment #ractices- re%ulation- #erformance measurement- and re#ortin% of #erformance results have historicall& varied considerabl& from countr& to countr&* Some countries have established #erformance calculation and #resentation %uidelines that are domesticall& acce#ted- and others have fe' standards for #resentin% investment #erformance* $hese #ractices have limited the com#arabilit& of #erformance results bet'een firms in different countries and have hindered the abilit& of firms to #enetrate mar(ets on a %lobal basis* LEARNING OUTCOMES Reading 3: In!%od'#!ion !o !"e G&o)a& In.e$!/en! Pe% o%/an#e S!anda%d$ 0GIPS12 and Reading 4: G&o)a& In.e$!/en! Pe% o%/an#e S!anda%d$ 0GIPS12 $he candidate should be able to1 a( e.#lain 'h& the GIPS standards 'ere created- 'hat #arties the GIPS standards a##l& to and 'ho is served b& the standards2 )( describe the (e& characteristics of the GIPS standards and the fundamentals of com#liance2 #( e.#lain the construction and #ur#ose of com#osites in #erformance re#ortin%2 d( describe the sco#e of the GIPS standards 'ith res#ect to an investment firm4s definition and historical #erformance record2 e( e.#lain ho' the GIPS standards are im#lemented in countries 'ith e.istin% standards for #erformance re#ortin% and describe the a##ro#riate res#onse 'hen the GIPS standards and local re%ulations are in conflict2 ( name and characteri/e the ei%ht ma5or sections of the GIPS standards2 g( e.#lain the re3uirements for verification of com#liance 'ith GIPS standards* GLO6AL IN-ESTMENT PERFORMANCE STANDARDS 0GIPS12 READING 4 6EGINS OPTIONAL

SEGMENT Co#&ri%ht 6 7!!8- C") Institute* 9e#rinted 'ith #ermission* C") Institute (formerl& (no'n as the )ssociation for Investment Aana%ement and 9esearch or )IA90) reco%ni/ed the need for a %lobal set of #erformance #resentation standards- and in 0<<8- it s#onsored and funded the Global Investment Performance Standards (GIPS) Committee to develo# a sin%le standard for #resentin% investment #erformance* In "ebruar& 0<<<- the GIPS committee finali/ed the GIPS standards and #resented them to the )IA9 Doard of Governors- 'ho formall& endorsed them* )lthou%h C") Institute is fundin% and su##ortin% the activities of the GIPS standards- the success of the Standards is the result of an alliance amon% e.#erts from a variet& of fields 'ithin the %lobal investment industr&* $he follo'in% (e& industr& %rou#s have been involved in and contributed si%nificantl& to #romotin% and develo#in% the GIPS standards1 122 9eadin% : @ Global Investment Performance Standards (GIPS) A'$!%a&ia>Performance )nal&st Grou# of )ustralia (P Grou#) A'$!%ia>Zsterreichischen Verreini%un% f[r "inan/anal&se und )sset Aana%ement und der Vereini%un% Zsterreichischer Investment%esellschaften 6e&gi'/>Del%ian )ssociation for Pension Institutions Den/a%8>Banish Societ& of "inancial )nal&sts and Banish Societ& of Investment Professionals F%an#e>Soci\t\ "rancaise des )nal&stes "inanciers (S")") and )ssociation "rancaise de la Gestion "inanciere ()"G) H'nga%4>,un%arian Societ& of Investment Professionals I%e&and>Irish )ssociation of Investment Aana%ers I!a&4>Italian Investment Performance Committee (IIPC) Ia:an>$he Securit& )nal&sts )ssociation of ?a#an (S))?) L'Ce/)o'%g>)ssociation Hu.embour%eoise des "onds d4Investissement ()H"I) and )ssociation Hu.embour%eoise des %estionnaires de #ortefeuilles et anal&stes financiers ()HG)"I) Ne!"e%&and$>Vereni%in% van Dele%%in%s )nalisten (VD)) Ne< Lea&and>C") Societ& of ;e'

Sealand No%<a4>$he ;or'e%ian Societ& of "inancial )nal&sts Po&and>Pols(i Iomitet F&ni(]' In'est&c&5n&ch Po%!'ga&>)ssocia^_o Portu%uesa de )nalistas "inanceiros ()P)") S:ain>C") S#ain So'!" A %i#a>Investment Aana%ement )ssociation of South )frica (IA)S)) S<eden>S'edish Societ& of "inancial )nal&sts (S"") S<i!Be%&and>S'iss Dan(ers )ssociation (SD)) Uni!ed >ingdo/>;ational )ssociation of Pension "unds Htd (;)P") Uni!ed S!a!e$ and Canada>C") Institute Fith the release of the GIPS standards in 0<<<- the GIPS committee 'as re#laced b& the Investment Performance Council (IPC)- 'hich serves as the %lobal committee res#onsible for the Standards* It consists of L= members from OPTIONAL SEGMENT 0 In Aa& 7!!:- )IA9 chan%ed its name to C") Institute* 08 countries* $he IPC4s members have diverse and in de#th investment e.#erience* $he& come from firms of all si/es and s#eciali/e in mutual funds- #rivate 'ealth mana%ement- insurance- #ension funds- #rivate e3uit& and venture ca#italreal estate- investment consultin% services- and #erformance measurement and verification* $he #rinci#al %oal of the IPC is to have all countries ado#t the GIPS standards as t e standard for investment firms see(in% to #resent historical investment #erformance* $he IPC envisions GIPS com#liance actin% as a #ass#ort that allo's firms to enter the arena of investment mana%ement com#etition on a %lobal basis and to com#ete on an e3ual footin%* $he GIPS #ass#ort 'ill level the #la&in% field and #romote %lobal com#etition amon% investment firms- 'hich 'ill- in turn- #rovide #ros#ective clients 'ith a %reater level of confidence in the inte%rit& of #erformance #resentations as 'ell as the %eneral #ractices of a com#liant firm* In order to achieve this %oal- over the #ast 8 &ears- the IPC has used a dual a##roach conver%ence strate%& to (0) transition the e.istin% local standards to the GIPS standards and (7) evolve the GIPS standards to incor#orate local best #ractices from all re%ional standards so as to form one im#roved standard for investment #erformance calculation and re#ortin%* In addition to im#rovin% the ori%inal GIPS standards- this version includes ne' sections to address real estate and #rivate e3uit& investments as 'ell as ne' #rovisions to address fees* It also includes %uidelines for claimin% com#liance 'ith the GIPS standards in advertisements and formali/es #ositions resultin%

from the develo#ment of %uidance statements (such as firm definition- #o/:o$i!e de ini!ion- and #ortabilit&) and incor#orates local best #ractices for #erformance measurement and re#ortin% from around the 'orld* Several e.am#les have been included to assist 'ith the a##lication of the GIPS standards* $he GIPS standards are no lon%er a minimum 'orld'ide standard* Instead- this version #romotes the hi%hest #erformance measurement and #resentation #ractices and eliminates the need for se#arate local standards* $he IPC stron%l& encoura%es countries 'ithout an investment #erformance standard in #lace to acce#t the GIPS standards as the local standard and translate them into the native lan%ua%e 'hen necessar&- thus #romotin% a translation of GIPS ($G)* ,o'ever- to effectivel& transition e.istin% re%ional standards- the IPC ac(no'led%es that some countries need to ado#t certain lon% standin% re3uirements in addition to the GIPS standards* Since 0<<<- the IPC has #romoted the Countr& Version of GIPS (CVG) a##roach- 'hereb& countries that had e.istin% #erformance standards could ado#t the GIPS standards as the core* $his core 'as onl& to be su##lemented to satisf& local re%ulator& or le%al re3uirements and 'ell established #ractices* )n& other differences 'ere to be transitioned out of the CVG so that the CVG 'ould conver%e 'ith the GIPS standards* $oda&- 78 countries throu%hout ;orth )merica- Euro#e- )frica- and the )sia Pacific re%ion have ado#ted the GIPS standards- encoura%in% investment mana%ement firms to follo' the Standards 'hen calculatin% and re#ortin% their #erformance results* +ut of these 78 countries- < have an IPC endorsed CVG ()ustralia- Canada- Ireland- Ital&- ?a#an- South )frica- S'it/erland- Cnited Iin%domand Cnited States)* $he remainin% IPC endorsed standards are either translations of GIPS or GIPS (in En%lish)* Fe are no' enterin% the second #hase of the conver%ence strate%& to the GIPS standards>namel& to evolve the GIPS standards to incor#orate local best #ractices from all re%ional standards* $o effectivel& move to'ard one %loball& acce#ted standard for investment #erformance calculation and #resentation- the IPC stron%l& encoura%es countries 'ithout an investment #erformance standard in #lace to acce#t the GIPS standards in En%lish or translate them into the local lan%ua%e- ado#tin% a $G a##roach* 123 Preface1 Dac(%round of the GIPS Standards OPTIONAL SEGMENT D& revisin% the GIPS standards- it is the IPC4s ho#e that CVGs 'ill no lon%er be necessar&* Instead- all CVG com#liant firms 'ill be %ranted reci#rocit& for #eriods #rior to 0 ?anuar& 7!!=* $heir CVG com#liant histor& 'ill satisf& the GIPS re3uirement to sho' at least a 8 &ear trac( record* In this 'a&- firms from all countries 'ill com#l& 'ith one standard- the GIPS standards- from 0 ?anuar& 7!!= and the industr& 'ill achieve conver%ence of all standards* GLO6AL IN-ESTMENT PERFORMANCE STANDARDS I( INTRODUCTION A( PREAM6LEAHHY IS A GLO6AL STANDARD NEEDEDK 0* $he financial mar(ets and the investment mana%ement industr& are becomin% increasin%l& %lobal in nature* Given the variet& of

financial entities and countries involved- this %lobali/ation of the investment #rocess and the e.#onential %ro'th of assets under mana%ement demonstrate the need to standardi/e the calculation and #resentation of investment #erformance* 7* Pros#ective clients and investment mana%ement firms 'ill benefit from an established standard for investment #erformance measurement and #resentation that is reco%ni/ed 'orld'ide* Investment #ractices- re%ulation- #erformance measurement- and re#ortin% of #erformance results var& considerabl& from countr& to countr&* Some countries have %uidelines that are 'idel& acce#ted 'ithin their borders- and others have fe' reco%ni/ed standards for #resentin% investment #erformance* L* 9e3uirin% investment mana%ement firms to adhere to #erformance #resentation standards 'ill hel# assure investors that the #erformance information is both com#lete and fairl& #resented* Investment mana%ement firms in countries 'ith minimal #resentation standards 'ill be able to com#ete for business on an e3ual footin% 'ith investment mana%ement firms from countries 'ith more develo#ed standards* Investment mana%ement firms from countries 'ith established #ractices 'ill have more confidence that the& are bein% fairl& com#ared 'ith local investment mana%ement firms 'hen com#etin% for business in countries that have not #reviousl& ado#ted #erformance standards* :* Doth #ros#ective and e.istin% clients of investment mana%ement firms 'ill benefit from a %lobal investment #erformance standard b& havin% a %reater deg%ee o #on iden#e in the #erformance numbers #resented b& the investment mana%ement firms* Performance standards that are acce#ted in all countries enable all investment mana%ement firms to measure and #resent their investment #erformance so that clients can readil& com#are investment #erformance amon% investment mana%ement firms* 6( -ISION STATEMENT 8* ) %lobal investment #erformance standard leads to readil& acce#ted #resentations of investment #erformance that (0) #resent #erformance results that are readil& com#arable amon% investment mana%ement firms 'ithout re%ard to %eo%ra#hical location and (7) facilitate a dialo%ue bet'een investment mana%ers and their #ros#ective 124 9eadin% : @ Global Investment Performance Standards (GIPS) ENDS OPTIONAL SEGMENT clients about the critical issues of ho' the investment mana%ement firm achieved #erformance results and determines future investment strate%ies* C( O6IECTI-ES =* $o obtain 'orld'ide acce#tance of a standard for the calculation and #resentation of investment #erformance in a fair- com#arable format that #rovides full disclosure*

X* $o ensure accurate and consistent investment #erformance data for re#ortin%- record (ee#in%- mar(etin%- and #resentations* Q* $o #romote fair- %lobal com#etition amon% investment mana%ement firms for all mar(ets 'ithout creatin% )a%%ie%$ !o en!%4 for ne' investment mana%ement firms* <* $o foster the notion of industr& self re%ulation on a %lobal basis* D( O-ER-IEH 0!* $he Global Investment Performance Standards (GIPS standards or Standards) have several (e& characteristics1 a* "or the #ur#ose of claimin% com#liance 'ith the GIPS standardsinvestment mana%ement firms must define an entit& that claims com#liance ("I9A)* $he "I9A ACS$ be defined as an investment firm- subsidiar&- or division held out to clients or #otential clients as a DISTINCT 6USINESS ENTITY* b* $he GIPS standards are ethical standards for investment #erformance #resentation to ensure fair re#resentation and full disclosure of a "I9A4S #erformance* c* $he GIPS standards 9EWCI9E "I9AS to include all actual fee#a&in%discretionar& P+9$"+HI+S in C+AP+SI$ES defined accordin% to similar strate%& andEor investment ob5ective and 9EWCI9E "I9AS to initiall& sho' GIPS com#liant histor& for a minimum of five (8) &ears or since ince#tion of the "I9A or C+AP+SI$E if in e.istence less than 8 &ears* )fter #resentin% at least 8 &ears of com#liant histor&- the "I9A ACS$ add annual #erformance each &ear %oin% for'ard u# to ten (0!) &ears- at a minimum* d* $he GIPS standards 9EWCI9E "I9AS to use certain calculation and #resentation methods and to ma(e certain disclosures alon% 'ith the #erformance record* e* $he GIPS standards rel& on the inte%rit& of in#ut data* $he accurac& of in#ut data is critical to the accurac& of the #erformance #resentation* "or e.am#le- DE;C,A)9IS and C+AP+SI$ES S,+CHB be createdEselected on an EV );$E basis- not after the fact* f* $he GIPS standards consist of #rovisions that "I9AS are 9EWCI9EB to follo' in order to claim com#liance* "I9AS are encoura%ed to ado#t the 9EC+AAE;BEB #rovisions to achieve best #ractice in #erformance #resentation* %* $he GIPS standards ACS$ be a##lied 'ith the %oal of full disclosure and fair re#resentation of investment #erformance* Aeetin% the ob5ectives of full disclosure and fair re#resentation 'ill li(el& re3uire more than com#liance 'ith the minimum 9EWCI9EAE;$S of the GIPS standards* If an investment "I9A a##lies the GIPS standards in a #erformance situation that is not addressed s#ecificall& b& the Standards or is o#en to inter#retation- disclosures other than those 9EWCI9EB b& the GIPS standards ma& 123 Global Investment Performance Standards be necessar&* $o full& e.#lain the #erformance included in a #resentation- "I9AS are encoura%ed to #resent all relevant )BBI$I+;)H I;"+9A)$I+; and SUPPLEMENTAL INFORMATION*

h* )ll re3uirements- clarifications- u#dated information- and %uidance ACS$ be adhered to 'hen determinin% a "I9A4S claim of com#liance and 'ill be made available via the GIPS Handbook and the C") Institute 'ebsite ('''*cfainstitute*or%)* i* In cases 'here a##licable local or countr& s#ecific la' or re%ulation conflicts 'ith the GIPS standards- the Standards 9EWCI9E "I9AS to com#l& 'ith the local la' or re%ulation and ma(e full disclosure of the conflict* 5* $he GIPS standards do not address ever& as#ect of #erformance measurement- valuation- attribution- or covera%e of all asset classes* $he GIPS standards 'ill evolve over time to address additional as#ects of investment #erformance* Certain 9EC+AAE;BEB elements in the GIPS standards ma& become 9EWCI9EAE;$S in the future* (* Fithin the GIPS standards are su##lemental P9IV)$E EWCI$P and 9E)H ES$)$E #rovisions that must be a##lied to these asset classes* (See sections II*= and II*X*) E( SCOPE 00* )##lication of the GIPS Standards1 "I9AS from an& countr& ma& come into com#liance 'ith the GIPS standards* Com#liance 'ith the GIPS standards 'ill facilitate a "I9A4S #artici#ation in the investment mana%ement industr& on a %lobal level* 07* ,istorical Performance 9ecord1 a* "I9AS are 9EWCI9EB to #resent- at a minimum- 8 &ears of annual investment #erformance that is com#liant 'ith the GIPS standards* If the "I9A or C+AP+SI$E has been in e.istence less than 8 &ears- the "I9A ACS$ #resent #erformance since the ince#tion of the "I9A or C+AP+SI$E2 and b* )fter a "I9A #resents 8 &ears of com#liant histor&- the "I9A ACS$ #resent additional annual #erformance u# to 0! &ears- at a minimum* "or e.am#le- after a "I9A #resents 8 &ears of com#liant histor&- the "I9A ACS$ add an additional &ear of #erformance each &ear so that after 8 &ears of claimin% com#liance- the "I9A #resents a 0! &ear #erformance record* c* "I9AS ma& lin( a non GIPS com#liant #erformance record to their com#liant histor& so lon% as no noncom#liant #erformance is #resented after 0 ?anuar& 7!!! and the "I9A discloses the #eriods of noncom#liance and e.#lains ho' the #resentation is not in com#liance 'ith the GIPS standards* d* "I9AS #reviousl& claimin% com#liance 'ith an Investment Performance Council endorsed Countr& Version of GIPS (CVG) are %ranted reci#rocit& to claim com#liance 'ith the GIPS standards for historical #eriods #rior to 0 ?anuar& 7!!=* (See Dac(%round of GIPS Standards for more details on CVGs)* If the "I9A #reviousl& claimed com#liance 'ith a CVG- at a minimum- the "I9A ACS$ continue to sho' the historical CVG com#liant trac( record u# to 0! &ears (or since ince#tion)* ;othin% in this section shall #revent "I9AS from initiall& #resentin%

more than 8 &ears of #erformance results* 125 9eadin% : @ Global Investment Performance Standards (GIPS) F( COMPLIANCE 0L* Effective Bate1 $he GIPS standards 'ere amended b& the IPC on X Becember 7!!: and ado#ted b& the C") Institute Doard of Governors on : "ebruar& 7!!8* $he effective date of the revised Standards is 0 ?anuar& 7!!=* )ll #resentations that include #erformance results for #eriods after L0 Becember 7!!8 ACS$ meet all the 9EWCI9EAE;$S of the revised GIPS standards* Performance #resentations that include results throu%h L0 Becember 7!!8 ma& be #re#ared in com#liance 'ith the 0<<< version of the GIPS standards* Earl& ado#tion of these revised GIPS standards is encoura%ed* 0:* 9EWCI9EAE;$S1 "I9AS ACS$ meet all the 9EWCI9EAE;$S set forth in the GIPS standards to claim com#liance 'ith the GIPS standards* )lthou%h the 9EWCI9EAE;$S ACS$ be met immediatel& b& a "I9A claimin% com#liance- the follo'in% 9EWCI9EAE;$S do not %o into effect until a future date1 a* "or #eriods be%innin% 0 ?anuar& 7!!Q- 9E)H ES$)$E investments must be valued at least 3uarterl&* b* "or #eriods be%innin% 0 ?anuar& 7!0!- "I9AS ACS$ V)HCE P+9$"+HI+S on the date of all H)9GE EV$E9;)H C)S, "H+FS* c* "or #eriods be%innin% 0 ?anuar& 7!0!- "I9AS ACS$ value P+9$"+HI+S as of the calendar month end or the last business da& of the month* d* "or #eriods be%innin% 0 ?anuar& 7!0!- C+AP+SI$E returns ACS$ be calculated b& asset 'ei%htin% the individual P+9$"+HI+ returns at least monthl&* e* "or #eriods be%innin% 0 ?anuar& 7!0!- CAR-EDOUT returns are not #ermitted to be included in sin%le asset class C+AP+SI$E returns unless the C)9VE +C$S are actuall& mana%ed se#aratel& 'ith their o'n cash balances* Cntil these future 9EWCI9EAE;$S become effective- these #rovisions S,+CHB be considered 9EC+AAE;B)$I+;S* "I9AS are encoura%ed to im#lement these future 9EWCI9EAE;$S #rior to their effective dates* $o ease com#liance 'ith the GIPS standards 'hen the future 9EWCI9EAE;$S ta(e effect- the industr& should immediatel& be%in to desi%n #erformance soft'are to incor#orate these future 9EWCI9EAE;$S* 08* Com#liance Chec(1 "I9AS ACS$ ta(e all ste#s necessar& to ensure that the& have satisfied all the 9EWCI9EAE;$S of the GIPS standards before claimin% com#liance 'ith the GIPS standards* "I9AS are stron%l& encoura%ed to #erform #eriodic internal com#liance chec(s and im#lement ade3uate business controls on all sta%es of the investment #erformance #rocess>from data in#ut to #resentation material>to ensure the validit& of com#liance claims* 0=* $hird Part& Performance Aeasurement and C+AP+SI$E Construction1 $he GIPS standards reco%ni/e the role of inde#endent third #art& #erformance measurers and the value the& can add to the "I9A4S #erformance measurement activities* Fhere third #art& #erformance

measurement is an established #ractice or is available- "I9AS are encoura%ed to use this service as it a##lies to the "I9A* Similarl&'here the #ractice is to allo' third #arties to construct C+AP+SI$ES for "I9AS- "I9AS can use such C+AP+SI$ES in a GIPS com#liant #resentation onl& if the C+AP+SI$ES meet the 9EWCI9EAE;$S of the GIPS standards* 127 Global Investment Performance Standards 0X* Sam#le Presentations1 Sam#le #resentations- sho'n in )##endi. :)#rovide e.am#les of 'hat a com#liant #resentation mi%ht loo( li(e* G( IMPLEMENTING A GLO6AL STANDARD 0Q* In 0<<<- the Investment Performance Council (IPC) 'as created and %iven the res#onsibilit& to meet the on%oin% needs for maintainin% and develo#in% a hi%h 3ualit& %lobal investment #erformance standard* $he IPC #rovides a #ractical and effective im#lementation structure for the GIPS standards and encoura%es 'ider #ublic #artici#ation in an industr& 'ide standard* 0<* +ne of the #rinci#al ob5ectives of the IPC is for all countries to ado#t the GIPS standards as the common method for calculatin% and #resentin% investment #erformance* )s of Becember 7!!:more than 78 countries around the 'orld had ado#ted or 'ere in the #rocess of ado#tin% the GIPS standards* $he IPC believes the establishment and acce#tance of the GIPS standards are vital ste#s in facilitatin% the availabilit& of com#arable investment #erformance histor& on a %lobal basis* GIPS com#liance #rovides "I9AS 'ith a #ass#ort and creates a level #la&in% field 'here all "I9AS can com#ete on e3ual footin%* 7!* $he #resence of a local s#onsorin% or%ani/ation for investment #erformance standards is essential for their effective im#lementation and on %oin% o#eration 'ithin a countr&* Such countr& s#onsors also #rovide an im#ortant lin( bet'een the IPC- the %overnin% bod& for the GIPS standards- and the local mar(ets 'here investment mana%ers o#erate* $he countr& s#onsor- b& activel& su##ortin% the GIPS standards and the 'or( of the IPC- 'ill ensure that the countr&4s interests can and 'ill be ta(en into account as the GIPS standards are develo#ed %oin% for'ard* Com#liance 'ith the GIPS standards is voluntar&but su##ort from the local countr& s#onsor 'ill hel# drive the success of the GIPS standards* 70* $he IPC stron%l& encoura%es countries 'ithout an investment #erformance standard in #lace to acce#t the GIPS standards as the local standard and translate them into the local lan%ua%e 'hen necessar&thus #romotin% a translation of GIPS ($G)* 77* Com#liance 'ith the GIPS standards 'ill #rovide "I9AS 'ith a ri%ht of access to be considered alon%side all investment mana%ersthereb& allo'in% all "I9AS to be evaluated on e3ual terms* 7L* )lthou%h the GIPS standards ma& be translated into man& lan%ua%esif a discre#anc& arises bet'een the different versions of the Standards (e*%*- $Gs)- the En%lish version of GIPS standards is

controllin%* 7:* $he IPC 'ill continue to develo# the GIPS standards so that the& maintain their relevance 'ithin the chan%in% investment mana%ement industr& and has committed to evaluatin% the Standards ever& 8 &ears* 78* $he self re%ulator& nature of the GIPS standards necessitates a stron% commitment to ethical inte%rit&* Self re%ulation also assists re%ulators in e.ercisin% their res#onsibilit& for ensurin% the fair disclosure of information to and 'ithin the financial mar(ets in %eneral* 9e%ulators are encoura%ed to1 129 9eadin% : @ Global Investment Performance Standards (GIPS) G reco%ni/e the benefit of voluntar& com#liance 'ith standards that re#resent %lobal best #racticesG %ive consideration to ado#tin% a function favored b& some re%ulatorsnamel& to enforce sanctions u#on false claims of com#liance 'ith the GIPS standards as fraudulent advertisin%- and G reco%ni/e and encoura%e inde#endent verification services* 7=* Fhere e.istin% la's or re%ulations alread& im#ose #erformance #resentation standards- "I9AS are stron%l& encoura%ed to com#l& 'ith the GIPS standards in addition to those local re3uirements* Com#liance 'ith a##licable la' or re%ulation does not necessaril& lead to com#liance 'ith the GIPS standards* Fhen com#l&in% 'ith the GIPS standards and local la' or re%ulation- "I9AS must disclose an& local la's and re%ulations that conflict 'ith the GIPS standards* II( PRO-ISIONS OF THE GLO6AL IN-ESTMENT PERFORMANCE STANDARDS $he GIPS standards are divided into ei%ht sections that reflect the basic elements involved in #resentin% #erformance information1 fundamentals of com#liance- in#ut data- calculation methodolo%&- C+AP+SI$E constructiondisclosures- #resentation and re#ortin%- 9E)H ES$)$E- and P9IV)$E EWCI$P* $he #rovisions for each section are divided bet'een 9EWCI9EAE;$Slisted first in each section- and 9EC+AAE;B)$I+;S* "I9AS ACS$ meet all the 9EWCI9EAE;$S to claim com#liance 'ith the GIPS standards* "I9AS are stron%l& encoura%ed to ado#t and im#lement the recommendations to ensure that the "I9A full& adheres to the s#irit and intent of the GIPS standards* E.am#les of GIPS com#liant #resentations are included as )##endi. :)* =( F'nda/en!a&$ o Co/:&ian#e: Critical issues that a "I9A ACS$ consider 'hen claimin% com#liance 'ith the GIPS standards are definin% the "I9A- documentin% "I9A #olicies and #rocedures- maintainin% com#liance 'ith u#dates to the GIPS standards- and #ro#erl& usin% the claim of com#liance and references to verification* $he definition of the "I9A is the foundation for "I9A 'ide com#liance and creates defined boundaries 'hereb& TOTAL FIRM ASSETS can be determined* +nce a "I9A meets all of the 9EWCI9EAE;$S of the GIPS standards- it ACS$ a##ro#riatel& use the claim of com#liance to state com#liance 'ith the GIPS standards* 1( In:'! Da!a: Consistenc& of in#ut data is critical to effective com#liance 'ith the GIPS standards and establishes the foundation for full- fair- and

com#arable investment #erformance #resentations* 2( Ca&#'&a!ion Me!"odo&og4: )chievin% com#arabilit& amon% "I9AS4 #erformance #resentations 9EWCI9ES uniformit& in methods used to calculate returns* $he Standards mandate the use of certain calculation methodolo%ies for both P+9$"+HI+S and C+AP+SI$ES* 3( Co/:o$i!e Con$!%'#!ion: ) C+AP+SI$E is an a%%re%ation of one or more P+9$"+HI+S into a sin%le %rou# that re#resents a #articular investment ob5ective or strate%&* $he C+AP+SI$E return is the asset 'ei%hted avera%e of the #erformance results of all the P+9$"+HI+S in the C+AP+SI$E* Creatin% meanin%ful- asset 'ei%hted C+AP+SI$ES is critical to the fair #resentationconsistenc&- and com#arabilit& of results over time and amon% "I9AS* 4( Di$#&o$'%e$: Bisclosures allo' "I9AS to elaborate on the ra' numbers #rovided in the #resentation and %ive the end user of the #resentation 12; Global Investment Performance Standards the #ro#er conte.t in 'hich to understand the #erformance results* $o com#l& 'ith the GIPS standards- "I9AS ACS$ disclose certain information about their #erformance #resentation and #olicies ado#ted b& the "I9A* Bisclosures are to be considered static information that does not normall& chan%e from #eriod to #eriod* )lthou%h some disclosures are 9EWCI9EB of all "I9AS- others are s#ecific to certain circumstances and thus ma& not be 9EWCI9EB* ;o ne%ative assurance lan%ua%e is needed for nona##licable disclosures* 3( P%e$en!a!ion and Re:o%!ing: )fter %atherin% the in#ut data- calculatin% returns- constructin% the C+AP+SI$ES- and determinin% the necessar& disclosuresthe "I9A ACS$ incor#orate this information in #resentations based on the 9EWCI9EAE;$S set out in the GIPS standards for #resentin% the investment #erformance returns* ;o finite set of #rovisions can cover all #otential situations or antici#ate future develo#ments in investment industr& structure- technolo%&- #roducts- or #ractices* Fhen a##ro#riate"I9AS have the res#onsibilit& to include other information not necessaril& covered b& the Standards in a GIPS com#liant #resentation* 5( REAL ESTATE: $hese #rovisions a##l& to all investments 'here returns are #rimaril& from the holdin%- tradin%- develo#ment- or mana%ement of 9E)H ES$)$E assets* 9E)H ES$)$E includes land- buildin%s under develo#mentcom#leted buildin%s- and other structures or im#rovements held for investment #ur#oses* $he #rovisions a##l& re%ardless of the level of control the "I9A has over mana%ement of the investment* $he #rovisions a##l& irres#ective of 'hether a 9E)H ES$)$E asset or investment is #roducin% revenue* $he& also a##l& to 9E)H ES$)$E investments 'ith levera%e or %earin%* 7( PRI-ATE EMUITY: $hese #rovisions a##l& to all P9IV)$E EWCI$P investments other than +PE; E;B or EVE9G9EE; "C;BS ('hich ACS$ follo' the main GIPS #rovisions)* P9IV)$E EWCI$P investments ACS$ be valued accordin% to the GIPS P9IV)$E EWCI$P Valuation Princi#les found in )##endi. :B* P9IV)$E EWCI$P refers to investments in non#ublic com#anies that are in various sta%es of develo#ment and encom#asses venture investin%- bu&out investin%- and me//anine investin%* "und of funds investin% as 'ell

as secondar& investin% are also included in P9IV)$E EWCI$P* Investors t&#icall& invest in P9IV)$E EWCI$P assets either directl& or throu%h a fund of funds or LIMITED PARTNERSHIP* =( FUNDAMENTALS OF COMPLIANCE =(A De ini!ion o !"e Fi%/AReG'i%e/en!$ !*)*0 $he GIPS standards ACS$ be a##lied on a "I9A 'ide basis* !*)*7 "I9AS must be defined as an investment firm- subsidiar&- or division held out to clients or #otential clients as a BIS$I;C$ DCSI;ESS E;$I$P* !*)*L $+$)H "I9A )SSE$S ACS$ be the a%%re%ate of the A)9IE$ V)HCE of all discretionar& and nondiscretionar& assets under mana%ement 'ithin the defined "I9A* $his includes both fee #a&in% and non fee #a&in% assets* !*)*: "I9AS ACS$ include the #erformance of assets assi%ned to a subadvisor in a C+AP+SI$E #rovided the "I9A has discretion over the selection of the subadvisor* !*)*8 Chan%es in a "I9A4S or%ani/ation are not #ermitted to lead to alteration of historical C+AP+SI$E results* 13= 9eadin% : @ Global Investment Performance Standards (GIPS) =(6 De ini!ion o !"e Fi%/ARe#o//enda!ion$ !*D*0 "I9AS are encoura%ed to ado#t the broadest- most meanin%ful definition of the "I9A* $he sco#e of this definition should include all %eo%ra#hical (countr&- re%ional- etc*) offices o#eratin% under the same )%and na/e re%ardless of the actual name of the individual investment mana%ement com#an&* =(A Do#'/en! Po&i#ie$ and P%o#ed'%e$AReG'i%e/en!$ !*)*= "I9AS ACS$ document- in 'ritin%- their #olicies and #rocedures used in establishin% and maintainin% com#liance 'ith all the a##licable 9EWCI9EAE;$S of the GIPS standards* =(A C&ai/ o Co/:&ian#eAReG'i%e/en!$ !*)*X +nce a "I9A has met all the 9EWCI9EB elements of the GIPS standardsthe "I9A ACS$ use the follo'in% com#liance statement to indicate that the "I9A is in com#liance 'ith the GIPS standards1 JInsert name of "I9AK has #re#ared and #resented this re#ort in com#liance 'ith the Global Investment Performance Standards (GIPS)* !*)*Q If the "I9A does not meet all the 9EWCI9EAE;$S of the GIPS standardsthe "I9A cannot re#resent that it is in com#liance 'ith the Global Investment Performance Standards e.ce#t for**** !*)*< Statements referrin% to the calculation methodolo%& used in a C+AP+SI$E #resentation as bein% in accordance Jor com#lianceK 'ith the Global Investment Performance Standards are #rohibited* !*)*0! Statements referrin% to the #erformance of a sin%le- e.istin% client as bein% calculated in accordance 'ith the Global Investment Performance Standards are #rohibited e.ce#t 'hen a GIPS com#liant "I9A re#orts the #erformance of an individual account to the e.istin% client*

=(A Fi%/ F'nda/en!a& Re$:on$i)i&i!ie$AReG'i%e/en!$ !*)*00 "I9AS ACS$ ma(e ever& reasonable effort to #rovide a com#liant #resentation to all #ros#ective clients* $hat is- "I9AS cannot choose to 'hom the& 'ant to #resent com#liant #erformance* ()s lon% as a #ros#ective client has received a com#liant #resentation 'ithin the #revious 07 months- the "I9A has met this 9EWCI9EAE;$*) !*)*07 "I9AS ACS$ #rovide a C+AP+SI$E list and COMPOSITE DESCRIPTION to an& #ros#ective client that ma(es such a re3uest (a sam#le list and C+AP+SI$E BESC9IP$I+; are included in )##endi. :D)* "I9AS ACS$ list discontinued C+AP+SI$ES on the "I9A4S list of C+AP+SI$ES for at least 8 &ears after discontinuation* !*)*0L "I9AS ACS$ #rovide a com#liant #resentation for an& C+AP+SI$E listed on the "I9A4S list and a C+AP+SI$E BESC9IP$I+; to an& #ros#ective client that ma(es such a re3uest* !*)*0: Fhen the "I9A 5ointl& mar(ets 'ith other "I9AS- the "I9A claimin% com#liance 'ith the GIPS standards ACS$ be sure that it is clearl& defined and se#arate relative to an& other "I9AS bein% mar(eted and that it is clear 'hich "I9A is claimin% com#liance* 131 Global Investment Performance Standards !*)*08 "I9AS are encoura%ed to com#l& 'ith the 9EC+AAE;B)$I+;S and ACS$ com#l& 'ith all a##licable 9EWCI9EAE;$S of the GIPS standardsincludin% an& u#dates- re#orts- %uidance statementsinter#retations- or clarifications #ublished b& C") Institute and the Investment Performance Council- 'hich 'ill be made available via the C") Institute 'ebsite ('''*cfainstitute*or%) as 'ell as the $!PS Handbook* =(6 -e%i i#a!ionARe#o//enda!ion$ !*D*7 "I9AS are encoura%ed to underta(e the verification #rocessdefined as the revie' of a "I9A4S #erformance measurement #rocesses and #rocedures b& an inde#endent third #art& verifier* ) sin%le verification re#ort is issued in res#ect to the 'hole "I9A2 verification cannot be carried out for a sin%le C+AP+SI$E* $he #rimar& #ur#ose of verification is to establish that a "I9A claimin% com#liance 'ith the GIPS standards has adhered to the Standards* !*D*L "I9AS that have been verified are encoura%ed to add a disclosure to C+AP+SI$E #resentations or advertisements statin% that the "I9A has been verified* "I9AS ACS$ disclose the #eriods of verification if the C+AP+SI$E #resentation includes results for #eriods that have not been sub5ect to "I9A 'ide verification* $he verification disclosure lan%ua%e S,+CHB read1 JInsert name of "I9AK has been verified for the #eriods Jinsert datesK b& Jname of verifierK* ) co#& of the verification re#ort is available u#on re3uest* 1( INPUT DATA 1(A In:'! Da!aAReG'i%e/en!$ 0*)*0 )ll data and information necessar& to su##ort a "I9A4S #erformance

#resentation and to #erform the 9EWCI9EB calculations ACS$ be ca#tured and maintained* 0*)*7 P+9$"+HI+ valuations ACS$ be based on A)9IE$ V)HCES (not cost basis or boo( values)* 0*)*L "or #eriods #rior to 0 ?anuar& 7!!0- P+9$"+HI+S ACS$ be valued at least 3uarterl&* "or #eriods bet'een 0 ?anuar& 7!!0 and 0 ?anuar& 7!0!- P+9$"+HI+S ACS$ be valued at least monthl&* "or #eriods be%innin% 0 ?anuar& 7!0!- "I9AS ACS$ value P+9$"+HI+S on the date of all H)9GE EV$E9;)H C)S, "H+FS* 0*)*: "or #eriods be%innin% 0 ?anuar& 7!0!- "I9AS ACS$ value P+9$"+HI+S as of the calendar month end or the last business da& of the month* 0*)*8 "or #eriods be%innin% 0 ?anuar& 7!!8- "I9AS ACS$ use TRADE DATE ACCOUNTING* 0*)*= ACCRUAL ACCOUNTING ACS$ be used for fi.ed income securities and all other assets that accrue interest income* A)9IE$ V)HCES of fi.ed income securities ACS$ include accrued income* 0*)*X "or #eriods be%innin% 0 ?anuar& 7!!=- C+AP+SI$ES ACS$ have consistent be%innin% and endin% annual valuation dates* Cnless the C+AP+SI$E is re#orted on a noncalendar fiscal &ear- the be%innin% and endin% valuation dates ACS$ be at calendar &earend (or on the last business da& of the &ear)* 132 9eadin% : @ Global Investment Performance Standards (GIPS) 1(6 In:'! Da!aARe#o//enda!ion$ 0*D*0 )CC9C)H )CC+C;$I;G S,+CHB be used for dividends (as of the e.dividend date)* 0*D*7 Fhen #resentin% NETDOFDFEES RETURNS- "I9AS S,+CHB accrue I;VES$AE;$ A);)GEAE;$ "EES* 0*D*L Calendar month end valuations or valuations on the last business da& of the month are 9EC+AAE;BEB* 2( CALCULATION METHODOLOGY 2(A Ca&#'&a!ion Me!"odo&og4AReG'i%e/en!$ 7*)*0 $+$)H 9E$C9;- includin% reali/ed and unreali/ed %ains and losses #lus income- ACS$ be used* 7*)*7 $IAE FEIG,$EB 9)$ES +" 9E$C9; that ad5ust for EV$E9;)H C)S, "H+FS ACS$ be used* Periodic returns ACS$ be %eometricall& lin(ed* EV$E9;)H C)S, "H+FS ACS$ be treated in a consistent manner 'ith the "I9A4S documented- C+AP+SI$E s#ecific #olic&* )t a minimum1 a* "or #eriods be%innin% 0 ?anuar& 7!!8- "I9AS ACS$ use a##ro.imated rates of return that ad5ust for dail& 'ei%hted EV$E9;)H C)S, "H+FS* b* "or #eriods be%innin% 0 ?anuar& 7!0!- "I9AS ACS$ value P+9$"+HI+S on the date of all H)9GE EV$E9;)H C)S, "H+FS* 7*)*L C+AP+SI$E returns ACS$ be calculated b& asset 'ei%htin% the individual P+9$"+HI+ returns usin% be%innin% of #eriod values or a method that reflects both be%innin% of #eriod values and EV$E9;)H C)S, "H+FS*

7*)*: 9eturns from cash and #a$" eG'i.a&en!$ held in P+9$"+HI+S ACS$ be included in $+$)H 9E$C9; calculations* 7*)*8 )ll returns ACS$ be calculated after the deduction of the actual TRADING EEPENSES incurred durin% the #eriod* Estimated $9)BI;G EVPE;SES are not #ermitted* 7*)*= "or #eriods be%innin% 0 ?anuar& 7!!=- "I9AS ACS$ calculate C+AP+SI$E returns b& asset 'ei%htin% the individual P+9$"+HI+ returns at least 3uarterl&* "or #eriods be%innin% 0 ?anuar& 7!0!C+AP+SI$E returns ACS$ be calculated b& asset 'ei%htin% the individual P+9$"+HI+ returns at least monthl&* 7*)*X If the actual direct $9)BI;G EVPE;SES cannot be identified and se%re%ated from a 6UNDLED FEE1 a* 'hen calculatin% GROSSDOFDFEES RETURNS- returns ACS$ be reduced b& the entire DC;BHEB "EE or the #ortion of the DC;BHEB "EE that includes the direct $9)BI;G EVPE;SES* $he use of estimated $9)BI;G EVPE;SES is not #ermitted* b* 'hen calculatin% ;E$ +" "EES 9E$C9;S- returns ACS$ be reduced b& the entire DC;BHEB "EE or the #ortion of the DC;BHEB "EE that includes the direct $9)BI;G EVPE;SES and the I;VES$AE;$ A);)GEAE;$ "EE* $he use of estimated $9)BI;G EVPE;SES is not #ermitted* 2(6 Ca&#'&a!ion Me!"odo&og4ARe#o//enda!ion$ 7*D*0 9eturns S,+CHB be calculated net of nonreclaimable 'ithholdin% ta.es on dividends- interest- and ca#ital %ains* 9eclaimable 'ithholdin% ta.es S,+CHB be accrued* 133 Global Investment Performance Standards 7*D*7 "I9AS S,+CHB calculate C+AP+SI$E returns b& asset 'ei%htin% the member P+9$"+HI+S at least monthl&* 7*D*L "I9AS S,+CHB value P+9$"+HI+S on the date of all H)9GE EV$E9;)H C)S, "H+FS* 3( COMPOSITE CONSTRUCTION 3(A Co/:o$i!e Con$!%'#!ionAReG'i%e/en!$ L*)*0 )ll actual- fee #a&in%- discretionar& P+9$"+HI+S ACS$ be included in at least one C+AP+SI$E* )lthou%h non fee #a&in% discretionar& P+9$"+HI+S ma& be included in a C+AP+SI$E ('ith a##ro#riate disclosures)- nondiscretionar& P+9$"+HI+S are not #ermitted to be included in a "I9A4S C+AP+SI$ES* L*)*7 C+AP+SI$ES ACS$ be defined accordin% to similar investment ob5ectives andEor strate%ies* $he full C+AP+SI$E BE"I;I$I+; ACS$ be made available on re3uest* L*)*L C+AP+SI$ES ACS$ include ne' P+9$"+HI+S on a timel& and consistent basis after the P+9$"+HI+ comes under mana%ement unless s#ecificall& mandated b& the client* L*)*: $erminated P+9$"+HI+S ACS$ be included in the historical returns of the a##ro#riate C+AP+SI$ES u# to the last full measurement #eriod that the P+9$"+HI+ 'as under mana%ement* L*)*8 P+9$"+HI+S are not #ermitted to be s'itched from one C+AP+SI$E to another unless documented chan%es in client %uidelines

or the redefinition of the C+AP+SI$E ma(e it a##ro#riate* $he historical record of the P+9$"+HI+ ACS$ remain 'ith the a##ro#riate C+AP+SI$E* L*)*= Convertible and other h&brid securities ACS$ be treated consistentl& across time and 'ithin C+AP+SI$ES* L*)*X C)9VE +C$ se%ments e.cludin% cash are not #ermitted to be used to re#resent a discretionar& P+9$"+HI+ and- as such- are not #ermitted to be included in C+AP+SI$E returns* Fhen a sin%le asset class is carved out of a multi#le asset class P+9$"+HI+ and the returns are #resented as #art of a sin%le asset C+AP+SI$E- cash must be allocated to the C)9VE +C$ returns in a timel& and consistent manner* De%innin% 0 ?anuar& 7!0!- C)9VE +C$ returns are not #ermitted to be included in sin%le asset class C+AP+SI$E returns unless the C)9VE +C$ is actuall& mana%ed se#aratel& 'ith its o'n cash balance* L*)*Q C+AP+SI$ES must include onl& assets under mana%ement 'ithin the defined "I9A* "I9AS are not #ermitted to lin( simulated or model P+9$"+HI+S 'ith actual #erformance* L*)*< If a "I9A sets a minimum asset level for P+9$"+HI+S to be included in a C+AP+SI$E- no P+9$"+HI+S belo' that asset level can be included in that C+AP+SI$E* )n& chan%es to a C+AP+SI$Es#ecific minimum asset level are not #ermitted to be a##lied retroactivel&* 3(6 Co/:o$i!e Con$!%'#!ionARe#o//enda!ion$ L*D*0 C)9VE +C$ returns S,+CHB not be included in sin%le asset class C+AP+SI$E returns unless the C)9VE +C$S are actuall& mana%ed se#aratel& 'ith their o'n cash balance* 134 9eadin% : @ Global Investment Performance Standards (GIPS) L*D*7 $o remove the effect of a si%nificant EETERNAL CASH FLOH- the use of a TEMPORARY NEH ACCOUNT is 9EC+AAE;BEB (as o##osed to ad5ustin% the C+AP+SI$E com#osition to remove P+9$"+HI+S 'ith si%nificant EV$E9;)H C)S, "H+FS)* L*D*L "I9AS S,+CHB not mar(et a C+AP+SI$E to a #ros#ective client 'ho has assets less than the C+AP+SI$E4S minimum asset level* 4( DISCLOSURES 4(A Di$#&o$'%e$AReG'i%e/en!$ :*)*0 "I9AS ACS$ disclose the definition of "I9A used to determine the $+$)H "I9A )SSE$S and "I9A FIBE com#liance* :*)*7 "I9AS ACS$ disclose the availabilit& of a com#lete list and descri#tion of all of the "I9A4S C+AP+SI$ES* :*)*L "I9AS ACS$ disclose the minimum asset level- if an&- belo' 'hich P+9$"+HI+S are not included in a C+AP+SI$E* "I9AS ACS$ also disclose an& chan%es to the minimum asset level* :*)*: "I9AS ACS$ disclose the currenc& used to e.#ress #erformance* :*)*8 "I9AS ACS$ disclose the #resence- use- and e.tent of levera%e or derivatives (if material)- includin% a sufficient descri#tion of the use- fre3uenc&- and characteristics of the instruments to identif& ris(s*

:*)*= "I9AS ACS$ clearl& label returns as G9+SS +" "EES or ;E$ +" "EES* :*)*X "I9AS ACS$ disclose relevant details of the treatment of 'ithholdin% ta. on dividends- interest income- and ca#ital %ains* If usin% inde.es that are net of ta.es- the "I9A ACS$ disclose the ta. basis of the DE;C,A)9I (e*%*- Hu.embour% based or C*S* based) versus that of the C+AP+SI$E* :*)*Q "I9AS ACS$ disclose and describe an& (no'n inconsistencies in the e.chan%e rates used amon% the P+9$"+HI+S 'ithin a C+AP+SI$E and bet'een the C+AP+SI$E and the DE;C,A)9I* :*)*< If the #resentation conforms 'ith local la's and re%ulations that differ from the GIPS 9EWCI9EAE;$S- "I9AS ACS$ disclose this fact and disclose the manner in 'hich the local la's and re%ulations conflict 'ith the GIPS standards* :*)*0! "or an& #erformance #resented for #eriods #rior to 0 ?anuar& 7!!! that does not com#l& 'ith the GIPS standards- "I9AS ACS$ disclose the #eriod of noncom#liance and ho' the #resentation is not in com#liance 'ith the GIPS standards* :*)*00 "or #eriods #rior to 0 ?anuar& 7!0!- 'hen a sin%le asset class is carved out of a multi#le asset P+9$"+HI+ and the returns are #resented as #art of a sin%le asset C+AP+SI$E- "I9AS ACS$ disclose the #olic& used to allocate cash to the C)9VE +C$ returns* :*)*07 "I9AS ACS$ disclose the FEE SCHEDULE a##ro#riate to the #resentation* :*)*0L If a C+AP+SI$E contains P+9$"+HI+S 'ith DC;BHEB "EES- "I9AS ACS$ disclose for each annual #eriod sho'n the #ercenta%e of C+AP+SI$E assets that is DC;BHEB "EE P+9$"+HI+S* :*)*0: If a C+AP+SI$E contains P+9$"+HI+S 'ith DC;BHEB "EES- "I9AS ACS$ disclose the various t&#es of fees that are included in the DC;BHEB "EE* 133 Global Investment Performance Standards :*)*08 Fhen #resentin% G9+SS +" "EES 9E$C9;S- "I9AS ACS$ disclose if an& other fees are deducted in addition to the direct $9)BI;G EVPE;SES* :*)*0= Fhen #resentin% ;E$ +" "EES 9E$C9;S- "I9AS ACS$ disclose if an& other fees are deducted in addition to the I;VES$AE;$ A);)GEAE;$ "EE and direct $9)BI;G EVPE;SES* :*)*0X "I9AS ACS$ disclose that )BBI$I+;)H I;"+9A)$I+; re%ardin% #olicies for calculatin% and re#ortin% returns is available u#on re3uest* :*)*0Q De%innin% 0 ?anuar& 7!!=- "I9AS ACS$ disclose the use of a subadvisor( s) and the #eriods a subadvisor(s) 'as used* :*)*0< "I9AS ACS$ disclose all si%nificant events that 'ould hel# a #ros#ective client inter#ret the #erformance record* :*)*7! "I9AS ACS$ disclose the C+AP+SI$E BESC9IP$I+;* :*)*70 If a "I9A is redefined- the "I9A ACS$ disclose the date and reason for the redefinition* :*)*77 If a "I9A has redefined a C+AP+SI$E- the "I9A ACS$ disclose the date and nature of the chan%e* Chan%es to C+AP+SI$ES are not #ermitted to be a##lied retroactivel&*

:*)*7L "I9AS ACS$ disclose an& chan%es to the name of a C+AP+SI$E* :*)*7: "I9AS ACS$ disclose the COMPOSITE CREATION DATE* :*)*78 "I9AS ACS$ disclose if- #rior to 0 ?anuar& 7!0!- calendar monthend P+9$"+HI+ valuations or valuations on the last business da& of the month are not used* :*)*7= "I9AS ACS$ disclose 'hich DISPERSION measure is #resented* 4(6 Di$#&o$'%e$ARe#o//enda!ion$ :*D*0 If a #arent com#an& contains multi#le defined "I9AS- each "I9A 'ithin the #arent com#an& is encoura%ed to disclose a list of the other "I9AS contained 'ithin the #arent com#an&* :*D*7 "I9AS S,+CHB disclose 'hen a chan%e in a calculation methodolo%& or valuation source results in a material im#act on the #erformance of a C+AP+SI$E 9E$C9;* :*D*L "I9AS that have been verified S,+CHB add a disclosure to their C+AP+SI$E #resentation statin% that the "I9A has been verified and clearl& indicatin% the #eriods the verification covers if the C+AP+SI$E #resentation includes results for #eriods that have not been sub5ect to "I9A 'ide verification* 3( PRESENTATION AND REPORTING 3(A P%e$en!a!ion and Re:o%!ingAReG'i%e/en!$ 8*)*0 $he follo'in% items ACS$ be re#orted for each C+AP+SI$E #resented1 a* )t least 8 &ears of #erformance (or a record for the #eriod since "I9A or C+AP+SI$E ince#tion if the "I9A or C+AP+SI$E has been in e.istence less than 8 &ears) that meets the 9EWCI9EAE;$S of the GIPS standards2 after #resentin% 8 &ears of #erformance- the "I9A ACS$ #resent additional annual #erformance u# to 0! &ears* ("or e.am#le- after a "I9A #resents 8 &ears of com#liant histor&- the "I9A ACS$ add an additional &ear of #erformance each &ear so that after 8 &ears of claimin% com#liance- the "I9A #resents a 0! &ear #erformance record*) 135 9eadin% : @ Global Investment Performance Standards (GIPS) b* )nnual returns for all &ears* c* $he number of P+9$"+HI+S and amount of assets in the C+AP+SI$Eand either the #ercenta%e of the $+$)H "I9A )SSE$S re#resented b& the C+AP+SI$E or the amount of $+$)H "I9A )SSE$S at the end of each annual #eriod* If the C+AP+SI$E contains less than 8 P+9$"+HI+S- the number of P+9$"+HI+S is not 9EWCI9EB* d* ) measure of BISPE9SI+; of individual P+9$"+HI+ returns for each annual #eriod* If the C+AP+SI$E contains less than 8 P+9$"+HI+S for the full &ear- a measure of BISPE9SI+; is not 9EWCI9EB* 8*)*7 "I9AS ma& lin( non GIPS com#liant returns to their com#liant histor& so lon% as the "I9AS meet the disclosure 9EWCI9EAE;$S for noncom#liant #erformance and onl& com#liant returns are #resented for #eriods after 0 ?anuar& 7!!!* ("or e.am#le- a "I9A

that has been in e.istence since 0<<8 and that 'ants to #resent its entire #erformance histor& and claim com#liance be%innin% 0 ?anuar& 7!!8 ACS$ #resent returns that meet the 9EWCI9EAE;$S of the GIPS standards at least from 0 ?anuar& 7!!! and ACS$ meet the disclosure 9EWCI9EAE;$S for an& noncom#liant histor& #rior to 0 ?anuar& 7!!!*) 8*)*L 9eturns of P+9$"+HI+S and C+AP+SI$ES for #eriods of less than 0 &ear are not #ermitted to be annuali/ed* 8*)*: a* Performance trac( records of a #ast "I9A or affiliation ACS$ be lin(ed to or used to re#resent the historical record of a ne' "I9A or ne' affiliation if1 i* Substantiall& all the investment decision ma(ers are em#lo&ed b& the ne' "I9A (e*%*- research de#artmentP+9$"+HI+ mana%ers- and other relevant staff)ii* $he staff and decision ma(in% #rocess remain intact and inde#endent 'ithin the ne' "I9A- and iii* $he ne' "I9A has records that document and su##ort the re#orted #erformance* b* $he ne' "I9A ACS$ disclose that the #erformance results from the #ast "I9A are lin(ed to the #erformance record of the ne' "I9A* c* In addition to 8*)*:*a and 8*)*:*b- 'hen one "I9A 5oins an e.istin% "I9A- #erformance of C+AP+SI$ES from both "I9AS ACS$ be lin(ed to the on%oin% returns if substantiall& all the assets from the #ast "I9A4S C+AP+SI$E transfer to the ne' "I9A* d* If a com#liant "I9A ac3uires or is ac3uired b& a noncom#liant "I9A- the "I9AS have 0 &ear to brin% the noncom#liant assets into com#liance* 8*)*8 De%innin% 0 ?anuar& 7!!=- if a C+AP+SI$E includes or is formed usin% sin%le asset class C)9VE +C$S from multi#le asset class P+9$"+HI+S- the #resentation ACS$ include the #ercenta%e of the C+AP+SI$E that is com#osed of C)9VE +C$S #ros#ectivel& for each #eriod* 8*)*= $he $+$)H 9E$C9; for the DE;C,A)9I (or DE;C,A)9IS) that reflects the investment strate%& or mandate re#resented b& the C+AP+SI$E ACS$ be #resented for each annual #eriod* If no DE;C,A)9I is #resented- the #resentation ACS$ e.#lain 'h& no 137 Global Investment Performance Standards DE;C,A)9I is disclosed* If the "I9A chan%es the DE;C,A)9I that is used for a %iven C+AP+SI$E in the #erformance #resentationthe "I9A ACS$ disclose both the date and the reasons for the chan%e* If a custom DE;C,A)9I or combination of multi#le DE;C,A)9IS is used- the "I9A ACS$ describe the DE;C,A)9I creation and re balancin% #rocess* 8*)*X If a C+AP+SI$E contains an& non fee #a&in% P+9$"+HI+S- the "I9A ACS$ #resent- as of the end of each annual #eriod- the #ercenta%e of the C+AP+SI$E assets re#resented b& the non fee #a&in% P+9$"+HI+S*

3(6 P%e$en!a!ion and Re:o%!ingARe#o//enda!ion$ 8*D*0 It is 9EC+AAE;BEB that "I9AS #resent the follo'in% items1 a* C+AP+SI$E returns %ross of I;VES$AE;$ A);)GEAE;$ "EES and ADMINISTRATI-E FEES and before ta.es (e.ce#t for nonreclaimable 'ithholdin% ta.es)b* Cumulative returns for C+AP+SI$E and DE;C,A)9IS for all #eriodsc* E3ual 'ei%hted mean and /edian returns for each C+AP+SI$Ed* Gra#hs and charts #resentin% s#ecific information 9EWCI9EB or 9EC+AAE;BEB under the GIPS standardse* 9eturns for 3uarterl& andEor shorter time #eriodsf* )nnuali/ed C+AP+SI$E and DE;C,A)9I returns for #eriods %reater than 07 months%* C+AP+SI$E level countr& and sector 'ei%htin%s* 8*D*7 It is 9EC+AAE;BEB that "I9AS #resent relevant C+AP+SI$E level ris( measures- such as beta- !%a#8ing e%%o%- /odi ied d'%a!ionin o%/a!ion %a!io- S"a%:e %a!io- $re&nor ratio- credit ratin%s.a&'e a! %i$8 0-aR2- and volatilit&- over time of the C+AP+SI$E and DE;C,A)9I returns* 8*D*L )fter #resentin% the 9EWCI9EB 8 &ears of com#liant historical #erformance- the "I9A is encoura%ed to brin% an& remainin% #ortion of its istorical trac( record into com#liance 'ith the GIPS standards* ($his does not #reclude the 9EWCI9EAE;$ that the "I9A ACS$ add annual #erformance to its trac( record on an on-going basis to build a 0! &ear trac( record*) 5( REAL ESTATE "ollo'in% are #rovisions that a##l& to the calculation and #resentation of 9E)H ES$)$E assets* $he 9E)H ES$)$E #rovisions su##lement all the 9EWCI9EB and 9EC+AAE;BEB elements of the GIPS standards (outlined in Section II*0* throu%h Section II*8*)- e.ce#t the 9E)H ES$)$E #rovisions that override the e.istin% GIPS #rovisions for valuation1 II*=*)*0- II*=*)*7- II*=*D*0- and II*=*D*7* Investment t&#es not considered as 9E)H ES$)$E and- therefore- are addressed else'here in the %eneral #rovisions of the GIPS standards include1 G Publicl& traded 9E)H ES$)$E securities- includin% an& listed securities issued b& #ublic com#aniesG Commercial mort%a%e bac(ed securities (CADS)G Private debt investments- includin% commercial and residential loans 'here the eC:e#!ed %e!'%n is solel& related to contractual interest rates 'ithout an& #artici#ation in the economic #erformance of the underl&in% 9E)H ES$)$E* 139 9eadin% : @ Global Investment Performance Standards (GIPS) If a P+9$"+HI+ includes a mi. of 9E)H ES$)$E and other investments that are not 9E)H ES$)$E- then these 9EWCI9EAE;$S and 9EC+AAE;B)$I+;S onl& a##l& to the 9E)H ES$)$E #ortion of the P+9$"+HI+- and 'hen the "I9A C)9VES +C$ the 9E)H ES$)$E #ortion of the P+9$"+HI+- the GIPS C)9VE +C$ #rovisions (see II*L*)*X) ACS$ also be a##lied* 5(A Rea& E$!a!e In:'! Da!aAReG'i%e/en!$ =*)*0 9E)H ES$)$E investments ACS$ be valued at A)9IE$ V)HCE at least

once ever& 07 months* "or #eriods be%innin% 0 ?anuar& 7!!Q9E)H ES$)$E investments ACS$ be valued at least 3uarterl&* =*)*7 9E)H ES$)$E investments ACS$ be valued b& an e.ternal P9+"ESSI+;)HHP BESIG;)$EB- CE9$I"IEB- or HICE;SEB C+AAE9CI)H P9+PE9$P V)HCE9E)PP9)ISE9 at least once ever& L= months* In mar(ets 'here neither #rofessionall& desi%nated nor a##ro#riatel& sanctioned valuers or a##raisers are available and valuers or a##raisers from other countries bearin% such credentials do not commonl& o#erate- then the #art& res#onsible for en%a%in% such services locall& shall ta(e necessar& ste#s to ensure that onl& 'ell 3ualified #ro#ert& valuers are used* 5(6 Rea& E$!a!e In:'! Da!aARe#o//enda!ion$ =*D*0 9E)H ES$)$E investments S,+CHB be valued at least 3uarterl&* =*D*7 9E)H ES$)$E investments S,+CHB be valued b& an e.ternal valuer or a##raiser at least once ever& 07 months* =*D*L If calculatin% the I;$E9;)H 9)$E +" 9E$C9;- "I9AS S,+CHB use 3uarterl& cash flo's at a minimum* 5(A Rea& E$!a!e Di$#&o$'%e$AReG'i%e/en!$ =*)*L In addition to the other disclosure 9EWCI9EAE;$S of the GIPS standards- #erformance #resentations for 9E)H ES$)$E investments ACS$ disclose1 a* $he calculation methodolo%& for com#onent returns>that iscom#onent returns are (0) calculated se#aratel& usin% chainlin(ed $IAE FEIG,$EB 9)$ES +" 9E$C9;- (7) ad5usted such that the sum of the I;C+AE 9E$C9; and the CAPITAL RETURN is e3ual to the $+$)H 9E$C9;- or (L) income cash reco%nition modeb* $he "I9A4S descri#tion of discretionc* $he valuation methods and #rocedures (e*%*- discounted cash flo' valuation model- ca#itali/ed income a##roachsales com#arison a##roach- the valuation of debt #a&able in determinin% the value of levera%ed 9E)H ES$)$E)d* $he ran%e of #erformance returns for the individual accounts in the C+AP+SI$Ee* $he source of the valuation ('hether valued b& an e.ternal valuer or INTERNAL -ALUATION or 'hether values are obtained from a third #art& mana%er) for each #eriodf* $he #ercent of total A)9IE$ V)HCE of C+AP+SI$E assets (asset 'ei%hted not e3uall& 'ei%hted) total 9E)H ES$)$E assets valued b& an EETERNAL -ALUATION for each #eriod- and %* $he fre3uenc& 9E)H ES$)$E investments are valued b& e.ternal valuers* 13; Global Investment Performance Standards 5(6 Rea& E$!a!e Di$#&o$'%e$ARe#o//enda!ion$ =*D*: If since ince#tion INTERNAL RATE OF RETURN #erformance results are sho'n- the "I9A S,+CHB disclose the time #eriod that is covered as 'ell as the fre3uenc& of the cash flo's used in the calculation* 5(A P%e$en!a!ion and Re:o%!ingAReG'i%e/en!$

=*)*: $he income and ca#ital a##reciation com#onent returns ACS$ be #resented in addition to $+$)H 9E$C9;* 5(6 P%e$en!a!ion and Re:o%!ingARe#o//enda!ion$ =*D*8 Fhen available- the ca#ital and income se%ments of the a##ro#riate 9E)H ES$)$E DE;C,A)9I S,+CHB be #resented* =*D*= It is 9EC+AAE;BEB that "I9AS #resent the since ince#tion I;$E9;)H 9)$E +" 9E$C9; for the C+AP+SI$E* =*D*X It is 9EC+AAE;BEB that the follo'in% items be #resented- es#eciall& in those circumstances 'hen the investment mana%er has the abilit& to control the timin% of investor ca#ital call tranches durin% the fund4s or P+9$"+HI+4S initial ac3uisition #eriod1 a* G9+SS and ;E$ +" "EES (includin% incentive allocations) annuali/ed since ince#tion TIMEDHEIGHTED RATE OF RETURN and I;$E9;)H 9)$E +" 9E$C9; (terminal value based on ENDING MAR>ET -ALUE net assets of the C+AP+SI$E) to the last &ear re#orted for the C+AP+SI$E* b* G9+SS and ;E$ +" "EES (includin% incentive allocations) annuali/ed since ince#tion $IAE FEIG,$EB 9)$E +" 9E$C9; and I;$E9;)H 9)$E +" 9E$C9; (based on reali/ed cash flo's onl&e.cludin% unreali/ed %ains) to the last &ear re#orted for the C+AP+SI$E* c* In addition- other #erformance measures ma& #rovide additional useful information for both #ros#ective and e.istin% investors* $he GIPS P9IV)$E EWCI$P Provisions (See GIPS standards II*X) #rovide %uidance 'ith re%ard to such additional measures as investment and 9E)HIS)$I+; ACH$IPHES and ratios relatin% to P)IB I; C)PI$)H* 7( PRI-ATE EMUITY "ollo'in% are #rovisions that a##l& to the calculation and #resentation of P9IV)$E EWCI$P investments other than +PE; E;B or EVE9G9EE; "C;BS ('hich ACS$ follo' the main GIPS #rovisions)* $he P9IV)$E EWCI$P #rovisions su##lement all the 9EWCI9EB and 9EC+AAE;BEB elements of the GIPS standards (outlined in Section II*0* throu%h Section II*8)- e.ce#t these P9IV)$E EWCI$P #rovisions that override the e.istin% GIPS #rovisions for valuation (II*X*)*0 and II*X*D*0)- calculation methodolo%& (II*X*)*7 and II*X*)*L)- fees (II*X*)*: and II*X*)*8)- and #resentation and re#ortin% of returns (II*X*)*7!)* 7(A P%i.a!e EG'i!4 In:'! Da!aAReG'i%e/en!$ X*)*0 P9IV)$E EWCI$P investments ACS$ be valued (#referabl& 3uarterl& but at least annuall&) accordin% to the GIPS P9IV)$E EWCI$P Valuation Princi#les #rovided in )##endi. :B* 7(6 P%i.a!e EG'i!4 In:'! Da!aARe#o//enda!ion$ X*D*0 P9IV)$E EWCI$P investments S,+CHB be valued 3uarterl&* 14= 9eadin% : @ Global Investment Performance Standards (GIPS) 7(A P%i.a!e EG'i!4 Ca&#'&a!ion Me!"odo&og4AReG'i%e/en!$ X*)*7 "I9AS ACS$ calculate the annuali/ed since ince#tion I;$E9;)H 9)$E +" 9E$C9; (SI IRR)* X*)*L $he annuali/ed SI I99 ACS$ be calculated usin% either dail& or monthl& cash flo's and the #eriod end valuation of the unli3uidated

remainin% holdin%s* Stoc( BIS$9IDC$I+;S ACS$ be valued at the time of BIS$9IDC$I+;* X*)*: ;E$ +" "EES 9E$C9;S ACS$ be net of I;VES$AE;$ A);)GEAE;$ "EESCARRIED INTERES$- and TRANSACTION EEPENSES* X*)*8 "or I;VES$AE;$ )BVIS+9S- all returns ACS$ be net of all underl&in% #artnershi# andEor fund fees and C)99IEB I;$E9ES$* ;E$ +""EES 9E$C9;S ACS$- in addition- be net of all the I;VES$AE;$ )BVIS+94S fees- e.#enses- and C)99IEB I;$E9ES$* 7(A( P%i.a!e EG'i!4 Co/:o$i!e Con$!%'#!ionAReG'i%e/en!$ X*)*= )ll CH+SEB E;B P9IV)$E EWCI$P investments- includin%- but not limited to- fund of funds- #artnershi#s- or BI9EC$ I;VES$AE;$S- ACS$ be included in a C+AP+SI$E defined b& strate%& and -INTAGE YEAR* X*)*X Partnershi#Efund investments- BI9EC$ I;VES$AE;$S- and +PE; E;B P9IV)$E EWCI$P investments (e*%*- EVE9G9EE; "C;BS) ACS$ be in se#arate C+AP+SI$ES* 7(A( P%i.a!e EG'i!4 Di$#&o$'%e$AReG'i%e/en!$ X*)*Q "I9AS ACS$ disclose the VI;$)GE PE)9 of the C+AP+SI$E* X*)*< "or all closed (discontinued) C+AP+SI$ES- "I9AS ACS$ disclose the final reali/ation (li3uidation) date of the C+AP+SI$E* X*)*0! "I9AS ACS$ disclose the unreali/ed a##reciationEde#reciation of the C+AP+SI$E for the most recent #eriod* X*)*00 "I9AS ACS$ disclose the total COMMITTED CAPITAL of the C+AP+SI$E for the most recent #eriod* X*)*07 "or the most recent #eriod- "I9AS ACS$ disclose the valuation methodolo%ies used to value their P9IV)$E EWCI$P investments* If an& chan%e occurs in either valuation basis or methodolo%& from the #rior #eriod- the chan%e ACS$ be disclosed* X*)*0L If the #resentation com#lies 'ith an& local or re%ional valuation %uidelines in addition to the GIPS P9IV)$E EWCI$P Valuation Princi#les- "I9AS ACS$ disclose 'hich local or re%ional %uidelines have been used* X*)*0: "I9AS ACS$ document the "I9A4S valuation revie' #rocedures and disclose that the #rocedures are available u#on re3uest* X*)*08 "I9AS ACS$ disclose the definition of the C+AP+SI$E investment strate%& (e*%*- earl& sta%e- develo#ment- bu& outs- %eneralistturnaround- me//anine- %eo%ra#h&- middle mar(et- and lar%e transaction)* X*)*0= If a DE;C,A)9I is used- "I9AS ACS$ disclose the calculation methodolo%& used for the DE;C,A)9I* X*)*0X If a valuation basis other than FAIR -ALUE is used to value investments 'ithin the C+AP+SI$E- "I9AS ACS$ disclose for the most recent #eriod #resented their 5ustification for 'h& ")I9 V)HCE is not a##licable* )dditionall&- "I9AS ACS$ disclose the follo'in%1 a* $he #a%%4ing .a&'e of non ")I9 V)HCE basis investments relative to total fund* 141 Global Investment Performance Standards b* $he number of holdin%s valued on a non ")I9 V)HCE basis* c* $he absolute value of the non ")I9 V)HCE basis investments*

X*)*0Q "I9AS ACS$ disclose 'hether the& are usin% dail& or monthl& cash flo's in the SI I99 calculation* X*)*0< If a "I9A does not use a calendar &ear #eriod end- a disclosure ACS$ be made indicatin% the #eriod end used* 7(A P%i.a!e EG'i!4 P%e$en!a!ion and Re:o%!ingAReG'i%e/en!$ X*)*7! "I9AS ACS$ #resent both the ;E$ +" "EES and G9+SS +" "EES annuali/ed SI I99 of the C+AP+SI$E for each &ear since ince#tion* X*)*70 "or each #eriod #resented- "I9AS ACS$ re#ort1 a* PAIDDIN CAPITAL to date (cumulative B9)FB+F;)b* $otal current IN-ESTED CAPITAL- and c* Cumulative BIS$9IDC$I+;S to date* X*)*77 "or each #eriod #resented- "I9AS ACS$ re#ort the follo'in% multi#les1 a* $+$)H V)HCE to P)IB I; C)PI$)H (IN-ESTMENT MULTIPLE or $VPI)b* Cumulative BIS$9IDC$I+;S to P)IB I; C)PI$)H (REALILATION MULTIPLE or BPI)c* P)IB I; C)PI$)H to C+AAI$$EB C)PI$)H (PIC ACH$IPHE)- and d* RESIDUAL -ALUE $+ P)IB I; C)PI$)H (9VPI)* X*)*7L If a DE;C,A)9I is sho'n- the cumulative annuali/ed SI I99 for the DE;C,A)9I that reflects the same strate%& and VI;$)GE PE)9 of the C+AP+SI$E ACS$ be #resented for the same #eriods for 'hich the C+AP+SI$E is #resented* If no DE;C,A)9I is sho'nthe #resentation ACS$ e.#lain 'h& no DE;C,A)9I is disclosed* 7(6 P%i.a!e EG'i!4 P%e$en!a!ion and Re:o%!ingARe#o//enda!ion$ X*D*7 "I9AS S,+CHB #resent the avera%e holdin% #eriod of the investments (P+9$"+HI+ com#anies) over the life of the C+AP+SI$E* III( -ERIFICATION $he #rimar& #ur#ose of verification is to establish that a "I9A claimin% com#liance 'ith the GIPS standards has adhered to the Standards* Verification 'ill also increase the understandin% and #rofessionalism of #erformance measurement teams and consistenc& of #resentation of #erformance results* $he verification #rocedures attem#t to stri(e a balance bet'een ensurin% the 3ualit&- accurac&- and relevance of #erformance #resentations and minimi/in% the cost to "I9AS of inde#endent revie' of #erformance results* "I9AS S,+CHB assess the benefits of im#roved internal #rocesses and #rocedures'hich are as si%nificant as the mar(etin% advanta%es of verification* $he %oal of the IPC in draftin% the verification #rocedures is to encoura%e broad acce#tance of verification* Verification is stron%l& encoura%ed and is e.#ected to become mandator& at a future date* $he IPC 'ill re evaluate all as#ects of mandator& verification b& 7!0! and #rovide the industr& sufficient time to im#lement an& chan%es* A( SCOPE AND PURPOSE OF -ERIFICATION 0* Verification is the revie' of an investment mana%ement "I9A4S #erformance measurement #rocesses and #rocedures b& an inde#endent third #art& verifier* Verification tests1 142 9eadin% : @ Global Investment Performance Standards (GIPS) a* Fhether the "I9A has com#lied 'ith all the C+AP+SI$E construction

9EWCI9EAE;$S of the GIPS standards on a "I9A 'ide basisand b* Fhether the "I9A4S #rocesses and #rocedures are desi%ned to calculate and #resent #erformance results in com#liance 'ith the GIPS standards* ) sin%le verification re#ort is issued in res#ect of the 'hole "I9A2 verification cannot be carried out for a sin%le C+AP+SI$E* 7* $hird #art& verification brin%s credibilit& to the claim of com#liance and su##orts the overall %uidin% #rinci#les of full disclosure and fair re#resentation of investment #erformance* L* $he initial minimum #eriod for 'hich verification can be #erformed is 0 &ear of a "I9A4S #resented #erformance* $he 9EC+AAE;BEB #eriod over 'hich verification is #erformed is that #art of the "I9A4S trac( record for 'hich GIPS com#liance is claimed* :* ) verification re#ort must confirm that1 a* $he "I9A has com#lied 'ith all the C+AP+SI$E construction 9EWCI9EAE;$S of the GIPS standards on a "I9A 'ide basis- and b* $he "I9A4S #rocesses and #rocedures are desi%ned to calculate and #resent #erformance results in com#liance 'ith the GIPS standards* Fithout such a re#ort from the verifier- the "I9A cannot state that its claim of com#liance 'ith the GIPS standards has been verified* 8* )fter #erformin% the verification- the verifier ma& conclude that the "I9A is not in com#liance 'ith the GIPS standards or that the records of the "I9A cannot su##ort a com#lete verification* In such situations- the verifier must issue a statement to the "I9A clarif&in% 'h& a verification re#ort 'as not #ossible* =* ) #rinci#al verifier ma& acce#t the 'or( of a local or #revious verifier as #art of the basis for the #rinci#al verifier4s o#inion* X* $he minimum GIPS verification #rocedures are described in section III*D 9e3uired Verification Procedures* 6( REMUIRED -ERIFICATION PROCEDURES $he follo'in% are the minimum #rocedures that verifiers must follo' 'hen verif&in% an investment "I9A4S com#liance 'ith the GIPS standards* Verifiers must follo' these #rocedures #rior to issuin% a verification re#ort to the "I9A1 0* Preverification Procedures a* Ino'led%e of the "I9A1 Verifiers must obtain selected $a/:&e$ of the "I9A4S investment #erformance re#orts and other available information re%ardin% the "I9A to ensure a##ro#riate (no'led%e of the "I9A* b* Ino'led%e of GIPS Standards1 Verifiers must understand all the 9EWCI9EAE;$S and 9EC+AAE;B)$I+;S of the GIPS standardsincludin% an& u#dates- re#orts- %uidance statements- inter#retationsand clarifications #ublished b& C") Institute and the Investment Performance Council- 'hich 'ill be made available via the C") Institute 'ebsite ('''*cfainstitute*or%) as 'ell as the $!PS Handbook* )ll clarification and u#date information must be

considered 'hen determinin% a "I9A4S claim of com#liance* 143 Global Investment Performance Standards c* Ino'led%e of the Performance Standards1 Verifiers must be (no'led%eable of countr& s#ecific la's and re%ulations a##licable to the "I9A and must determine an& differences bet'een the GIPS standards and the countr& s#ecific la's and re%ulations* d* Ino'led%e of "I9A Policies1 Verifiers must determine the "I9A4S assum#tions and #olicies for establishin% and maintainin% com#liance 'ith all a##licable 9EWCI9EAE;$S of the GIPS standards* )t a minimum- verifiers must determine the follo'in% #olicies and #rocedures of the "I9A1 i* Polic& 'ith re%ard to investment discretion* $he verifier must receive from the "I9A- in 'ritin%- the "I9A4S definition of investment discretion and the "I9A4S %uidelines for determinin% 'hether accounts are full& discretionar&2 ii* Polic& 'ith re%ard to the definition of C+AP+SI$ES accordin% to investment strate%&* $he verifier must obtain the "I9A4S list of C+AP+SI$E BE"I;I$I+;S 'ith 'ritten criteria for includin% accounts in each C+AP+SI$E2 iii* Polic& 'ith re%ard to the timin% of inclusion of ne' accounts in the C+AP+SI$ES2 iv* Polic& 'ith re%ard to timin% of e.clusion of closed accounts in the C+AP+SI$ES2 v* Polic& 'ith re%ard to the accrual of interest and dividend income2 vi* Polic& 'ith re%ard to the mar(et valuation of investment securities2 vii* Aethod for com#utin% the $IAE FEIG,$EB 9)$E +" 9E$C9; for the #ortfolio2 viii* )ssum#tions on the timin% of ca#ital inflo'sEoutflo's2 i.* Aethod for com#utin% C+AP+SI$E returns2 .* Polic& 'ith re%ard to the #resentation of C+AP+SI$E returns2 .i* Policies re%ardin% timin% of im#lied ta.es due on income and %ea&iBed #a:i!a& gain$ for re#ortin% #erformance on an after ta. basis2 .ii* Policies re%ardin% use of securitiesEcountries not included in a C+AP+SI$E4S DE;C,A)9I2 .iii* Cse of levera%e and other derivatives2 and .iv* )n& other #olicies and #rocedures relevant to #erformance #resentation* e* Ino'led%e of Valuation Dasis for Performance Calculations1 Verifiers must ensure that the& understand the methods and #olicies used to record valuation information for #erformance calculation #ur#oses* In #articular- verifiers must determine that1 i* $he "I9A4S #olic& on classif&in% fund flo's (e*%*- in5ectionsdisbursements- dividends- interest- fees- and ta.es) is consistent 'ith the desired results and 'ill %ive rise to accurate returns2

ii* $he "I9A4S accountin% treatment of income- interest- and dividend recei#ts is consistent 'ith cash account and cash accruals definitions2 144 9eadin% : @ Global Investment Performance Standards (GIPS) iii* $he "I9A4S treatment of ta.es- ta. reclaims- and ta. accruals is correct and the manner used is consistent 'ith the desired method (i*e*- %ross or net of ta. return)2 iv* $he "I9A4S #olicies on reco%ni/in% #urchases- sales- and the o#enin% and closin% of other #ositions are internall& consistent and 'ill #roduce accurate results2 and v* $he "I9A4S accountin% for investments and derivatives is consistent 'ith the GIPS standards* 7* Verification Procedures a* Befinition of the "I9A1 Verifiers must determine that the "I9A isand has been- a##ro#riatel& defined* b* C+AP+SI$E Construction* Verifiers must be satisfied that1 i* $he "I9A has defined and maintained C+AP+SI$ES accordin% to reasonable %uidelines in com#liance 'ith the GIPS standards2 ii* )ll the "I9A4S actual discretionar& fee #a&in% P+9$"+HI+S are included in a C+AP+SI$E2 iii* $he "I9A4S definition of discretion has been consistentl& a##lied over time2 iv* )t all times- all accounts are included in their res#ective C+AP+SI$ES and no accounts that belon% in a #articular C+AP+SI$E have been e.cluded2 v* C+AP+SI$E DE;C,A)9IS are consistent 'ith C+AP+SI$E BE"I;I$I+;S and have been consistentl& a##lied over time2 vi* $he "I9A4S %uidelines for creatin% and maintainin% C+AP+SI$ES have been consistentl& a##lied2 and vii* $he "I9A4S list of C+AP+SI$ES is com#lete* c* ;ondiscretionar& )ccounts1 Verifiers must obtain a listin% of all "I9A P+9$"+HI+S and determine on a $a/:&ing basis 'hether the mana%er4s classification of the account as discretionar& or nondiscretionar& is a##ro#riate b& referrin% to the account4s a%reement and the "I9A4S 'ritten %uidelines for determinin% investment discretion* d* Sam#le )ccount Selection1 Verifiers must obtain a listin% of o#en and closed accounts for all C+AP+SI$ES for the &ears under e.amination* Verifiers ma& chec( com#liance 'ith the GIPS standards usin% a selected sam#le of a "I9A4S accounts* Verifiers S,+CHB consider the follo'in% criteria 'hen selectin% the sam#le accounts for e.amination1 i* ;umber of C+AP+SI$ES at the "I9A2 ii* ;umber of P+9$"+HI+S in each C+AP+SI$E2 iii* ;ature of the C+AP+SI$E2 iv* $otal assets under mana%ement2 v* Internal control structure at the "I9A (s&stem of chec(s and

balances in #lace)2 vi* ;umber of &ears under e.amination2 and vii* Com#uter a##lications- soft'are used in the construction and maintenance of C+AP+SI$ES- the use of e.ternal #erformance measurers- and the calculation of #erformance results* 143 Global Investment Performance Standards $his list is not all inclusive and contains onl& the minimum criteria that S,+CHB be used in the selection and evaluation of a sam#le for testin%* "or e.am#le- one #otentiall& useful a##roach 'ould be to choose a P+9$"+HI+ for the stud& sam#le that has the lar%est im#act on C+AP+SI$E #erformance because of its si/e or because of e.tremel& %ood or bad #erformance* $he lac( of e.#licit record (ee#in% or the #resence of errors ma& 'arrant selectin% a lar%er sam#le or a##l&in% additional verification #rocedures* e* )ccount 9evie'1 "or selected accounts- verifiers must determine1 i* Fhether the timin% of the initial inclusion in the C+AP+SI$E is in accordance 'ith #olicies of the "I9A2 ii* Fhether the timin% of e.clusion from the C+AP+SI$E is in accordance 'ith #olicies of the "I9A for closed accounts2 iii* Fhether the ob5ectives set forth in the account a%reement are consistent 'ith the mana%er4s C+AP+SI$E BE"I;I$I+; as indicated b& the account a%reement- P+9$"+HI+ summar&and C+AP+SI$E BE"I;I$I+;2 iv* $he e.istence of the accounts b& tracin% selected accounts from account a%reements to the C+AP+SI$ES2 v* $hat all P+9$"+HI+S sharin% the same %uidelines are included in the same C+AP+SI$E2 and vi* $hat shifts from one C+AP+SI$E to another are consistent 'ith the %uidelines set forth b& the s#ecific account a%reement or 'ith documented %uidelines of the "I9A4S clients* f* Performance Aeasurement Calculation1 Verifiers must determine 'hether the "I9A has com#uted #erformance in accordance 'ith the #olicies and assum#tions ado#ted b& the "I9A and disclosed in its #resentations* In doin% so- verifiers S,+CHB1 i* 9ecalculate rates of return for a sam#le of accounts in the "I9A usin% an acce#table return formula as #rescribed b& the GIPS standards (e*%*- $IAE FEIG,$EB 9)$E +" 9E$C9;)2 and ii* $a(e a reasonable sam#le of C+AP+SI$E calculations to assure themselves of the accurac& of the asset 'ei%htin% of returnsthe %eometric lin(in% of returns to #roduce annual rates of returns- and the calculation of the BISPE9SI+; of individual returns around the a%%re%ate C+AP+SI$E return* %* Bisclosures1 Verifiers must revie' a sam#le of C+AP+SI$E #resentations to ensure that the #resentations include the information and disclosures 9EWCI9EB b& the GIPS standards* h* Aaintenance of 9ecords1 $he verifier must maintain sufficient information to su##ort the verification re#ort* $he verifier must obtain a re#resentation letter from the client "I9A confirmin% ma5or #olicies and an& other s#ecific re#resentations made to

the verifier durin% the e.amination* C( DETAILED EEAMINATIONS OF IN-ESTMENT PERFORMANCE PRESENTATIONS Se#arate from a GIPS verification- a firm ma& choose to have a furthermore e.tensive- s#ecificall& focused e.amination (or #erformance audit) of a s#ecific C+AP+SI$E #resentation* "I9AS cannot ma(e an& claim that a #articular C+AP+SI$E has been inde#endentl& e.amined 'ith res#ect to the GIPS standards unless the verifier has also follo'ed the GIPS verification #rocedures set forth in 145 9eadin% : @ Global Investment Performance Standards (GIPS) section III*D* "I9AS cannot state that a #articular C+AP+SI$E #resentation has been GIPS verified or ma(e an& claim to that affect* GIPS verification relates onl& to "I9A FIBE verification* "I9AS can ma(e a claim of verification onl& after a verifier has issued a GIPS verification re#ort* $o assert a verification re#ort has been received- a detailed e.amination of a C+AP+SI$E #resentation is not 9EWCI9EB* E.aminations of this t&#e are unli(el& to become a 9EWCI9EAE;$ of the GIPS standards or become mandator&* 147 Global Investment Performance Standards 149 9eadin% : @ Global Investment Performance Standards (GIPS) APPENDIE 4AASAMPLE GIPSDCOMPLIANT PRESENTATIONS ECa/:&e 1 Sa/:&e 1 In.e$!/en! Fi%/ 6a&an#ed Co/:o$i!e 1 Ian'a%4 1;;3 !"%o'g" 31 De#e/)e% 2==4 Yea% 0<<8 0=*! 08*! 0:*0 7= :*8 0=8 7L= 0<<= 7*7 0*L 0*Q L7 7*! 7L8 L:= 0<<X 77*: 70*8 7:*0 LQ 8*X L:: 87< 0<<Q X*0 =*7 =*! :8 7*Q ::8 =<8 0<<< Q*8 X*8 Q*! :Q L*0 87! QL< 7!!! Q*! Q*< Q*: :< 7*Q 8!8 0!0: 7!!0 8*< =*Q =*7 87 7*< :<< <<8 7!!7 7*: 0*= 7*7 8Q L*0 878 0078 7!!L =*X 8*< =*Q 88 L*8 8:< 0778 7!!: <*: Q*= <*0 8< 7*8 8X8 07<! Sa/:&e 1 In.e$!/en! Fi%/ "a$ :%e:a%ed and :%e$en!ed !"i$ %e:o%! in #o/:&ian#e <i!" !"e G&o)a& In.e$!/en! Pe% o%/an#e S!anda%d$ 0GIPS12( ;otes1 0* Sam#le 0 Investment "irm is a balanced #ortfolio investment mana%er that invests solel& in Canadian securities* Sam#le 0 Investment "irm is defined as an inde#endent investment mana%ement firm that is not affiliated 'ith an& #arent or%ani/ation* "or the #eriods from 7!!! throu%h 7!!:- Sam#le 0 Investment "irm has been verified b& Verification Services Inc* ) co#& of the verification re#ort is available u#on re3uest* )dditional information re%ardin% the firm4s #olicies and #rocedures for calculatin% and re#ortin% #erformance results is available u#on re3uest*

7* $he com#osite includes all nonta.able balanced #ortfolios 'ith an asset allocation of L!` SOP $SV and X!` Scotia Canadian Dond Inde. "und- 'hich allo' u# to a 0!` deviation in asset allocation* L* $he benchmar(1 L!` SOP $SV2 X!` Scotia Canadian Dond Inde. "und rebalanced monthl&* :* Valuations are com#uted and #erformance re#orted in Canadian dollars* 8* Gross of fees #erformance returns are #resented before mana%ement and custodial fees but after all tradin% e.#enses* 9eturns are #resented net of nonreclaimable 'ithholdin% ta.es* ;et of fees #erformance returns are calculated b& deductin% the hi%hest fee of !*78` from the 3uarterl& %ross com#osite return* $he mana%ement fee schedule is as follo's1 0*!!` on first C)B78A2 !*=!` thereafter* =* $his com#osite 'as created in "ebruar& 0<<8* ) com#lete list and descri#tion of firm com#osites is available u#on re3uest* X* "or the #eriods 0<<8 and 0<<=- Sam#le 0 Investment "irm 'as not in com#liance 'ith the GIPS standards because #ortfolios 'ere valued annuall&* Q* Internal dis#ersion is calculated usin% the e3ual 'ei%hted standard deviation of all #ortfolios that 'ere included in the com#osite for the entire &ear* To!a& Fi%/ A$$e!$ 0CAD Mi&&ion2 To!a& Co/:o$i!e A$$e!$ 0CAD Mi&&ion2 In!e%na& Di$:e%$ion 0:e%#en!2 N'/)e% o Po%! o&io$ 6en#"/a%8 Re!'%n 0:e%#en!2 Ne!Do DFee$ Re!'%n 0:e%#en!2 G%o$$Do DFee$ Re!'%n 0:e%#en!2 14; )##endi. :)>Sam#le GIPS Com#liant Presentations ECa/:&e 2 Sa/:&e 2 A$$e! Manage/en! Co/:an4 EG'i!ie$ Ho%&d 6M MSCI A#!i.e Manda!e$ Di%e#! Re:o%!ing C'%%en#4 CHF C%ea!ion Da!e =1 I'&4 1;;; Pe%iod 7!!: 0Q*! 0<*= = !*7 Q:*L a!*0 7!!L L8*L LL*! Q !*X 07=*= !*0 7!!7 0=*! 0:*8 Q 0*8 7LL*! !*7 7!!0 0L*8 00*Q X 0*L 7!7*0 !*7

7!!! =!*7 :=*0 a8 ;E) 0:L*X !*7 0<<< 70*L 0X*8 a8 ;E) =7*Q a!*0 0<<Q 77*8 7=*L a8 ;E) 0=*0 a!*0 Co/:&ian#e S!a!e/en! Sam#le 7 )sset Aana%ement Com#an& has #re#ared and #resented this re#ort in com#liance 'ith the Global Investment Performance Standards (GIPS)* De ini!ion o !"e Fi%/ Sam#le 7 )sset Aana%ement Com#an& is an inde#endent investment mana%ement firm established in 0<<X* Sam#le 7 )sset Aana%ement Com#an& mana%es a variet& of e3uit&- fi.ed income- and balanced assets for #rimaril& S'iss and Euro#ean clients* )dditional information re%ardin% the firm4s #olicies and #rocedures for calculatin% and re#ortin% #erformance returns is available u#on re3uest* 6en#"/a%8 Sources of forei%n e.chan%e rates ma& be different bet'een the com#osite and the benchmar(* Fee$ Performance fi%ures are #resented %ross of mana%ement fees- custodial fees- and 'ithholdin% ta.es but net of all tradin% e.#enses* Li$! o Co/:o$i!e$ ) com#lete listin% and descri#tion of all com#osites is available on re3uest* -e%i i#a!ion Sam#le 7 )sset Aana%ement Com#an& has been verified b& an inde#endent verifier on an annual basis from 0<<Q throu%h 7!!L* Fee S#"ed'&e $he standard fi.ed mana%ement fee for accounts 'ith assets under mana%ement of u# to C,"8! million is !*L8` #er annum* Mini/'/ A##o'n! SiBe $he minimum #ortfolio si/e for inclusion in E3uities Forld DA ASCI com#osite is C,"0 million* Pe%#en!age o Fi%/ A$$e!$ 0N2 To!a& Co/:o$i!e A$$e!$ 0/i&&ion$2 Co/:o$i!e Di$:e%$ion 0Range2 N'/)e% o Po%! o&io$ MSCI Ho%&d 0%i2 in CHF 6en#"/a%8 Re!'%n 0N2

To!a& Re!'%n 0N2 13= 9eadin% : @ Global Investment Performance Standards (GIPS) ECa/:&e 3 S#"ed'&e o Pe% o%/an#e Re$'&!$ Sa/:&e 3 Rea&!4 Manage/en! Fi%/ Co%e Rea& E$!a!e Co/:o$i!e Ian'a%4 1@ 1;;3 !"%o'g" De#e/)e% 31@ 2==4 G%o$$Do DFee$ Re!'%n$ Yea%DEnd Co/:o$i!e 0<<8 8*0` :*!` !*Q` !*X 0*! ;) 8*=` a8 R X< :L` 0!!` R <8! Q` 0<<= 8*8` !*<` :*8` :*! 8*! ;) :*L` a8 R 0:L :<` 0!!` R <Q< 0:` 0<<X =*<` 0*8` 8*L` 8*! 8*: ;) 0*:` a8 R 70X 8=` 0!!` R 0-70< 0Q` 0<<Q Q*0` !*<` <*0` Q*< <*X ;) =*:` a8 R 7<= 8:` 0!!` R 0-LX8 77` 0<<< Q*<` 0*X` 0!*Q` <*< 00*! ;) X*8` a8 R L0< 8!` 0!!` R 0-:78 77` 7!!! <*!` !*8` <*=` <*0 0!*< !*X 0!*L` 8 R L=X :8` 0!!` R 0-8L7 7:` 7!!0 <*0` 0*7` 0!*8` 0!*! 0!*X !*L 0L*<` 8 R L:< L<` 0!!` R 0-X07 7!` 7!!7 X*<` 0*Q` <*<` <*Q 0!*8 !*L 0=*L` = R L<Q L0` 0!!` R 0-X<= 77` 7!!L Q*8` 7*<` 00*8` 0!*< 07*! !*8 00*0` = R :78 7Q` 0!!` R 0-<7: 77` 7!!: Q*7` 7*8` 0!*Q` <*< 00*Q !*Q 07*!` X R :L7 77` 0!!` R 0-<8: 77` )nnuali/ed Since Ince#tion $ime Fei%hted 9eturns1 X*X` !*8` Q*!` =*X` )nnuali/ed Since Ince#tion Internal 9ate of 9eturn1 X*Q` DISCLOSURES Co/:&ian#e S!a!e/en! Sam#le L 9ealt& Aana%ement "irm has #re#ared and #resented this re#ort in com#liance 'ith the Global Investment Performance Standards (GIPS)* T"e Fi%/ Sam#le L 9ealt& Aana%ement "irm (the "irm)- a subsidiar& of )DC Ca#ital- Inc*- is a re%istered investment adviser under the Investment )dvisors )ct of 0<:!* $he "irm e.ercises com#lete discretion over the selection- ca#itali/ation- asset mana%ement- and dis#osition of investments in 'holl& o'ned #ro#erties and 5oint ventures* ) com#lete list and descri#tion of the "irm4s com#osites is available u#on re3uest* T"e Co/:o$i!e $he Core 9eal Estate Com#osite (the Com#osite) com#rises all actual fee #a&in% discretionar& #ortfolios mana%ed b& the "irm 'ith a core investment and ris( strate%& 'ith an income focus havin% a minimum initial #ortfolio si/e of R0! million* Portfolios that initiall& 3ualif& are e.cluded later from the com#osite if their asset si/e decreases belo' the minimum re3uirement due to ca#ital distributions* $he Com#osite 'as created in 0<<Q* Com#osite dis#ersion is measured usin% an asset 'ei%hted standard deviation of returns of the #ortfolios* -a&'a!ion

)ssets are valued 3uarterl& b& the "irm and a##raised annuall& b& an inde#endent Aember of the )##raisal Institute* Doth the internal and e.ternal #ro#ert& valuations rel& #rimaril& on the a##lication of mar(et discount rates to future #ro5ections of free cash flo's (unlevera%ed cash flo's) and ca#itali/ed terminal values over the e.#ected holdin% #eriod for each #ro#ert&* Pro#ert& mort%a%es- notes- and loans are /a%8ed !o /a%8e! usin% #revailin% interest rates for com#arable #ro#ert& loans if the terms of e.istin% loans #reclude the immediate re#a&ment of such loans* Hoan re#a&ment fees- if an&- are considered in the #ro5ected &ear of sale* Yea% In#o/e Re!'%n Ca:i!a& Re!'%n TOTAL Range o Re!'%n$ Co/:o$i!e Di$:e%$ion NCREIF P%o:e%!4 IndeC 6en#"/a%8 N'/)e% o Po%! o&io$ Ne! A$$e!$ 0USD Mi&&ion2 Pe%#en! Le.e%aged EC!e%na& -a&'a!ion Fi%/ To!a& Ne! A$$e!$ 0USD Mi&&ion2 Pe%#en! o Fi%/ A$$e!$ 131 )##endi. :)>Sam#le GIPS Com#liant Presentations Ca&#'&a!ion o Pe% o%/an#e Re!'%n$ 9eturns #resented are denominated in Cnited States dollars* 9eturns are #resented net of levera%e* Com#osite returns are calculated on an asset 'ei%hted avera%e basis usin% be%innin% of #eriod values* 9eturns include cash and cash e3uivalents and related interest income* Income return is based on accrual reco%nition of earned income* Ca#ital e.#enditures- tenant im#rovements- and lease commissions are ca#itali/ed and included in the cost of the #ro#ert&- are not amorti/ed- and are reconciled

throu%h the .a&'a!ion :%o#e$$ and reflected in the ca#ital return com#onent* Income and ca#ital returns ma& not e3ual total returns due to chain lin(in% of 3uarterl& returns* )nnual returns are time 'ei%hted rates of return calculated b& lin(in% 3uarterl& returns* "or the annuali/ed since ince#tion !i/eD <eig"!ed %e!'%n- terminal value is based on endin% mar(et value of net assets of the Com#osite* "or the sinceince#tion internal rate of return- contributions from and distributions to investors since ?anuar& 0- 0<<8and a terminal value e3ual to the com#osite4s endin% mar(et value of net assets as of Becember L07!!:are used* $he I99 is calculated usin% monthl& cash flo's* )dditional information re%ardin% #olicies for calculatin% and re#ortin% returns in com#liance 'ith the GIPS standards is available u#on re3uest* In.e$!/en! Manage/en! Fee$ Some of the #ortfolios #a& incentive fees ran%in% bet'een 0!` and 7!` of I99 in e.cess of established benchmar(s* Current annual investment advisor& fees are as follo's1 C# to RL! million1 0*=` RL! R8! million1 0*L` over R8! million1 0*!` NCREIF P%o:e%!4 IndeC 6en#"/a%8 $he ;ational Council of 9eal Estate Investment "iduciaries (;C9EI") Pro#ert& Inde. benchmar( has been ta(en from #ublished sources* $he ;C9EI" Pro#ert& Inde. is unlevera%ed- includes various real estate #ro#ert& t&#es- e.cludes cash and other non#ro#ert& related assets and liabilities- income- and e.#enses* $he calculation methodolo%& for the inde. is not consistent 'ith calculation methodolo%& em#lo&ed for the Com#osite because the benchmar( com#utes the total return b& addin% the income and ca#ital a##reciation return on a 3uarterl& basis* ECa/:&e 4 Sa/:&e 4 P%i.a!e EG'i!4 Pa%!ne%$ 6'4DO'! Co/:o$i!e 1 Ian'a%4 1;;3 !"%o'g" 31 De#e/)e% 2==2 0<<8 (X*8) (00*!X) (<*:7) :*L0 L8X*L= 0<<= =*7 :*8L 7*QL 0!*!: :!7*XQ 0<<X 0L*Q 0!*0! 0:*<: 0:*78 8L!*80 0<<Q 0L*0 <*7Q 0:*77 78*70 =0L*XL 0<<< 8L*7 ::*8L LX*:L 8:*!! QX0*X8 To!a& Fi%/ A$$e!$ 0USDO /i&2 Co/:o$i!e A$$e!$ 0USDO /i&2 6en#"/a%8 Re!'%n 0N2 Ann'a&iBed

SIDIRR Ne!Do DFee$ 0N2 Ann'a&iBed SIDIRR G%o$$Do DFee$ 0N2 Yea% 132 9eadin% : @ Global Investment Performance Standards (GIPS) ECa/:&e 4 Sa/:&e 4 P%i.a!e EG'i!4 Pa%!ne%$ 6'4DO'! Co/:o$i!e 1 Ian'a%4 1;;3 !"%o'g" 31 De#e/)e% 2==2 7!!! :!*= 7=*:X L7*<X 7:*78 0-08L*=7 7!!0 7<*< 70*Q= 7X*:7 Q*78 0-0X8*=< 7!!7 78*L 0X*88 78*7: 0!*78 0-08!*XQ 0<<8 :*=Q :*=Q ! !*<7 !*!! !*0< !*<7 0<<= <*8= <*8= ! 0*!8 !*!! !*LQ 0*!8 0<<X 0:*8: 07*<0 7*88 0*0= !*0Q !*8Q !*<Q 0<<Q 7L*X< 77*08 7*88 0*0X !*00 !*<8 0*!= 0<<< 78*!! 0<*!Q 08*XQ 7*X< !*=L 0*!! 7*0= 7!!! 78*!! 0X*:= 7X*:: 7*!X 0*0! 0*!! !*<X 7!!0 78*!! 0:*Q< L<*0! 0*Q< 0*8= 0*!! !*LL 7!!7 78*!! 0L*XL :0*78 7*!= 0*=8 0*!! !*:0 $VPI N $otal Value to Paid In Ca#ital BPI N Bistributed Ca#ital to Paid In Ca#ital PIC N Paid In Ca#ital to Committed Ca#ital 9VPI N 9esidual Value to Paid In Ca#ital Sa/:&e 4 P%i.a!e EG'i!4 Pa%!ne%$ "a$ :%e:a%ed and :%e$en!ed !"i$ %e:o%! in #o/:&ian#e <i!" !"e G&o)a& In.e$!/en! Pe% o%/an#e S!anda%d$ 0GIPS2( Sam#le : Private E3uit& Partners is an inde#endent #rivate e3uit& investment firm- havin% offices in Hondon- ;e' Por(- and San "rancisco* $he Sam#le : Du& +ut Com#osite invests in #rivate e3uit& bu&outs and 'as created in ?anuar& 0<<8* $he Sam#le : Du& +ut Com#osite com#lies 'ith the VPS Venture Ca#ital )ssociation4s valuation %uidelines* Valuations are #re#ared b& Sam#le :4s valuations committee and revie'ed b& an inde#endent advisor& board* Sam#le : follo's the fair value basis of valuation as recommended in the GIPS Private E3uit& Valuation Princi#les* )ll investments 'ithin the Sam#le : Du& +ut Com#osite are valued either usin% a most recent transaction or an earnin%s multi#le* Sam#le :4s valuation revie' #rocedures are available u#on re3uest* $he GP D+ inde. is used as the benchmar( and is constructed as the W9S inde. return #lus 8!! )a$i$ #oints* $he benchmar( return is calculated usin% monthl& cash flo's* $here is onl& one fund in the com#osite for all time #eriods- and the dis#ersion of #ortfolio returns 'ithin the com#ositethereforeis /ero for all &ears*

$he vinta%e &ear of the Sam#le : Du& +ut "und is 0<<8- and total committed ca#ital is CSBR78 million* $he total com#osite assets (unreali/ed %ains) are CSBR0!*78 million as of L0 Becember 7!!7* $he fund4s SI I99 calculation incor#orates monthl& cash flo's* ) com#lete list of firm com#osites and com#osite #erformance results is available u#on re3uest* )dditional information re%ardin% the firm4s #olicies and #rocedures for calculatin% and re#ortin% #erformance results is available u#on re3uest* R-PI PIC Rea&iBa!ion M'&!i:&e 0DPI2 In.e$!/en! M'&!i:&e 0T-PI2 C'/'&a!i.e Di$!%i)'!ion$ 0USDO /i&2 In.e$!ed Ca:i!a& 0USDO /i&2 PaidDIn Ca:i!a& 0USDO /i&2 Yea% To!a& Fi%/ A$$e!$ 0USDO /i&2 Co/:o$i!e A$$e!$ 0USDO /i&2 6en#"/a%8 Re!'%n 0N2 Ann'a&iBed SIDIRR Ne!Do DFee$ 0N2 Ann'a&iBed SIDIRR G%o$$Do DFee$ 0N2 Yea% 133 )##endi. :D>Sam#le Hist and Bescri#tion of Com#osites APPENDIE 46ASAMPLE LIST AND DESCRIPTION OF COMPOSITES Sa/:&e A$$e! Manage/en! Fi%/ Li$! and De$#%i:!ion o Co/:o$i!e$ $he S/a&& Ca: G%o<!" Co/:o$i!e includes all institutional #ortfolios invested in C*S* e3uities 'ith stron% earnin%s and %ro'th characteristics and small ca#itali/ations*

$he benchmar( is the 9ussell 7!!! Gro'th Inde.* $he La%ge Ca: G%o<!" Co/:o$i!e includes all institutional #ortfolios invested in C*S* e3uities 'ith stron% earnin%s and %ro'th characteristics and lar%e ca#itali/ations* $he benchmar( is the 9ussell 0!!! Gro'th Inde.* $he Co%e FiCed In#o/e Co/:o$i!e includes all institutional #ortfolios invested in fi.ed securities* Portfolios 'ithin the com#osite 'ill have a d'%a!ion that is #lus or minus 7! #ercent of the benchmar(* $he benchmar( is the Hehman Drothers )%%re%ate Dond Inde.* $he In!e%/edia!e FiCed In#o/e Co/:o$i!e includes all institutional #ortfolios invested in fi.ed securities* Portfolios 'ithin the com#osite 'ill have a duration that is #lus or minus 7! #ercent of the benchmar(* $he benchmar( is the Hehman Drothers Intermediate )%%re%ate Dond Inde.* $he Hig" Yie&d FiCed In#o/e Co/:o$i!e includes all institutional #ortfolios invested in hi%h &ield debt securities* $he benchmar( is the Hehman Drothers C*S* Cor#orate ,i%h Pield Dond Inde.* $he 6a&an#ed G%o<!" Co/:o$i!e includes all institutional balanced #ortfolios that have a 8!X!` allocation to %ro'th e3uities- 'ith a t&#ical allocation bet'een 88=8`* $he benchmar( is =!` SOP 8!! and :!` Hehman Drothers )%%re%ate Dond Inde.* +nl& #ortfolios %reater than R8 million are included in the com#osite* Te%/ina!ed Co/:o$i!e$ $he GARP EG'i!4 Co/:o$i!e includes all institutional #ortfolios invested in %ro'th stoc(s that are reasonabl& #riced and valued chea# com#ared 'ith their #eers* $he benchmar( is the SOP 8!! Inde.* $he com#osite terminated in ;ovember 7!!L* $he S/a&&DMid Ca: G%o<!" Co/:o$i!e includes all institutional #ortfolios invested in C*S* e3uities 'ith stron% earnin%s and %ro'th characteristics* $he benchmar( is the 9ussell 78!! Gro'th Inde.* $he com#osite terminated in "ebruar& 7!!:* 134 9eadin% : @ Global Investment Performance Standards (GIPS) APPENDIE 4CAGIPS AD-ERTISING GUIDELINES A( PURPOSE OF THE GIPS AD-ERTISING GUIDELINES $he Global Investment Performance Standards #rovide the investment communit& 'ith a set of ethical standards for "I9AS to follo' 'hen #resentin% their #erformance results to #otential clients* $he Standards serve to #rovide %reater uniformit& and com#arabilit& amon% investment mana%ers 'ithout re%ard to %eo%ra#hical location and to facilitate a dialo%ue bet'een "I9AS and their #ros#ective clients about the critical issues of ho' the "I9A achieved historical #erformance results and determines future investment strate%ies* $he GIPS )dvertisin% Guidelines attem#t to serve as industr& %lobal best #ractice for the advertisement of #erformance results* $he GIPS )dvertisin% Guidelines do not re#lace the GIPS standards nor do the& absolve "I9AS from #resentin% #erformance #resentations that adhere to the 9EWCI9EAE;$S of the full GIPS standards* $he %uidelines onl& a##l& to firms that alread& satisf& all the 9EWCI9EAE;$S of the Standards on a "I9A 'ide basis and claim com#liance 'ith the Standards* "I9AS that claim com#liance can choose to advertise that claim usin% the GIPS )dvertisin% Guidelines* $he %uidelines are mandator& for "I9AS that include a claim of com#liance

'ith the GIPS )dvertisin% Guidelines in their advertisements* $he %uidelines are voluntar& for "I9AS that do not include a claim of com#liance in their advertisements* )ll "I9AS are encoura%ed to abide b& these ethical %uidelines* De inition o !d"ertisement "or the #ur#oses of these %uidelines- an advertisement includes an& materials that are distributed to or desi%ned for use in ne's#a#ers- ma%a/ines- "I9A brochures- letters- media- or an& other 'ritten or electronic material addressed to more than one #ros#ective client* )n& 'ritten material (other than one onone #resentations and individual client re#ortin%) distributed to maintain e.istin% clients or solicit ne' clients for an advisor is considered an advertisement* #elations$ip o %&'( !d"ertisin) %*idelines to #e)*lator+ #e,*irements $he GIPS )dvertisin% Guidelines are %uidelines that #romote an ethical frame'or( for advertisements* $he& do not chan%e the sco#e of the activities of local re%ulator& bodies re%ardin% the re%ulation of advertisements* "I9AS advertisin% #erformance results ACS$ also adhere to all a##licable re%ulator& rules and re3uirements %overnin% advertisements* "I9AS are encoura%ed to see( le%al or re%ulator& counsel because it is li(el& that additional disclosures are 9EWCI9EB* In cases 'here a##licable la' or re%ulation conflicts 'ith the GIPS )dvertisin% Guidelines- the %uidelines 9EWCI9E "I9AS to com#l& 'ith the la' or re%ulation* "I9AS ACS$ disclose an& conflicts bet'een la'sEre%ulations and the GIPS )dvertisin% Guidelines* $he calculation and advertisement of #ooled uniti/ed #roducts- such as mutual funds and o#en ended investment com#anies- are re%ulated in most mar(ets* $hese advertisin% %uidelines are not intended to re#lace the re%ulations 'hen a "I9A is advertisin% #erformance solel& for a #ooled uniti/ed #roduct* ,o'ever- should a GIPS com#liant "I9A choose to advertise #erformance results- the "I9A ACS$ a##l& all a##licable la's and re%ulations as 'ell as the GIPS )dvertisin% Guidelines in order to include a claim of com#liance 'ith the GIPS standards* 133 )##endi. :C>GIPS )dvertisin% Guidelines 6( REMUIREMENTS OF THE GIPS AD-ERTISING GUIDELINES A&& ad.e%!i$e/en!$ !"a! in#&'de a #&ai/ o #o/:&ian#e <i!" !"e GIPS Ad.e%!i$ing G'ide&ine$ /'$! in#&'de !"e o&&o<ing: 0* ) descri#tion of the "I9A* 7* ,o' an interested #art& can obtain a #resentation that com#lies 'ith the 9EWCI9EAE;$S of GIPS standards andEor a list and descri#tion of all "I9A C+AP+SI$ES* L* $he GIPS )dvertisin% Guidelines com#liance statement1 JInsert name of firmK claims com#liance 'ith the Global Investment Performance Standards (GIPS)* A&& ad.e%!i$e/en!$ !"a! in#&'de a #&ai/ o #o/:&ian#e <i!" !"e GIPS Ad.e%!i$ing G'ide&ine$ and !"a! :%e$en! :e% o%/an#e %e$'&!$ MUST a&$o in#&'de !"e o&&o<ing in o%/a!ion 0!"e %e&e.an! in o%/a!ion MUST )e !a8enPde%i.ed %o/ a :%e$en!a!ion !"a! ad"e%e$ !o !"e REMUIREMENTS o !"e GIPS $!anda%d$2: :* ) descri#tion of the strate%& of the C+AP+SI$E bein% advertised* 8* Period to date C+AP+SI$E #erformance results in addition to either1 a* 0 - L - and 8 &ear cumulative annuali/ed C+AP+SI$E returns 'ith the

end of #eriod date clearl& identified (or annuali/ed #eriod since C+AP+SI$E ince#tion if ince#tion is %reater than 0 and less than 8 &ears)* Periods of less than 0 &ear are not #ermitted to be annuali/ed* $he annuali/ed returns ACS$ be calculated throu%h the same #eriod of time as #resented in the corres#ondin% com#liant #resentation2 or b* 8 &ears of annual C+AP+SI$E returns 'ith the end of #eriod date clearl& identified (or since C+AP+SI$E ince#tion if ince#tion is less than 8 &ears)* $he annual returns ACS$ be calculated throu%h the same #eriod of time as #resented in the corres#ondin% com#liant #resentation* =* Fhether #erformance is sho'n %ross andEor net of I;VES$AE;$ A);)GEAE;$ "EES* X* $he DE;C,A)9I $+$)H 9E$C9; for the same #eriods for 'hich the C+AP+SI$E return is #resented and a descri#tion of that DE;C,A)9I* ($he a##ro#riate C+AP+SI$E DE;C,A)9I return is the same DE;C,A)9I $+$)H 9E$C9; as #resented in the corres#ondin% GIPS com#liant #resentation*) If no DE;C,A)9I is #resented- the advertisement ACS$ disclose 'h& no DE;C,A)9I is #resented* Q* $he currenc& used to e.#ress returns* <* $he descri#tion of the use and e.tent of levera%e and derivatives if levera%e or derivatives are used as an active #art of the investment strate%& (i*e*- not merel& for efficient P+9$"+HI+ mana%ement) of the C+AP+SI$E* Fhere levera%eEderivatives do not have a material effect on returns- no disclosure is 9EWCI9EB* 0!* Fhen #resentin% noncom#liant #erformance information for #eriods #rior to 0 ?anuar& 7!!! in an advertisement- "I9AS ACS$ disclose the #eriod(s) and 'hich s#ecific information is not com#liant as 'ell as #rovide the reason(s) the information is not in com#liance 'ith the GIPS standards* 135 9eadin% : @ Global Investment Performance Standards (GIPS) Addi!iona& and S'::&e/en!a& In o%/a!ion "I9AS are encoura%ed to #resent SCPPHEAE;$)H I;"+9A)$I+; or )BBI$I+;)H I;"+9A)$I+; (in addition to the information 9EWCI9EB under the GIPS )dvertisin% Guidelines) #rovided the SCPPHEAE;$)H I;"+9A)$I+; is clearl& labeled as such and sho'n 'ith e3ual or lesser #rominence than the information 9EWCI9EB under the %uidelines* Fhere such SCPPHEAE;$)H I;"+9A)$I+; is included for noncom#liant #eriods- these #eriods ACS$ be disclosed to%ether 'ith an e.#lanation of 'hat information is not com#liant and 'h& it is not in com#liance 'ith the GIPS standards* SCPPHEAE;$)H and )BBI$I+;)H I;"+9A)$I+; is the sub5ect of the Guidance Statement on the Cse of Su##lemental Information and users should refer to that %uidance for further clarification on ho' to disclose such data* SAMPLE AD-ERTISEMENTS Sa/:&e Ad.e%!i$e/en! Hi!"o'! Pe% o%/an#e Re!'%n$ Sa/:&e 4 In.e$!/en!$ Sam#le : Investments is the institutional asset mana%ement

division of Sam#le : Plc and is a re%istered investment advisor& firm s#eciali/in% in 3ualitative- %ro'th oriented investment mana%ement* $o receive a com#lete list and descri#tion of Sam#le : Investments4 com#osites andEor a #resentation that adheres to the GIPS standardscontact ?ohn Boe at (Q!!) 888 07L:- or 'rite to Sam#le : Investments- 07L Aain Street9esultland 07L:8- or e mail 5doeMsam#le:investments*com Sam#le : Investments claims com#liance 'ith the Global Investment Performance Standards (GIPS)* Sa/:&e Ad.e%!i$e/en! In#&'ding Pe% o%/an#e Re!'%n$ 01D@ 3D@ and 3D4ea% ann'a&iBed2 137 )##endi. :C>GIPS )dvertisin% Guidelines Sa/:&e 4 In.e$!/en!$: G&o)a& EG'i!4 G%o<!" Co/:o$i!e Pe% o%/an#e Ending 31 Ma% =4 Ending 31 De# =3 1 Yea% L*Q:` 0<*!8` 0:*<Q` !*:7` :*<:` 0<*8:` 0=*LX` 0*X=` Sam#le : Investments is the institutional asset mana%ement subsidiar& of Sam#le : #lc and is a re%istered investment advisor s#eciali/in% in 3ualitative- %ro'thoriented investment mana%ement* $he Global E3uit& Gro'th Com#osite strate%& focuses on earnin%s- %ro'th of earnin%s- and (e& valuation metrics* Sam#le : Investments claims com#liance 'ith the Global Investment Performance Standards (GIPS)* $o receive a com#lete list and descri#tion of Sam#le : Investments4 com#osites andEor a #resentation that adheres to the GIPS standards- contact ?ean Paul at b07 (!L:) 8=XQ<0!- or 'rite Sam#le : Investments- +ne Plain Street- 9esultland 07I?:- or 5#aulMsam#le:inv*com*re* MSCI Ho%&d IndeC G&o)a& EG'i!4 G%o<!" 3 Yea%$ :e% ann'/ 3 Yea%$ :e% ann'/ Pe%iod !o Da!e 03 /!"$2 Re$'&!$ $"o<n in US O )e o%e ee$ OR !"e i%/ /a4 :%e$en!: Sa/:&e Ad.e%!i$e/en! In#&'ding Pe% o%/an#e Re!'%n$

03 4ea%$ o ann'a& %e!'%n$2 Sa/:&e 4 In.e$!/en!$: G&o)a& EG'i!4 G%o<!" Co/:o$i!e Pe% o%/an#e 31 De# 2==3 31 De# 2==2 31 De# 2==1 31 De# 2=== 31 De# 1;;; L*Q:` 0<*!8` 0X*!8` Q*:X` L0*<X` 78*QX` :*<:` 0<*8:` 0=*87` 07*<7` 78*L:` 7:*Q!` Sam#le : Investments is the institutional asset mana%ement subsidiar& of Sam#le : #lc and is a re%istered investment advisor s#eciali/in% in 3ualitative- %ro'th oriented investment mana%ement* $he Global E3uit& Gro'th Com#osite strate%& focuses on earnin%s- %ro'th of earnin%s- and (e& valuation metrics* Sam#le : Investments claims com#liance 'ith the Global Investment Performance Standards (GIPS)* $o receive a com#lete list and descri#tion of Sam#le : Investments4 com#osites andEor a #resentation that adheres to the GIPS standards- contact ?ean Paul at b07 (!L:) 8=XQ<0!- or 'rite Sam#le : Investments- +ne Plain Street- 9esultland 07I?:- or 5#aulMsam#le:inv*com*re* MSCI Ho%&d IndeC G&o)a& EG'i!4 G%o<!" Co/:o$i!e Pe%iod !o Da!e 03 /!"$ !o 31 Ma% =42 Re$'&!$ $"o<n in US O )e o%e ee$ 139 9eadin% : @ Global Investment Performance Standards (GIPS) APPENDIE 4DAPRI-ATE EMUITY -ALUATION PRINCIPLES INTRODUCTION +#inions amon% I;VES$AE;$ )BVIS+9S- #ractitioners- and investors differ re%ardin% the valuation of P9IV)$E EWCI$P assets* $he mar%in of error for a #articular valuation methodolo%& ma& often be %reater than the difference bet'een alternative methodolo%ies* $he volatilit& of asset values is also often hi%h- increasin% the #erce#tion that a historical valuation 'as 'ron%* )lthou%h cash to cash returns are the #rinci#al metric- P9IV)$E EWCI$P funds raise ca#ital in #art based on unreali/ed interim returns* $he valuation of unreali/ed assets under#innin% these interim returns is critical to this anal&sis* )lthou%h man& #oints are contested- some common %round e.ists1 G $he P9IV)$E EWCI$P industr& must strive to #romote inte%rit& and #rofessionalism in order to im#rove investor confidence and self re%ulation* G Consistenc& and com#arabilit& are im#ortant in re#ortin% to investors- and man& as#ects of valuation S,+CHB be trans#arent* Aore information- ho'everdoes not al'a&s e3ual %reater trans#arenc&- and there are le%al and #ractical constraints on the dissemination of information* G Each P9IV)$E EWCI$P investment is based on a set of assum#tions* It is reasonable for investors to e.#ect interim valuations to reflect factors that- at a minimum- adversel& im#act these assum#tions* G Fhen a P9IV)$E EWCI$P asset becomes #ublicl& traded- ar%uments a%ainst interim valuations fall a'a&- althou%h #ractical considerations ma& remain

'here there are restrictions on tradin% or tradin% volumes are lo'* De&ond these issues are the debates on valuation basis and methodolo%&* $he move to'ard a ")I9 V)HCE basis has been %atherin% momentum in most areas of financial re#ortin%* Particularl& for earl& sta%e venture investments that ma& not achieve #rofitabilit& for a number of &ears- #ractical #roblems remain and the '!i&i!4 of the ")I9 V)HCE basis must %arner %reater su##ort before a consensus on detailed %uidelines is li(el& to be #ossible* GUIDELINES FOR -ALUATION $he follo'in% ACS$ be a##lied to all forms of investment vehicles ma(in% P9IV)$E EWCI$P investments* $hese #rinci#les do not a##l& to +PE; E;B or EVE9G9EE; "C;BS* 0* Valuations ACS$ be #re#ared 'ith inte%rit& and #rofessionalism b& individuals 'ith a##ro#riate e.#erience and abilit& under the direction of senior mana%ement* 7* "I9AS ACS$ document their valuation revie' #rocedures* L* "I9AS ACS$ create as much trans#arenc& as deemed #ossible in relation to the valuation basis used to value fund investments* "or the latest #eriod #resentedthe valuation methodolo%ies used to value P9IV)$E EWCI$P investments ACS$ be clearl& disclosed- includin% all (e& assum#tions* 13; )##endi. :B>Private E3uit& Valuation Princi#les :* $he basis of valuation ACS$ be lo%icall& cohesive and a##lied ri%orousl&* )lthou%h a ")I9 V)HCE basis is 9EC+AAE;BEB- all valuations ACS$- at a minimumreco%ni/e 'hen assets have suffered a diminution in value* (Please see the )dditional Considerations section for further %uidance on diminution circumstances*) 8* Valuations ACS$ be #re#ared on a consistent and com#arable basis from one re#ortin% #eriod to the ne.t* If an& chan%e is deemed a##ro#riate in either valuation basis or method- the chan%e ACS$ be e.#lained* Fhen such a chan%e %ives rise to a material alteration in the valuation of the investments- the effect of the chan%e S,+CHB also be disclosed* =* Valuations ACS$ be #re#ared at least annuall&* (Wuarterl& valuations are 9EC+AAE;BEB*) FAIR -ALUE RECOMMENDATION It is 9EC+AAE;BEB that the ")I9 V)HCE basis- 'hich is consistent 'ith international financial re#ortin% #rinci#les- be used to value P9IV)$E EWCI$P investments* $his valuation S,+CHB re#resent the amount at 'hich an asset could be ac3uired or sold in a current transaction bet'een 'illin% #arties in 'hich the #arties each acted (no'led%eabl&- #rudentl&- and 'ithout com#ulsion* $he accurac& 'ith 'hich the value of an individual P9IV)$E EWCI$P asset can be determined 'ill %enerall& have substantial 'n#e%!ain!4* Conse3uentl&- it is 9EC+AAE;BEB that a valuation method that involves the least number of estimates is #referred over another method that introduces additional sub5ective assum#tions* ,o'ever- if the latter method results in more accurate and meanin%ful valuationthen it S,+CHB be used instead of the former method* -al*ation .ierar/$+ $he follo'in% hierarch& of ")I9 V)HCE methodolo%ies S,+CHB be follo'ed 'hen valuin% P9IV)$E EWCI$P investments1 0* Aar(et $ransaction Fhere a recent inde#endent third #art& transaction has occurred involvin%

a material investment as #art of a ne' round of financin% or sale of e3uit&it 'ould #rovide the most a##ro#riate indication of ")I9 V)HCE* 7* Aar(et Dased Aulti#les In the absence of an& such third #art& transactions continuin% to have relevancethe ")I9 V)HCE of an investment ma& be calculated usin% earnin%s or other mar(et based multi#les* $he #articular multi#le used S,+CHB be a##ro#riate for the business bein% valued* Aar(et based multi#les includebut are not limited to- the follo'in%1 #rice to earnin%s- enter#rise value to EDI$- enter#rise value to E6ITDA- and so on* L* Biscounted E.#ected "uture Cash "lo's $his method S,+CHB re#resent the :%e$en! .a&'e of ris( ad5usted e.#ected cash flo's- discounted at the ris( free rate* !dditional Considerations 0* Fhere a third #art& transaction has ta(en #lace other than at arm4s len%thor 'here the ne' investor4s ob5ectives in ma(in% the investment are lar%el& strate%ic in nature (i*e* the ne' investor 'as not actin% solel& as a financial 15= 9eadin% : @ Global Investment Performance Standards (GIPS) investor)- the mana%er S,+CHB consider i%norin% the valuation or a##l&in% an a##ro#riate discount to it* 7* ) material diminution in the value of an investment ma& result fromamon% other thin%s- a breach of covenant- failure to service debt- a filin% for creditor #rotection or ban(ru#tc&- ma5or la'suit (#articularl& concernin% in!e&&e#!'a& :%o:e%!4 %ig"!$)- or a loss or chan%e of mana%ement* +ther events ma& include fraud 'ithin the com#an&- a material devaluation in an investment currenc& that is different from the fund currenc&- substantial chan%es in 3uoted mar(et conditions- or an& event resultin% in #rofitabilit& fallin% si%nificantl& belo' the levels at the time of investment or the com#an& #erformin% substantiall& and consistentl& behind #lan* Estimatin% the e.tent of the diminution in most cases 'ill %enerall& involve both 3uantitative and 3ualitative anal&sis and S,+CHB be #erformed 'ith as much dili%ence as #ossible* L* $he "I9A S,+CHB have #olicies in #lace for informin% clientsE#ros#ects 'hen a material diminution has ta(en #lace 'ithin the P+9$"+HI+* Faitin% until a 3uarterl& u#date ma& often not #rovide the #ros#ective investor 'ith this critical information soon enou%h to ma(e an informed decision* :* Fithin the valuation hierarch& there 'ill be certain industries 'here ver& s#ecific valuation methodolo%ies become a##licable* Fithin the correct industr&- either of these methods could be considered the #rimar& valuation methodolo%& in the absence of an a##licable third #art& transaction* Fhenever one of these methods is used- the "I9A ACS$ 5ustif& the measure as re#resentin% the most a##ro#riate and accurate method for calculatin% a ")I9 V)HCE* a* ;et )ssets1 "or "I9AS that derive a ma5orit& of their value from their underl&in% assets rather than the com#an&4s earnin%s- this method ma& be #referred* b* Industr& DE;C,A)9IS1 In #articular industries- there are metrics- such as #rice #er subscriber- that can be used to derive the value of a "I9A* $hese measures are ver& s#eciali/ed to the industries the& re#resent and

must not be carried over to more diversified "I9AS* 8* It is 9EC+AAE;BEB that valuations be revie'ed b& a 3ualified #erson or entit& that is inde#endent from the valuer* Such #arties 'ould include third #art& e.#erts- an inde#endent advisor& board- or a committee inde#endent of the e.ecutives res#onsible for the valuations* =* )s stated in the Valuation ,ierarch& section of this document- ")I9 V)HCE allo's for the use of a recent transaction as the #rimar& methodolo%& for valuation* )ccordin%l&- 'hen an investment is first made- this cost re#resents the most recent transaction and- therefore- the ")I9 V)HCE* In this case- the cost is #ermitted to be used not because it re#resents the cost of the investment but- rather- because it re#resents the value of the most recent transaction* Cost as a basis of valuation is onl& #ermitted 'hen an estimate of ")I9 V)HCE cannot be reliabl& determined* )lthou%h a ")I9 V)HCE basis should al'a&s be attem#ted- the P9IV)$E EWCI$P Provisions do reco%ni/e that there ma& be situations 'hen a non ")I9 V)HCE basis is necessar&* Cltimatel&- "I9AS must (ee# in mind that investors ma(e decisions based on ")I9 V)HCES- not out of date historical cost based measures* In an& case- 'hen a non ")I9 V)HCE basis is used- the "I9A ACS$ disclose its 5ustification for 'h& a ")I9 V)HCE basis cannot be a##lied* In addition- for each C+AP+SI$E- the "I9A ACS$ disclose the number of holdin%s to 'hich a 151 )##endi. :B>Private E3uit& Valuation Princi#les non ")I9 V)HCE basis is a##lied- the $+$)H V)HCE of those holdin%s- and the value of those holdin%s as a #ercenta%e of the total C+AP+SI$EEfund assets* X* Fhere com#anies have activities that s#an more than one sector- ma(in% it im#ractical to find com#arable com#anies or sectors- each earnin%s stream ma& be valued inde#endentl&* Sector avera%e multi#les- based on com#anies of com#arable si/e- can be used 'here it is not #ractical or #ossible to identif& a sufficient number of directl& com#arable com#anies* Q* $he entr& multi#le(s) for an investment S,+CHB onl& be used as a last resort 'hen com#arable 3uoted com#anies are not available* <* )ll 3uasi e3uit& investments S,+CHB be valued as e3uit& unless their reali/able value can be demonstrated to be other than the e3uit& value* 0!* Fhen a P9IV)$E EWCI$P "I9A has invested in loan stoc( and #reference shares alon%side an e3uit& investment- these instruments S,+CHB not %enerall& be valued on the basis of their &ield* $he& S,+CHB be valued at cost #lus an& #remium or rolled u# interest onl& to the e.tent it has full& accruedless an& #rovisionEdiscount 'here a##ro#riate* 152 9eadin% : @ Global Investment Performance Standards (GIPS) AD2 )##endi. ) SOLUTIONS FOR READING 2 1( $he correct ans'er is b* $his 3uestion involves Standard III(D) "air Bealin%* Smith disseminated a chan%e in the stoc( recommendation to his clients but then received a re3uest contrar& to that recommendation from a client 'ho li(el& had not &et received the recommendation* Prior to e.ecutin% the order- Smith should ta(e additional ste#s to ensure that the customer has received the chan%e of recommendation* )ns'er a is incorrect because the client #laced the order #rior to receivin% the recommendation

and- therefore- does not have the benefit of Smith4s most recent recommendation* )ns'er c is incorrect because it 'ould result in a dela& in e.ecutin% an order re3uested b& the client* )ns'er d is also incorrect2 sim#l& because the client re3uest is contrar& to the firm4s recommendation does not mean a member can override a direct re3uest b& a client* )fter Smith contacts the client to ensure that the client received the chan%ed recommendationif the client still 'ants to #lace a bu& order for the shares- Smith is obli%ated to com#l& 'ith the client4s directive* 2( $he correct ans'er is d* $his 3uestion involves Standard III()) Ho&alt&Prudence- and Care- and the s#ecific to#ic of soft dollars or soft commissions* )ns'er d is the correct choice because client bro(era%e commissions ma& not be directed to #a& for the investment mana%er4s o#eratin% e.#enses* )ns'er b 'ould be an incorrect choice because bro(era%e commissions ma& be directed to #a& for securities research used in mana%in% a client4s #ortfolio* )ns'er c describes ho' members and candidates should determine ho' to use bro(era%e commissions1 if the use is in the best interests of clients and is commensurate 'ith the value of the services #rovided* )ns'er a describes a #ractice that is commonl& referred to as directed bro(era%e* Decause bro(era%e is an asset of the client and is used to benefit the clientnot the mana%er- such #ractice does not violate a dut& of lo&alt& to the client* Aembers and candidates are obli%ated in all situations to disclose to clients their #ractices in the use of client bro(era%e commissions* 3( $he correct ans'er is c* $his 3uestion involves Standard VI()) Bisclosure of Conflicts* $he 3uestion establishes a conflict of interest 'hereb& an anal&st?amison- is as(ed to 'rite a research re#ort on a com#an& that is a client of ?amison4s em#lo&er* In addition- t'o directors of the com#an& are senior officers of ?amison4s em#lo&er* Doth facts are conflicts of interest and must be disclosed b& ?amison in her research re#ort* )ns'er d 'ould be incorrect because an anal&st is not #revented from 'ritin% a re#ort because of the s#ecial relationshi# the anal&st4s em#lo&er has 'ith the com#an& so lon% as that relationshi# is disclosed* Fhether or not ?amison e.#resses an& o#inions in the re#ort is irrelevant to her dut& to disclose a conflict of interest* ;ot e.#ressin% o#inions does not relieve the anal&st of her res#onsibilit& to disclose the s#ecial relationshi# bet'een the t'o com#anies* $herefore- ans'er a is incorrect* )ns'er b is also incorrect* )lthou%h an em#lo&er should not #ut #ressure on an anal&st to alter a re#ort in an& 'a& and ?amison cannot chan%e the re#ort based on her em#lo&er4s influencethe relationshi# bet'een the t'o com#anies #osin% the conflict of interest must be disclosed* 4( $he correct ans'er is c* $his 3uestion as(s about com#liance #rocedures relatin% to #ersonal investments of members and candidates* $he statement in ans'er c clearl& conflicts 'ith the recommended #rocedures in the Handbook* Em#lo&ers should com#are #ersonal transactions of em#lo&ees Co#&ri%ht 7!!8- C") Institute* 9e#rinted 'ith #ermission* AD3 )##endi. ) 'ith those of clients on a re%ular basis re%ardless of the e.istence of a re3uirement b& a re%ulator& or%ani/ation* Such com#arisons ensure that em#lo&ees4 #ersonal trades do not conflict 'ith their dut& to their clients-

and the com#arisons can be conducted in a confidential manner* $he statement in ans'er a does not conflict 'ith the #rocedures in the Handbook* Bisclosure of such #olicies 'ill %ive full information to clients re%ardin% #otential conflicts of interest on the #art of those entrusted to mana%e their mone&* )ns'er b is incorrect because firms are encoura%ed to establish #olicies 'hereb& em#lo&ees clear #ersonal holdin%s and transactions* )ns'er d describes the cate%ories of securities that com#liance #rocedures desi%ned to monitor #ersonal transactions should cover* 3( $he correct ans'er is b* $his 3uestion relates to Standard III()) Ho&alt&Prudence- and Care and Standard III(E) Preservation of Confidentialit&* In this case- the member mana%es funds of a #rivate endo'ment* Aembers and candidates o'e a fiduciar& dut& to their clients- 'ho are in this case the trustees of the fund* Dronson cannot disclose confidential financial information to an&one 'ithout the #ermission of the fund- re%ardless of 'hether the disclosure ma& benefit the fund* $herefore- ans'er a is incorrect* )ns'er c is also incorrect because Dronson must notif& the fund and obtain the fund4s #ermission before #ublici/in% the information* )ns'er d is incorrect because- even if the information is nonmaterial- the member cannot disclose the information because it is confidential* +nl& if Dronson receives #ermission from the trustees can he disclose the information to the alumnus* 5( $he correct ans'er is c* Cnder Standard IV(C) 9es#onsibilities of Su#ervisorsmembers and candidates ma& dele%ate su#ervisor& duties to subordinates but such dele%ation does not relieve members or candidates of their su#ervisor& res#onsibilities* )s a result- ans'ers b and d are incorrect* Aoreover'hether or not Ailler4s subordinates are sub5ect to the C") Institute Code and Standards is irrelevant to her su#ervisor& res#onsibilities* $hereforeans'er a is incorrect* 7( $he correct ans'er is d* $his 3uestion relates to Standard V()) Bili%ence and 9easonable Dasis* Fillier4s action in chan%in% the recommendation based on the o#inion of another financial anal&st is not an ade3uate basis for the recommendation* )ns'er a is thus incorrect* So is ans'er b becausealthou%h it is true that members and candidates must distin%uish bet'een facts and o#inions in recommendations- the 3uestion does not illustrate a violation of that nature* )ns'er c is incorrect2 'hether or not a member or candidate has to see( a##roval from the firm of a chan%e in a recommendation is a matter of #olic& set b& the firm2 the Standards do not re3uire that members and candidates see( such a##roval* If the o#inion overheard b& Fillier had s#ar(ed him to conduct additional research and investi%ation that 5ustified a chan%e of o#inion- then a chan%ed recommendation 'ould be a##ro#riate* 9( $he correct ans'er is b* $his 3uestion relates to Standard I(D) Inde#endence and +b5ectivit&* Fhen as(ed to chan%e a recommendation on a com#an& stoc( to %ain business for the firm- the head of the bro(era%e unit must refuse in order to maintain his inde#endence and ob5ectivit& in ma(in% the recommendation* ,e must not &ield to #ressure b& the firm4s investment ban(in% de#artment* $o avoid the a##earance of a conflict of interest- the firm should discontinue issuin% recommendations about the com#an&* )ns'er a is incorrect2 chan%in% the recommendation in an& manner that is

contrar& to the anal&st4s o#inion violates the dut& to maintain inde#endence and ob5ectivit&* )ns'er c is incorrect because merel& assi%nin% a ne' anal&st to decide if the stoc( deserves a hi%her ratin% 'ill not address the conflict of interest* )ns'er d 'ould actuall& e.acerbate the conflict of interest* ;( $he correct ans'er is a* Standard VII(D) 9eference to C") Institute- the C") Besi%nation- and the C") Pro%ram- is the sub5ect of this 3uestion* $he reference on )lbert4s business card im#lies that there is a C") Hevel II desi%nation2 $&e merel& indicates in #romotional material that he is #artici#atin% in the C") Pro%ram and has com#leted Hevels I and II* Candidates ma& not im#l& that there is some sort of #artial desi%nation earned after #assin% one level of the C") e.amination* $herefore- )lbert has violated Standard VII(D)* Candidates ma& communicate that the& are #artici#atin% in the C") Pro%ram- ho'ever- and ma& state the levels that the& have com#leted* $herefore- $&e has not violated Standard I(C)* 1=( $he correct ans'er is b* $his 3uestion relates to Standard V(D) Communication 'ith Clients and Pros#ective Clients* Scott has issued a research re#ort statin% that he e.#ects the #rice of Fal(ton Industries stoc( to rise b& RQ a share because the dividend 'ill increase b& R0*8! #er share* ,e ma(es this statement (no'in% that the dividend 'ill increase onl& if Con%ress enacts certain le%islation- an uncertain #ros#ect* D& statin% that the dividend 'ill increase- Scott failed to se#arate fact from o#inion* $herefore- statement II is correct* $he information re%ardin% #assa%e of le%islation is not material non#ublic information because it is con5ecture and it is not clear that the C*S* 9e#resentative %ave Scott her o#inion on the #assa%e of the le%islation in confidence* She could be offerin% this o#inion to an&one 'ho as(s* Statement I is incorrect- as is statement III* 11( $he correct ans'er is b* $his 3uestion- 'hich relates to Standard III(D) "air Bealin%- tests the (no'led%e of the #rocedures that 'ill assist members and candidates to treat clients fairl& 'hen ma(in% investment recommendations* $he ste#s listed in a- c- and d 'ill all hel# ensure the fair treatment of clients* )ns'er b- distributin% recommendations to institutional clients before distributin% them to individual accounts- discriminates amon% clients based on si/e and class of assets and is a violation of Standard III(D)* 12( $he correct ans'er is b* $his 3uestion deals 'ith Standard II()) Aaterial ;on#ublic Information* $he mosaic theor& states that an anal&st ma& use material #ublic information or nonmaterial non#ublic information in creatin% a lar%er #icture than sho'n b& an& individual #iece of information and the conclusions the anal&st reaches become material onl& after the #ieces are assembled* )ns'ers a- c- and d are accurate statements relatin% to the Code and Standards but do not describe the mosaic theor&* 13( $he correct ans'er is c* $his 3uestion involves Standard IV(D) )dditional Com#ensation )rran%ements* $he arran%ement described in the 3uestion'hereb& ?ur%ens 'ould be com#ensated- based on the account4s #erformancebe&ond that #rovided b& her firm- is not a violation of the Standards so lon% as ?ur%ens discloses the arran%ement in 'ritin% to her em#lo&er and obtains #ermission from her em#lo&er #rior to enterin% into the arran%ement* )ns'er a is incorrect2 althou%h the #rivate com#ensation arran%ement could conflict 'ith the interests of other clients- members and

candidates ma& enter into such a%reements so lon% as the& have disclosed the arran%ements to their em#lo&er and obtained #ermission for the arran%ement from their em#lo&er* )ns'er d is also incorrect2 this #otential conflict can be mana%ed throu%h disclosure* )ns'er b is incorrect because members and candidates are not re3uired to receive #ermission from C") Institute for such arran%ements* AD4 )##endi. ) AD3 )##endi. ) 14( $he correct ans'er is b* $his 3uestion involves Standard III()) Ho&alt&Prudence- and Care- s#ecificall&- a member and candidate4s res#onsibilit& for votin% #ro.ies and the use of client bro(era%e* )ccordin% to the facts stated in the 3uestion- "arns'orth did not violate Standard III())* )lthou%h the com#an& #resident as(ed "arns'orth to vote the shares of the ?ones Cor#oration #rofit sharin% #lan a certain 'a&- "arns'orth investi%ated the issue and concluded- inde#endentl&- the best 'a& to vote* $hereforeeven thou%h his decision coincided 'ith the 'ishes of the com#an& #resident"arns'orth is not in violation of his fiduciar& res#onsibilit& to his clients* In this case- the #artici#ants and the beneficiaries of the #rofitsharin% #lan are the clients- not the com#an&4s mana%ement* ,ad "arns'orth not investi%ated the issue or had he &ielded to the #resident4s 'ishes and voted for a slate of directors that he had determined 'as not in the best interest of the com#an&- "arns'orth 'ould have violated his fiduciar& res#onsibilit& to the beneficiaries of the #lan* In addition- because the bro(era%e firm #rovided the lo'est commissions and best e.ecution for securities transactions- "arns'orth has met his fiduciar& duties to the client in usin% this bro(era%e firm* It does not matter that the bro(era%e firm also #rovides research information that is not useful for the account %eneratin% the commission- because "arns'orth is not #a&in% e.tra mone& of the client4s for that information* 13( $he correct ans'er is a* In this 3uestion- Dro'n is #rovidin% investment recommendations before ma(in% in3uiries about the client4s financial situationinvestment e.#erience- or investment ob5ectives* Dro'n is thus violatin% Standard III(C) Suitabilit&* )s for ans'er b- 'h& the client chan%ed investment firms mi%ht be useful information- but it is not the onl& information the member needs to #rovide suitable investment recommendationsand Dro'n is under no obli%ation to notif& C") Institute of an& violation of the Code and Standards other than her o'n* )ns'ers c and d #rovide e.am#les of information members and candidates should discuss 'ith their clients at the outset of the relationshi#- but these ans'ers do not constitute a com#lete list of those factors* )ns'er a is the best ans'er* 15( $he correct ans'er is c* $his 3uestion involves Standard I(C) Aisre#resentation* Statement I is a factual statement that discloses to clients and #ros#ects accurate information about the terms of the investment instrument* Statement II- 'hich %uarantees a s#ecific rate of return for a mutual fund- is an o#inion stated as a fact and- therefore- violates Standard I(C)* If statement II 'ere re#hrased to include a 3ualif&in% statement- such as in m& o#inioninvestors ma& earnc it 'ould not be in violation of the Standards* 17( $he correct ans'er is d* $his 3uestion involves three Standards* )nderb-

the #ortfolio mana%er- has been obtainin% lo'er #rices for her #ersonal securities transactions than she %ets for her clients- 'hich is a breach of Standard III()) Ho&alt&- Prudence- and Care* In addition- she violated Standard I(B) Aisconduct- b& failin% to adhere to com#an& #olic& and hidin% her #ersonal transactions from her firm* )nderb4s su#ervisor- Datesviolated Standard IV(C) 9es#onsibilities of Su#ervisors2 althou%h the com#an& had re3uirements for re#ortin% #ersonal tradin%- Dates failed to ade3uatel& enforce those #rocedures* $herefore- statements I- II- and III are all correct* 19( $he correct ans'er is a* $his 3uestion relates to Standard I()) Ino'led%e of the Ha'- s#ecificall&- %lobal a##lication of the Code and Standards* Aembers and candidates 'ho #ractice in multi#le 5urisdictions ma& be sub5ect to various securities la's and re%ulations* If a##licable la' is more strict than the re3uirements of the Code and Standards- members and candidates must adhere to a##licable la'2 other'ise- members and candidates must adhere to the Code and Standards* $herefore- statement I is correct* Statement II is incorrect because members and candidates must adhere to the hi%her standard set b& the Code and Standards if local a##licable la' is less strict* Statement III is incorrect because 'hen no a##licable la' e.istsmembers and candidates are re3uired to adhere to the Code and Standardsand the Code and Standards #rohibit the use of material non#ublic information* 1;( $he correct ans'er is b* $he best course of action under Standard I(D) Inde#endence and +b5ectivit&- is to avoid a conflict of interest 'henever #ossible* $herefore- #a&in% for all e.#enses is the correct ans'er* )ns'er c details a course of action in 'hich the conflict 'ould be disclosed- but the solution is not as a##ro#riate as avoidin% the conflict of interest* )ns'er a 'ould not be the best course because it 'ould not remove the a##earance of a conflict of interest2 even thou%h the re#ort 'ould not be affected b& the reimbursement of e.#enses- it could a##ear to be* )ns'er d is not a##ro#riate because- b& failin% to ta(e advanta%e of close ins#ection of the com#an&- Fard 'ould not be usin% all the information available in com#letin% his re#ort* 2=( $he correct ans'er is c* Cnder Standard IV()) Buties to Em#lo&er1 Ho&alt&members and candidates ma& underta(e inde#endent #ractice that ma& result in com#ensation or other benefit in com#etition 'ith their em#lo&er so lon% as the& obtain consent from their em#lo&er* Statements II and III are consistent 'ith Standard IV* Statement I is not correct because the Standards do not include a com#lete #rohibition a%ainst underta(in% inde#endent #ractice* Statement IV is also incorrect because the Standards allo' members and candidates to ma(e arran%ements or #re#arations to %o into com#etitive business so lon% as those arran%ements do not interfere 'ith their dut& to their current em#lo&er* 21( $he correct ans'er is c* $his 3uestion involves Standard VI()) Bisclosure of Conflicts* Statements I- II- and III describe conflicts of interest for Smithers or her firm that 'ould have to be disclosed* Statement I describes an em#lo&ment relationshi# bet'een the anal&st and the com#an& that is the sub5ect of the recommendation* Statement II describes the beneficial

interest of the anal&st4s em#lo&er in the com#an&4s stoc(- and statement III describes the anal&st4s o'n beneficial interest in the com#an& stoc(* In statement IV- the relationshi# bet'een the anal&st and the com#an& throu%h a relative is so tan%ential that it does not create a conflict of interest necessitatin% disclosure* 22( $he correct ans'er is d* $his 3uestion relates to Standard I(C) Aisre#resentation* )lthou%h Aichelieu4s statement re%ardin% the total return of his client4s accounts on avera%e ma& be technicall& true- it is misleadin% because the ma5orit& of the %ain resulted from one client4s lar%e #osition ta(en a%ainst Aichelieu4s advice* $herefore- this statement misre#resents the investment #erformance the member is res#onsible for* ,e has not ta(en ste#s to #resent a fair- accurate- and com#lete #resentation of #erformance* )ns'er c is thus incorrect* )ns'er b is incorrect because althou%h Aichelieu is not %uaranteein% future results- his 'ords are still a misre#resentation of his #erformance histor&* )ns'er a is incorrect because failin% to disclose the ris( #references of clients does not ma(e a statement misleadin% and is not a violation of the Standards in this conte.t* AD5 )##endi. ) AD7 )##endi. ) 23( $he correct ans'er is b* $he best #olic& to #revent violation of Standard II()) Aaterial ;on#ublic Information- is the establishment of "ire Falls 'ithin a firm to #revent e.chan%e of insider information* $he #h&sical and informational barrier of a "ire Fall bet'een the investment ban(in% de#artment and the bro(era%e o#eration #revents the investment ban(in% de#artment from #rovidin% information to anal&sts on the bro(era%e side 'ho ma& be 'ritin% recommendations re%ardin% a com#an& stoc(* Prohibitin% recommendations of the stoc( of com#anies that are clients of the investment ban(in% de#artment is an alternative- but ans'er a states that this #rohibition 'ould be #ermanent- 'hich is not the best ans'er* +nce an offerin% is com#lete and the material non#ublic information obtained b& the investment ban(in% de#artment becomes #ublic- resumin% #ublishin% recommendations on the stoc( is not a violation of the Code and Standards because the information of the investment ban(in% de#artment no lon%er %ives the bro(era%e o#eration an advanta%e in 'ritin% the re#ort* )ns'er c is incorrect2 'hether or not a fiduciar& dut& is o'ed to clients does not override the #rohibition a%ainst use of material non#ublic information* )ns'er d is incorrect because no e.chan%e of information should be occurrin% bet'een the investment ban(in% de#artment and the bro(era%e o#erationso monitorin% of such e.chan%es is not an effective com#liance #rocedure for #reventin% the use of material non#ublic information* 24( $he correct ans'er is c* Cnder Standard III()) Ho&alt&- Prudence- and Care- members and candidates 'ho mana%e a com#an&4s #ension funds o'e a fiduciar& dut& to the #artici#ants and beneficiaries of the #lan- not the mana%ement of the com#an& or the com#an& shareholders* 23( $he correct ans'er is a* Statements I and II %ive the t'o #rimar& reasons listed in the Standards of Practice Handbook for disclosin% referral fees to clients* $he #ur#ose %iven in statement III is not a #rimar& consideration*