Can any one please help me out with this ethics concept- If we get someone to do our research and we make a decision based on this report without checking the veracity or conducting any research ourselves, are we violating any or all of Independence and Objectivity, Misrepresentation and Misconduct? Thanks:)
Yeah, you are violating Diligence and Reasonable Basis. There is a gray area here, because it could involve delegation of duties, which is allowed under New Prudent Investor rules.
eh, it’s not really grey there west. you delegate when you somebody else has more competence/expertise in the area you do (like for a special situation for the trust). as long as you’ve done your diligence to assert they add value and are worth the cost, that is fine. if it’s delegation to a subordinate or an outside source (not a skilled consultant), then you have to check that their conclusions and basis are reasonable and justifiable when you rely upon it.
It really depends on the context. Most likely you will violate Diligence/Reasonable Basis standard. But I’ll give you an example where you don’t. Let’s say you are evaluating a biotech-drug company stock and the entire valuation depends on the approval or decline of a medication for treatment of a rare cancer that is currently in Stage III clinical trials. You hire an expert in the field to do an evaluation of the drug, review the published literature and write a report for you. The expert is a leading researcher/doctor on pancreatic cancer (you have no expert knowledge in this area, so you hired him). He writes a thorough report which in summary says the drug’s approval is a, “a no brainer.” The drug will work and this will be the next Gleevac. You model out the value (stupidly simple like $1 billion drug value / 25 million shares, which is basically what these Venture Capital-like public biotech drugs with zero current earnings look like) and get $40 per share. It’s currently at $12 a share so you buy a bunch. You hired the leading expert in the field and he gave you a proprietary, positive analysis of the critical issue facing the company and the value of the stock. You probably didn’t violate any standard even though you didn’t really do the report. Obviously there is other work like market share data, drug pricing, revenues/modeling, production cost, etc. but just an example where it might not be a violation…
Long story short, Ethics is the toughest section on there IMO, and no amount of studying can really put your mind at ease. Too much subjectivity in the questions… Law of diminishing returns. Don’t spin your wheels grinding on this material when you could be memorizing Equity formulas. When in doubt, choose the safest and most complete answer. You’ll probably be fine.