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Viewpoint

Tilting at Alpha
Can Don Quixote teach us how to become better investors?
BY RYAN FLOYD, CFA

Investing is an art and a science. We all know that. The science portion is fairly well understood.
Modelsdiscounted cash flow, Black-Scholes, Gordon growth, capital asset pricingprovide
systematic support in a field that used to be governed almost entirely by intuition and gut feel.
But where should we learn about the art of investing? We can draw on successful fund
managers words of wisdom, behavioral finances insights, and our own personal experience.
Still, these sources leave considerable gaps. Aside from experience, art itselfspecifically
literaturecan be one of the best ways to enlighten investors about the art portion of investing.
In particular, we all suffer from a problem of perception: seeing an asset the way we want to
instead of the way it actually is, whether we are too optimistic about a companys future or think
a bonds chances of default are much lower than reality.
Managing an investment fund seeking fast-growing companies in risky countries like
Bangladesh and Nigeria, I have found challenges in making sure the value of a company and the
quality of its operations are what I perceive them to be. I actually question my senses. To give an
example, we were looking at an agricultural inputs company in an Asian country that had all of
the qualities of a great business and wonderful investment: trading at less than six times
historical profits, high return on invested capital and historical growth rates, honest management,
and dominant market share in its region. My eye saw a perfect investment, fitting the evidence
into a story familiar from books and speeches on great businesses. This bias, called the narrative

fallacy, fills in the gaps when information is limited. But the reality behind the perception was
quite different. Years of inflation and currency depreciation obscured the value of the companys
fixed assets, making return on invested capital look higher than was actually the case. The
company was losing its dominant market share (a legacy from earlier government regulation
against competition), and its main product didnt come from its own research facilities but
instead consisted of repackaged imported goods. The point is that my senses deceived me.
To help overcome inherent human misperceptions, I have found a surprising source of
wisdom: Miguel de Cervantes The Ingenious Gentleman Don Quixote of La Mancha. No
stranger to risk and deception, Cervantes fought for the Spanish crown against the Turks, losing
his right arm in 1575. He was then imprisoned in Algiers for five years, was finally ransomed
and released, and worked as a spy in Portugal. Cervantes turned to odd jobs and finally wrote
Don Quixote, one of the worlds first novels and perhaps the best. The storys famous namesake
sells his familys land to buy books on knights and chivalry. His fascination is so great that he
fits scenes from his life to the patterns of the books he has read, with consequences ranging from
comic to tragic. The dreamy knight appears remarkably like an overly optimistic investor. For
example, consider a passage describing Don Quixotes confusion:
His fantasy filled with everything he had read in his books, enchantments as well as combats,
battles, challenges, wounds, courtings, loves, torments, and other impossible foolishness, and he
became so convinced in his imagination of the truth of all the countless grandiloquent and false
inventions he read that for him no history in the world was truer. (All quotations from the novel
throughout this article are from the 2003 edition translated by Edith Grossman and published by
Ecco.)

He sees the world through this misshapen lens. He lashes out at windmills thinking they are
giants. He slaughters a flock of sheep because they look like a mighty army. He slashes a series

of puppets to bits because they appear to be challenging soldiers. On the surface, these episodes
appear as foolish jokes for children, but they hold deep truths about human perception that each
investor should learn. Cervantes uses extreme examples to show us that as people (and as
investors), we need to be wary of our minds attempts to see in a situation or investment what we
want instead of what really is.
In one scene, Cervantes uses the language of value investing. A barber riding a donkey
down a path in a heavy rain wears a basin over his head to protect from the bad weather. To Don
Quixotes eyes, the barber is riding a famous horse and wearing the great helmet of Mambrino,
a fictional Spanish Moorish kings armor made of pure gold mentioned in grand chivalric stories.
Don Quixote asks Sancho, his squire, Tell me, do you not see that knight coming toward us,
mounted on a dappled gray and wearing on his head a helmet of gold? Surprised that the man
would carry a helmet of such particular value so casually, Don Quixote sounds almost like a
write-up at a value investors conference:
[This] helmet, by some strange accident, must have fallen into the hands of one who could not
recognize or estimate its value, and not knowing what he was doing, and seeing that it was made
of purest gold, he must have melted down one half to take advantage of its high price, and from
the other half he made this, which resembles a barbers basin, as you say. Be that as it may, I
recognize it, and its transmutation does not matter to me, for I shall repair it in the first village
that has a blacksmith, and in a manner that will leave far behind the one made and forged by the
god of smithies for the god of war.

The story is a joke, for the reader knows that the helmet is a basin. But Cervantes touches on the
problem of whether the value of an asset is in the eyes of the beholder or rather the market place
as a whole. Don Quixote thinks that he has found a great, undervalued asset while others see it as

a basin. To prove them correct, our protagonist wears the basin on his head as a helmet for
himself.
Cervantes was not writing for fund managers, but he may as well have been. How many
times have we seen a grand helmet instead of a basin and figured that some magical catalyst in
the market would finally unearth its true value? Cervantes describes Don Quixote investing in a
value trap that we all know too well.
The knights valiant attempts to experience great chivalric deeds end with tremendous
pain for himself and those around him. In fact, every time Don Quixote misjudges a situation he
is met with painhe loses teeth, spits blood, and suffers beatings sufficient to give him
concussions. Cervantes appears to be poking fun at dreamers out of touch with reality, and the
scene can provide an interesting perspective on the effects of bad perception in financial markets,
such as the consequences of dreaming traders, loose risk controls, and their impacts on the
broader financials system, in large part stemming from overly optimistic forecasts derived from
reading books of history. For example, analysts noticed that American home prices had always
risen, and packaged together mortgage-backed securities. When reality met with the dream, their
actions rippled throughout the financial community and actual working people outside of the
industry.

In particular, we all suffer from a problem of perception: seeing an asset the way
we want to instead of the way it actually is, whether we are too optimistic about a
company's future or think a bond's chances of default are much lower than reality.
Yet Cervantes also respects the clumsy Don Quixote, implying that our human ability to
see greatness amid squalor keeps us alive. At the end of the novel, Don Quixote loses a jousting
match against a member of his community, who forces our valiant knight to return to your

home, and rear your children, if you have any, and tend to your estate, and stop wandering
around the world and wasting your time and being a laughingstock to all who know you and all
who do not. These words are cold, and many underperforming value investors have probably
heard similar requests from close friends. After his loss, Don Quixote decides to go back home
and stop going around looking for adventures in places and countries we dont know. It is easy
to see his loss as resembling an investment loss; he literally tells the reader: In short, I took a
risk, I did what I could, I was toppled. Sancho delivers a short speech on the role of chance in
life, sounding like a wise trader lecturing new recruits: Ive heard that the woman they call
Fortune is drunken, and fickle, and most of all blind, and she doesnt see what shes doing and
doesnt know who shes throwing down or raising up.
When he arrives home, Don Quixote comes down with a bad fever and melancholy. The
sickness helps him come to a revelation:
My judgment is restored, free and clear of the dark shadows of ignorance imposed on it by my
grievous and constant reading of detestable books of chivalry. I now recognize their absurdities
and deceptions, and my sole regret is that this realization has come so late it does not leave me
time to compensate by reading other books that can be a light to the soul.

Shortly thereafter, he dies. This plot device is interesting. On the one hand, Cervantes chides our
hero for seeing the world only through the lens of the books he has read without accounting for
the hard realities of life. On the other hand, Don Quixote loses his energy for life when he must
see the world only how it is. One might side with Don Quixotes compatriots who wish to see
him act more realistically instead of fighting puppets and sheep, but the man dies when he is
unable to see the great possibilities in life. To an investor, I think this point is useful. To do our
jobs and provide returns to investors, we must try to divine future cash flows, discount rates, or
probabilities of default. We lose our lives as investors the moment we are unable to think about

the potential return of assets, instead seeing only what is past. For an equity investor, the analogy
would be akin to looking only at historical financial statements without taking into account what
the future will look like. For all of the pain, foolishness, and discomfort underlying the attempts
at earning risk-adjusted returns, we can only provide returns to investors by perceiving
something great in something very modest, similar to Don Quixote.
Don Quixote is full of tidbits of wisdom for a professional who deals with risk, chance,
and uncertainty on a daily basis. I, like most fund managers, generally prefer reading nonfiction.
And one should continue reading about the science of investing, but opening the occasional piece
of great literature can supplement our understanding of the art of investing.
Ryan Floyd, CFA, is founder and portfolio manager at Barca Capital in San Francisco and a
member of the CFA Society of San Francisco.

Market
INTEGRITY
A Seat at the Table
CFA Institute will provide investor perspective for SEC committee

The U.S. SEC recently named Kurt Schacht, CFA, managing director of Standards and Financial
Market Integrity, to its newly formed Investor Advisory Committee (IAC).
The 21-member committee, mandated by the DoddFrank Wall
Street Reform and Consumer Protection Act, replaces an older investor
advisory committee formed in the aftermath of the 2008 financial crisis.
In this interview with CFA Magazine, Schacht discusses the
committees important role in advising the SEC on regulatory priorities
and initiatives to protect market integrity and investor interests.
Kurt Schacht, CFA

How much clout will the committee have?


Schacht: Because the IAC is mandated by Congress, we hope it will offer a higher profile for the
investor voice in the reform agenda. That voice has been missing or shouted down too often by
a very strong financial lobby in Washington DC. Hopefully, this committee provides a credible
counterbalance with investors needs at its heart. The IAC is authorized by the DoddFrank Act
to submit its findings and recommendations for review and consideration by the SEC. Obviously,
we cannot force anything, but the investor protection perspective will have much improved
visibility.

What about the timing of this committeewhy did it take so long?


Clearly, the SEC and other regulators are facing greater challenges than at any point in history. If
this new committee were ever needed, it is now. But the entire pace of reforms under Dodd
Frank, including the creation of this committee, has languishednot only because of the scope
and complexity of the Dodd-Frank legislation itself but also because of the politically charged
nature of policy development in Washington. The same can be said for Europe or any other place
still emerging from credit implosions and bailouts. Add to this the lingering enforcement
concerns in the aftermath of Madoff, MF Global, and recent insider trading exposs, and the
birth of the IAC could no longer be delayed.

What are your expectations for the IAC agenda?


It should be thought provoking and quite diverse. For instance, the Dodd-Frank Act significantly
expanded the SECs authority, reach, and enforcement responsibilities, including the regulation
of hedge fund advisers, derivatives dealers, and credit rating agencies. Add to that issues related
to accounting, auditing, and self-regulatory organizations, and the range of possible agenda items
is extensive. Ultimately, we see this SEC committee as an opportunity for more consistent and
bolder investor input that will directly impact the SECs ongoing rule-making and enforcement
functions.

Which issues are likely to take priority?


It is hard to predict, but we expect to raise fiduciary duty, corporate governance, SEC funding,
and enforcement activities as matters of high interest to investor protection. In addition, the
SECs extensive DoddFrank rule-making agenda is still emerging and will remain active. On
the emerging front, technological issues, such as use of social media, crowd funding, and
regulation of high-speed computerized trading, will challenge conventional approaches to

investor protection. As a practical matter, a scan of the committees roster shows broad
representation of a variety of investor interests, so we are encouraged that the discussions will be
informed by those closest to markets and investors.
For more on these and other industry developments, please follow us on our blog,
Market Integrity Insights, at http://blogs.cfainstitute.org/marketintegrity.

CFA Institute Co-sponsors Systemic Risk Council


While the DoddFrank Act was supposed to tame the excesses that produced the financial crisis,
some glaring vulnerabilities remain. In response to concerns over the lack of regulatory progress,
CFA Institute and Pew Charitable Trusts have formed the Systemic Risk Council (SRC). Led by
former Federal Deposit Insurance Corporation chair Sheila Bair, the council aims to accelerate
financial market reforms.
The SRCcomprised of a diverse group of experts in investments, capital markets, and
securities regulation, including senior adviser Paul Volcker, former chair of the Federal Reserve
expects to evaluate and provide commentary on the existing efforts of regulators to design and
implement a credible and globally coordinated systemic risk oversight function.

Financial Amnesia: An Embarrassment to Our Profession


BY SHEETAL RADIA, CFA

We cannot afford to forget the lessons of the crisis. Amnesia causes financial crises.
U.S. Treasury Secretary Timothy Geithner, March 2012
In December 2011, the CFA Society of the UK published a headline-grabbing position
paper about the critical lessons that financial market participants fail to learn from history. By
identifying and learning these three key lessons, the investment profession can become a stronger
source of market discipline.

What is Financial Amnesia?


Financial amnesia occurs when market participants forget (or behave as
if they have forgotten) the lessons from financial history. Financial amnesia
disarms individuals, the market, and the regulator. It causes risk to be mispriced,
bubbles to develop, and crises to break. Rather than seeing the recent crisis as a
black swan, one might say it is more a case of a white swan made black and
blue from frequent systemic governance collapses in the past.

Three Lessons We Forget


Lesson 1: Innovation, the illusion of safety, and this time its different:
The world of finance hails the invention of the wheel over and over again, often in a
slightly more unstable version.
John Kenneth Galbraith
The expansion of credit plays a key role in fuelling innovation, while the creation of an
illusion of safety (e.g., Goldilocks economy1, risk transfer via credit default swaps) results in a
1

A Goldilocks economy is not too hot to cause inflation and not too cold to cause a recessionjust

right. The term was used to describe the U.S. economy in the late 1990s during the rise of the dot-com

this time its different approach that enables investors to continue unsustainable activity and
risk taking. Sadly, each time the outcome is the same, never different.
Lesson 2: Financial institutions are prone to failure:
I dont want any yes-men around me. I want everybody to tell me the truth even if it
costs them their jobs.
Samuel Goldwyn
Financial services firms, by acting in their own self interest and in the interests of their
shareholders, are supposed to impose market discipline. History demonstrates that they
commonly fail to act as expected because of poor information, poor governance, or flawed
incentives. Consequently, overreliance on market forces is unwarranted.
Lesson 3: Ineffective regulation:
I was shocked, because I have been going for 40 years or more with very
considerable evidence that it (free market theory) was working exceptionally well.
Alan Greenspan
The frequency of market failure places a greater onus on regulators to be more effective
in encouraging and imposing market discipline. Regulators inability to supervise and enforce
effectively contributes to crisis. Regulators focus on symptoms of the markets failure to impose
discipline rather than the root causes. Furthermore, they often ignore, or forget, the root cause of
their own inability to act promptly, thereby contributing to the risk of systemic governance
failure.

The Way Forward


Solution 1: Educate investment professionals to maintain and apply their financial memory. It
took 50 yearsequivalent to a working lifetimefor the regulatory frameworks applied in the
bubble.

aftermath of the 1929 stock market crash to be repealed. We need to ensure that the memory of
the recent crisis (and its costs) is maintained in the future. We should incorporate material about
the practical history of financial markets, designed to remind us about the effects of liquidity,
psychology, and regulatory failure, into qualifications for investment professionals.
Solution 2: To alert investment professionals, we should support broader industry and regulatory
initiatives to monitor the impact of credit growth and financial innovation. The red light should
flare at the first instance of a claim that this time its different.
Solution 3: We should encourage boards of financial institutions to undertake an annual
amnesia check or encourage independent assessments (by regulators and academics) of the
levels of amnesia apparent in these institutions. The check or assessment could consider the
institutions risk assessments and the degree of probability they assign to those. It could also
review the extent to which the determinants of management compensation have shifted over
time.
Solution 4: We should encourage regulators to emphasize supervision rather than regulation,
establish and operate supervisory processes that mitigate adverse behaviors, and aim for
informed independence from market influence.
We should also support the regulator as a critical provider of market discipline and a vital
component in maintaining financial market integrity.
Financial amnesia is an embarrassment to our profession. We should do what we can to
prevent it. It is upon us to heed the call of the Financial Times Gillian Tett to make finance the
rational engine that supplies money to the rest of the economy in the most efficient and
functional way possible.

For a full copy of the CFA UK position paper on financial amnesia, please e-mail
advocacy@cfauk.org.
Sheetal Radia, CFA, is Policy Adviser at the CFA Society of the UK.

Seeing through the Labyrinth


Asian ETFs need more transparency
BY LEE KHA LOON, CFA

In August 2011, Chinese Vice-Premier Li Keqiang visited Hong Kong, where he unveiled plans
to create an exchange-traded fund (ETF) that would allow mainland Chinese investors to invest
in stocks listed in Hong Kong. The announcement hardly came as a surprise, as ETFs have
become an increasingly popular and cost-efficient way for investors to gain equity market
exposure.
According to research consulting company Strategic Insight, net sales of ETFs in Asia,
excluding Japan, totaled US$3.1 billion from January to April 2011, compared with negative net
sales of US$13.4 billion for mutual funds during the same period. In the first half of 2011, 65
new ETFs were launched in Asian countries other than Japan. And as of 30 June 2011, the region
had 376 listed ETFs with assets of US$61 billion, representing 67 providers and listings on 13
different exchanges.
As of June 2011, the four largest Asian ETFs (excluding Japan) are as follows:

I-Share FTSE A50 China Index


Tracker Fund HK
Hang Seng Index ETF
China AMC SSE 50

Hong Kong
Hong Kong
Hong Kong
China

Assets Under

Average Daily

Management
USD7.5 billion
USD7.1 billion
USD3.9 billion
USD3.2 billion

Volume
USD120.8 million
USD56 million
USD1.7 million
USD77.8 billion

Source: BlackRock

Although the industry is thriving today, ETFs started relatively modestly in Asia with the
launch of the Tracker Fund of Hong Kong following the 1998 financial crisis. At that time, the
government purchased shares, pooled them, and listed the ETF on the Hong Kong Exchange

(HKEx) to stabilize the stock market. Today, Asias largest ETF is the A50 China ETF, which
tracks the 50 largest stocks on the Shanghai Stock Exchange and is listed in Hong Kong.
Launched in 2004, this fund has an annualized return rate of 17.9% since inception.
Analysts expect additional growth in the ETF arena in the next few years in response to
new innovations, products, and structures. A recent example is the Valentines Day 2012 launch
of the worlds first yuan-denominated gold ETF on the Hong Kong stock exchange. The Hang
Seng RMB Gold ETF, launched by Hang Seng Bank Limited, aims to track the performance of
the London gold fixing price in U.S. dollars.

Have Regulations Kept Pace with Innovation?


Although ETFs started out with basic rules and regulations in most Asian markets, in recent
years there has been a proliferation of new and innovative products based on different types of
physical assets or replication strategies using derivatives, with more-complex synthetic ETFs
being offered to investors. In response, critics have questioned whether existing regulations and
disclosure practices are sufficient for investors to fully understand and appreciate these funds
risks and costs. Synthetic ETFs, which use over-the-counter derivatives and total return swaps to
replicate returns on broad market indices, are more common in Asia than in the U.S. because
Asian regulation allows greater flexibility in using derivatives to construct an ETF.
Critics also have expressed concerns that the development of ETFs has followed a pattern
similar to structured products, which led to the 2008 Lehman minibonds crisis. Synthetic ETFs,
such as the A50, use total-return swaps in an attempt to deliver the index return of the top 50
stocks (by market capitalization) for the A-share market on the Shanghai Stock Exchange. This
strategy raises counterparty risks similar to those of Lehman minibonds. The effects of sudden
and large investor withdrawals, which could be triggered by market events or concerns about

counterparty risks, are untested. As recent experience has shown, in a crisis, a bankruptcy
administrator can freeze collateral assets pledged by a failed counterparty. Securities lending to
improve returns on the ETF might further complicate the process of gaining access to the pledge
collateral from the swap counterparty in times of distress.
Perhaps the time has come to take stock of the ETF labyrinth in Asia, including the
clarity of the underlying assets, structures, and risks embedded in the structures, as well as the
transparency of information disclosed to investors in prospectuses and ongoing disclosure of
performance and risk management. Because ETFs, compared with other instruments, generally
are less well understood by investors, the exchanges, originators, and distributors need to address
this knowledge vacuum, in concert.
Originators have begun to take the lead in providing more information on their websites
to help investors understand their products and services as well as address investors concerns.
As a result, more educational materials are now available to investors through fund distributors
a step in the right direction, as investors should understand the investment product as well as
its objective. Indeed, some ETFs are not designed as long-term investments for the retail
investor. In Korea, for example, the two most actively traded products are leverage and short
ETFsthe Samsung Kodex Leverage ETF and the Samsung Kodex Inverse ETFwhich
demonstrate concentration in the speculative end of the market.

Need for a Classification System


ETF has become a blanket term for a variety of products with different structures and
underlying assets. ETFs need appropriate labeling to identify the product structure, investment
objective, and underlying risks. To start, the term ETP (exchange-traded product) could be
used as an umbrella term. The various types of underlying assets (equities, fixed income, stock

indices, gold, oil, and other commodities) could be classified using separate labels. Purely
synthetic ETFs that attempt to replicate the asset class should carry a separate symbol. In Hong
Kong, for instance, all synthetic ETFs are required to have a mark to distinguish them from the
others. The classification is important not only at a country level but also on a regional (if not
global) basis, with investors in Asia increasingly investing across markets.
As the market develops, the current framework regarding transparency, disclosure,
conflicts of interest, and governance must be removed. The prospectus documents are long and
complex, especially for synthetic ETFs. Investors need a better summary of key information to
understand the underlying assets or strategy adopted to achieve returns in order to identify the
risk points. Regulatory agencies also should re-examine regulations on continuous and periodic
disclosures, especially relating to performance and risk management. Investors can benefit from
adequate and timely disclosures of counterparty risks and collateral. Currently, semiannual and
annual reports generally provide insufficient information, and originators can choose to be
selective in how information is disclosed. Even an astute investor will have difficulty working
through the information provided or the disclosures, mostly published on the ETFs website.
Some originators have been more forthcoming, disclosing such important information as
downgrades of counterparties and the impact of such downgrades on the ETFs overall collateral.
Moreover, because no annual general meetings are required of ETFs, investors need ways
to engage with the originators. Most ETFs in Asia apply a manager/trustee model under their
local regulatory frameworks, and the trustee will look after the investors interests. This process
is similar to listing investment funds on the exchange. The threshold to call a members meeting
is usually between 3 and 10% of the shareholdings in Asia, which is daunting for dispersed

minority investors. Although this model may be more cost efficient, it works well only if trustees
are independently appointed and unrelated to the manager or the sponsor in any way.
Finally, the market is developing independent research on ETF performance and risk
analysis, creating a more healthy environment for investors. Valuable lessons can be learned
from the way the real estate investment trust (REIT) market in Asia developed over the past 10
years. For example, Singapore now requires annual general meetings for REITs investors despite
the manager/trustee model. Analyst coverage of the REIT market also increased as disclosures
improved, to the benefit of investors.
For more than 10 years, ETFs have offered a way for investors to access a broad range of
asset classes using a low-cost investment vehicle listed on Asian stock exchanges. They also
have provided investment opportunities in the Chinese equities market, which is otherwise
difficult for international investors to access. These qualities have contributed to the popularity
of the China ETFs traded in Hong Kong. Similarly, China is now working toward allowing
mainland investors to invest in Hong Kong using a synthetic ETF. As the market develops,
investors need to seek changes that will improve transparency and disclosure of the performance
and risk management of ETFs. Such enhancements will help market participants stay well
informed of the developments in the ETF market.
Lee Kha Loon, CFA, is head of Standards and Financial Market Integrity for the Asia-Pacific
region of CFA Institute.

XBRL Awareness Continues Upward Trend


BY GLENN DOGGETT, CFA

A recent CFA Institute survey confirms a continuing upward trend in XBRL (eXtensible
Business Reporting Language) awareness among members who are end users of financial
reports.
Indeed, nearly half (47%) of survey respondents reported being aware of the worldwide
standard for electronic business reportingup from 45% in 2009 and 41% in 2007. For global
capital markets regulators, this awareness level among individuals considered end users shows a
clear need for marketing campaigns promoting the benefits of tagged financial reporting to the
analytical process.
Regarding expectations for how XBRL could affect investment analysis, we have seen
some interesting shifts. Based on responses to this years survey, members increasingly believe
that XBRL reporting should improve the timeliness of the valuation process, with 64% scoring
this attribute as highly important (either a 4 or 5 on a 5-point scale), compared with 54% in
2009 and 53% in 2007. Unfortunately, the results also show that respondents are less optimistic
about XBRLs ability to compare companies and industries (64%, versus 68% in 2007). The level
of inconsistency found in initial XBRL filings, including the use of company-specific tags,
appear to be tempering the perceived benefits of analytical use.
We introduced several new survey questions designed to address concerns about the state
of XBRL-tagged information that is currently available. Although some tagged information may
not be comparable because of company-specific tags or classifications, 45% of survey
respondents believe it is important to tag such information, as doing so ultimately will allow
users to determine the importance of the information. Another 34% believe that such tagging will
improve the information they can access from the third-party data aggregators. The majority of

respondents want to determine for themselves whether the information is useful to the fair
valuation of a particular company.
When asked about how best to facilitate the use of XBRL-tagged information, 82% of
member respondents said it was highly important to have access to all companies (across a
meaningful set of annual and interim periods). Additionally, 75% indicated it was highly
important to make XBRL tagging available for all sections of the annual report, because key
information for some industries may be presented in sections outside of the financial statements
and required note disclosures.
XBRL resource improvements are necessary to expand the standards use and
application. Although survey respondents prefer free servicesan overwhelming majority
expressed strong support for regulators offering such free servicesnearly a third (30%) stated
that fee-based vendor resources were highly important. That result is likely because the XBRL
document viewers available today fall short of helping users achieve the analytical benefits
envisioned in the initial promotion of the XBRL reporting structure.
Access the full XBRL survey report at www.cfainstitute.org/about/Pages/surveys.aspx.
Glenn Doggett, CFA, is director of Standards of Practice at CFA Institute.

User-Friendly Tools Make XBRL-Tagged Data More Accessible


Regulators around the globe have been moving toward technology-based financial reporting
platforms for many years now, with special emphasis on XBRL (eXtensible Business Reporting
Language). But even as both the quantity and quality of the tagged data expanded, investors and
end users had limited options for accessing this new electronic information. Given the
advancement of products and services for building XBRL reports, the time has come to focus on
end-user tools to aid in the consumption of XBRL data.

To that end, XBRL US organized a competition the XBRL Challenge, which CFA
Institute co-sponsored to advance the development of tools and applications designed to
consume XBRL-formatted data from the U.S. Securities and Exchange Commissions EDGAR
database.
Calcbench, an open-source application that utilizes corporate XBRL data and performs
comparative analytics, took top prize. In this interview with CFA Magazine, Calcbench cofounders Pranav Ghai and Alex Rapp discuss their winning application and the future prospects
of XBRL internationally.

How does Calcbench enhance the investment decisionmaking or analytical


process?
We quickly put data and some simple analytics in front of you. Then we make it easy for you to
continue your own analysis. The data are exactly as the companies reported (not normalized or
interpreted by a third party), and yet were still able to show you comparisons over time and
across companies.

What do you believe gave your application an edge in the competition?


Simplicity. With a few mouse clicks, you can get all of the financial information about a
particular company within seconds. Plus, we throw in our own automated metrics and
calculations (for example, margin percentages and percent changes from period to period) and
put it all in an easy-to-read format.

What needs to change for XBRL to gain an analytical foothold in the


investment industry?
While there may be some skepticism about XBRL in the investment community, we think these
concerns can be overcome. XBRL provides very timely, accurate, and detailed information. It

just requires a knowledgeable middleman to process it for you in most cases. Analysts should
not be expected to do this processing for themselves. As more quality tools like ours appear and
give people an edge, analysts are going to embrace XBRL. And we think it is a bad strategy to
hold out too long early adopters will benefit.
Of course, the universe of data is only a few years deep, but only time can solve that
problem.

What are the challenges to incorporating XBRL information from regulators


outside the U.S.?
Honestly, we dont know yet. We know that different regions use different taxonomies, different
languages, different filing schedules, etc. But we also expect additional complications will arise,
like changes in the filing structure itself. I guess well find out pretty soon.
We would like to start incorporating data from the U.K., Australia, and Japan in the next
12 months. We are getting closer every day. Other things on tap include more automated
analytics, some industry benchmarking data, and easier-to-use collaborative tools.
For more information on the XBRL Challenge contest submissions, including Calcbench,
visit http://xbrl.us/research/pages/challenge.aspx.

The Capital Markets Policy Council and staff in front of the New York Stock Exchange following a meeting
with NYSE officials to discuss regulatory policy.

CFA Institute Announces Appointment to GIPS Executive


Committee
CFA Institute has announced the appointment of Karyn D. Vincent, CFA, CIPM, to the GIPS
Executive Committee (EC), the decisionmaking body for the Global Investment Performance
Standards (GIPS).
Vincent

will

chair

the

GIPS

Verification/Practitioner

Subcommittee and serve on the GIPS EC.


The nine-member GIPS Executive Committee is a diverse
group of investment professionals who develop and promote the
adoption and implementation of the GIPS standards as the single,
global

standard

for

calculating

and

presenting

investment

performance. Vincent will begin her term in September, replacing

Karyn Vincent, CFA, CIPM

outgoing member Carl Bacon, CIPM, chairman of StatPro in London.


Vincent the founder of Vincent Performance Services LLC, which provides GIPS
standards consulting and verification services is a vital volunteer with a long-standing service

record dedicated to the GIPS standards, and its predecessor AIMR-PPS standards, that dates back
to 1998. She was most recently chair of the GIPS Interpretations Subcommittee.
I am pleased to welcome Karyn back to the GIPS Executive Committee, states
Jonathan Boersma, CFA, executive director of the GIPS standards at CFA Institute. Karyn has
been a tireless volunteer for more than a decade, and her technical expertise will be a valuable
asset on the Executive Committee.
In recognition of her volunteer service, CFA Institute recently awarded Vincent the
prestigious Daniel J. Forrestal III Leadership Award for Professional Ethics and Standards of
Investment Practice. This award recognizes a CFA Institute member who has championed the
pursuit of excellence in professional ethics and standards of practice, and who has provided
outstanding leadership in elevating the integrity and competence of the investment profession.

CFA Institute Appoints Graziella Marras, Director, Capital


Markets, EMEA
CFA Institute has appointed Graziella Marras to the position of director, capital markets policy,
for Europe, Middle East, and Africa (EMEA). She is based in Brussels, representing and
promoting the interests of CFA Institute on capital markets issues before EU institutions and
other stakeholders as part of the Standards and Financial Markets Integrity team. In this role,
Marras will continue to grow the CFA Institute voice in regulatory reform, as well as advocate on
behalf of the global investment community for market integrity, investor protection, and ethical
practice within the financial services industry.
Marras is a seasoned finance professional, with more than 20 years of experience
working for financial institutions in Brussels, New York, and Frankfurt, Germany. Most recently,
she worked as policy director at the European Fund and Asset Management Association

(EFAMA) in Brussels, where she was in charge of regulatory affairs, representing the European
asset management industry. Prior to her role at EFAMA, Marras was a senior portfolio manager
in equities at Fortis Investment Management. Her earlier career also included two roles as
assistant vice president portfolio manager in equities at Commerz International Capital
Management and Deutscher Investment Trust.
Graziellas appointment demonstrates our commitment to ensuring that our voice is
heard at the center of policy making in Brussels. Through our offices in London and Brussels,
Graziella will continue to support our efforts in developing and strengthening our independent
voice, on behalf of the investor, with key stakeholders, says Claire Fargeot, CFA, head of
Standards and Financial Market Integrity for EMEA.

Ethics
FORUM
Implications and Consequences
The Professional Conduct Program and Operation Perfect Hedge
BY DOROTHY KELLY, CFA

At regional society meetings this spring, members around the globe frequently asked the same
question, Have any CFA members or charterholders been implicated in the insider-trading
scandals reported in the news? Sadly, the answer is yes.
Several individuals who had enrolled in or completed the CFA Program have been barred
by securities regulators or have pled guilty to securities fraud and/or conspiracy charges in recent
years. A handful have been ensnared by Operation Perfect Hedge, the well-publicized joint
effort by the U.S. Federal Bureau of Investigation (FBI), SEC, and Department of Justice (DOJ)
to target insider trading in the hedge fund industry. Operation Perfect Hedge began more than
four years ago, yielded its first arrests in late 2009, and is ongoing. To date, the FBI has arrested
more than 65 individuals and the DOJ has won 57 convictions or guilty pleas, some of which
include jail time up to 11 years. The SEC, meanwhile, is pursuing parallel civil actions.
Is CFA Institute doing anything about this? Yes. The Professional Conduct Program
(PCP) monitors compliance with the Code of Ethics and Standards of Professional Conduct,
investigates potential misconduct by members and candidates, and disciplines members and
candidates in accordance with our Rules of Procedure, which are firmly grounded in the
principles of confidentiality and fair process. Because the Code and Standards are principlesbased and may or may not be the same as applicable lawswhich are generally rules-basedthe

PCP conducts a separate investigation to determine whether a member or candidate has violated
the Code and Standards. Such investigations, conducted on a confidential basis in accordance
with our Rules of Procedure, can take significant time.
The Rules of Procedure allow CFA Institute, through its designated officer, to impose a
summary suspension on any member or candidate who has been indefinitely or permanently
barred by a securities regulator or convicted of or pled guilty to a crime punishable by more than
one year in prison. A summary suspension imposed on a member immediately terminates all
membership rights, as well as the right to use the CFA designation, while a summary suspension
imposed on a candidate prohibits continued participation in the CFA Program. Summary
suspensions allow CFA Institute to expeditiously dispose of certain matters without a full
disciplinary hearing, much as summary judgments allow courts to simplify or avoid unnecessary
trials.1
When the designated officer imposes a summary suspension, the PCP notifies the
individual of the suspension as well as the right to review. The individual has 30 days to submit a
written request for a summary suspension hearing panel, composed of five members of the
Disciplinary Review Committee (DRC), to review the matter. If the summary suspension hearing
panel rejects the summary suspension, membership rights are reinstated and the PCP may
continue with a full investigation. If the summary suspension hearing panel affirms the summary
suspension, or the individual fails to request a review within 30 days, the sanction automatically
becomes a revocation of membership and the right to use the CFA designation for members and
charterholders and a permanent prohibition from the CFA Program for candidates. The
imposition of a summary suspension is published in CFA Magazine and on the industry-related
1

CFA Institute may also impose a summary suspension on a member or candidate for failing to cooperate

with the PCP in its investigation of the persons conduct.

sanctions section of the CFA Institute website, which includes a list of individuals currently
under sanction as well as a repository of historical sanctions imposed.

What Can Members Do?


CFA Institute will continue to protect the integrity of its membership, designations, and
examination programs by upholding our Code of Ethics and Standards of Professional Conduct
and disciplining members as necessary, but what can members do?
At the CFA Institute annual conference in Chicago in early May, CFA Institute president
and CEO John Rogers, CFA, issued a personal call to action to help restore trust in the financial
services industry. Lets step forward with a bolder voice for professional ethics. Members of
CFA Institute have always had to conform to a robust code of ethics, but these times call for us to
step up more visibly. Rogers introduced the integrity list50 actions that members can take to
help rebuild trust in the investment industry. Some, such as always be honest with clients,
describe quiet ways to build trust at the individual level, but others, such as bring to justice
those who take part in irresponsible and illegal activities, illustrate ways to step forward with a
bolder voice for ethics in the investment industry.
Need guidance applying the Code and Standards? Contact ethics@cfainstitute.org. Aware
of possible violations of the Code and Standards by a member or candidate? Contact
pconduct@cfainstitute.org.
Should a member or candidate appeal a conviction or industry bar, the rules regarding
summary suspensions allow for the possibility of reversals by courts or other bodies. Under the
rules, a revocation or prohibition resulting from a summary suspension may be rescinded if an
individual provides reliable evidence that the underlying criminal conviction or industry bar has
been reversed. In such cases, the PCP would proceed with the investigation of the persons
conduct as it relates to the Code and Standards.

Finally, the rules relating to industry-related conduct allow former members and
candidates who believe that they have been rehabilitated to seek reinstatement of membership or
candidacy after five years. The rules require that the PCP review petitions for reinstatement,
investigate as necessary, and deliver a written recommendation to a DRC hearing panel convened
to decide the matter. According to the Rules of Procedure, the petitioner must demonstrate to the
hearing panels satisfaction professional competence and fitness to practice, which will include
sufficient evidence demonstrating rehabilitation and full compliance with all disciplinary orders.
In the past 15 years, one former member has petitioned for reinstatement, and the hearing panel
denied the request.
In late February, news reports indicated that the FBI is currently investigating another
120 individuals as part of Operation Perfect Hedge. Investigators hint that they will continue
Operation Perfect Hedge for another five years, which means that we can expect stories about
unethical practices in the financial services industry to continue. If history is any guide, some of
those stories regrettably will include the names of current CFA charterholders, members, or
candidates.
Dorothy Kelly, CFA, is director of training and outreach for the CFA Institute Professional
Conduct Program.

Professional Conduct Program: Society Liaison Position


CFA Institute works to promote and protect the integrity and reputation of its membership, the
CFA charter, and the CFA Program. The Professional Conduct Program (PCP) at CFA Institute
helps this effort by reaching out to societies around the world. The goal in working with societies
is to ensure that the PCP and CFA Institute are aware of professional conduct issues involving
members on a timely basis. Members can assist the PCP formally through the PCP society liaison
or informally by forwarding relevant news articles via email to pcprogram@cfainstitute.org. For

more information on the PCP society liaison, please contact Dorothy Kelly, CFA, at
dorothy.kelly@cfainstitute.org.

DISCIPLINARY NOTICES
Summary Suspensions
On 15 March 2012, CFA Institute imposed a Summary Suspension on Spyridon Sam
Adondakis (U.S.), a charterholder member, automatically suspending his CFA Institute
membership and right to use the CFA designation. Because he did not request a review, the
summary suspension automatically became a permanent revocation.
On 18 January 2012, the U.S. Attorneys Office for the Southern District of New York
announced the unsealing of a guilty plea entered in April 2011 by Adondakis, a research analyst
at the hedge fund Level Global Investors, to criminal charges that he conspired with others to
engage in insider trading. According to the government, Adondakis participated in a scheme with
fund managers and research analysts at five different investment firms to share material,
nonpublic information about two publicly-traded technology companies, Dell and NVIDIA.
Prior to a Dell earnings announcement in August 2008, Adondakis knowingly received
inside information from a co-conspirator analyst indicating that the companys gross margins
would be materially lower than the market expected. Adondakis provided this inside information
to the portfolio manager for whom he worked who then sold short approximately 9 million
shares of Dell and purchased 10,900 put option contracts. Shortly after Dells disappointing
earnings announcement, the price of its stock fell about 13%. The portfolio manager then
covered the funds short position, sold its option contracts, and realized an illegal profit of
US$53 million. Adondakis faces a statutory maximum sentence of 25 years in prison, but he has
been cooperating in the governments ongoing investigation.

_________
On 13 March 2012, CFA Institute imposed a Summary Suspension on Daniel Moshe Dani
Naeh (Israel), a charterholder member, automatically suspending his membership and right to
use the CFA designation. Because he did not request a review, the summary suspension
automatically became a permanent revocation.
On 24 February 2010 in federal district court in New York City, Naeh pleaded guilty to
charges that he engaged in separate conspiracies to rig bids for investment agreements and to
defraud municipal issuers. According to the U.S. Department of Justice, from approximately
1998 through 2006, Naeh was an employee of CDR Financial Products, a financial services firm
based in Beverly Hills, California. State and local governments and agencies hired CDR to act as
their broker and conduct a competitive bidding process for contracts to invest the proceeds of

municipal bonds issued to pay for public projects. Naeh and others, however, decided in advance
which providers would be the winning bidders for certain investment agreements, in return for
kickbacks to CDR in the form of unearned or inflated fees. As part of their fraudulent scheme,
Naeh and others also gave certain co-conspirator providers last look information about the
prices and conditions in their competitors bids, which enabled the providers to win contracts at
artificially determined price levels. In exchange, CDR received kickbacks and relied on the coconspirator providers to submit intentionally losing bids when requested on other contracts.
_________
On 3 November 2011, the CFA Institute Designated Officer imposed a Summary Suspension on
Simone O. Fevola (U.S.), a charterholder member, automatically suspending his membership
and right to use the CFA designation. Fevola subsequently requested a review of his summary
suspension, as provided under Rule 10.3 of the Rules of Procedure (2010). A Summary
Suspension Hearing Panel convened, and a hearing was conducted by conference call on 30
March 2012. Fevola did not submit a pre-hearing brief or exhibits, and he did not call in to
participate in the hearing. Nevertheless, the Hearing Panel reviewed the matter and affirmed the
Designated Officers decision.
Specifically, the Hearing Panel found that on 12 March 2010, the U.S. SEC concluded
that Fevola, while president and chief investment officer of Wealth Management, improperly
accepted US$1.24 million in undisclosed kickbacks from certain investments made by four of the
six unregistered funds the investment adviser managed, while continuing to cause clients to
invest in those funds even though he knew the investments were clearly unsuitable. The SEC
also found that Fevola breached his fiduciary duty and made fraudulent representations to clients
regarding the safety and stability of the two largest funds managed by Wealth Management. As a

result, the SEC entered an order indefinitely barring Fevola from association with any investment
adviser, with an opportunity to reapply after three years. In a related civil action, the U.S. District
Court for the Eastern District of Wisconsin permanently enjoined Fevola from committing
further violations and ordered him to disgorge his ill-gotten gains.
_________
On 23 March 2012, CFA Institute imposed a Summary Suspension on Jeffrey Mayberry
(U.S.), a charterholder member, automatically suspending his membership and right to use the
CFA designation. Mayberry was suspended for his failure to cooperate with a Professional
Conduct Program investigation. Because he did not request a review, the summary suspension
automatically became a permanent revocation.

Resignations
Effective 2 April 2012, Christopher T. Fide (U.S.), a charterholder member, permanently
resigned his membership in CFA Institute and any member societies and his right to use the CFA
designation in the course of an investigation by the Professional Conduct Program.

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