"I will not be submitting any new articles to the FAJ ..."
Robert D. Arnott wrote those words in the January/February 2003 Financial Analysts Journal in a letter to readers when he took up responsibilities as the publication's new editor.
But before the end of the year, his pledge was cast away. That fall he submitted an article to the FAJ on fundamental indexation, a concept he developed at his firm, Research Affiliates LLC, Pasadena, Calif. It was published in the March/April 2005 FAJ, which is owned by the CFA Institute, Charlottesville, Va.
"I told management of the CFA Institute I was doing this work and asked if they prefer I submit it elsewhere," he said in an interview. "They expressed strong interest I submit it (to FAJ)."
"I had forgotten about that statement," Mr. Arnott said of his pledge. "No one (at the CFA Institute or FAJ) reminded me of that, and I had forgotten it myself."
Mr. Arnott said he made the pledge to avoid a potential conflict of interest. He is a prolific author, published often in the FAJ before becoming editor, and in other publications. Indeed, in that introductory letter he informed readers his situation in taking up his new FAJ job "is complicated by the fact that I and various co-authors had several articles that were submitted before the start of my tenure as editor. I will play no role whatsoever in the final editorial process for these papers."
Then the letter added: "I will not be submitting any new articles to the FAJ, but I may contribute some short perspective pieces, which will be subject to independent review without my involvement in any way."
The FAJ subsequently published two articles by Mr. Arnott, each containing a note: "This article was accepted for publication prior to Mr. Arnott's appointment as editor ..." His article on the fundamental index contained a note only stating Mr. Arnott, as editor, "recused himself from any involvement in the refereeing or acceptance process for this article."
The article criticized traditional market-capitalization indexes, and referred to them as a "trillion-dollar industry." Mr. Arnott's article put forward his idea of the fundamental index, whose components are weighted by fundamental factors. A note divulged that "a patent is currently pending for the construction and management of indexes," based on his concept.
At that time, Research Affiliates already had a contract to manage $100 million in a fundamental index fund for a major pension fund. After the publication, Mr. Arnott's firm gained more business through licensing arrangements with other money managers offering products based on the index.
In his 2003 introductory letter, Mr. Arnott wrote, "All of us working on the FAJ recognize that the reputation of the journal depends in part on its commitment to high standards of ethics and professional conduct ... and will continue to abide by the FAJ's conflict-of-interest policies and ethical standards.
Mr. Arnott took over as editor after the FAJ had come under questioning over personal interests interfering in the editorial process, a controversy Pensions & Investments covered.
Katrina F. Sherrerd, CFA Institute managing director-planning and professional development, said the FAJ asked Mr. Arnott to submit the article, believing it of great value to its readers. "I believe the process we used was ethical and objective," she said.
How credible are the leaders of the CFA Institute and FAJ, who evangelize about professional standards, when such an editorial pledge is scrapped without notice to its membership, providing an opportunity to advance the editor's business interest under the aura of academic-like credibility of the FAJ?