James Bogen and James Woodward EVADING THE IRS I ³IRS´ is

3R]QD 6WXGLHV LQ WKH 3KLORVRSK\
RI WKH 6FLHQFHV DQG WKH +XPDQLWLHV
YRO;;SS
-DPHV%RJHQDQG-DPHV:RRGZDUG
(9$',1*7+(,56
,
³,56´ LV RXU WHUP IRU D YLHZ DERXW WKHRU\ WHVWLQJ RULJLQDWHG E\ PHPEHUV DQG
DVVRFLDWHVRIWKH9LHQQD&LUFOH,WVOHDGLQJLGHDLVWKDWWKHHSLVWHPLFEHDULQJRI
REVHUYDWLRQDO HYLGHQFH RQ D VFLHQWLILF WKHRU\ LV EHVW XQGHUVWRRG LQ WHUPV RI
,QIHUHQWLDO 5HODWLRQV EHWZHHQ 6HQWHQFHV ZKLFK UHSUHVHQW WKH HYLGHQFH DQG
VHQWHQFHVZKLFKUHSUHVHQWK\SRWKHVHVEHORQJLQJWRWKHWKHRU\7KHEHVWNQRZQ
YHUVLRQVRI,56DQGWKHRQHVZHFRQFHQWUDWHRQLQWKLVSDSHUDUH+\SRWKHWLFR
'HGXFWLYH DQG SRVLWLYH LQVWDQFH LQFOXGLQJ ERRWVWUDSSLQJ FRQILUPDWLRQ
WKHRULHV ,W JRHV ZLWKRXW VD\LQJ WKDW VXFK DFFRXQWV DORQJ ZLWK WKH SUREOHPV
WKH\JHQHUDWHKDYHH[HUWHGDGRPLQDQWLQIOXHQFHRQSKLORVRSKHUVZKRVWXG\WKH
HSLVWHPRORJ\RIVFLHQFH
:H PDLQWDLQ WKDW WKH HSLVWHPLF LPSRUW RI REVHUYDWLRQDO HYLGHQFH LV WR EH
XQGHUVWRRG LQ WHUPV RI HPSLULFDO IDFWV DERXW SDUWLFXODU FDXVDO FRQQHFWLRQV DQG
DERXW WKH HUURU FKDUDFWHULVWLFV RI GHWHFWLRQ SURFHVVHV 7KHVH FRQQHFWLRQV DQG
FKDUDFWHULVWLFVDUHQHLWKHUFRQVWLWXWHGE\QRUJUHDWO\LOOXPLQDWHGE\FRQVLGHULQJ
WKH IRUPDO UHODWLRQV EHWZHHQ VHQWHQWLDO VWUXFWXUHV ZKLFK ,56 PRGHOV IRFXV RQ
:HDUJXHWKDWE\WDNLQJWKHPVHULRXVO\\RXWRRFDQHYDGHWKH,56
:H KDYH DUJXHG HOVHZKHUH WKDW WKHRU\ WHVWLQJ LQ WKH QDWXUDO DQG VRFLDO
VFLHQFHV LV W\SLFDOO\ D WZRVWDJH SURFHVV DQG WKDW WKH XVH RI REVHUYDWLRQDO
HYLGHQFHEHORQJVSULPDULO\WRWKHILUVWVWDJH,QWKLVVWDJHGDWDDUHSURGXFHGDQG
LQWHUSUHWHGLQRUGHUWRGUDZFRQFOXVLRQVDERXWZKDWZHFDOOSKHQRPHQD7KLVLV
XVXDOO\ D PDWWHU RI FRQVLGHULQJ D QXPEHU RI FRPSHWLQJ FODLPV DERXW WKH
SKHQRPHQRQ XQGHU LQYHVWLJDWLRQ DQG XVLQJ WKH GDWD WR GHFLGH ZKLFK RI WKRVH
FODLPV LV PRVW OLNHO\ WR EH FRUUHFW ,Q WKH VHFRQG VWDJH WKHRUHWLFDO FODLPV DUH
FRQIURQWHGZLWKFRQFOXVLRQVDERXWSKHQRPHQDUHDFKHGLQWKHILUVWVWDJH6RPH
H[DPSOHV RI GDWD DUH UHFRUGV RI WHPSHUDWXUH UHDGLQJV XVHG WR GHWHUPLQH WKH
PHOWLQJ SRLQW RI D VXEVWDQFH VFRUHV RQ SV\FKRORJLFDO WHVWV XVHG WR LQYHVWLJDWH
PHPRU\ SURFHVVLQJ EXEEOH FKDPEHU DQG VSDUN GHWHFWRU SKRWRJUDSKV XVHG WR

%RJHQDQG:RRGZDUG:RRGZDUG%RJHQDQG:RRGZDUG
-DPHV%RJHQDQG-DPHV:RRGZDUG
GHWHFW SDUWLFOH LQWHUDFWLRQV GUDZLQJV RI SUHSDUHG WLVVXH YLHZHG XQGHU
PLFURVFRSHVXVHGWRGHWHUPLQHWKHVWUXFWXUHRIQHXUDOV\VWHPVDQGWKHHFOLSVH
SKRWRJUDSKV (GGLQJWRQ &XUWLV DQG RWKHUV XVHG WR FDOFXODWH WKH GHIOHFWLRQ RI
VWDUOLJKW E\ WKH VXQ 6RPH H[DPSOHV RI SKHQRPHQD DUH WKH PHOWLQJ SRLQWV
FDOFXODWHG IURP WKH WHPSHUDWXUH UHDGLQJV WKH ZLGHVSUHDG DQG UHJXODUO\
RFFXUULQJ IHDWXUHV RI PHPRU\ SURFHVVLQJ LQYHVWLJDWHG WKURXJK WKH XVH RI
SV\FKRORJLFDOWHVWVWKHGHIOHFWLRQRIVWDUOLJKWHWF'DWDDUHHIIHFWVSURGXFHGE\
HODERUDWH FDXVDO SURFHVVHV WKDW PD\ LQYROYH WKH RSHUDWLRQ RI WKH KXPDQ
SHUFHSWXDO DQG FRJQLWLYH V\VWHPV DV ZHOO DV PHDVXULQJ DQG UHFRUGLQJ GHYLFHV
DQG PDQ\ RWKHU VRUWV RI QDWXUDO DQG PDQXIDFWXUHG QRQKXPDQ V\VWHPV :H
WKLQN WKH HSLVWHPLF LPSRUWDQFH RI WKH KXPDQ SHUFHSWXDO V\VWHP LQ GDWD
SURGXFWLRQ GHSHQGV XSRQ LWV LQIOXHQFH RQ WKH UHOLDELOLW\ RI WKH SURFHGXUHV E\
ZKLFK WKH GDWD DUH SURGXFHG DQG LQWHUSUHWHG ,Q WKLV UHVSHFW WKHUH LV QR
HSLVWHPLFDOO\ LQWHUHVWLQJ GLIIHUHQFH EHWZHHQ KXPDQ SHUFHSWLRQ DQG DQ\ RWKHU
IDFWRUZKLFKLQIOXHQFHVUHOLDELOLW\
7KH HSLVWHPLF VLJQLILFDQFH RI GDWD GHSHQGV XSRQ ZKHWKHU WKH\ SRVVHVV
IHDWXUHV WKURXJK ZKLFK WKH SKHQRPHQD RI LQWHUHVW FDQ EH VWXGLHG ,W GHSHQGV
DOVR XSRQ ZKHWKHU WKH\ FDQ EH LQVSHFWHG DQG DQDO\]HG E\ LQYHVWLJDWRUV ZKR
ZLVK WR XVH WKHP 7KH SURGXFWLRQ RI GDWD PHHWLQJ ERWK RI WKHVH FRQGLWLRQV
XVXDOO\UHTXLUHVWKHPDQLSXODWLRQRIKLJKO\WUDQVLWRU\DQGXQXVXDOFRPELQDWLRQV
RIFDXVDOIDFWRUVZKLFKGRQRWQDWXUDOO\RSHUDWHWRJHWKHULQDQ\UHJXODUZD\,Q
PDQ\FDVHVWKHVHFDXVDOVWUXFWXUHVDUHLGLRV\QFUDWLFWRKLJKO\XQXVXDOVLWXDWLRQV
PDQ\RIZKLFKDUHKLJKO\FRQWULYHGDQGSHFXOLDUWRWKHODERUDWRU\,QFRQWUDVW
SKHQRPHQD DUH W\SLFDOO\ GXH WR WKH XQLIRUP RSHUDWLRQ RI D UHODWLYHO\ VPDOO
QXPEHU RI IDFWRUV ZKRVH RSHUDWLRQ GRHV QRW GHSHQG XSRQ WKH UDUH DQG RIWHQ
KLJKO\ DUWLILFLDO VHWWLQJV UHTXLUHG IRU GDWD SURGXFWLRQ $V D UHVXOW PDQ\
SKHQRPHQD DUH FDSDEOH RI RFFXUULQJ LQ D YDULHW\ RI GLIIHUHQW QDWXUDO DQG
FRQWULYHGVHWWLQJV
,WLVSKHQRPHQDUDWKHUWKDQGDWDWKDWVFLHQWLVWVW\SLFDOO\VHHNWRH[SODLQDQG
SUHGLFW :H EHOLHYH WKDW LQ PRVW FDVHV VFLHQWLILF WKHRULHV DUH WHVWHG GLUHFWO\
DJDLQVW SKHQRPHQD UDWKHU WKDQ GDWD )RU H[DPSOH (LQVWHLQ¶V WKHRU\ RI JHQHUDO
UHODWLYLW\ZDVWHVWHGDJDLQVWDYDOXHIRUWKHGHIOHFWLRQRIVWDUOLJKWUDWKHUWKDQWKH
SKRWRJUDSKVIURPZKLFKWKHGHIOHFWLRQZDVFDOFXODWHG7KHHOHFWURZHDNWKHRU\
GHYLVHGE\:HLQEHUJDQG6DODPZDVWHVWHGDJDLQVWFODLPVDERXWDSKHQRPHQRQ
WKHRFFXUUHQFHRIQHXWUDOFXUUHQWVUDWKHUWKDQDJDLQVWWKHEXEEOHFKDPEHUDQG
VSDUNGHWHFWRUGDWDRQZKLFKWKRVHFODLPVZHUHEDVHG7KHWHVWLQJRI1HZWRQ¶V
WKHRU\RIXQLYHUVDOJUDYLWDWLRQLQYROYHGVXFKSKHQRPHQDFODLPVDV.HSOHU¶VDQG
*DOLOHR¶V ODZV UDWKHU WKDQ WKH GDWD XVHG WR LQYHVWLJDWH WKHVH SKHQRPHQD HJ
GHVFULSWLRQVRISHQGXOXPDQGLQFOLQHGSODQHH[SHULPHQWVDVWURQRPLFDOUHFRUGV
RI WKH PRYHPHQW RI WKH PRRQ HWF 7KH VHFRQG VWDJH RI WKHRU\ WHVWLQJ LV WKH
FRQIURQWDWLRQRIWKHRU\ZLWKSKHQRPHQD

%RJHQDQG:RRGZDUG
%RJHQDQG:RRGZDUGSII
(YDGLQJWKH,56
:H ZLOO XVH WKH WHUP ³REVHUYDWLRQ VHQWHQFHV´ LQ FRQQHFWLRQ ZLWK WKH
VHQWHQFHVDOVRFDOOHG³SURWRFROVHQWHQFHV´³HYLGHQFHVHQWHQFHV´HWFWKH,56
XVHV WR UHSUHVHQW HPSLULFDO HYLGHQFH $OWKRXJK GHWDLOV YDU\ DQG FRQWURYHUV\
DERXQGV WKH ,56 OLWHUDWXUH WHQGV WR DVVRFLDWH WKHP ZLWK UHSRUWV RI ZKDW
LQGLYLGXDOREVHUYHUVSHUFHLYH$VZLOOEHVHHQLQVHFWLRQV,9DQG9EHORZLWLV
RIWHQ YHU\ KDUG WR VHH KRZ WR FRQVWUXFW D VHQWHQFH ZKLFK ERWK UHSUHVHQWV WKH
SKRWRJUDSKV DQG RWKHU QRQVHQWHQWLDO HYLGHQFH VFLHQWLVWV RIWHQ XVH DV GDWD DQG
DOVR FDSWXUHV ZKDW LV HSLVWHPLFDOO\ VLJQLILFDQW DERXW WKHP 1HYHUWKHOHVV ZH
DVVXPHWKH,56QRWLRQRIDQREVHUYDWLRQVHQWHQFHZDVPHDQWWRSOD\VRPHWKLQJ
OLNHWKHVDPHUROHDVRXUQRWLRQRIGDWDERWKQRWLRQVDUHPHDQWWRH[SODLQWKH
UROH RI HPSLULFDO HYLGHQFH LQ WKHRU\ WHVWLQJ $FFRUGLQJO\ ZH VKDOO VSHDN RI
REVHUYDWLRQ VHQWHQFHV DV ³FRUUHVSRQGLQJ´ WR GDWD EXW ZLWK WKH FDYHDW WR EH
LOOXVWUDWHGLQVHFWLRQ,9WKDWWKHGHWDLOVRIWKLVFRUUHVSRQGHQFHDUHRIWHQTXLWH
XQFOHDU
%\ SLFWXULQJ WKHRU\ WHVWLQJ DV D RQHVWHS FRQIURQWDWLRQ RI WKHRU\ ZLWK WKH
HYLGHQFHZKLFK³REVHUYDWLRQVHQWHQFHV´DUHPHDQWWRUHSUHVHQWWKH,56LJQRUHV
WKH WZRWLHUHG VWUXFWXUH MXVW VNHWFKHG $QG DV WKH EXON RI WKLV SDSHU ZLOO EH
GHYRWHG WR VXJJHVWLQJ ZH WKLQN WKH ,56 SLFWXUH GRHV QRW SURYLGH DQ DGHTXDWH
DFFRXQWRIUHDOZRUOGVFLHQWLILFUHDVRQLQJIURPGDWDWRSKHQRPHQD
2XU RZQ YLHZ LV WKDW ZLWK UHJDUG WR WKH LQYHVWLJDWLRQ RI SKHQRPHQD WKH
HYLGHQWLDOYDOXHRIGDWDLVDVVHVVHGLQWHUPVRIJHQHUDODQGORFDOUHOLDELOLW\$V
ZH XVH WKHVH WHUPV JHQHUDO UHOLDELOLW\ GHSHQGV XSRQ WKH ORQJUXQ HUURU
FKDUDFWHULVWLFV RI UHSHDWDEOH SURFHVVHV IRU GDWD SURGXFWLRQ DQG LQWHUSUHWDWLRQ
:HGLVFXVVLWLQVHFWLRQ9,,EHORZ*HQHUDOO\UHOLDEOHGHWHFWLRQSURFHGXUHVPD\
IDLO DQG JHQHUDOO\ XQUHOLDEOH SURFHGXUHV PD\ VXFFHHG LQ HQDEOLQJ DQ
LQYHVWLJDWRU WR GLVFULPLQDWH FRUUHFWO\ LQ D SDUWLFXODU FDVH )XUWKHUPRUH VRPH
SURFHGXUHV XVHG LQ RQH RU D YHU\ IHZ FDVHV DUH QRW RU FDQQRW EH UHSHDWHG DV
ZRXOG EH QHHGHG WR HVWDEOLVK WKHLU ORQJWHUP HUURU FKDUDFWHULVWLFV /RFDO

,Q WKLV ZH GHSDUW IURP WKH ,56 OLWHUDWXUH LQ ZKLFK WKH WHUP ³REVHUYDWLRQ VHQWHQFH´ LV XVHG IRU
QDWXUDOODQJXDJHREVHUYDWLRQUHSRUWVDVZHOODVWKHLUFRXQWHUSDUWVLQILUVWRUGHUORJLFDOODQJXDJHV:H
HPSKDVL]HWKDWZHDUHXVLQJWKHWHUPRQO\IRUWKHODWWHU
7KLV LV URXJKO\ WKH QRWLRQ LQYRNHG E\ $OYLQ *ROGPDQ DQG RWKHUUHOLDELOLVWV 6HH HJ *ROGPDQ
FKVSDVVLP+RZHYHUXQOLNH*ROGPDQZHWKLQNIRUUHDVRQVWKDWZLOOHPHUJHLQ
VHFWLRQ ,; WKDW WKH SURMHFW RI LQYHVWLJDWLQJ WKH UHOLDELOLW\ FKDUDFWHULVWLFV RI PRVW KXPDQ EHOLHI
IRUPLQJ PHWKRGV DQG PHFKDQLVPV LV XQOLNHO\ WR EH LOOXPLQDWLQJ RU IUXLWIXO 5DWKHU ZH DSSO\ WKH
QRWLRQ RI JHQHUDO UHOLDELOLW\ WR KLJKO\ VSHFLILF PHDVXUHPHQW DQG GHWHFWLRQ SURFHGXUHV RU LQ
FRQQHFWLRQ ZLWK WKH XVH RI LQVWUXPHQWV IRU SDUWLFXODU SXUSRVHV 6XFK SURFHGXUHV DQG XVHV RI
LQVWUXPHQWV RIWHQ KDYH GHWHUPLQDWH HUURU FKDUDFWHULVWLFV WKDW ZH NQRZ KRZ WR LQYHVWLJDWH
HPSLULFDOO\ZKLOHZHVXVSHFWWKDWWKLVLVQRWWUXHRIPDQ\RIWKHPHWKRGVRUSV\FKRORJLFDOSURFHVVHV
WKDWXQGHUOLHEHOLHIIRUPDWLRQ
)RUH[DPSOHFRQVLGHUDWHFKQLTXHIRUVWDLQLQJWLVVXHWREHYLHZHGXQGHUDOLJKWPLFURVFRSHZKLFK
OLNHJROJLVWDLQLQJWHQGVWRSURGXFHDJUHDWPDQ\DUWLIDFWV7KHVWDLQLQJWHFKQLTXHPD\QHYHUWKHOHVV
RFFDVLRQDOO\ SURGXFH SUHSDUDWLRQV ZKLFK DUH IUHH IURP DUWLIDFWV RU ZKRVH DUWLIDFWV FDQ EH HDVLO\
GLVWLQJXLVKHG IURP UHDO FHOO VWUXFWXUHV ,Q VXFK FDVHV D JHQHUDOO\ XQUHOLDEOH PLFURVFRSLF WHFKQLTXH
FDQEHORFDOO\UHOLDEOHDQGUHFRJQL]DEO\VR
-DPHV%RJHQDQG-DPHV:RRGZDUG
UHOLDELOLW\ KDV WR GR ZLWK VLQJOH FDVH SHUIRUPDQFHV RI SURFHGXUHV SLHFHV RI
HTXLSPHQW HWF :H GLVFXVV WKLV LQ VHFWLRQ 9,,, :H ZLOO DUJXH WKDW QHLWKHU
JHQHUDOQRUORFDOUHOLDELOLW\FDQEHDVVHVVHGE\FRQVLGHULQJWKHGDWDDOOE\LWVHOI
ZLWKRXW FRQVLGHULQJ WKH SURFHVVHV E\ ZKLFK LW ZDV SURGXFHG DQG LQWHUSUHWHG
7KHVHSURFHVVHVDUHWKHORFLRIWKHHPSLULFDOIDFWVXSRQZKLFKERWKWKHORFDODQG
WKHJHQHUDOUHOLDELOLW\±DQGKHQFHWKHHYLGHQWLDOYDOXH±RIGDWDRIWHQGHSHQGV
7KH ODVW VHFWLRQ RI RXU SDSHU DUJXHV WKDW ,56 QHJOHFWV DQG ODFNV WKH UHVRXUFHV
QHHGHGWRGHDOLQIRUPDWLYHO\ZLWKWKHVHHSLVWHPLFDOO\FUXFLDOIDFWRUV
,,
$VFRPSDUHGWRWKHEHVWVWXGLHVE\KLVWRULDQVVRFLRORJLVWVDQGDQWKURSRORJLVWV
RI VFLHQFH WKH ,56 OLWHUDWXUH FRQWDLQV OLWWOH WKDW FDQ EH HDVLO\ UHFRJQL]HG DV
EHORQJLQJ WR DFWXDO VFLHQWLILF SUDFWLFH :KLOH ,56 DQDO\VHV UHO\ KHDYLO\ RQ D
ORJLFDO IRUPDOLVP ZKLFK LV NQRZQ E\ IHZ DQG XVHG E\ IHZHU SUDFWLFLQJ
VFLHQWLVWVWKHPDWKHPDWLFDOIRUPDOLVPVQDWXUDOVFLHQWLVWVDFWXDOO\UHO\XSRQ GR
OLWWOH ZRUN LQ WKH ,56 OLWHUDWXUH 0RUH LPSRUWDQWO\ PDQ\ GDWD FRQVLVW RI
SKRWRJUDSKVGUDZLQJVWDEOHVRIQXPEHUVHWFZKLFKDUHQRWDWDOOVHQWHQWLDOLQ
IRUPDQGVFLHQWLILFK\SRWKHVHVDUHDOPRVWDOZD\VVHWRXWLQODQJXDJHVZKLFKDUH
YHU\GLIIHUHQWIURPILUVWRUGHUORJLF,QFRQWUDVWWKHYHUVLRQVRI,56ZHFRQVLGHU
WU\WRDFFRXQWIRUWKHHYLGHQWLDOUHOHYDQFHRIGDWDWRWKHRUHWLFDOFODLPVLQWHUPV
RI D FRQILUPDWLRQ UHODWLRQ VHH ,,, EHORZ FKDUDFWHUL]HG LQ WHUPV RI UHODWLRQV
EHWZHHQVHQWHQFHVLQDILUVWRUGHUODQJXDJH$OORIWKLVLVUHPDUNDEOHHQRXJKWR
UDLVH TXHVWLRQV DERXW ZKDW PRWLYDWHV WKH ,56 7KH IROORZLQJ PRWLYDWLRQDO
VNHWFK LV LQWHQGHG WR LQGLFDWH ZK\ WKLV SURJUDP PLJKW KDYH VHHPHG ZRUWK
SXUVXLQJ DQG DOVR WR VKRZ WKDW VWULNLQJ GLVFUHSDQFLHV EHWZHHQ VFLHQWLILF
SUDFWLFHDQGLWV,56GHSLFWLRQGHULYHQRQDFFLGHQWDOO\IURPLWVEDVLFJRDOVDQG
VWUDWHJLHV
/LNH PDQ\ RI LWV IRXQGHUV DQG SURSRQHQWV +HPSHO VDZ WKH ,56 DV DQ
DOWHUQDWLYH WR WKH LGHD WKDW VFLHQWLILF WKHRULHV DUH QRW RU FDQQRW EH WHVWHG

7KH UHOHYDQFH RI FDXVDO IDFWRUV LQ DVVHVVLQJ HYLGHQWLDO VLJQLILFDQFH LV DOVR HPSKDVL]HG LQ 0LOOHU
:KLOH ZH ILQG PXFK WKDW LV YDOXDEOH DQG LQVLJKWIXO LQ 0LOOHU¶V GLVFXVVLRQ KLV DFFRXQW
GLYHUJHVIURPRXUVLQLPSRUWDQWUHVSHFWV±LQSDUWLFXODUKHWHQGVWRVHHLQGXFWLYHLQIHUHQFHJHQHUDOO\
DVDVSHFLHVRILQIHUHQFHWRWKHEHVWH[SODQDWLRQZKLOHZHGRQRW7KHHYLGHQWLDOUHOHYDQFHRIGDWD
JHQHUDWLQJ SURFHVVHV DQG WKH OLPLWDWLRQV RI IRUPDO DFFRXQWV RI HYLGHQWLDO VXSSRUW DUH DOVR
HPSKDVL]HGLQ+XPSKUH\VDGLVFXVVLRQZHKDYHIRXQGYHU\KHOSIXO
)RUDQH[FHOOHQWDQGIRUFHIXOFKDUDFWHUL]DWLRQRIWKHGLVSDULW\EHWZHHQWKHOLWHUDWXUHRIVFLHQFHDQG
WKHOLWHUDWXUHRI,56LQIOXHQFHGSKLORVRSK\RIVFLHQFHVHH)H\HUDEHQGSS$OWKRXJK
ZH GLVDJUHH ZLWK PXFK RI ZKDW)H\HUDEHQG VD\V HOVHZKHUH ZH KHDUWLO\ HQGRUVH KLV LGHD LQ WKLV
SDVVDJH WKDW PXFK RI ZKDW RFFXSLHV WKH ,56 SKLORVRSKHUV LV DQ DUWLIDFW RI WKHLU RZQ SLFWXUH RI
VFLHQFHDQGLQSDUWLFXODUWKDWPXFK)H\HUDEHQGZRXOGSUREDEO\VD\³QHDUO\DOO´UHVHDUFKLQWKH
SKLORVRSK\ RI VFLHQFH ³FRQVLVWV LQ SURSRVLQJ LGHDV WKDW ILW WKH ERXQGDU\ FRQGLWLRQV LH WKH
VWDQGDUGV RI WKH VLPSOH ORJLF´ FKRVHQ E\ WKH ORJLFDO SRVLWLYLVWV WR UHSUHVHQW VFLHQWLILF UHDVRQLQJ
LELGS
(YDGLQJWKH,56
REMHFWLYHO\±WKDW³WKHGHFLVLRQDVWRZKHWKHUDJLYHQK\SRWKHVLVLVDFFHSWDEOHLQ
WKHOLJKWRIDJLYHQERG\RIHYLGHQFH´UHVWVRQQRWKLQJPRUHWKDQDVXEMHFWLYH
³µVHQVHRIHYLGHQFH¶RU D IHHOLQJ RI SODXVLELOLW\ LQ YLHZ RI WKH UHOHYDQW GDWD´
7KLVVD\V+HPSHOLVDQDORJRXVWRWKHHTXDOO\QR[LRXVLGHDWKDW³WKHYDOLGLW\RI
D PDWKHPDWLFDO SURRI RU RI D ORJLFDO DUJXPHQW KDV WR EH MXGJHG XOWLPDWHO\ E\
UHIHUHQFH WR D IHHOLQJ RI VRXQGQHVV RU FRQYLQFLQJQHVV´ +HPSHO WKLQNV ERWK
LGHDV UHVW RQ D FRQIXVLRQ RI UDWLRQDO REMHFWLYH ORJLFDO IDFWRUV ZKLFK FDQ
DFWXDOO\ GHWHUPLQH ZKHWKHU WKH DYDLODEOH HYLGHQFH ZDUUDQWV WKH DFFHSWDQFH RU
UHMHFWLRQRIDVFLHQWLILFK\SRWKHVLVZLWKVXEMHFWLYHSV\FKRORJLFDOIDFWRUVZKLFK
PD\ LQIOXHQFH VFLHQWLILF EHOLHI 7R GLVHQWDQJOH WKHP ZH QHHG SXUHO\ IRUPDO
FULWHULDIRUFRQILUPDWLRQRIWKHNLQGGHGXFWLYHORJLFSURYLGHVIRUWKHYDOLGLW\RI
GHGXFWLYHDUJXPHQWV6XFKFULWHULDZRXOGSURYLGHIRU³UDWLRQDOUHFRQVWUXFWLRQ>V@
RIWKHVWDQGDUGVRIVFLHQWLILFYDOLGDWLRQ´IUHHIURPWKHLQIOXHQFHRIIHHOLQJVRI
FRQYLFWLRQ VHQVHV RI HYLGHQFH RU RWKHU VXEMHFWLYH IDFWRUV ZKLFK YDU\ ³IURP
SHUVRQWRSHUVRQDQGZLWKWKHVDPHSHUVRQLQWKHFRXUVHRIWLPH´$QGOLNHWKH
VWDQGDUGVE\ZKLFKGHGXFWLYHYDOLGLW\LVMXGJHG³LWVHHPVUHDVRQDEOHWRUHTXLUH
WKDWWKHFULWHULDRIHPSLULFDOFRQILUPDWLRQEHVLGHVEHLQJREMHFWLYHLQFKDUDFWHU
VKRXOGFRQWDLQQRUHIHUHQFHWRWKHVSHFLILFVXEMHFWPDWWHURIWKHK\SRWKHVLVRU
RIWKHHYLGHQFHLQTXHVWLRQ´
7KHDSSOLFDWLRQRIWKLVDSSURDFKWRDUHDOOLIHH[DPSOHRIVFLHQWLILFUHDVRQLQJ
IURPHYLGHQFHWRDFRQFOXVLRQEHJLQVZLWKWKHFRQVWUXFWLRQRIDKLJKO\LGHDOL]HG
UHSUHVHQWDWLRQRIWKHUHDVRQLQJXQGHUFRQVLGHUDWLRQ5HLFKHQEDFKGHVFULEHVWKLV
DV WKH FRQVWUXFWLRQ RI D ³ORJLFDO VXEVWLWXWH´ IRU WKH ³UHDO SURFHVVHV´ E\ ZKLFK
WKHVFLHQWLVWWKLQNVDERXWWKHHYLGHQFH$VKHGHVFULEHVLWWKLVLVDQDORJRXVWR
UHSODFLQJ DQ LQIRUPDO GHGXFWLYH DUJXPHQW ZLWK D IRUPDO YHUVLRQ ZKLFK RPLWV
ORJLFDOO\LUUHOHYDQWIHDWXUHVDQGH[KLELWVORJLFDOVWUXFWXUHZKLFKZDVQRWH[SOLFLW
LQ WKH RULJLQDO YHUVLRQ )RU +HPSHO LW LV DQDORJRXV WR WKH FRQVWUXFWLRQ RI DQ
LGHDOL]HGVLPSOLILHGWKHRUHWLFDOPRGHORIDUHDOSURFHVV
2QFH D UDWLRQDO UHFRQVWUXFWLRQ RI D SDUWLFXODU DUJXPHQW IURP HYLGHQFH KDV
EHHQ SURGXFHG WKH QH[W VWHS LQ DQ ,56 WUHDWPHQW LV WKH DSSOLFDWLRQ RI ORJLFDO
VWDQGDUGV +HPSHO¶V ³REMHFWLYH FULWHULD´ WR WKH UHFRQVWUXFWLRQ 7KLV LV
DQDORJRXVWRDSSO\LQJORJLFDOUXOHVWRWKHIRUPDOL]HGYHUVLRQRIDQDUJXPHQWWR

+HPSHO SS 7KLV LV H[DFWO\ ZKDW*O\PRXU SURPLVHV IRU KLV ERRWVWUDS WKHRU\ ,WV
FRQILUPDWLRQ UHODWLRQV DUH WR EH ³HQWLUHO\ VWUXFWXUDO WKH\ KDYH QR FRQQHFWLRQ WR WKH FRQWHQW RI WKH
K\SRWKHVLVWHVWHGRUWRWKHPHDQLQJRIWKHHYLGHQFHVHQWHQFHVRUWRWKHPHDQLQJRIWKHWKHRULHVZLWK
UHVSHFW WR ZKLFK WKH WHVWV DUH VXSSRVHG WR EH FDUULHG RXW´ *O\PRXU SS 7KH JRDO
VKDUHGE\+HPSHODQG*O\PRXULVFORVHO\UHODWHGWR3RSSHU¶VJRDORISURYLGLQJDVIRUPDODVSRVVLEOH
D GHPDUFDWLRQ EHWZHHQ UHDO DQG SVHXGR VFLHQFH $QG LW EHDUV DQ LQWHUHVWLQJ UHODWLRQ WR .XKQ
)H\HUDEHQG +DQVRQ 6KDSHUH 4XLQH DQG PDQ\ RWKHU FULWLFV RI WKH RULJLQDO SRVLWLYLVW SURJUDP
'LIIHUHQWDVWKHLUYLHZVREYLRXVO\DUHDOORIWKHVHSHRSOHVXEVFULEHWRVRPHYHUVLRQRIWKHLGHDWKDW
WKH ,56 LV WKH RQO\ DOWHUQDWLYH WR WKH LGHD WKDW VFLHQWLILF EHOLHI LV QRW REMHFWLYHO\ FRQVWUDLQHG E\
HYLGHQFH
5HLFKHQEDFKS
+HPSHOS
-DPHV%RJHQDQG-DPHV:RRGZDUG
H[SODLQ ZKHWKHU DQG XQGHU ZKDW LQWHUSUHWDWLRQV LWV FRQFOXVLRQ LV ZHOO
VXSSRUWHG E\ LWV SUHPLVHV ,W LV DOVR DQDORJRXV WR H[SODLQLQJ DVSHFWV RI WKH
EHKDYLRURIDUHDOV\VWHPE\DSSHDOWRWKHEHKDYLRURIWKHLWHPVLQDWKHRUHWLFDO
PRGHO
7KHSXUVXLWRIWKHVHDQDORJLHVPDGHLWQDWXUDOLIQRWLQHYLWDEOHIRUWKH,56WR
OHDYHRXWDJUHDWGHDORIZKDWVHHPVWRXVWREHPRVWFKDUDFWHULVWLFRIUHDOZRUOG
VFLHQWLILFWHVWLQJ7KXV5HLFKHQEDFKLQVLVWVLWLVQRREMHFWLRQWRKLVSURJUDPWKDW
LWV ³ILFWLYH FRQVWUXFWLRQV´ GR QRW ³FRUUHVSRQG DW HYHU\ SRLQW´ WR WKH DFWXDO
WKRXJKW SURFHVVHV RI ZRUNLQJ VFLHQWLVWV :H UHVSHFW 5HLFKHQEDFK¶V SRLQW
GLVFUHSDQFLHV EHWZHHQ DQ LGHDOL]DWLRQ DQG D UHDO V\VWHP FRQVWLWXWH VHULRXV
REMHFWLRQVRQO\LQVRIDUDVWKH\GHIHDWWKHSXUSRVHIRUZKLFKWKHLGHDOL]DWLRQLV
XVHG%XWZHWKLQNWKHIRUPDOO\GHILQHGFRQILUPDWLRQUHODWLRQVRIWKH,56IDLO
WRFRUUHVSRQGWRWKHHYLGHQWLDOUHOHYDQFHRIGDWDWRWKHRU\LQZD\VZKLFKUHQGHU
WKH,56SLFWXUHXQLQIRUPDWLYHLQPDQ\FDVHVDQGVHULRXVO\PLVOHDGLQJLQRWKHUV
,,,
7KH YHUVLRQV RI ,56 ZH ZLOO GLVFXVV DUH SRVLWLYH LQVWDQFH LQFOXGLQJ
ERRWVWUDSSLQJ DFFRXQWV DQG +\SRWKHWLFR'HGXFWLYH +' DFFRXQWV RI WKHRU\
WHVWLQJ7KHLUPRGHOVDUHSRSXODWHGE\VHQWHQFHVRIDILUVWRUGHUODQJXDJH$V
QRWHG REVHUYDWLRQDO HYLGHQFH LV UHSUHVHQWHG E\ REVHUYDWLRQ VHQWHQFHV
7KHRUHWLFDOFODLPVXQGHUWHVWDUHUHSUHVHQWHGE\ZKDWZHZLOOFDOO³K\SRWKHVLV
VHQWHQFHV´7KHUHVRXUFHVRIILUVWRUGHUORJLFDUHXVHGWRFKDUDFWHUL]HDUHODWLRQ
RIHYLGHQWLDOUHOHYDQFHFDOOHG³FRQILUPDWLRQ´$OWKRXJKREVHUYDWLRQDOHYLGHQFH
LV VDLG WR ³FRQILUP´ K\SRWKHVHV RU WKHRULHV WKH REWDLQLQJ RI WKH FRQILUPDWLRQ
UHODWLRQGHSHQGVXSRQORJLFDOUHODWLRQVEHWZHHQZKDWZHDUHFDOOLQJREVHUYDWLRQ
DQGK\SRWKHVHVVHQWHQFHV6LPSOHYHUVLRQVRI+'GHSLFWWKHFRQILUPDWLRQRIWKH
WKHRUHWLFDO FODLP FRUUHVSRQGLQJ WR D K\SRWKHVLV VHQWHQFH K E\ HYLGHQFH
UHSUHVHQWHG E\ DQ REVHUYDWLRQ VHQWHQFH R DV GHSHQGLQJ RQ ZKHWKHU K $
GHGXFWLYHO\ HQWDLOV R +HUH $ LV D ILUVW RUGHU UHSUHVHQWDWLRQ RI RQH RU PRUH
³DX[LOLDU\K\SRWKHVHV´³FRUUHVSRQGHQFHUXOHV´RU³EDFNJURXQGEHOLHIV´ZKLFK
EHORQJWRWKHVDPHWKHRU\DVWKHFODLPUHSUHVHQWHGE\K7KHVLPSOHVWSRVLWLYH
LQVWDQFHYHUVLRQVRI,56FKDUDFWHUL]HFRQILUPDWLRQLQWHUPVRIORJLFDOUHODWLRQV
ZKLFK UXQ LQ H[DFWO\ WKH RSSRVLWH GLUHFWLRQ :KHUH HYLGHQFH UHSUHVHQWHG E\ R

5HLFKHQEDFKS
7KXV5HLFKHQEDFKUHTXLUHVWKH³FRQVWUXFWLRQ>WREH@ERXQGWRDFWXDOWKLQNLQJE\WKHSRVWXODWHRI
FRUUHVSRQGHQFH´LELGDQG+HPSHOVD\VWKHPRGHOVKRXOGFRQIRUPWRDFWXDOEHKDYLRUDVIDUDVLW
FDQ ZLWKRXW YLRODWLQJ FRQVWUDLQWV LPSRVHG IRU WKH VDNH RI DWWDLQLQJ ³VLPSOLFLW\ FRQVLVWHQF\ DQG
FRPSUHKHQVLYHQHVV´+HPSHOS
)RUSRVLWLYHLQVWDQFHDFFRXQWVVHH³6WXGLHVLQWKH/RJLFRI&RQILUPDWLRQ´LQ+HPSHOSS
)RU ERRWVWUDSSLQJ DFFRXQWV VHH*O\PRXU )RU D VLPSOH +' DFFRXQW VHH%UDLWKZDLWH
DQG 3RSSHU )RU PRUH FRPSOH[ +' DFFRXQWV VHH6FKOHVLQJHU DQG 0HUULOO
(YDGLQJWKH,56
FRQILUPVKRRULQWKHERRWVWUDSYHUVLRQWKHFRQMXQFWLRQRIRDQG$HQWDLOVDQ
LQVWDQFHRIK
-XVW DV HQWDLOPHQW FDQ KROG EHWZHHQ IDOVH DV ZHOO DV WUXH VHQWHQFHV
FRQILUPDWLRQFDQUHODWHZRUWKOHVVHYLGHQFHWRXQDFFHSWDEOHK\SRWKHVHVDVZHOO
DVJRRGHYLGHQFHWRFRUUHFWRUZHOOMXVWLILHGWKHRUHWLFDOFODLPV-XVWDVWKHPHUH
IDFWWKDWSHQWDLOVTGRHVQRWWHOOXVZKHWKHUZHVKRXOGEHOLHYHTWKHPHUHIDFW
WKDW R VWDQGV LQ WKH UHTXLUHG LQIHUHQWLDO UHODWLRQ WR K GRHV QRW WHOO XV ZKHWKHU
WKHUHLVJRRGUHDVRQ WR DFFHSW WKH FODLP K UHSUHVHQWV 6R ZKDW FDQ ,56 WHOO XV
DERXW WKH DFFHSWDQFH DQG UHMHFWLRQ RI WKHRUHWLFDO FODLPV" /HW D EURNHQ DUURZ
! UHSUHVHQW WKH LQIHUHQWLDO UHODWLRQ XVHG WR FKDUDFWHUL]H FRQILUPDWLRQ $
QDLYH +' DQVZHU WR RXU TXHVWLRQ ZRXOG EH WKDW LI R ! K HYLGHQFH ZKLFK
PDNHV R WUXH SURYLGHV HSLVWHPLF VXSSRUW IRU WKH FODLP UHSUHVHQWHG E\ K RU WKH
WKHRU\WRZKLFKWKDWFODLPEHORQJVDQGHYLGHQFHZKLFKPDNHVaRWUXHSURYLGHV
HSLVWHPLFVXSSRUWIRUWKHUHMHFWLRQRIWKHFODLPUHSUHVHQWHGE\K$VLPSOLILHG
SRVLWLYHLQVWDQFHDQVZHUZRXOGEHWKDWWKHHYLGHQFHUHSUHVHQWHGE\RSURYLGHV
HSLVWHPLFVXSSRUWIRUWKHFODLPUHSUHVHQWHGE\KLIRLVWUXHDQGR!KZKLOH
HYLGHQFHFRXQWVDJDLQVWWKHFODLPLIRLVWUXHDQGR!aK
,9
:H KDYH HPSKDVL]HG WKDW WKH ,56 GHSLFWV FRQILUPDWLRQ DV GHSHQGLQJ XSRQ
IRUPDOUHODWLRQVEHWZHHQVHQWHQFHVLQDILUVWRUGHUODQJXDJHHYHQWKRXJKPDQ\
GDWD DUH SKRWRJUDSKV GUDZLQJV HWF ZKLFK DUH QRW VHQWHQFHV LQ DQ\ ODQJXDJH
OHW DORQH D ILUVW RUGHU RQH 7KLV LV HQRXJK WR HVWDEOLVK WKDW WKH FODLP WKDW
FRQILUPDWLRQFDSWXUHVZKDWLVHVVHQWLDOWRHYLGHQWLDOUHOHYDQFHLVQRWWULYLDO,Q
IDFW WKDW FODLP LV SUREOHPDWLF +HPSHO¶V UDYHQ SDUDGR[ LOOXVWUDWHV RQH RI LWV
SUREOHPV5HSODFLQJWKHQDWXUDOODQJXDJHSUHGLFDWH³LVDUDYHQ´ZLWK)DQG³LV
EODFN´ ZLWK * OHW D K\SRWKHVLV VHQWHQFH K [ )[ Š *[ UHSUHVHQW WKH
JHQHUDOFODLP&³$OOUDYHQVDUHEODFN´:KHUHDLVDQDPH)D*DLVDQ
LQVWDQFH RI K %XW K LV ORJLFDOO\ HTXLYDOHQW WR K [a*[ Š a)[ 1RZ
a)Da*DHQWDLOVa*DŠa)DDQLQVWDQFHRIK7KXVa)Da*D!K
%XW DV +HPSHO REVHUYHV a)D a*D LV WUXH ZKHQ WKH UHIHUHQW RI D LV D UHG

'LIIHUHQWYHUVLRQVRI+'DQGSRVLWLYHLQVWDQFHWKHRULHVDGGGLIIHUHQWFRQGLWLRQVRQFRQILUPDWLRQ
WRPHHWFRXQWHUH[DPSOHVZKLFKFRQFHUQWKHP)RUH[DPSOHRPD\EHUHTXLUHGWRKDYHDFKDQFHRI
EHLQJIDOVHWREHFRQVLVWHQWZLWKWKHWKHRU\ZKRVHFODLPVDUHWREHWHVWHGWREHVXFKWKDWLWVGHQLDO
ZRXOGFRXQWDJDLQVWWKHFODLPLWZRXOGVXSSRUWHWF7KHGHWDLOVRIVXFKFRQGLWLRQVGRQRWDIIHFWRXU
DUJXPHQWV 7KXV RXU GLVFXVVLRQ IUHTXHQWO\ DVVXPHV WKHVH DGGLWLRQDO FRQGLWLRQV DUH PHW VR WKDW LWV
EHLQJ WKH FDVH WKDW R ! K LV VXIILFLHQW IRU FRQILUPDWLRQ RI WKH FODLPV UHSUHVHQWHG E\K E\ WKH
HYLGHQFHUHSUHVHQWHGE\R
6HH WKH SUHYLRXV QRWH )RU H[DPSOHV RI WKLV YLHZ VHH%UDLWKZDLWH DQG*O\PRXU FK9
([DPSOHVIHDWXULQJLWHPVZKLFKVRXQGPRUHWKHRUHWLFDOWKDQELUGVDQGFRORUVDUHHDVLO\SURGXFHG
-DPHV%RJHQDQG-DPHV:RRGZDUG
SHQFLO 7KHUHIRUH DVVXPLQJ WKDW HYLGHQFH ZKLFK FRQILUPV D FODLP DOVR
FRQILUPV FODLPV ZKLFK DUH ORJLFDOO\ HTXLYDOHQW WR LW ZK\ VKRXOGQ¶W WKH
REVHUYDWLRQRIDUHGSHQFLOFRQILUP&",I LW GRHV WKLV YHUVLRQ RI ,56 DOORZV
HYLGHQFHHJUHGSHQFLOREVHUYDWLRQVWRFRQILUPWKHRUHWLFDOFODLPVOLNH³$OO
UDYHQV DUH EODFN´ WR ZKLFK LW LV HSLVWHPLFDOO\ TXLWH LUUHOHYDQW 6LQFH WKH
SUHPLVHV RI D GHGXFWLYHO\ YDOLG DUJXPHQW FDQQRW IDLO WR EH UHOHYDQW WR LWV
FRQFOXVLRQWKLVDORQJZLWKVXFKUHODWHGSX]]OHVDV*RRGPDQ¶VJUXHULGGOHDQG
*O\PRXU¶VSUREOHPRILUUHOHYDQWFRQMXQFWLRQ*O\PRXUSSRLQWVWRD
VHULRXV GLVDQDORJ\ EHWZHHQ GHGXFWLYH YDOLGLW\ DQG FRQILUPDWLRQ :KLOH WKH
GHGXFWLYHYDOLGLW\RIDQDUJXPHQWJXDUDQWHHVLQHYHU\FDVHWKDWLILWVSUHPLVHV
DUH WUXH WKHQ RQH KDV D FRPSHOOLQJ UHDVRQ WR EHOLHYH LWV FRQFOXVLRQ WKH
HYLGHQFH UHSUHVHQWHG E\ R FDQ EH HSLVWHPLFDOO\ LUUHOHYDQW WR WKH K\SRWKHVLV
UHSUHVHQWHGE\KHYHQWKRXJKR!K
7KH PRVW SRSXODU UHVSRQVH WR VXFK GLIILFXOWLHV LV WR WLQNHU ZLWK ,56 E\
DGGLQJ RU PRGLI\LQJ WKH IRUPDO UHTXLUHPHQWV IRU FRQILUPDWLRQ %XW FORVH
YDULDQWV RI WKH DERYH SX]]OHV WHQG WR UHDSSHDU LQ PRUH FRPSOLFDWHG ,56
PRGHOV :H WKLQN WKLV LV V\PSWRPDWLF RI WKH IDFW WKDW HYLGHQWLDO UHOHYDQFH
GHSHQGV XSRQ IHDWXUHV RI WKH FDXVDO SURFHVVHV E\ ZKLFK WKH HYLGHQFH LV
SURGXFHGDQGWKDWWKHIRUPDOUHVRXUFHV,56KDVDWLWVGLVSRVDODUHQRWYHU\JRRG
DW FDSWXULQJ RU WUDFNLQJ WKHVH IDFWRUV RU WKH UHDVRQLQJ ZKLFK GHSHQGV XSRQ
WKHP7KLVLVZK\WKHWLQNHULQJGRHVQ¶WZRUN
$QHTXDOO\VHULRXVSUREOHPHPHUJHVLIZHFRQVLGHUWKHIROORZLQJDQDORJ\
-XVW DV ZH FDQ¶W WHOO ZKHWKHU ZH PXVW DFFHSW WKH FRQFOXVLRQ RI D GHGXFWLYHO\
YDOLGDUJXPHQWXQOHVVZHFDQGHFLGHZKHWKHULWVSUHPLVHVDUHWUXHWKHIDFWWKDW
R!KGRHVQ¶WJLYHXVDQ\UHDVRQWREHOLHYHDWKHRUHWLFDOFODLPXQOHVVZHFDQ
GHFLGHZKHWKHURLVWUXH7RVHHZK\WKLVLVDSUREOHPIRUWKH,56FRQVLGHUWKH
WHVW 3ULHVWOH\ DQG /DYRLVLHU XVHG WR VKRZ WKDW WKH JDV SURGXFHG E\ KHDWLQJ
R[LGHV RI PHUFXU\ LURQ DQG VRPH RWKHU PHWDOV GLIIHU IURP DWPRVSKHULF DLU
$QDFKURQLVWLFDOO\GHVFULEHGLWGHSHQGVRQWKHIDFWWKDWWKHJDVLQTXHVWLRQZDV
R[\JHQDQGWKDWR[\JHQFRPELQHVZLWKZKDW3ULHVWOH\FDOOHG³QLWURXVDLU´QLWULF
R[LGH WR SURGXFH ZDWHUVROXEOH QLWURXV R[LGH 7R SHUIRUP WKH WHVW RQH
FRPELQHVPHDVXUHGDPRXQWVRIQLWULFR[LGHDQGWKHJDVWREHWHVWHGRYHUZDWHU
LQ DQ LQYHUWHG JUDGXDWHG WXEH VHDOHG DW WKH WRS $V WKH QLWURXV R[LGH WKXV
SURGXFHGGLVVROYHVWKHWRWDOYROXPHRIJDVGHFUHDVHVDOORZLQJWKHZDWHUWRULVH
LQWKHWXEH$WIL[HGYROXPHVWKHPRUHXQFRPSRXQGHGR[\JHQDJDVFRQWDLQV
WKHJUHDWHUZLOOEHWKHGHFUHDVHLQYROXPHRIJDV7KHGHFUHDVHLVPHDVXUHGE\
ZDWFKLQJ KRZ IDU WKH ZDWHU ULVHV ,Q WKHLU ILUVW H[SHULPHQWV ZLWK WKLV WHVW
3ULHVWOH\ DQG /DYRLVLHU ERWK UHSRUWHG WKDW WKH DGGLWLRQ RI ³QLWURXV DLU´ WR WKH
XQNQRZQJDVUHOHDVHGIURPKHDWHGUHGR[LGHRIPHUFXU\GHFUHDVHGWKHYROXPH

+HPSHOSI&I*O\PRXUSII
)RU DQ LOOXVWUDWLRQ RI WKLV SRLQW LQ FRQQHFWLRQ ZLWK*O\PRXU¶V WUHDWPHQW RI WKH SUREOHP RI
LUUHOHYDQWFRQMXQFWLRQVHH:RRGZDUG
7KLVH[DPSOHLVDOVRGLVFXVVHGLQ%RJHQDQG:RRGZDUG
(YDGLQJWKH,56
RI WKH ODWWHU E\ URXJKO\ WKH DPRXQW SUHYLRXVO\ REVHUYHG IRU DWPRVSKHULF DLU
7KLV GDWXP FRXOG QRW EH XVHG WR GLVWLQJXLVK R[\JHQ IURP DWPRVSKHULF DLU ,Q
ODWHU H[SHULPHQWV 3ULHVWOH\ REWDLQHG GDWD ZKLFK FRXOG EH XVHG WR PDNH WKH
GLVWLQFWLRQ:KHQKHDGGHGWKUHHPHDVXUHVRI³QLWURXVDLU´WRWZRPHDVXUHVRI
WKH XQNQRZQ JDV WKH YROXPH RI JDV LQ WKH WXEH GURSSHG WR RQH PHDVXUH
/DYRLVLHU HYHQWXDOO\ ³REWDLQHG URXJKO\ VLPLODU UHVXOWV´ 7KH DYDLODEOH
HTXLSPHQW DQG WHFKQLTXHV IRU PHDVXULQJ JDVHV IRU LQWURGXFLQJ WKHP LQWR WKH
JUDGXDWHGWXEHDQGIRUPHDVXULQJYROXPHVZHUHVXFKDVWRPDNHLWLPSRVVLEOH
IRU HLWKHU LQYHVWLJDWRU WR REWDLQ DFFXUDWH PHDVXUHV RI WKH WUXH GHFUHDVHV LQ
YROXPH 7KHUHIRUH DQ ,56 DFFRXQW ZKLFK WKLQNV RI WKH GDWD DV SXWDWLYH
PHDVXUHV RI UHDO GHFUHDVHV VKRXOG WUHDW REVHUYDWLRQ VHQWHQFHV UHSUHVHQWLQJ WKH
GDWD IURP WKH ODWHU DV ZHOO DV IURP WKH HDUOLHU H[SHULPHQWV DV IDOVH %XW ZKLOH
XQVRXQG GHGXFWLYH DUJXPHQWV SURYLGH QR HSLVWHPLF VXSSRUW IRU WKHLU
FRQFOXVLRQV WKH LQDFFXUDWH GDWD IURP 3ULHVWOH\¶V DQG /DYRLVLHU¶V ODWHU
H[SHULPHQWV SURYLGH JRRG UHDVRQ WR EHOLHYH WKH SKHQRPHQD FODLP IRU ZKLFK
WKH\ZHUHXVHGWRDUJXH
$OWHUQDWLYHO\ VXSSRVH WKH GDWD ZHUH PHDQW WR UHSRUW KRZ WKLQJV ORRNHG WR
3ULHVWOH\DQG/DYRLVLHULQVWHDGRIUHSRUWLQJWKHWUXHPDJQLWXGHVRIWKHYROXPH
GHFUHDVHV,I3ULHVWOH\DQG/DYRLVLHUZHUHJRRGDWZULWLQJGRZQZKDWWKH\VDZ
REVHUYDWLRQVHQWHQFHVUHSUHVHQWLQJWKHZRUWKOHVVGDWDIURPWKHILUVWH[SHULPHQWV
VKRXOG EH FRXQWHG DV WUXH DORQJ ZLWK REVHUYDWLRQ VHQWHQFHV UHSUHVHQWLQJ WKH
HSLVWHPLFDOO\ YDOXDEOH GDWD IURP WKH ODWHU H[SHULPHQWV %XW ZKLOH DOO GHGXF
WLYHO\ VRXQG DUJXPHQWV VXSSRUW WKHLU FRQFOXVLRQV RQO\ GDWD IURP WKH ODWHU
H[SHULPHQWVVXSSRUWHGWKHFODLPWKDWWKHJDVUHOHDVHGIURPUHGR[LGHRUPHUFXU\
GLIIHUV IURP DWPRVSKHULF DLU +HUH WKH DQDORJ\ EHWZHHQ GHGXFWLYH VRXQGQHVV
DQGFRQILUPDWLRQE\JRRGHYLGHQFHJRHVODPHXQOHVVWKH ,56 KDV D SULQFLSOHG
ZD\ WR DVVLJQ WUXH REVHUYDWLRQ VHQWHQFHV WR WKH LQDFFXUDWH EXW HSLVWHPLFDOO\
YDOXDEOHGDWDIURPWKHODWHUH[SHULPHQWVDQGIDOVHREVHUYDWLRQVHQWHQFHVWRWKH
LQDFFXUDWHEXWHSLVWHPLFDOO\ZRUWKOHVVGDWDIURPWKHHDUOLHUH[SHULPHQWV,IWUXWK
YDOXHV PXVW EH DOORFDWHG RQ WKH EDVLV RI VRPHWKLQJ RWKHU WKDQ WKH DFFXUDF\ RI
WKHGDWDWKH\UHSUHVHQWLWLVIDUIURPFOHDUKRZWKH,56LVWRDOORFDWHWKHP
7RDYRLGWKHSUREOHPSRVHGE\3ULHVWOH\¶VDQG/DYRLVLHU¶VGDWDWKH,56PXVW
DVVLJQWUXHREVHUYDWLRQVHQWHQFHVWRHSLVWHPLFDOO\JRRGHYLGHQFHDQGIDOVHRQHV
WR HSLVWHPLFDOO\ EDG HYLGHQFH :KDW GHWHUPLQHV ZKHWKHU HYLGHQFH LV JRRG RU
EDG"7KHIROORZLQJH[DPSOHLOOXVWUDWHVRXUYLHZWKDWWKHUHOHYDQFHRIHYLGHQFH
WR WKHRU\ DQG WKH HSLVWHPLF YDOXH RI WKH HYLGHQFH GHSHQGV LQ ODUJH SDUW XSRQ
FDXVDOIDFWRUV,IZHDUHULJKWDERXWWKLVLWLVWREHH[SHFWHG±DVZHZLOODUJXH
LQVHFWLRQV9,,DQG9,,,±WKDWGHFLVLRQVDERXWWKHYDOXHRIHYLGHQFHGHSHQGLQ
ODUJHSDUWXSRQDVRUWRIFDXVDO UHDVRQLQJ FRQFHUQHG ZLWK ZKDW ZH DUH FDOOLQJ
UHOLDELOLW\

6HH&RQDQW/DYRLVLHUSW,FKV
3ULHVWOH\SS
-DPHV%RJHQDQG-DPHV:RRGZDUG
9
&XUWLV DQG &DPSEHOO (GGLQJWRQ DQG &RWWLQJKDP DPRQJ RWKHUV SURGXFHG
DVWURQRPLFDO GDWD WR WHVW (LQVWHLQ¶V WKHRU\ RI JHQHUDO UHODWLYLW\ 2QH RI WKH
SKHQRPHQD JHQHUDO UHODWLYLW\ FDQ EH XVHG WR PDNH SUHGLFWLRQV DERXW LV WKH
GHIOHFWLRQ RI VWDUOLJKW GXH WR WKH JUDYLWDWLRQDO LQIOXHQFH RI WKH VXQ (GGLQJWRQ
DQGWKHRWKHUVWULHGWRSURGXFHGDWDZKLFKZRXOGHQDEOHLQYHVWLJDWRUVWRGHFLGH
EHWZHHQ WKUHH FRPSHWLQJ FODLPV DERXW WKLV SKHQRPHQRQ 1 QR GHIOHFWLRQ DW
DOO ( GHIOHFWLRQ RI WKH PDJQLWXGH SUHGLFWHG E\ JHQHUDO UHODWLYLW\ DQG 16
GHIOHFWLRQ RI D GLIIHUHQW PDJQLWXGH SUHGLFWHG E\ 6ROGQHU IURP 1HZWRQLDQ
SK\VLFVDXJPHQWHGE\DVVXPSWLRQVQHHGHGWRDSSO\LWWRWKHPRWLRQRIOLJKW
1 DQG 16 ZRXOG FRXQW DJDLQVW JHQHUDO UHODWLYLW\ ZKLOH ( ZRXOG FRXQW LQ
IDYRU RI LW 7KH GDWD XVHG WR GHFLGH EHWZHHQ WKHVH DOWHUQDWLYHV LQFOXGHG
SKRWRJUDSKV RI VWDUV WDNHQ LQ GD\WLPH GXULQJ D VRODU HFOLSVH FRPSDULVRQ
SKRWRJUDSKVWDNHQDWQLJKWODWHULQWKH\HDUZKHQWKHVWDUOLJKWZKLFKUHDFKHGWKH
SKRWRJUDSKLF HTXLSPHQW ZRXOG QRW SDVV DV QHDU WR WKH VXQ DQG FKHFN
SKRWRJUDSKV RI VWDUV XVHG WR HVWDEOLVK VFDOH 7R LQWHUSUHW WKH SKRWRJUDSKV WKH
LQYHVWLJDWRUV ZRXOG KDYH WR HVWDEOLVK WKHLU VFDOH LH WKH FRUUHVSRQGHQFH RI
UDGLDOGLVWDQFHVEHWZHHQVWDUVVKRZQRQDQDFFXUDWHVWDUPDSWROLQHDUGLVWDQFHV
EHWZHHQ VWDU LPDJHV RQ WKH SKRWRJUDSKV 7KH\ ZRXOG KDYH WR PHDVXUH
GLIIHUHQFHV EHWZHHQ WKH SRVLWLRQV RI VWDU LPDJHV RQ WKH HFOLSVH DQG WKH
FRPSDULVRQ SKRWRJUDSKV 7KH\ ZRXOG KDYH WR FDOFXODWH WKH GHIOHFWLRQ RI
VWDUOLJKWLQVHFRQGVRIDUFIURPGLVSODFHPHQWVRIWKHVWDULPDJHVWRJHWKHUZLWK
WKH VFDOH $W HDFK VWHS RI WKH ZD\ WKH\ ZRXOG KDYH WR FRUUHFW IRU HUURUV RI
GLIIHUHQWNLQGVIURPGLIIHUHQWVRXUFHV
7KH HYLGHQWLDO EHDULQJ RI WKH SKRWRJUDSKLF GDWD RQ (LQVWHLQ¶V WKHRU\ LV DQ
LQVWDQFH RI ZKDW ,56 DFFRXQWV RI FRQILUPDWLRQ DUH VXSSRVHG WR H[SODLQ 7KLV
HYLGHQWLDOEHDULQJGHSHQGHGXSRQWZRFRQVLGHUDWLRQVWKHXVHIXOQHVVRIWKH
GDWD LQ GLVFULPLQDWLQJ EHWZHHQ SKHQRPHQD FODLPV 1 16 ( DQG WKH
GHJUHH WR ZKLFK ( WKH YDOXH SUHGLFWHG E\ JHQHUDO UHODWLYLW\ GLVDJUHHV ZLWK
SUHGLFWLRQVEDVHGRQWKHFRPSHWLWRUWKHRULHVXQGHUFRQVLGHUDWLRQEHORQJVWR
WKH ILUVW RI WKH WZR VWDJHV RI WKHRU\ WHVWLQJ ZH PHQWLRQHG LQ VHFWLRQ ,
WKHSURGXFWLRQDQGLQWHUSUHWDWLRQRIGDWDWRDQVZHUDTXHVWLRQDERXWSKHQRPHQD
EHORQJV WR WKH VHFRQG RI WKHVH VWDJHV ± WKH XVH RI D SKHQRPHQD FODLP WR
DUJXH IRU RU DJDLQVW SDUW RI D WKHRU\ :LWK UHJDUG WR WKH ILUVW RI WKHVH
FRQVLGHUDWLRQV HYLGHQWLDO UHOHYDQFH GHSHQGV XSRQ WKH H[WHQW LI DQ\ WR ZKLFK
GLIIHUHQFHV EHWZHHQ WKH SRVLWLRQV RI VWDU LPDJHV RQ HFOLSVH DQG FRPSDULVRQ
SLFWXUHV DUH GXH WR GLIIHUHQFHV EHWZHHQ SDWKV RI VWDUOLJKW GXH WR WKH
JUDYLWDWLRQDOLQIOXHQFHRIWKHVXQ(YHQLIWKH,56KDVWKHUHVRXUFHVWRDQDO\]H

6ROGQHU¶VLVURXJKO\WKHVDPHDVDYDOXHSUHGLFWHGIURPDQHDUOLHUWKHRU\RI(LQVWHLQ¶V6HH3DLV
S
(DUPDQDQG*O\PRXUS
(YDGLQJWKH,56
WKH SUHGLFWLRQ RI ( IURP (LQVWHLQ¶V WKHRU\ WKH UHOHYDQFH RI WKH GDWD WR (
ZRXOGEHDQRWKHUPDWWHU
$VVXPLQJWKDWWKHVXQ¶VJUDYLWDWLRQDOILHOGLVFDXVDOO\UHOHYDQWWRGLIIHUHQFHV
EHWZHHQSRVLWLRQVRIHFOLSVHDQGFRPSDULVRQLPDJHVWKHHYLGHQWLDOYDOXHRIWKH
GDWDGHSHQGHGXSRQDJUHDWPDQ\RWKHUIDFWRUVDVZHOO6RPHRIWKHVHKDGWRGR
ZLWK WKH LQVWUXPHQWV DQG WHFKQLTXHV XVHG WR PHDVXUH GLVWDQFHV RQ WKH SKRWR
JUDSK 6RPH KDG WR GR ZLWK WKH UHVRXUFHV DYDLODEOH WR WKH LQYHVWLJDWRU IRU
GHFLGLQJ ZKHWKHU DQG WR ZKDW H[WHQW PHDVXUHG GLVSODFHPHQWV RI VWDU LPDJHV
ZHUH GXH WR WKH GHIOHFWLRQ RI VWDUOLJKW UDWKHU WKDQ H[WUDQHRXV LQIOXHQFHV $V
)LJLQGLFDWHVRQHVXFKIDFWRUZDVFKDQJHLQFDPHUDDQJOHGXHWRWKHPRWLRQ
RI WKH HDUWK $QRWKHU ZDV SDUDOOD[ UHVXOWLQJ IURP WKH GLVWDQFH EHWZHHQ WKH
JHRJUDSKLFDOORFDWLRQVIURPZKLFK(GGLQJWRQ¶VHFOLSVHDQGFRPSDULVRQSLFWXUHV
ZHUHWDNHQ
)LJ $V WKH HDUWK PRYHV IURP LWV SRVLWLRQ DW RQH WLPH 9 WR LWV SRVLWLRQ DW D
ODWHUWLPH9WKHSRVLWLRQVRIWKHHFOLSVHDQGFRPSDULVRQFDPHUDVFKDQJH
UHODWLYHWRWKHVWDUV

,QWKHGLVFXVVLRQZKLFKIROORZVZHLJQRUHWKHIDFWWKDWWKHGHIOHFWLRQYDOXHVFDOFXODWHGIURPWKH
EHVWSKRWRJUDSKLFGDWDGLIIHUHGQRWRQO\IURP1DQG16EXWDOVRDOEHLWWRDOHVVHUH[WHQWIURP
($VVXPLQJDVZHGRWKDWWKHGDWDVXSSRUWHGJHQHUDOUHODWLYLW\WKLVPLJKWPHDQWKDWDOWKRXJK(
LV FRUUHFW LWV GLVFULPLQDWLRQ GRHV QRW UHTXLUH LW WR EH LGHQWLFDO WR WKH YDOXH FDOFXODWHG IURP WKH
SKRWRJUDSKV$OWHUQDWLYHO\LWPLJKWPHDQWKDW(LVIDOVHEXWWKDWMXVWDVLQDFFXUDWHGDWDFDQPDNH
LW UHDVRQDEOH WR EHOLHYH D SKHQRPHQRQFODLP VRPH IDOVH SKHQRPHQD FODLPV SURYLGHHSLVWHPLFDOO\
JRRGVXSSRUWIRUWKHRUHWLFDOFODLPVLQZKRVHWHVWLQJWKH\DUHHPSOR\HG'HFLGLQJZKLFKLIHLWKHURI
WKHVH DOWHUQDWLYHV LV FRUUHFW IDOOV EH\RQG WKH VFRSH RI WKLV SDSHU %XW VLQFHHSLVWHPLF VXSSRUW E\
LQDFFXUDWH GDWD DQG FRQILUPDWLRQ E\ IDOVH FODLPV DUH PDMRU GLIILFXOWLHV IRU ,56 WKH GLVSDULWLHV
EHWZHHQ ( DQG PDJQLWXGHV FDOFXODWHG IURP WKH EHVW GDWD RIIHU QR DLG DQG FRPIRUW WR WKH ,56
DQDO\VLV,PSRUWDQWDVWKH\DUHLQFRQQHFWLRQZLWKRWKHUHSLVWHPRORJLFDOLVVXHVWKHVHGLVSDULWLHVZLOO
QRWDIIHFWWKHDUJXPHQWVRIWKLVSDSHU
(GGLQJWRQ DQG&RWWLQJKDP WRRN HFOLSVH SKRWRJUDSKV IURP 3ULQFLSH EXW ORJLVWLFDO FRPSOLFDWLRQV
PDGHLWQHFHVVDU\IRUWKHPWRKDYHFRPSDULVRQSLFWXUHVWDNHQIURP2[IRUG,QDGGLWLRQWRFRUUHFWLQJ
IRUSDUDOOD[WKH\KDGWRHVWDEOLVKVFDOHIRUSKRWRJUDSKVWDNHQIURPWZRYHU\GLIIHUHQWORFDWLRQVZLWK
YHU\GLIIHUHQWHTXLSPHQW(DUPDQDQG*O\PRXUSS
-DPHV%RJHQDQG-DPHV:RRGZDUG
$SDUWIURPWKHVHLQIOXHQFHVDQXPEHURIIDFWRUVLQFOXGLQJFKDQJHVLQWHPSHUD
WXUHFRXOGSURGXFHPHFKDQLFDOHIIHFWVLQWKHSKRWRJUDSKLFHTXLSPHQWVXIILFLHQW
WRFDXVHVLJQLILFDQWGLIIHUHQFHVLQVFDOH
$GGLWLRQDO FRPSOLFDWLRQV DURVH IURP FDXVHV LQYROYHG LQ WKH SURFHVV RI
LQWHUSUHWDWLRQ 2QH SURFHGXUH IRU PHDVXULQJ GLVWDQFHV EHWZHHQ VWDU LPDJHV
XWLOL]HV D ORZ SRZHU PLFURVFRSH HTXLSSHG ZLWK D FURVV KDLU +DYLQJ ORFNHG D
SKRWRJUDSKRQWRDQLOOXPLQDWHGIUDPHWKHLQYHVWLJDWRUORFDWHVDVWDULPDJHRU
SDUW RI RQH DJDLQVW WKH FURVV KDLU DQG VORZO\ WXUQV D FUDQN XQWLO WKH LPDJH
ZKRVHGLVWDQFHIURPWKHILUVWLVWREHPHDVXUHGDSSHDUVDJDLQVWWKHFURVVKDLU
$W HDFK WXUQ RI WKH FUDQN D JDGJHW UHJLVWHUV WKH GLVWDQFH WUDYHUVHG E\ WKH
PLFURVFRSH LQ PLFURQV DQG IUDFWLRQV RI PLFURQV 7KH GLVWDQFH LV UHFRUGHG WKH
SKRWRJUDSKLVUHPRYHGIURPWKHIUDPHDQGWKHSURFHGXUHLVUHSHDWHGZLWKWKH
QH[WSKRWRJUDSK,IWKHSKRWRJUDSKVDUHQRWRULHQWHGLQWKHVDPHZD\RQWKH
IUDPHLPDJHGLVSODFHPHQWVZLOOEHPHDVXUHGLQFRUUHFWO\
7KH IROORZLQJ GUDZLQJ RI D VWDU LPDJH IURP RQH RI &XUWLV¶V SKRWRJUDSKV
LOOXVWUDWHVHIIHFWVSURGXFHGE\WKHIRFXVDQGE\PRWLRQVRIWKHFDPHUDZKLFK
PDNHWKLVELWRIGDWDHSLVWHPLFDOO\LUUHOHYDQWWRWKHWHVWLQJRIJHQHUDOUHODWLYLW\
WKHRU\E\UHQGHULQJLWXVHOHVVLQGHFLGLQJEHWZHHQ(1DQG16
7KH HSLVWHPLF GHIHFWV RI &XUWLV¶V VWDU LPDJH DUH QRW GXH WR WKH IDLOXUH RI
LQIHUHQWLDO FRQQHFWLRQV EHWZHHQ DQ REVHUYDWLRQ VHQWHQFH DQG D K\SRWKHVLV
VHQWHQFH1RUDUHWKH\GXHWRWKHIDOVLW\RIDQREVHUYDWLRQVHQWHQFH%\WKHVDPH
WRNHQWKHHSLVWHPLFYDOXHRI WKH EHVW SKRWRJUDSKV ZDV QRW GXH WR WKH WUXWK RI
REVHUYDWLRQ VHQWHQFHV RU WR WKH REWDLQLQJ RI LQIHUHQWLDO FRQQHFWLRQV EHWZHHQ
WKHP DQG K\SRWKHVLV VHQWHQFHV 7KH HYLGHQWLDO YDOXH RI WKH VWDUOLJKW GDWD
GHSHQGHG XSRQ QRQORJLFDO H[WUDOLQJXLVWLF UHODWLRQV EHWZHHQ QRQVHQWHQWLDO
IHDWXUHVRISKRWRJUDSKVDQGFDXVHVZKLFKDUHQRWVHQWHQWLDOVWUXFWXUHV
$WWKLVSRLQWZHQHHGWRVD\DOLWWOHPRUHDERXWDGLIILFXOW\ZHPHQWLRQHGLQ
VHFWLRQ , 2EVHUYDWLRQ VHQWHQFHV DUH VXSSRVHG WR UHSUHVHQW HYLGHQFH %XW WKH
,56WHQGVWRDVVRFLDWHHYLGHQFHZLWKVHQWHQFHVUHSRUWLQJREVHUYDWLRQVDQGHYHQ
WKRXJKVRPHLQYHVWLJDWLRQVXVHGDWDRIWKLVVRUW WKH GDWD ZKLFK VXSSRUWHG (
ZHUHQRWOLQJXLVWLFLWHPVRIDQ\VRUWOHWDORQHVHQWHQFHV7KH\ZHUHSKRWRJUD
SKV 7KLV LV QRW DQ XQXVXDO FDVH 6R PDQ\ LQYHVWLJDWLRQV GHSHQG XSRQ QRQ
VHQWHQWLDO GDWD WKDW LW ZRXOG EH IDWDO IRU WKH ,56 WR PDLQWDLQ WKDW DOO VFLHQWLILF
HYLGHQFHFRQVLVWVRIREVHUYDWLRQUHSRUWVOHWDORQHWKHH[SUHVVLRQVLQILUVWRUGHU

(DUPDQDQG*O\PRXU
:H DUH LQGHEWHG WR $OPD =RRN RI WKH 3RPRQD &ROOHJH SK\VLFV GHSDUWPHQW IRU VKRZLQJ DQG
H[SODLQLQJWKHXVHRIVXFKPHDVXULQJHTXLSPHQWWRXV
(DUPDQDQG*O\PRXUS
)URPDOHWWHUIURP&DPSEHOOWR&XUWLVUHSURGXFHGLQ(DUPDQDQG*O\PRXUS
(YDGLQJWKH,56
ORJLFZHDUHFDOOLQJREVHUYDWLRQVHQWHQFHV:KDWWKHQGRREVHUYDWLRQVHQWHQFHV
UHSUHVHQW" 7KH PRVW FKDULWDEOH DQVZHU ZRXOG EH WKDW WKH\ UHSUHVHQW ZKDWHYHU
GDWD DUH DFWXDOO\ XVHG DV HYLGHQFH HYHQ ZKHUH WKH GDWD DUH QRW REVHUYDWLRQ
UHSRUWV%XWWKLVGRHVQRWWHOOXVZKLFKREVHUYDWLRQVHQWHQFHVWRXVHWRUHSUHVHQW
WKH SKRWRJUDSKV 7KXV D VHULRXV GLIILFXOW\ LV WKDW IRU WKHRU\ WHVWLQJ ZKLFK
LQYROYHV QRQVHQWHQWLDO HYLGHQFH WKH ,56 SURYLGHV QR JXLGDQFH IRU WKH FRQ
VWUXFWLRQRIWKHUHTXLUHGREVHUYDWLRQVHQWHQFHV
/DFNLQJ DQ DFFRXQW RI ZKDW REVHUYDWLRQ VHQWHQFHV WKH ,56 ZRXOG XVH WR
UHSUHVHQWWKHSKRWRJUDSKVLWLVKDUGWRWDONDERXWZKDWZRXOGGHFLGHWKHLUWUXWK
YDOXHV%XWZHFDQVD\WKLVPXFKZKDWHYHUWKHREVHUYDWLRQVHQWHQFHVPD\EH
WKHLU WUXWK KDG EHWWHU QRW GHSHQG XSRQ KRZ ZHOO WKH SKRWRJUDSKV GHSLFWHG WKH
WUXHSRVLWLRQVRIWKHVWDUV7KHSKRWRJUDSKVGLGQRWSXUSRUWWRVKRZDQGZHUH
QRWXVHGWRFDOFXODWHWKHLUDFWXDOSRVLWLRQVRUWKHWUXHPDJQLWXGHVRIGLVWDQFHV
EHWZHHQ WKHP 7KH\ FRXOG UHSUHVHQW WUXH SRVLWLRQV RI RU GLVWDQFHV EHWZHHQ
VWDUV ZLWK HTXDO DFFXUDF\ RQO\ LI WKHUH ZHUH QR VLJQLILFDQW GLVFUHSDQFLHV
EHWZHHQWKHSRVLWLRQVRIVWDULPDJHVRQWKHHFOLSVHSKRWRJUDSKVDQGVWDULPDJHV
RQ WKH FRPSDULVRQ SKRWRJUDSKV %XW KDG WKHUH EHHQ QR VXFK GLVFUHSDQFLHV WKH
SKRWRJUDSKV ZRXOG KDYH DUJXHG DJDLQVW ( 7KXV WR UHTXLUH ERWK WKH HFOLSVH
DQGWKHFRPSDULVRQSKRWRJUDSKVWRPHHWWKHVDPHVWDQGDUGRIUHSUHVHQWDWLRQDO
DFFXUDF\ZRXOGEHWRUXOHRXWHYLGHQFHQHHGHGWRVXSSRUW()XUWKHUPRUHWKH
WUXWKYDOXHVRIWKHREVHUYDWLRQVHQWHQFHVKDGEHWWHUQRWEHGHFLGHGVROHO\RQWKH
EDVLVRIZKHWKHUWKHPHDVXUHPHQWVRIGLVWDQFHVEHWZHHQWKHLUVWDULPDJHVPHHW
VRPH JHQHUDO VWDQGDUG RI DFFXUDF\ VSHFLILHG LQGHSHQGHQWO\ RI WKH SDUWLFXODU
LQYHVWLJDWLRQLQTXHVWLRQ,QKLVWH[WERRNRQHUURUDQDO\VLV-RKQ7D\ORUSRLQWV
RXWWKDWHYHQWKRXJKPHDVXUHPHQWVFDQEHWRRLQDFFXUDWHWRVHUYHWKHLUSXUSRVHV
LW LV QRW QHFHVVDU\ WKDW WKH XQFHUWDLQWLHV >LH OHYHOV RI HUURU@ EH H[WUHPHO\
VPDOO>W@KLVLVW\SLFDORIPDQ\VFLHQWLILFPHDVXUHPHQWVZKHUHXQFHUWDLQWLHVKDYH
WR EH UHDVRQDEO\ VPDOO SHUKDSV D IHZ SHUFHQW RI WKH PHDVXUHG YDOXH EXW ZKHUH
H[WUHPHSUHFLVLRQLVRIWHQTXLWHXQQHFHVVDU\
:H PDLQWDLQ WKDW ZKDW FRXQWV DV D ³UHDVRQDEO\ VPDOO´ OHYHO RI HUURU GHSHQGV
XSRQ WKH QDWXUH RI WKH SKHQRPHQRQ XQGHU LQYHVWLJDWLRQ WKH PHWKRGV XVHG WR
LQYHVWLJDWHLWDQGWKHDOWHUQDWLYHSKHQRPHQDFODLPVXQGHUFRQVLGHUDWLRQ6LQFH
WKHVHYDU\IURPFDVHWRFDVHQRVLQJOHOHYHORIDFFXUDF\FDQGLVWLQJXLVKEHWZHHQ
DFFHSWDEOH DQG XQDFFHSWDEOH PHDVXUHPHQWV IRU HYHU\ FDVH 7KXV 3ULHVWOH\¶V
QLWULF R[LGH WHVW WROHUDWHV FRQVLGHUDEO\ PRUH PHDVXUHPHQW HUURU WKDQ GLG WKH
VWDUOLJKWEHQGLQJLQYHVWLJDWLRQV7KLVPHDQVWKDWLQRUGHUWRGHFLGHZKHWKHURU
QRW WR WUHDW REVHUYDWLRQ VHQWHQFHV UHSUHVHQWLQJ (GGLQJWRQ¶V SKRWRJUDSKV DQG
PHDVXUHPHQWV DV WUXH WKH ,56 HSLVWHPRORJLVW ZRXOG KDYH WR NQRZ HQRXJK

:H PHDQ PHDVXUDEOH GLVFUHSDQFLHV QRW DFFRXQWHG IRU E\ FKDQJHV LQ WKH SRVLWLRQ RI WKH HDUWK
GLIIHUHQFHVLQWKHORFDWLRQRIWKHHFOLSVHDQGFRPSDULVRQHTXLSPHQWHWF
7D\ORUS
-DPHV%RJHQDQG-DPHV:RRGZDUG
DERXW ORFDO GHWDLOV SHFXOLDU WR WKHLU SURGXFWLRQ DQG LQWHUSUHWDWLRQ WR ILQG RXW
ZKDWOHYHOVRIHUURUZRXOGEHDFFHSWDEOH
6XSSRVH WKDW RQH UHVSRQGV WR WKLV GLIILFXOW\ E\ VWLSXODWLQJ WKDW ZKDWHYHU
REVHUYDWLRQVHQWHQFHVDUHXVHGWRUHSUHVHQWSKRWRJUDSKVDUHWREHFDOOHGWUXHLI
WKHSKRWRJUDSKVFRQVWLWXWHJRRGHYLGHQFHDQGIDOVHLIWKH\GRQRW7KLVPHDQV
WKDW WKH WUXWK YDOXHV RI WKH REVHUYDWLRQ VHQWHQFHV ZLOO GHSHQG IRU H[DPSOH
XSRQ ZKHWKHU WKH LQYHVWLJDWRUV FRXOG UXOH RXW RU FRUUHFW IRU WKH LQIOXHQFHV RI
VXFK IDFWRUV DV PHFKDQLFDO FKDQJHV LQ WKH HTXLSPHQW SDUDOOD[ VRXUFHV RI
PHDVXUHPHQW HUURU HWF DV IDU DV QHFHVVDU\ WR DOORZ WKHP WR GLVFULPLQDWH
FRUUHFWO\ EHWZHHQ ( 1 DQG 16 :H VXEPLW WKDW WKLV VWLSXODWLRQ LV
FRPSOHWHO\ XQLOOXPLQDWLQJ 7KH QRWLRQ RI WUXWK DV DSSOLHG WR DQ REVHUYDWLRQ
VHQWHQFHLVQRZXQFRQQHFWHGZLWKDQ\QRWLRQRIUHSUHVHQWDWLRQDOFRUUHFWQHVVRU
DFFXUDF\ LH LW LV XQFOHDU ZKDW VXFK VHQWHQFHV DUH VXSSRVHG WR UHSUHVHQW RU
FRUUHVSRQGWRZKHQWKH\DUHWUXH0DUNLQJDQREVHUYDWLRQ VHQWHQFH DV WUXH LV
QRZ MXVW D ZD\ RI VD\LQJ WKDW WKH GDWD DVVRFLDWHG ZLWK WKH VHQWHQFH SRVVHVV
YDULRXVRWKHUIHDWXUHVWKDWDOORZWKHPWRSOD\DUROHLQUHOLDEOHGLVFULPLQDWLRQ,W
LVEHWWHUWRIRFXVGLUHFWO\RQWKHGDWDDQGWKHSURFHVVHVWKDWJHQHUDWHWKHPDQGWR
GURSWKHUROHRIDQREVHUYDWLRQVHQWHQFHDVDQXQQHFHVVDU\LQWHUPHGLDU\
9,
5HFDOOWKDWDQLPSRUWDQWSDUWRIWKHPRWLYDWLRQIRUWKHGHYHORSPHQWRI,56ZDV
WKH TXHVWLRQ RI ZKDW REMHFWLYH IDFWRUV GR RU VKRXOG GHWHUPLQH D VFLHQWLVW¶V
GHFLVLRQDERXWZKHWKHUDJLYHQERG\RIHYLGHQFHZDUUDQWVWKHDFFHSWDQFHRID
K\SRWKHVLV:HKDYHVXJJHVWHGWKDWWKH HYLGHQWLDO YDOXH RI GDWD GHSHQGV XSRQ
FRPSOH[DQGPXOWLIDULRXVFDXVDOFRQQHFWLRQVEHWZHHQWKHGDWDWKHSKHQRPHQRQ
RI LQWHUHVW DQG D KRVW RI RWKHU IDFWRUV %XW LW GRHV QRW IROORZ IURP WKLV WKDW
VFLHQWLVWV W\SLFDOO\ GR RU HYHQ FDQ NQRZ PXFK DERXW WKH ILQH GHWDLOV RI WKH
UHOHYDQWFDXVDOPHFKDQLVPV4XLWHWKHFRQWUDU\DVZHKDYHDUJXHGHOVHZKHUH
VFLHQWLVWV FDQ VHOGRP LI HYHU JLYH DQG DUH VHOGRP LI HYHU UHTXLUHG WR JLYH
GHWDLOHGV\VWHPDWLFFDXVDODFFRXQWVRIWKHSURGXFWLRQRIDSDUWLFXODUELWRIGDWD
RU LWV LQWHUDFWLRQ ZLWK WKH KXPDQ SHUFHSWXDO V\VWHP DQG ZLWK GHYLFHV OLNH WKH
PHDVXULQJ HTXLSPHQW XVHG E\ WKH VWDUOLJKW LQYHVWLJDWRUV LQYROYHG LQ LWV
LQWHUSUHWDWLRQ %XW HYHQ WKRXJK LW GRHV QRW LQYROYH V\VWHPDWLF FDXVDO
H[SODQDWLRQZHEHOLHYHWKDWDNLQGRIFDXVDOUHDVRQLQJLVHVVHQWLDOWRWKHXVHRI
GDWD WR LQYHVWLJDWH SKHQRPHQD 7KLV UHDVRQLQJ IRFXVHV XSRQ ZKDW ZH KDYH
FDOOHGJHQHUDODQGORFDOUHOLDELOLW\7KHUHPDLQGHURIWKLVSDSHUGLVFXVVHVVRPH
IHDWXUHVRIWKLVVRUWRIUHDVRQLQJDQGDUJXHVWKDWLWVREMHFWLYLW\GRHVQRWGHSHQG
XSRQ DQG LV QRW ZHOO H[SODLQHG LQ WHUPV RI WKH KLJKO\ JHQHUDO FRQWHQW
LQGHSHQGHQWIRUPDOFULWHULDVRXJKWE\WKH,56

%RJHQDQG:RRGZDUG)RUDQH[FHOOHQWLOOXVWUDWLRQRIWKLVVHH+DFNLQJS
(YDGLQJWKH,56
9,,
:H WXUQ ILUVW WR D PRUH GHWDLOHG FKDUDFWHUL]DWLRQ RI ZKDW ZH PHDQ E\ JHQHUDO
UHOLDELOLW\$VZHKDYHDOUHDG\VXJJHVWHGJHQHUDOUHOLDELOLW\LVDPDWWHURIORQJ
UXQHUURUFKDUDFWHULVWLFV$GHWHFWLRQSURFHVVLVJHQHUDOO\UHOLDEOHZKHQXVHGLQ
FRQQHFWLRQ ZLWK D ERG\ RI GDWD LI LW KDV D VDWLVIDFWRULO\ KLJK SUREDELOLW\ RI
RXWSXWWLQJ XQGHU UHSHDWHG XVH FRUUHFW GLVFULPLQDWLRQV DPRQJ D VHW RI
FRPSHWLQJSKHQRPHQRQFODLPVDQGDVDWLVIDFWRULO\ORZSUREDELOLW\RIRXWSXWWLQJ
LQFRUUHFW GLVFULPLQDWLRQV :KDW PDWWHUV LV WKXV WKDW WKH SURFHVV GLVFULPLQDWHV
FRUUHFWO\DPRQJDVHWRIUHOHYDQWDOWHUQDWLYHVQRWWKDWLWGLVFULPLQDWHVFRUUHFWO\
DPRQJDOOORJLFDOO\SRVVLEOHDOWHUQDWLYHV:KHWKHURUQRWDGHWHFWLRQSURFHVVLV
JHQHUDOO\ UHOLDEOH LV DOZD\V DQ HPSLULFDO PDWWHU KDYLQJ WR GR ZLWK WKH FDXVDO
FKDUDFWHULVWLFV RI WKH GHWHFWLRQ SURFHVV DQG LWV W\SLFDO FLUFXPVWDQFHV RI XVH
UDWKHUWKDQZLWKDQ\IRUPDOUHODWLRQVKLSEHWZHHQWKHGDWDWKDWILJXUHLQVXFKD
SURFHVVDQGWKHSKHQRPHQRQFODLPVIRUZKLFKWKH\DUHHYLGHQFH7KHQRWLRQRI
JHQHUDO UHOLDELOLW\ WKXV KDV DSSOLFDWLRQ LQ WKRVH FRQWH[WV LQ ZKLFK ZH FDQ
SURYLGH D QRQWULYLDO FKDUDFWHUL]DWLRQ RI ZKDW LW LV WR UHSHDW D SURFHVV RI GDWD
SURGXFWLRQDQGLQWHUSUHWDWLRQZHVKDOOFDOOWKLVDGHWHFWLRQSURFHVVIRUEUHYLW\
DQGZKHUHWKLVSURFHVVSRVVHVVHVIDLUO\VWDEOHGHWHUPLQDWHHUURUFKDUDFWHULVWLFV
XQGHUUHSHWLWLRQWKDWDUHVXVFHSWLEOHRIHPSLULFDOLQYHVWLJDWLRQ$VZHVKDOOVHH
LQ VHFWLRQ 9,,, WKHVH FRQGLWLRQV DUH PHW LQ PDQ\ EXW E\ QR PHDQV DOO WKH
FRQWH[WVLQZKLFKGDWDDUHXVHGWRDVVHVVFODLPVDERXWSKHQRPHQD:KHUHWKHVH
FRQGLWLRQVDUHQRWPHWZHPXVWDVVHVVHYLGHQWLDOVXSSRUWLQWHUPVRIDGLVWLQFW
QRWLRQRIUHOLDELOLW\ZKLFKZHFDOOORFDOUHOLDELOLW\
+HUHLVDQH[DPSOHLOOXVWUDWLQJZKDWZHKDYHLQPLQGE\JHQHUDOUHOLDELOLW\
7UDGLWLRQDOO\ SDOHRDQWKURSRORJLVWV KDYH UHOLHG RQ IRVVLO HYLGHQFH WR LQIHU
UHODWLRQVKLSVDPRQJKXPDQEHLQJVDQGRWKHUSULPDWHV7KHVZLWQHVVHGWKH
HPHUJHQFH RI DQ HQWLUHO\ GLVWLQFW ELRFKHPLFDO PHWKRG IRU PDNLQJ VXFK
LQIHUHQFHV ZKLFK LQYROYHG FRPSDULQJ SURWHLQV DQG QXFOHLF DFLGV IURP OLYLQJ
VSHFLHV 7KLV PHWKRG UHVWV RQ WKH DVVXPSWLRQ WKDW WKH UDWH RI PXWDWLRQ LQ
SURWHLQV LV UHJXODU RU FORFNOLNH ZLWK WKLV DVVXPSWLRQ RQH FDQ LQIHU WKDW WKH
JUHDWHU WKH GLIIHUHQFH LQ SURWHLQ VWUXFWXUH DPRQJ VSHFLHV WKH ORQJHU WKH WLPH
WKH\ KDYH EHHQ VHSDUDWHG LQWR GLVWLQFW VSHFLHV 0ROHFXODU SK\ORJHQ\ DV VXFK
WHFKQLTXHV FDPH WR EH FDOOHG LQLWLDOO\ VXJJHVWHG FRQFOXVLRQV VWULNLQJO\ DW
YDULDQFH ZLWK WKH PRUH WUDGLWLRQDO JHQHUDOO\ DFFHSWHG FRQFOXVLRQV EDVHG RQ
IRVVLO HYLGHQFH )RU H[DPSOH ZKLOH IRVVLO HYLGHQFH VXJJHVWHG DQ HDUO\ GLYHU
JHQFHEHWZHHQKRPLQLGVDQGRWKHUSULPDWHVPROHFXODUWHFKQLTXHVVXJJHVWHGD
PXFK ODWHU GDWH RI GLYHUJHQFH ± WKDW KRPLQLGV DSSHDUHG PXFK ODWHU WKDQ
SUHYLRXVO\ WKRXJKW 7KXV ZKLOH SDOHRDQWKURSRORJLVWV FODVVLILHG WKH LPSRUWDQW
SUHKLVWRULFSULPDWH5DPDSLWKLFXVDVDQHDUO\KRPLQLGRQWKHEDVLVRILWV IRVVLO
UHPDLQVWKHPROHFXODUHYLGHQFHVHHPHGWRVXJJHVWWKDW5DPDSLWKLFXVFRXOGQRW

'HWDLOVRIWKLVH[DPSOHDUHODUJHO\WDNHQIURP/HZLQ
-DPHV%RJHQDQG-DPHV:RRGZDUG
EH D KRPLQLG 6LPLODUO\ IRVVLO DQG PRUSKRORJLFDO GDWD VHHPHG WR VXJJHVW WKDW
FKLPSDQ]HHV DQG JRULOODV ZHUH PRUH FORVHO\ UHODWHG WR HDFK RWKHU WKDQ WR
KXPDQV ZKLOH PROHFXODU GDWD VXJJHVWHG WKDW KXPDQV DQG FKLPSDQ]HHV ZHUH
PRUHFORVHO\UHODWHG
7KH LQLWLDO UHDFWLRQ RI PRVW SDOHRDQWKURSRORJLVWV WR WKHVH QHZ FODLPV ZDV
WKDWWKHELRFKHPLFDOPHWKRGVZHUHXQUHOLDEOHEHFDXVHWKH\SURGXFHGUHVXOWVDW
YDULDQFH ZLWK ZKDW WKH IRVVLOV VXJJHVWHG ,W ZDV VXJJHVWHG WKDW EHFDXVH WKH
DSSDUHQWUDWHVRIVHSDUDWLRQGHULYHGIURPPROHFXODUHYLGHQFHZHUHPRUHUHFHQW
WKDQWKRVHGHULYHGIURPWKHIRVVLOUHFRUGWKLVVKRZHGWKDWWKHPROHFXODUFORFN
ZDV QRW VWHDG\ DQG WKDW WKHUH KDG EHHQ D VORZ GRZQ LQ WKH UDWH RI FKDQJH LQ
SURWHLQVWUXFWXUHDPRQJKRPLQLGV7KLVGHEDWHZDVODUJHO\UHVROYHGLQIDYRURI
WKH VXSHULRU UHOLDELOLW\ RI PROHFXODU PHWKRGV 7KH LQYHQWLRQ RI PRUH SRZHUIXO
PROHFXODU WHFKQLTXHV EDVHG RQ '1$ K\EULGL]DWLRQ VXSSRUWHG E\ FRQYLQFLQJ
VWDWLVWLFDO DUJXPHQWV WKDW WKH UDWH RI PXWDWLRQ ZDV LQGHHG FORFNOLNH ODUJHO\
FRUURERUDWHG WKH UHVXOWV RI HDUOLHU PROHFXODU PHWKRGV 7KH GLVFRYHU\ RI
DGGLWLRQDOIRVVLOHYLGHQFHXQGHUPLQHGWKH KRPLQLG VWDWXV RI 5DPDSLWKLFXV DQG
VXSSRUWHGWKHFODLPRIDODWHGLYHUJHQFHEHWZHHQKRPLQLGVDQGRWKHUSULPDWHV
7KLV H[DPSOH LOOXVWUDWHV ZKDW ZH KDYH LQ PLQG ZKHQ ZH DVN ZKHWKHU D
PHDVXUHPHQW RU GHWHFWLRQ WHFKQLTXH LV JHQHUDOO\ UHOLDEOH :H FDQ WKLQN RI
YDULRXVPHWKRGVIRULQIHUULQJIDPLO\WUHHVIURPGLIIHUHQFHVLQSURWHLQVWUXFWXUH
DQG PHWKRGV IRU LQIHUULQJ VXFK UHODWLRQVKLSV IURP IRVVLO HYLGHQFH DV GLVWLQFW
PHDVXUHPHQW RU GHWHFWLRQ WHFKQLTXHV $Q\ SDUWLFXODU PROHFXODU PHWKRG LV
DVVXPHG WR KDYH IDLUO\ VWDEOH GHWHUPLQDWH HUURU FKDUDFWHULVWLFV ZKLFK GHSHQG
XSRQHPSLULFDOIHDWXUHVRIWKHPHWKRGLIWKHPHWKRGLVUHOLDEOHLWZLOOJHQHUDOO\
\LHOG URXJKO\ FRUUHFW FRQFOXVLRQV DERXW IDPLO\ UHODWLRQVKLS DQG GDWHV RI
GLYHUJHQFH LI LW LV XQUHOLDEOH LW ZLOO QRW &OHDUO\ WKH JHQHUDO UHOLDELOLW\ RI WKH
PROHFXODU PHWKRG ZLOO GHSHQG FUXFLDOO\ RQ ZKHWKHU LW LV UHDOO\ WUXH WKDW WKH
PROHFXODUFORFNLVUHJXODU
6LPLODUO\ WKH UHOLDELOLW\ RI WKH PHWKRG DVVRFLDWHG ZLWK WKH XVH RI IRVVLO
HYLGHQFH DOVR GHSHQGV XSRQ D QXPEHU RI HPSLULFDO FRQVLGHUDWLRQV ± DPRQJ
WKHPWKHDELOLW\RIKXPDQEHLQJVWRGHWHFWRYHUDOOSDWWHUQVRIVLPLODULW\EDVHGRQ
YLVXDODSSHDUDQFHWKDWFRUUHODWHZLWKJHQHWLFUHODWLRQVKLSV:KDWWKHSDUWLVDQV
RI IRVVLOV DQG RI PROHFXODU PHWKRGV GLVDJUHH DERXW LV WKH UHOLDELOLW\ RI WKH
PHWKRGVWKH\IDYRULQMXVWWKHVHQVHRIUHOLDELOLW\DVJRRGHUURUFKDUDFWHULVWLFV
GHVFULEHG DERYH 3DUW RI ZKDW SDOHRDQWKURSRORJLVWV OHDUQHG DV WKH\ EHFDPH
FRQYLQFHG RI WKH VXSHULRU UHOLDELOLW\ RI PROHFXODU PHWKRGV ZDV WKDW PHWKRGV
EDVHG RQ VLPLODULW\ RI DSSHDUDQFH ZHUH RIWHQ OHVV UHOLDEOH WKDQ WKH\ KDG
SUHYLRXVO\ WKRXJKW LQ SDUW EHFDXVH MXGJHPHQWV RI VLPLODULW\ FDQ EH KHDYLO\
LQIOXHQFHGE\SULRUH[SHFWDWLRQVDQGFDQOHDGWKHLQYHVWLJDWRUWRWKLQNWKDWVKH
VHHVIHDWXUHVLQWKHIRVVLOHYLGHQFHWKDWDUHVLPSO\QRWWKHUH

6HHHVSHFLDOO\/HZLQSII
(YDGLQJWKH,56
,VVXHV RI WKLV VRUW DERXW JHQHUDO UHOLDELOLW\ ± DERXW WKH ORQJUXQ HUURU
FKDUDFWHULVWLFV RI D WHFKQLTXH RU PHWKRG XQGHU UHSHDWHG DSSOLFDWLRQV ± SOD\ D
FHQWUDO UROH LQ PDQ\ DUHDV RI VFLHQWLILF LQYHVWLJDWLRQ :KHQHYHU D QHZ LQVWUX
PHQWRUGHWHFWLRQGHYLFHLVLQWURGXFHGLQYHVWLJDWRUVZLOOZLVKWRNQRZDERXWLWV
JHQHUDO UHOLDELOLW\ ± ZKHWKHU LW ZRUNV LQ VXFK D ZD\ DV WR \LHOG FRUUHFW
GLVFULPLQDWLRQVZLWKVRPHUHDVRQDEOHSUREDELOLW\RIVXFFHVVZKHWKHULWFDQEH
UHOLHG XSRQ DV D VRXUFH RI LQIRUPDWLRQ LQ VRPH SDUWLFXODU DUHD RI DSSOLFDWLRQ
7KXV*DOLOHR¶VFRQWHPSRUDULHVZHUHLQWHUHVWHGQRWMXVWLQZKHWKHUKLVWHOHVFRSLF
REVHUYDWLRQV RI WKH URXJK DQG LUUHJXODU VXUIDFH RI WKH PRRQ ZHUH FRUUHFW EXW
ZLWKWKHJHQHUDOUHOLDELOLW\RIKLVWHOHVFRSH±ZLWKZKHWKHULWVFDXVDOFKDUDFWHUL
VWLFVZHUHVXFKWKDWLWFRXOGEHXVHGWRPDNHFHUWDLQNLQGVRIGLVFULPLQDWLRQLQ
DVWURQRPLFDO DSSOLFDWLRQV ZLWK VRPH UHDVRQDEOH SUREDELOLW\ RI FRUUHFWQHVV RU
ZLWKZKHWKHULQVWHDGZKDWREVHUYHUVVHHPHGWRVHHWKURXJKWKHWHOHVFRSHZHUH
DUWLIDFWVSURGXFHGE\LPSHUIHFWLRQVLQWKHOHQVHVRUVRPHVXFKVRXUFH
6LPLODUO\ LQ PDQ\ FRQWH[WV LQ ZKLFK KXPDQ SHUFHLYHUV SOD\ DQ LPSRUWDQW
UROHLQVFLHQFHRQHFDQDVNDERXWWKHLUJHQHUDOUHOLDELOLW\DWYDULRXVSHUFHSWXDO
GHWHFWLRQ WDVNV ZKHUH WKLV KDV WR GR ZLWK WKH SUREDELOLW\ RU IUHTXHQF\ ZLWK
ZKLFKSHUFHLYHUVPDNHWKHUHOHYDQWSHUFHSWXDOGLVFULPLQDWLRQVFRUUHFWO\XQGHU
UHSHDWHGWULDOV'HWHUPLQDWLRQVRISHUVRQDOHUURUUDWHVLQREVHUYDWLRQDOVFLHQFHV
OLNHDVWURQRP\PDNHXVHRIWKLVXQGHUVWDQGLQJRIUHOLDELOLW\6LPLODUO\RQHFDQ
DVNZKHWKHUDQDXWRPDWHGGDWDUHGXFWLRQSURFHGXUHZKLFKVRUWVWKURXJKEDWFKHV
RI SKRWRJUDSKV VHOHFWLQJ WKRVH ZKLFK VDWLVI\ VRPH SUHVHOHFWHG FULWHULRQ LV
RSHUDWLQJUHOLDEO\ZKHUHWKLVKDVWRGRZLWKZKHWKHURUQRWLWLVLQIDFWFODVVLI\
LQJWKHSKRWRJUDSKVDFFRUGLQJWRWKHLQGLFDWHGFULWHULRQZLWKDORZHUURUUDWH
7KHUH DUH VHYHUDO JHQHUDO IHDWXUHV RI WKH DERYH H[DPSOHV ZKLFK DUH ZRUWK
XQGHUVFRULQJ/HWXVQRWHWREHJLQZLWKWKDWWKHTXHVWLRQRIZKHWKHUDPHWKRG
WHFKQLTXH RU GHWHFWLRQ GHYLFH DQG WKH GDWD LW SURGXFHV DUH UHOLDEOH DOZD\V
GHSHQGVYHU\PXFKRQWKHVSHFLILFIHDWXUHVRIWKHPHWKRGWHFKQLTXHRULQVWUX
PHQW LQ TXHVWLRQ ,W LV WKHVH KLJKO\ VSHFLILF HPSLULFDO IDFWV DERXW WKH JHQHUDO
UHOLDELOLW\ RI SDUWLFXODU PHWKRGV RI GDWD SURGXFWLRQ DQG LQWHUSUHWDWLRQ DQG QRW
WKH IRUPDO UHODWLRQVKLSV HPSKDVL]HG E\ ,56 WKDW DUH UHOHYDQW WR GHWHUPLQLQJ
ZKHWKHURUQRWGDWDDUHJRRGHYLGHQFHIRUYDULRXVFODLPVDERXWSKHQRPHQD)RU
H[DPSOHLWLVWKHUHOLDELOLW\FKDUDFWHULVWLFVRI*DOLOHR¶VWHOHVFRSHWKDWLQVXUHWKH
HYLGHQWLDO UHOHYDQFH RI WKH LPDJHV WKDW LW SURGXFHV WR WKH DVWURQRPLFDO REMHFWV
KHZLVKHVWRGHWHFWDQGLWLVWKHUHOLDELOLW\FKDUDFWHULVWLFVRI'1$K\EULGL]DWLRQ
WKDW LQVXUH WKH HYLGHQWLDO UHOHYDQFH RI WKH ELRFKHPLFDO GDWD LW SURGXFHV WR WKH
UHFRQVWUXFWLRQRIUHODWLRQVKLSVEHWZHHQVSHFLHV
+RZ LV WKH JHQHUDO UHOLDELOLW\ RI DQ LQVWUXPHQW RU GHWHFWLRQ WHFKQLTXH
DVFHUWDLQHG":HDQGRWKHUVKDYHGLVFXVVHGWKLVLVVXHDWVRPHOHQJWKHOVHZKHUH
DQG UHDGHUV DUH UHIHUUHG WR WKLV GLVFXVVLRQ IRU D PRUH GHWDLOHG WUHDWPHQW

)RUDGGLWLRQDOGLVFXVVLRQVHH%RJHQDQG:RRGZDUG
6HH%RJHQDQG:RRGZDUGDQG:RRGZDUG$OWKRXJKRQRXUYLHZLWLVDOZD\VD
PDWWHU RI HPSLULFDO IDFW ZKHWKHU RU QRW D GHWHFWLRQ SURFHVV LV JHQHUDOO\ UHOLDEOH ZH ZDQW WR
-DPHV%RJHQDQG-DPHV:RRGZDUG
$ZLGHYDULHW\RIGLIIHUHQWNLQGVRIFRQVLGHUDWLRQVKDYLQJWRGRIRUH[DPSOH
ZLWK WKH REVHUYHG HIIHFWV RI YDULRXV PDQLSXODWLRQV DQG LQWHUYHQWLRQV LQWR WKH
GHWHFWLRQ SURFHVV ZLWK UHSOLFDELOLW\ DQG ZLWK WKH XVH RI YDULRXV FDOLEUDWLRQ
WHFKQLTXHV SOD\ DQ LPSRUWDQW UROH 2QH SRLQW WKDW ZH HVSHFLDOO\ ZLVK WR
HPSKDVL]HDQGZKLFKZHZLOOPDNHXVHRIEHORZLVWKDWDVVHVVLQJWKHJHQHUDO
UHOLDELOLW\ RI DQ LQVWUXPHQW RU GHWHFWLRQ WHFKQLTXH GRHV QRW UHTXLUH WKDW RQH
SRVVHVV D JHQHUDO WKHRU\ WKDW V\VWHPDWLFDOO\ H[SODLQV WKH RSHUDWLRQ RI WKH
LQVWUXPHQWRUWHFKQLTXHRUZK\LWLVJHQHUDOO\UHOLDEOH7KHUHDUHPDQ\FDVHVLQ
WKH KLVWRU\ RI VFLHQFH LQYROYLQJ LQVWUXPHQWV DQG GHWHFWLRQ WHFKQLTXHV WKDW
LQYHVWLJDWRUV UHDVRQDEO\ EHOLHYHG WR EH JHQHUDOO\ UHOLDEOH LQ YDULRXV VWDQGDUG
XVHV HYHQ WKRXJK WKRVH LQYHVWLJDWRUV GLG QRW SRVVHVV D JHQHUDO H[SODQDWRU\
WKHRU\ RI WKH RSHUDWLRQ RI WKHVH LQVWUXPHQWV DQG WHFKQLTXHV 7KXV LW ZDV
UHDVRQDEOHRI*DOLOHRDQGKLVFRQWHPSRUDULHVWREHOLHYHWKDWKLVWHOHVFRSHZDV
JHQHUDOO\ UHOLDEOH LQ PDQ\ RI LWV DSSOLFDWLRQV HYHQ WKRXJK *DOLOHR ODFNHG DQ
RSWLFDO WKHRU\ WKDW H[SODLQHG LWV ZRUNLQJV LW LV UHDVRQDEOH WR EHOLHYH WKDW WKH
KXPDQ YLVXDO V\VWHP FDQ UHOLDEO\ PDNH YDULRXV SHUFHSWXDO GLVFULPLQDWLRQV LQ
VSHFLILHGFLUFXPVWDQFHVHYHQWKRXJKRXUXQGHUVWDQGLQJRIWKHRSHUDWLRQRIWKH
YLVXDOV\VWHPLVVWLOOUXGLPHQWDU\LWPD\EHUHDVRQDEOHWREHOLHYHWKDWDFHUWDLQ
VWDLQLQJWHFKQLTXHUHOLDEO\VWDLQVFHUWDLQFHOOVDQGGRHVQ¶WSURGXFHDUWLIDFWVHYHQ
WKRXJKRQHGRHVQ¶WXQGHUVWDQGWKHFKHPLVWU\RIWKHVWDLQLQJSURFHVVDQGVRRQ
:HPD\FRQWUDVWWKHSLFWXUHZHKDYHEHHQDGYRFDWLQJDFFRUGLQJWRZKLFK
HYLGHQWLDOUHOHYDQFHLVFDUULHGE\WKHUHOLDELOLW\FKDUDFWHULVWLFVRIKLJKO\VSHFLILF
SURFHVVHV RI GDWD SURGXFWLRQ DQG LQWHUSUHWDWLRQ ZLWK WKH FRQFHSWLRQ RI
HYLGHQWLDOUHOHYDQFHZKLFKLVLPSOLFLWLQ,56$FFRUGLQJWRWKDWFRQFHSWLRQWKH
UHOHYDQFH RI HYLGHQFH WR K\SRWKHVHV LV D PDWWHU RI REVHUYDWLRQ VHQWHQFHV
VWDQGLQJ LQ YDULRXV KLJKO\ JHQHUDO VWUXFWXUDO RU LQIHUHQWLDO UHODWLRQV WR WKRVH
K\SRWKHVHV UHODWLRQVKLSV ZKLFK DFFRUGLQJ WR ,56 DUH H[HPSOLILHG LQ PDQ\
GLIIHUHQW DUHDV RI VFLHQWLILF LQYHVWLJDWLRQ 7KXV WKH LGHD LV WKDW WKH HYLGHQWLDO
UHOHYDQFH RI ELRFKHPLFDO GDWD WR VSHFLHV UHODWLRQVKLSV RU WKH HYLGHQWLDO
UHOHYDQFHRIWKHLPDJHVSURGXFHGE\*DOLOHR¶VWHOHVFRSHWRYDULRXVDVWURQRPLFDO
K\SRWKHVHVLVDPDWWHURIWKHREWDLQLQJRIVRPHDSSURSULDWHIRUPDOUHODWLRQVKLS
EHWZHHQ VHQWHQFHV UHSUHVHQWLQJ WKHVH GDWD WKH K\SRWKHVHV LQ TXHVWLRQ DQG
SHUKDSV DSSURSULDWH EDFNJURXQG RU DX[LOLDU\ DVVXPSWLRQV 2Q WKH FRQWUDVWLQJ
SLFWXUH ZH KDYH GHIHQGHG HYLGHQWLDO UHOHYDQFH LV QRW D PDWWHU RI DQ\ VXFK
IRUPDOUHODWLRQVKLSEXWLVLQVWHDGDPDWWHURIHPSLULFDOIDFW±DPDWWHURIWKHUH
HPSKDVL]HWKDWWKHUHLVUDUHO\LIHYHUDQDOJRULWKPRUPHFKDQLFDOSURFHGXUHIRUGHFLGLQJWKLV,QVWHDG
LWLVW\SLFDOO\WKHFDVHWKDWDYDULHW\RIKHWHURJHQHRXVFRQVLGHUDWLRQVDUHUHOHYDQWDQGEXLOGLQJDFDVH
IRU JHQHUDO UHOLDELOLW\ RU XQUHOLDELOLW\ LV D PDWWHU RI EXLOGLQJ D FRQVHQVXV WKDW PRVW RI WKHVH
FRQVLGHUDWLRQVRUWKHPRVWFRPSHOOLQJDPRQJWKHPVXSSRUWRQHFRQFOXVLRQUDWKHUWKDQDQRWKHU$V
ZULWHUV OLNH 3HWHU *DOLVRQ KDYH HPSKDVL]HG UHDFKLQJ VXFK D FRQFOXVLRQ PD\ LQYROYH DQ
LUUHGXFLEOHHOHPHQWRIMXGJHPHQWRQWKHSDUWRIH[SHULPHQWDOLQYHVWLJDWRUVDERXWZKLFKVRXUFHVRI
HUURUQHHGWREHWDNHQVHULRXVO\DERXWZKLFKSRVVLELOLWLHVDUHSK\VLFDOO\UHDOLVWLFRUSODXVLEOHDQGVR
IRUWK6LPLODUUHPDUNVDSSO\WRFRQFOXVLRQVDERXWORFDOUHOLDELOLW\&IQ
(YDGLQJWKH,56
H[LVWLQJ HPSLULFDO UHODWLRQVKLSV RU FRUUHODWLRQV EHWZHHQ GDWD DQG SKHQRPHQD
ZKLFKSHUPLWXVWRXVHWKHGDWDWRGLVFULPLQDWHDPRQJFRPSHWLQJFODLPVDERXW
SKHQRPHQD DFFRUGLQJ WR SURFHGXUHV WKDW KDYH JRRG JHQHUDO HUURU
FKDUDFWHULVWLFV (YLGHQWLDO UHOHYDQFH WKXV GHULYHV IURP DQ HQRUPRXV YDULHW\ RI
KLJKO\ GRPDLQ VSHFLILF IDFWV DERXW WKH HUURU FKDUDFWHULVWLFV RI YDULRXV TXLWH
KHWHURJHQHRXV GHWHFWLRQ DQG PHDVXUHPHQW SURFHVVHV UDWKHU WKDQ IURP WKH
KLJKO\ JHQHUDO GRPDLQLQGHSHQGHQW IRUPDO UHODWLRQVKLSV HPSKDVL]HG LQ ,56
DFFRXQWV
2XU DOWHUQDWLYH FRQFHSWLRQ VHHPV WR XVWR KDYH VHYHUDO DGYDQWDJHV WKDW DUH
QRW VKDUHG E\ ,56 DFFRXQWV )LUVW ZH KDYH DOUHDG\ QRWHG WKDW D JUHDW GHDO RI
GDWD GRHV QRW KDYH DQ REYLRXV VHQWHQWLDO UHSUHVHQWDWLRQ DQG WKDW HYHQ ZKHQ
VXFK UHSUHVHQWDWLRQV DUH DYDLODEOH WKH\ QHHG QRW EH WUXH RU H[DFWO\
UHSUHVHQWDWLRQDOO\DFFXUDWHIRUGDWDWRSOD\DQHYLGHQWLDOUROH2XUDFFRXQWKHOSV
WRPDNHVHQVHRIWKHVHIDFWV7KHUHLVQRWKLQJLQWKHQRWLRQRIJHQHUDOUHOLDELOLW\
WKDW UHTXLUHV WKDW GDWD EH VHQWHQWLDO LQ VWUXFWXUH RU KDYH D QDWXUDO VHQWHQWLDO
UHSUHVHQWDWLRQRUKDYHVHPDQWLFFKDUDFWHULVWLFVOLNHWUXWKRUH[DFWUHSUHVHQWDWLR
QDO DFFXUDF\ 'DWD FDQ ILJXUH LQ D JHQHUDOO\ UHOLDEOH GHWHFWLRQ SURFHVV DQG
IHDWXUHV RI GDWD FDQ EH V\VWHPDWLFDOO\ FRUUHODWHG ZLWK WKH FRUUHFWQHVV RU
LQFRUUHFWQHVVRI GLIIHUHQW FODLPV DERXW SKHQRPHQD ZLWKRXW WKH GDWD EHLQJ WUXH
RUHYHQVHQWHQWLDOO\UHSUHVHQWDEOH)RUH[DPSOHZKHQDSDWKRORJLVWORRNVDWDQ
[UD\SKRWRJUDSKDQGSURGXFHVDGLDJQRVLVRUZKHQDJHRORJLVWORRNVDWDURFN
DQGSURYLGHVDQLGHQWLILFDWLRQRILWVW\SHDOOWKDWZHUHTXLUHLQRUGHUIRUWKHVH
FODLPV WR EH FUHGLEOH RU HYLGHQWLDOO\ ZHOOVXSSRUWHG LV WKDW WKH UHOHYDQW
SURFHVVHVRISHUFHSWXDOGHWHFWLRQDQGLGHQWLILFDWLRQEHJHQHUDOO\UHOLDEOHLQWKH
VHQVHRIKDYLQJJRRGHUURUFKDUDFWHULVWLFVDQGWKDWZHKDYHVRPHHYLGHQFHWKDW
WKLV LV WKH FDVH ,W LVQ¶W QHFHVVDU\ WKDW ZH EH DEOH WR SURYLGH VHQWHQWLDO UHSUH
VHQWDWLRQVRIZKDWWKHVHLQYHVWLJDWRUVSHUFHLYHRUWRH[KLELWWKHLUFRQFOXVLRQVDV
WKH UHVXOW RI WKH RSHUDWLRQ RI JHQHUDO ,56VW\OH LQGXFWLYH UXOHV RQ VHQWHQWLDO
UHSUHVHQWDWLRQVRIZKDWWKH\VHH6LPLODUO\LQWKHFDVHRIWKH3ULHVWOH\/DYRLVLHU
H[DPSOHWKHFKDUDFWHULVWLFVRI3ULHVWOH\¶VGHWHFWLRQSURFHGXUHPD\YHU\ZHOOEH
VXFK WKDW LW FDQ EH XVHG WR UHOLDEO\ GLVFULPLQDWH EHWZHHQ RUGLQDU\ DLU DQG
R[\JHQRQWKHEDVLVRIYROXPHPHDVXUHPHQWVLQWKHVHQVHWKDWUHSHDWHGXVHVRI
WKHSURFHGXUHZLOOUHVXOWLQFRUUHFWGLVFULPLQDWLRQVZLWKKLJKSUREDELOLW\HYHQ
WKRXJK WKH YROXPH PHDVXUHPHQWV RQ ZKLFK WKH GLVFULPLQDWLRQ LV EDVHG DUH
LQDFFXUDWH QRLV\ DQG LQ IDFW IDOVH LI WDNHQ DV UHSRUWV RI WKH DFWXDO YROXPH
GHFUHDVH
7KHUH LV D VHFRQG UHDVRQ WR IRFXV RQ UHOLDELOLW\ LQ SUHIHUHQFH WR ,56VW\OH
FRQILUPDWLRQ UHODWLRQV $FFRUGLQJ WR WKH ,56 HYLGHQFH H SURYLGHV HSLVWHPLF
VXSSRUW IRU D WKHRUHWLFDO FODLP ZKHQ WKH REVHUYDWLRQ VHQWHQFH R ZKLFK
FRUUHVSRQGVWRWKHHYLGHQFHVWDQGVLQWKHULJKWVRUWRIIRUPDOUHODWLRQVKLSWRWKH
K\SRWKHVLV VHQWHQFH K ZKLFK UHSUHVHQWV WKH WKHRUHWLFDO FODLP 2XU ZRUULHV VR
IDUKDYHFHQWHUHGDURXQGWKHGLIILFXOWLHVRIILQGLQJDWUXHREVHUYDWLRQVHQWHQFHR
ZKLFK IDLWKIXOO\ UHSUHVHQWV WKH HYLGHQWLDO VLJQLILFDQFH RI H DQG D K\SRWKHVLV
-DPHV%RJHQDQG-DPHV:RRGZDUG
VHQWHQFHKZKLFKIDLWKIXOO\UHSUHVHQWVWKHFRQWHQWRIWKHWKHRUHWLFDOFODLP%XW
TXLWH DSDUW IURP WKHVH GLIILFXOWLHV WKHUH LV D SHUHQQLDO LQWHUQDO SX]]OH IRU ,56
DFFRXQWV*LYHQWKDWZLWKLQWKHVHDFFRXQWVRGRHVQRWHYHQLQFRQMXQFWLRQZLWK
EDFNJURXQG LQIRUPDWLRQ HQWDLO K ZK\ VKRXOG ZH VXSSRVH WKDW WKHUH LV DQ\
FRQQHFWLRQ EHWZHHQ R¶V EHLQJ WUXH DQG R DQG K LQVWDQWLDWLQJ WKH IRUPDO
UHODWLRQVKLSV VSHFLILHG LQ WKHVH DFFRXQWV DQG K¶V EHLQJ WUXH RU KDYLQJ D KLJK
SUREDELOLW\RIWUXWKRUSRVVHVVLQJVRPHRWKHUIHDWXUHDVVRFLDWHGZLWKJURXQGVIRU
EHOLHI")RUH[DPSOHHYHQLIDWUXHREVHUYDWLRQVHQWHQFHUHSUHVHQWLQJ3ULHVWOH\¶V
GDWDDFWXDOO\GLGHQWDLODSRVLWLYHLQVWDQFHRIDK\SRWKHVLVVHQWHQFHUHSUHVHQWLQJ
WKHFODLPWKDWDFHUWDLQVRUWRIJDVLVQRWRUGLQDU\DLUZK\ZRXOGWKDWPDNHWKH
ODWWHU FODLP EHOLHIZRUWK\" :H WKLQN WKDW LW LV YHU\ KDUG WR VHH ZKDW WKH
MXVWLILFDWLRQ RI D QRQGHGXFWLYH ,56VW\OH PHWKRG RU FULWHULRQ RI HYLGHQWLDO
VXSSRUW FRXOG SRVVLEO\ FRQVLVW LQ H[FHSW WKH SURYLVLRQ RI JURXQGV WKDW WKH
PHWKRGRUFULWHULRQKDVJRRGJHQHUDOUHOLDELOLW\RUHUURUFKDUDFWHULVWLFVXQGHU
UHSHDWHGXVH7KDWLVLWLVKDUGWRVHHZK\ZHVKRXOGEHOLHYHWKDWWKHWUXWKRIWKH
REVHUYDWLRQVHQWHQFHRWRJHWKHUZLWKWKHIDFWWKDWWKHUHODWLRQVKLSEHWZHHQRDQG
K\SRWKHVLV K VDWLVILHV WKH SDWWHUQ UHFRPPHQGHG E\ IRU H[DPSOH K\SRWKHWLFR
GHGXFWLYLVPRUERRWVWUDSSLQJSURYLGHVDUHDVRQIRUEHOLHILQKLILWZHUHQRWWUXH
WKDWFDVHVLQZKLFKVXFKSDWWHUQVDUHLQVWDQWLDWHGWXUQRXWZLWKVRPHUHDVRQDEOH
SUREDELOLW\WREHFDVHVLQZKLFKKLVWUXHRUZHUHLWQRWDWOHDVWWUXHWKDWFDVHVLQ
ZKLFK VXFK SDWWHUQV DUH LQVWDQWLDWHG WXUQ RXW PRUH IUHTXHQWO\ WR EH FDVHV LQ
ZKLFKKLVWUXHWKDQFDVHVLQZKLFKVXFKSDWWHUQVDUHQRWLQVWDQWLDWHG
+RZHYHULWVHHPVYHU\XQOLNHO\WKDWDQ\RIWKH,56VW\OHDFFRXQWVZHKDYH
FRQVLGHUHGFDQEHJLYHQVXFKDUHOLDELOLVWMXVWLILFDWLRQ,56DFFRXQWVDUHDVZH
KDYH VHHQ VXEMHFW PDWWHU DQG FRQWH[WLQGHSHQGHQW WKH\ DUH PHDQW WR VXSSO\
XQLYHUVDOFULWHULDRIHYLGHQWLDOVXSSRUW%XWLWLVDOOWRRHDV\WRILQGIRUDQ\,56
DFFRXQW QRW MXVW K\SRWKHWLFDO EXW DFWXDO FDVHV LQ ZKLFK WUXH REVHUYDWLRQ
VHQWHQFHV VWDQG LQ WKH UHFRPPHQGHG UHODWLRQVKLS WR K\SRWKHVLV K DQG \HW LQ
ZKLFKKLVIDOVHFDVHVLQZKLFKSRVLWLYHLQVWDQFHVLQVWDQWLDWHDK\SRWKHVLVDQG
\HW WKH K\SRWKHVLV LV IDOVH FDVHV LQ ZKLFK WUXH REVHUYDWLRQ VHQWHQFHV DUH
GHGXFHGIURPDK\SRWKHVLVDQG\HWLWLVIDOVHDQGVRIRUWK:KHWKHUDFFHSWLQJK
ZKHQLWVWDQGVLQ WKH UHODWLRQVKLS WR R GHVFULEHG LQ RQH¶V IDYRULWH ,56 VFKHPD
DQGRLVWUXHZLOOOHDGRQHWRDFFHSWWUXHK\SRWKHVHVVRPHVLJQLILFDQWIUDFWLRQRI
WKHWLPHZLOOGHSHQGHQWLUHO\RQWKHHPSLULFDOGHWDLOVRIWKHSDUWLFXODUFDVHVWR
ZKLFKWKHVFKHPDLQTXHVWLRQLVDSSOLHG%XWWKLVLVWRVD\WKDWWKHYDULRXV,56

)RUDJHQHUDODUJXPHQWLQVXSSRUWRIWKLVFRQFOXVLRQVHH)ULHGPDQ2QHFDQWKLQNRI/DUU\
/DXGDQ¶V UHFHQW QDWXUDOL]LQJ SURJUDP LQ SKLORVRSK\ RI VFLHQFH ZKLFK DGYRFDWHV WKH WHVWLQJ RI
YDULRXV SKLORVRSKLFDO WKHVHV DERXW VFLHQWLILF FKDQJH DQG WKHRU\ FRQILUPDWLRQ DJDLQVW HPSLULFDO
HYLGHQFH SURYLGHG E\ WKH KLVWRU\ RI VFLHQFH DV DPRQJ RWKHU WKLQJV DQ DWWHPSW WR FDUU\ RXW DQ
HPSLULFDO LQYHVWLJDWLRQ RI WKH HUURU RU UHOLDELOLW\ FKDUDFWHULVWLFV RI WKH YDULRXV ,56 FRQILUPDWLRQ
VFKHPDV 'RQRYDQHW DO :H DJUHH ZLWK/DXGDQ WKDW YLQGLFDWLQJ WKH YDULRXV ,56 PRGHOV
ZRXOG UHTXLUH LQIRUPDWLRQ DERXW ORQJUXQ HUURU FKDUDFWHULVWLFV RI WKH VRUW IRU ZKLFK KH LV ORRNLQJ
%XW IRU UHDVRQV GHVFULEHG LQ WKH QH[W SDUDJUDSK LQ WKH WH[W ZH DUH PXFK PRUH SHVVLPLVWLF WKDQ
/DXGDQDQGKLVFROODERUDWRUVDERXWWKHSRVVLELOLW\RIREWDLQLQJVXFKLQIRUPDWLRQ
(YDGLQJWKH,56
VFKHPDVZHKDYHEHHQFRQVLGHULQJZKHQWDNHQDVPHWKRGVIRUIRUPLQJEHOLHIV
RU DFFHSWLQJ K\SRWKHVHV HLWKHU KDYH QR GHWHUPLQDWH HUURU FKDUDFWHULVWLFV DW DOO
ZKHQ FRQVLGHUHG LQ WKH DEVWUDFW WKHLU HUURU FKDUDFWHULVWLFV YDU\ ZLOGO\
GHSHQGLQJRQWKHGHWDLOVRIWKHSDUWLFXODUFDVHVWRZKLFKWKH\DUHDSSOLHGRUDW
OHDVWQRHUURU FKDUDFWHULVWLFV WKDW DUH NQRZDEOH E\ XV ,QGHHG WKH IDFW WKDW WKH
YDULRXV ,56 DFFRXQWV ZH KDYH EHHQ FRQVLGHULQJ FDQQRW EH JLYHQ D VDWLVI\LQJ
UHOLDELOLVW MXVWLILFDWLRQ LV WDFLWO\ FRQFHGHG E\ WKHLU SURSRQHQWV ZKR XVXDOO\ GR
QRWHYHQWU\WRSURYLGHVXFKDMXVWLILFDWLRQ
%\ FRQWUDVW WKHUH LV QR FRUUHVSRQGLQJ SUREOHP ZLWK WKH QRWLRQ RI JHQHUDO
UHOLDELOLW\ DV DSSOLHG WR SDUWLFXODU LQVWUXPHQWV RU GHWHFWLRQ SURFHVVHV 6XFK
LQVWUXPHQWVDQGSURFHVVHVRIWHQGRKDYHGHWHUPLQDWHHUURUFKDUDFWHULVWLFVDERXW
ZKLFKZHFDQREWDLQHPSLULFDOHYLGHQFH8QOLNHWKH+'PHWKRGRUWKHPHWKRG
DVVRFLDWHG ZLWK ERRWVWUDSSLQJ WKH UHOLDELOLW\ RI D WHOHVFRSH RU D UDGLRDFWLYH
GDWLQJ WHFKQLTXH LV H[DFWO\ WKH VRUW RI WKLQJ ZH NQRZ KRZ WR LQYHVWLJDWH
HPSLULFDOO\ DQG UHJDUGLQJ ZKLFK ZH FDQ REWDLQ FRQYLQFLQJ HYLGHQFH 7KHUH LV
QRSX]]OHFRUUHVSRQGLQJWRWKDWUDLVHGDERYHLQFRQQHFWLRQZLWK,56 DFFRXQWV
DERXW ZKDW LW PHDQV WR VD\ WKDW D GDWLQJ WHFKQLTXH KDV D KLJK SUREDELOLW\ RI
\LHOGLQJ FRUUHFW FRQFOXVLRQV DERXW WKH DJHV RI FHUWDLQ IRVVLOV RU DERXW ZK\
JLYHQ WKDW ZH KDYH DSSOLHG D UHOLDEOH GDWLQJ WHFKQLTXH DQG KDYH REWDLQHG D
FHUWDLQ UHVXOW ZH KDYH JRRG SULPD IDFLH JURXQGV IRU EHOLHYLQJ WKDW UHVXOW ,Q
VKRUWLWLVWKHXVHRIVSHFLILFLQVWUXPHQWVGHWHFWLRQGHYLFHVPHDVXUHPHQWDQG
REVHUYDWLRQDO WHFKQLTXHV UDWKHU WKDQ ,56VW\OH LQGXFWLYH SDWWHUQV WKDW DUH
DSSURSULDWHFDQGLGDWHVIRUMXVWLILFDWLRQLQWHUPVRIWKHLGHDRIJHQHUDOUHOLDELOLW\
5HIOHFWLRQ RQ D UHOLDELOLVW FRQFHSWLRQ RI MXVWLILFDWLRQ WKXV UHLQIRUFHV RXU
FRQFOXVLRQ WKDW WKH UHOHYDQFH RI HYLGHQFH WR K\SRWKHVLV LV QRW D PDWWHU RI
IRUPDO ,56VW\OH LQIHUHQWLDO UHODWLRQV EXW UDWKHU GHULYHV IURP KLJKO\ VSHFLILF
IDFWV DERXW WKH HUURU FKDUDFWHULVWLFV RI YDULRXV GHWHFWLRQ SURFHVVHV DQG
LQVWUXPHQWV

7\SLFDODWWHPSWVWRDUJXHIRUSDUWLFXODU,56PRGHOVDSSHDOLQVWHDGWRDDOOHJHGSDUDGR[HVDQG
LQDGHTXDFLHV DVVRFLDWHG ZLWK DOWHUQDWLYH ,56 DSSURDFKHV E YDULRXV VXSSRVHG LQWXLWLRQV DERXW
HYLGHQWLDOVXSSRUWDQGFIDPRXVH[DPSOHVRIVXFFHVVIXOVFLHQFHWKDWDUHDOOHJHGWRFRQIRUPWRWKH
PRGHO LQ TXHVWLRQ &I*O\PRXU %XW D LV FRPSDWLEOH ZLWK DQG SHUKDSV HYHQ VXSSRUWV
VNHSWLFLVP DERXW DOO ,56 DFFRXQWV RI HYLGHQFH DQG ZLWK UHVSHFW WR E LW LV XQFRQWURYHUVLDO WKDW
LQWXLWLRQVDERXWLQGXFWLYHVXSSRUWIUHTXHQWO\OHDGRQHDVWUD\)LQDOO\IURPDUHOLDELOLVWSHUVSHFWLYH
FLVTXLWHXQFRQYLQFLQJ,QVWHDGZKDWQHHGVWREHVKRZQLVWKDWVFLHQWLVWVV\VWHPDWLFDOO\VXFFHHGLQ
DYDULHW\RIFDVHVEHFDXVHWKH\DFFHSWK\SRWKHVHV LQ DFFRUG ZLWK WKH UHFRPPHQGDWLRQV RI WKH ,56
DFFRXQWRQHIDYRUV7KDWLVZKDWZHQHHGWRNQRZLVQRWMXVWWKDWWKHUHDUHHSLVRGHVLQWKHKLVWRU\RI
VFLHQFH LQ ZKLFK K\SRWKHVHV VWDQG LQ WKH UHODWLRQVKLS WR WUXH REVHUYDWLRQ VHQWHQFHV GHVFULEHG E\
VD\DERRWVWUDSPHWKRGRORJ\DQGWKDWWKHVHK\SRWKHVHVWXUQRXWWREHWUXHRUQHDUO\VREXWZKDWWKH
SHUIRUPDQFHRIDERRWVWUDSPHWKRGRORJ\ZRXOGEHRQDZLGHYDULHW\RIGLIIHUHQWNLQGVRIHYLGHQFH
LQGLVFULPLQDWLQJWUXHK\SRWKHVHVIURPIDOVHK\SRWKHVHV±ERWKZKDWWKLVSHUIRUPDQFHLVDEVROXWHO\
DQG KRZ LW FRPSDUHV ZLWK DOWHUQDWLYH PHWKRGV RQH PLJKW DGRSW $V ZH XQGHUVWDQG LW WKLV LV
*O\PRXU¶VSUHVHQWYLHZDVZHOO
-DPHV%RJHQDQG-DPHV:RRGZDUG
9,,,
,Q DGGLWLRQ WR WKH TXHVWLRQ RI ZKHWKHU VRPH W\SH RI GHWHFWLRQ SURFHVV RU
LQVWUXPHQW LV JHQHUDOO\ UHOLDEOH LQ WKH UHSHDWDEOH HUURU FKDUDFWHULVWLFV VHQVH
GHVFULEHGDERYHVFLHQWLVWVDOVRDUHLQWHUHVWHGLQZKHWKHUWKHXVHRIWKHSURFHVV
RQ VRPH SDUWLFXODU RFFDVLRQ LQ D SDUWLFXODU GHWHFWLRQ WDVN LV UHOLDEOH ± ZLWK
ZKHWKHU WKH GDWD SURGXFHG RQ WKDW SDUWLFXODU RFFDVLRQ DUH JRRG HYLGHQFH IRU
VRPH SKHQRPHQRQ RI LQWHUHVW 7KLV LV D PDWWHU RI ORFDO UHOLDELOLW\ :KLOH LQ
WKRVH FDVHV LQ ZKLFK D GHWHFWLRQ SURFHVV KDV UHSHDWDEOH HUURU FKDUDFWHULVWLFV
LQIRUPDWLRQDERXWLWVJHQHUDOUHOLDELOLW\LVDOZD\VHYLGHQWLDOO\UHOHYDQWWKHUHDUH
PDQ\ FDVHV LQ ZKLFK WKH HYLGHQWLDO LPSRUW RI GDWD FDQQRW EH DVVHVVHG MXVW LQ
WHUPVRIJHQHUDOUHOLDELOLW\)RUH[DPSOHHYHQLI,NQRZWKDWVRPHUDGLRDFWLYH
GDWLQJ WHFKQLTXH LV JHQHUDOO\ UHOLDEOH ZKHQ DSSOLHG WR IRVVLOV WKLV VWLOO OHDYHV
RSHQWKHTXHVWLRQRIZKHWKHUWKHGDWHDVVLJQHGWRVRPHSDUWLFXODUIRVVLOE\WKH
XVH RI WKH WHFKQLTXH LV FRUUHFW LW PLJKW EH WKDW WKLV SDUWLFXODU IRVVLO LV
FRQWDPLQDWHGLQDZD\WKDWJLYHVXVPLVWDNHQGDWDRUWKDWWKHHTXLSPHQW,DP
XVLQJ KDV PLVIXQFWLRQHG RQ WKLV SDUWLFXODU RFFDVLRQ RI XVH 7KDW WKH GDWLQJ
SURFHVVLVJHQHUDOO\UHOLDEOHGRHVQ¶WSUHFOXGHWKHVHSRVVLELOLWLHV
6RPHSKLORVRSKHUVZLWKDJHQHUDOLVWWXUQRIPLQGZLOOILQGLWWHPSWLQJWRWU\
WR UHGXFH ORFDO UHOLDELOLW\ WR JHQHUDO UHOLDELOLW\ LW ZLOO EH VDLG WKDW LI WKH GDWD
REWDLQHG IURP D SDUWLFXODU IRVVLO LV PLVWDNHQ EHFDXVH RI WKH SUHVHQFH RI D
FRQWDPLQDQW WKHQ LI WKDW YHU\ GHWHFWLRQ SURFHVV LV UHSHDWHG ZLWK WKH
FRQWDPLQDQWSUHVHQWDQGVRIRUWKRQRWKHURFFDVLRQVLWZLOOKDYHXQIDYRUDEOH
HUURU FKDUDFWHULVWLFV DQG WKLV LV ZKDW JURXQGV RXU MXGJHPHQW RI UHOLDELOLW\ RU
HYLGHQWLDOLPSRUWLQWKHSDUWLFXODUFDVH$VORQJDVZHWDNHFDUHWRVSHFLI\WKH
UHOHYDQW GHWHFWLRQ SURFHVVHV ILQHO\ HQRXJK DOO MXGJHPHQWV DERXW UHOLDELOLW\ LQ
SDUWLFXODU FDVHV FDQ EH H[SOLFDWHG LQ WHUPV RI WKH LGHD RI UHSHDWHG HUURU
FKDUDFWHULVWLFV2XUUHVSRQVHLVQRWWKDWWKLVLVQHFHVVDULO\ZURQJEXWWKDWLWLV
WKRURXJKO\ XQLOOXPLQDWLQJ DW OHDVW ZKHQ XQGHUVWRRG DV DQ DFFRXQW RI KRZ
MXGJHPHQWV RI ORFDO UHOLDELOLW\ DUH DUULYHG DW DQG MXVWLILHG $V ZH VKDOO VHH
EHORZ PDQ\ MXGJHPHQWV RI ORFDO UHOLDELOLW\ WXUQ RQ FRQVLGHUDWLRQV WKDW DUH
SDUWLFXODU RU LGLRV\QFUDWLF WR WKH LQGLYLGXDO FDVH DW KDQG 2IWHQ VFLHQWLVWV DUH
HLWKHU XQDEOH WR GHVFULEH LQ D QRQWULYLDO ZD\ ZKDW LW LV WR UHSHDW WKH
PHDVXUHPHQWRUGHWHFWLRQSURFHVVWKDWUHVXOWVLQVRPHSDUWLFXODUERG\RIGDWDRU
ODFN DQG FDQQRW JHW LQIRUPDWLRQ DERXW LWV ORQJUXQ HUURU FKDUDFWHULVWLFV ,W LV
QRW DW DOO FOHDU WR XV WKDW ZKHQHYHU D GHWHFWLRQ SURFHVV LV XVHG RQ VRPH
SDUWLFXODURFFDVLRQDQGDMXGJHPHQWDERXWLWVORFDOUHOLDELOLW\LVUHDFKHGRQWKH
EDVLVRIYDULRXVFRQVLGHUDWLRQVWKHUHPXVWEHVRPHGHVFULSWLRQRIWKHSURFHVV
FRQVLGHUDWLRQV DQG MXGJHPHQWV LQYROYHG WKDW H[KLELWV WKHP DV UHSHDWDEOH %XW
HYHQLIWKLVLVWKHFDVHWKLVGHVFULSWLRQDQGWKHUHOHYDQWHUURUFKDUDFWHULVWLFVRI
WKHSURFHVVZKHQUHSHDWHGRIWHQZLOOEHXQNQRZQWRWKHLQGLYLGXDOLQYHVWLJDWRU
± WKLV LQIRUPDWLRQ LV QRW ZKDW WKH LQYHVWLJDWRU DSSHDOV WR LQ UHDFKLQJ KLV
MXGJHPHQWDERXWORFDOUHOLDELOLW\RULQGHIHQGLQJKLVMXGJHPHQW
(YDGLQJWKH,56
:KDW WKHQ DUH WKH FRQVLGHUDWLRQV ZKLFK JURXQG MXGJHPHQWV RI ORFDO
UHOLDELOLW\ DQG KRZ VKRXOG ZH XQGHUVWDQG ZKDW LW LV WKDW ZH DUH WU\LQJ WR GR
ZKHQZHPDNHVXFKMXGJHPHQWV":KLOHWKHUHOHYDQWFRQVLGHUDWLRQVDUHDVZH
VKDOOVHHKLJKO\KHWHURJHQHRXVZHWKLQNWKDWWKH\YHU\RIWHQKDYHDFRPPRQ
SRLQWRUSDWWHUQZKLFKZHZLOOQRZWU\WRGHVFULEH3XWEDOGO\RXULGHDLVWKDW
MXGJHPHQWV RI ORFDO UHOLDELOLW\ DUH D VSHFLHV RI VLQJXODU FDXVDO LQIHUHQFH LQ
ZKLFK RQH WULHV WR VKRZ WKDW WKH SKHQRPHQRQ RI LQWHUHVW FDXVHV WKH GDWD E\
PHDQV RI DQ HOLPLQDWLYLVW VWUDWHJ\ ± E\ UXOLQJ RXW RWKHU SRVVLEOH FDXVHV RI WKH
GDWD:KHQRQHPDNHVDMXGJHPHQWRIORFDOUHOLDELOLW\RQHZDQWVWRDVFHUWDLQ
RQ WKH EDVLV RI VRPH ERG\ RI GDWD ZKHWKHU VRPH SKHQRPHQRQ RI LQWHUHVW LV
SUHVHQWRUKDVFHUWDLQIHDWXUHV2QHWULHVWRGRWKLVE\VKRZLQJWKDWWKHGHWHFWLRQ
SURFHVV DQG GDWD DUH VXFK WKDW WKH GDWD PXVW KDYH EHHQ FDXVHG E\ WKH
SKHQRPHQRQLQTXHVWLRQRUE\DSKHQRPHQRQZLWKWKHIHDWXUHVLQTXHVWLRQ±
WKDWDOORWKHUUHOHYDQWFDQGLGDWHVIRUFDXVHVRIWKHGDWDFDQEHUXOHGRXW6LQFH
VRPHWKLQJPXVWKDYHFDXVHGWKHGDWDZHVHWWOHRQWKHSKHQRPHQRQRILQWHUHVW
DV WKH RQO\ UHPDLQLQJ SRVVLELOLW\ )RU H[DPSOH LQ WKH IRVVLO GDWLQJ H[DPSOH
DERYHRQHZDQWVWRH[FOXGHDPRQJRWKHUWKLQJVWKHSRVVLELOLW\WKDWRQH¶VGDWD
± SUHVXPDEO\ VRPH PHDVXUH RI UDGLRDFWLYH GHFD\ UDWH VXFK DV FRXQWV ZLWK D
*HLJHU FRXQWHU ± ZHUH FDXVHG E\ RU UHVXOW LQ SDUW IURP D FDXVDO FRQWULEXWLRQ
GXH WR WKH SUHVHQFH RI WKH FRQWDPLQDQW 6LPLODUO\ DV ZH KDYH DOUHDG\ QRWHG
VKRZLQJWKDWVRPHSDUWLFXODUEXEEOHFKDPEHUSKRWRJUDSKZDVHYLGHQFHIRUWKH
H[LVWHQFHRIQHXWUDOFXUUHQWVLQWKH&(51H[SHULPHQWVRIUHTXLUHVUXOLQJ
RXWWKHSRVVLELOLW\WKDWWKHSDUWLFXODUSKRWRJUDSKPLJKWKDYHEHHQGXHLQVWHDGWR
VRPHDOWHUQDWLYHFDXVHVXFKDVDKLJKHQHUJ\QHXWURQWKDWFDQPLPLFPDQ\RI
WKH HIIHFWV RI QHXWUDO FXUUHQWV 7KH XQGHUO\LQJ LGHD RI WKLV VWUDWHJ\ LV QLFHO\
GHVFULEHG E\ $OODQ )UDQNOLQ LQ KLV UHFHQW ERRN ([SHULPHQWV 5LJKW RU :URQJ
)UDQNOLQ DSSURYLQJO\ TXRWHV 6KHUORFN +ROPHV¶V UHPDUN WR :DWVRQ
³+RZ RIWHQ KDYH , VDLG WR \RX WKDW ZKHQ \RX KDYH HOLPLQDWHG WKH LPSRVVLEOH
ZKDWHYHUUHPDLQVKRZHYHULPSUREDEOHPXVWEHWKHWUXWK"´DQGWKHQDGGV³,I
ZHFDQHOLPLQDWHDOOSRVVLEOHVRXUFHVRIHUURUDQGDOWHUQDWLYHH[SODQDWLRQVWKHQ
ZHDUHOHIWZLWKDYDOLGH[SHULPHQWDOUHVXOW´S
+HUHLVDPRUHH[WHQGHGH[DPSOHGHVLJQHGWRLOOXVWUDWHZKDWLVLQYROYHGLQ
ORFDO UHOLDELOLW\ DQG WKH UROH RI WKH HOLPLQDWLYH VWUDWHJ\ GHVFULEHG DERYH ,Q
H[SHULPHQWV FRQGXFWHG LQ WKH ODWH V -RVHSK :HEHU DQ H[SHULPHQWDOLVW DW
WKH 8QLYHUVLW\ RI 0DU\ODQG FODLPHG WR KDYH VXFFHVVIXOO\ GHWHFWHG WKH

$VZLWKMXGJHPHQWVDERXWJHQHUDOUHOLDELOLW\ZHGRQRWPHDQWRVXJJHVWWKDWWKHUHLVVRPHVLQJOH
PHWKRG RU DOJRULWKP WR EH HPSOR\HG LQ WKLV UXOLQJ RXW RI DOWHUQDWLYHV )RU H[DPSOH UXOLQJ RXW DQ
DOWHUQDWLYH PD\ LQYROYH HVWDEOLVKLQJ DQ REVHUYDWLRQDO FODLP WKDW LV ORJLFDOO\ LQFRQVLVWHQW ZLWK WKH
DOWHUQDWLYH 3RSSHULDQ IDOVLILFDWLRQ EXW PLJKW WDNH RWKHU IRUPV DV ZHOO IRU H[DPSOH LW PD\ EH D
PDWWHURIILQGLQJHYLGHQFHWKDWUHQGHUVWKHDOWHUQDWLYHXQOLNHO\RULPSODXVLEOHRURIILQGLQJHYLGHQFH
WKDWWKHDOWHUQDWLYHVKRXOGEXWLVQRWDEOHWRH[SODLQ
7KH DFFRXQW WKDW IROORZV GUDZV KHDYLO\ RQ &ROOLQV DQG &ROOLQV 2WKHU DFFHVVLEOH
GLVFXVVLRQVRI:HEHU¶VH[SHULPHQWRQZKLFKZHKDYHUHOLHGLQFOXGH'DYLVHVSSS
DQG:LOO
-DPHV%RJHQDQG-DPHV:RRGZDUG
SKHQRPHQRQ RI JUDYLWDWLRQDO UDGLDWLRQ 7KH SURGXFWLRQ RI JUDYLW\ ZDYHV E\
PDVVLYH PRYLQJ ERGLHV LV SUHGLFWHG DQG H[SODLQHG E\ JHQHUDO UHODWLYLW\
+RZHYHUJUDYLWDWLRQDOUDGLDWLRQLVVRZHDNO\FRXSOHGWRPDWWHUWKDWGHWHFWLRQRI
VXFKUDGLDWLRQE\XVLVH[WUHPHO\GLIILFXOW
:HEHU¶V DSSDUDWXV LQLWLDOO\ FRQVLVWHG RI D ODUJH PHWDO EDU ZKLFK ZDV
GHVLJQHG WR YLEUDWH DW WKH FKDUDFWHULVWLF IUHTXHQF\ RI JUDYLWDWLRQDO UDGLDWLRQ
HPLWWHG E\ UHODWLYHO\ ODUJH VFDOH FRVPRORJLFDO HYHQWV 7KH FHQWUDO SUREOHP RI
H[SHULPHQWDOGHVLJQZDVWKDWWRGHWHFWJUDYLWDWLRQDOUDGLDWLRQRQHKDGWREHDEOH
WR FRQWURO RU FRUUHFW IRU RWKHU SRWHQWLDO GLVWXUEDQFHV GXH WR HOHFWURPDJQHWLF
WKHUPDODQGDFRXVWLFVRXUFHV,QSDUWWKLVZDVDWWHPSWHGE\SK\VLFDOLQVXODWLRQ
RIWKHEDUEXWWKLVFRXOGQRWHOLPLQDWHDOO SRVVLEOH VRXUFHV RI GLVWXUEDQFH IRU
H[DPSOHDVORQJDVWKHEDULVDERYHDEVROXWH]HURWKHUPDOPRWLRQRIWKHDWRPV
LQWKHEDUZLOOLQGXFHUDQGRPYLEUDWLRQVLQLW2QHRIWKHZD\V:HEHUDWWHPSWHG
WRGHDOZLWKWKLVGLIILFXOW\ZDVWKURXJKWKHXVHRIDVHFRQGGHWHFWRUZKLFKZDV
VHSDUDWHGIURPKLVRULJLQDOGHWHFWRUE\DODUJHVSDWLDOGLVWDQFH±WKHLGHDEHLQJ
WKDW JHQXLQH JUDYLWDWLRQDO UDGLDWLRQ ZKLFK ZRXOG EH FRVPRORJLFDO LQ RULJLQ
VKRXOG UHJLVWHU VLPXOWDQHRXVO\ RQ ERWK GHWHFWRUV ZKLOH RWKHU VRUWV RI
EDFNJURXQG HYHQWV ZKLFK ZHUH ORFDO LQ RULJLQ ZRXOG EH OHVV OLNHO\ WR GR WKLV
1RQHWKHOHVVLWZDVUHFRJQL]HGWKDWVRPHFRLQFLGHQWGLVWXUEDQFHVZLOORFFXULQ
WKHWZRGHWHFWRUVMXVWE\FKDQFH7RGHDOZLWKWKLVSRVVLELOLW\YDULRXVFRPSOH[
VWDWLVWLFDO DUJXPHQWV DQG RWKHU NLQGV RI FKHFNV ZHUH XVHG WR DWWHPSW WR VKRZ
WKDW LW ZDV XQOLNHO\ WKDW DOO RI WKH FRLQFLGHQW GLVWXUEDQFHV FRXOG DULVH LQ WKLV
ZD\
:HEHUDOVRUHOLHGRQIDFWVDERXWWKHFDXVDOFKDUDFWHULVWLFVRIWKHVLJQDO±WKH
JUDYLWDWLRQDO UDGLDWLRQ KH ZDV WU\LQJ WR GHWHFW 7KH GHWHFWRUV XVHG E\ :HEHU
ZHUHPRVWVHQVLWLYHWRJUDYLWDWLRQDOUDGLDWLRQZKHQWKHGLUHFWLRQRISURSDJDWLRQ
RIJLYHQUDGLDWLRQZDVSHUSHQGLFXODUWRWKHD[HVRIGHWHFWRUV7KXVLIWKHZDYHV
ZHUHFRPLQJIURPDIL[HGGLUHFWLRQLQVSDFHDVZRXOGEHSODXVLEOHLIWKH\ZHUH
GXHWRVRPHDVWURQRPLFDOHYHQWWKH\VKRXOGYDU\UHJXODUO\LQLQWHQVLW\ZLWKWKH
SHULRG RI UHYROXWLRQ RI WKH HDUWK 0RUHRYHU DQ\ SHULRGLF YDULDWLRQV GXH WR
KXPDQDFWLYLW\VKRXOGH[KLELWWKHUHJXODUWZHQW\IRXUKRXUYDULDWLRQRIWKHVRODU
GD\%\FRQWUDVWWKHSDWWHUQRIFKDQJHGXHWRDQDVWURQRPLFDOVRXUFHZRXOGEH
H[SHFWHGWREHLQDFFRUGDQFHZLWKWKHVLGHUHDOGD\ZKLFKUHIOHFWVWKHUHYROXWLRQ
RIWKHHDUWKDURXQGWKHVXQDVZHOODVLWVURWDWLRQDERXWLWVD[LVDQGLVVOLJKWO\
VKRUWHUWKDQWKHVRODUGD\:KHQ:HEHULQLWLDOO\DSSHDUHGWRILQGDVLJQLILFDQW
FRUUHODWLRQZLWKVLGHUHDOEXWQRWVRODUWLPHLQWKHYLEUDWLRQVKHZDVGHWHFWLQJ
WKLVZDVWDNHQE\PDQ\RWKHUVFLHQWLVWVWREHLPSRUWDQWHYLGHQFHWKDWWKHVRXUFH
RI WKH YLEUDWLRQV ZDV QRW ORFDO RU WHUUHVWULDO EXW LQVWHDG GXH WR VRPH
DVWURQRPLFDOHYHQW
:HEHUFODLPHGWRKDYHGHWHFWHGWKHH[LVWHQFHRIJUDYLWDWLRQDOUDGLDWLRQIURP
RQ EXW IRU D YDULHW\ RI UHDVRQV KLV FODLPV DUH QRZ DOPRVW XQLYHUVDOO\
GRXEWHG,QZKDWIROORZVZHFRQFHQWUDWHRQZKDWLVLQYROYHGLQ:HEHU¶VFODLP
WKDW KLV GHWHFWLRQ SURFHGXUH ZDV ORFDOO\ UHOLDEOH DQG KRZ KH DWWHPSWHG WR
(YDGLQJWKH,56
HVWDEOLVKWKDWFODLP$VZHVHHLWZKDW:HEHUZDVLQWHUHVWHGLQHVWDEOLVKLQJZDV
DVLQJXODUFDXVDOFODLPKHZDQWHGWRVKRZWKDWDWOHDVWVRPHRIWKHYLEUDWLRQV
DQG GLVWXUEDQFHV KLV GDWD UHFRUGHG ZHUH GXH WR JUDYLWDWLRQDO UDGLDWLRQ WKH
SKHQRPHQRQ KH ZDV WU\LQJ WR GHWHFW DQG KHQFH WKDW VXFK UDGLDWLRQ H[LVWHG
7KH SUREOHP KH IDFHG ZDV WKDW D QXPEHU RI RWKHU SRVVLEOH FDXVHV RU IDFWRUV
EHVLGHV JUDYLWDWLRQDO UDGLDWLRQ PLJKW LQ SULQFLSOH KDYH FDXVHG KLV GDWD 8QOHVV
:HEHU FRXOG UXOH RXW RU UHQGHU LPSODXVLEOH RU XQOLNHO\ WKH SRVVLELOLW\ WKDW
WKHVHRWKHUIDFWRUVPLJKWKDYHFDXVHGWKHGLVWXUEDQFHVKHZRXOGQRWEHMXVWLILHG
LQ FRQFOXGLQJ WKDW WKH GLVWXUEDQFHV DUH GXH WR WKH SUHVHQFH RI JUDYLWDWLRQDO
UDGLDWLRQ 7KH YDULRXV H[SHULPHQWDO VWUDWHJLHV DQG DUJXPHQWV GHVFULEHG DERYH
SK\VLFDO LVRODWLRQ RI WKH EDU XVH RI VHFRQG GHWHFWRU DQG VR IRUWK DUH DQ
DWWHPSWWRGRMXVWWKLV±WRPDNHLWLPSODXVLEOHWKDWWKHYLEUDWLRQVLQKLVGHWHFWRU
FRXOGKDYHEHHQFDXVHGE\DQ\WKLQJEXWJUDYLWDWLRQDOUDGLDWLRQ)RUH[DPSOHLQ
WKHFDVHRIWKHVLGHUHDOFRUUHODWLRQWKHXQGHUO\LQJDUJXPHQWLVWKDWWKHSUHVHQFH
RI WKLV SDWWHUQ RU VLJQDWXUH LQ WKH GDWD LV VR GLVWLQFWLYH WKDW LW FRXOG RQO\ KDYH
EHHQSURGXFHGE\JUDYLWDWLRQDOUDGLDWLRQUDWKHUWKDQE\VRPHRWKHUVRXUFH
:H ZLOO QRW DWWHPSW WR GHVFULEH LQ GHWDLO WKH SURFHVV E\ ZKLFK :HEHU¶V
FODLPVRIVXFFHVVIXOGHWHFWLRQFDPHWREHFULWLFL]HGDQGHYHQWXDOO\GLVEHOLHYHG
1RQHWKHOHVV LW LV ZRUWK QRWLQJ WKDW ZH FDQ VHH WKH XQGHUO\LQJ SRLQW RI WKHVH
FULWLFLVPV DV VKRZLQJ WKDW :HEHU¶V H[SHULPHQW IDLOV WR FRQIRUP WR WKH
HOLPLQDWLYHSDWWHUQXQGHUGLVFXVVLRQ±ZKDWWKHFULWLFVVKRZLVWKDW:HEHUKDV
QRWFRQYLQFLQJO\UXOHGRXWWKHSRVVLELOLW\WKDWKLVGDWDZHUHGXHWRRWKHUFDXVHV
EHVLGHVJUDYLWDWLRQDOUDGLDWLRQ7KXVIRUH[DPSOHWKHVWDWLVWLFDOWHFKQLTXHVWKDW
:HEHU XVHG WXUQHG RXW WR EH SUREOHPDWLF ± LQGHHG DQ LQDGYHUWHQW QDWXUDO
H[SHULPHQWDSSHDUHGWRVKRZWKDWWKHWHFKQLTXHVODFNHGJHQHUDOUHOLDELOLW\LQWKH
VHQVH GHVFULEHG DERYH :HEHU¶V VWDWLVWLFDO WHFKQLTXHV GHWHFWHG HYLGHQFH IRU
JUDYLWDWLRQDO UDGLDWLRQ LQ GDWD SURYLGHG E\ DQRWKHU JURXS ZKLFK EHFDXVH RI D
PLVXQGHUVWDQGLQJ RQ :HEHU¶V SDUW DERXW V\QFKURQL]DWLRQ VKRXOG KDYH EHHQ
UHSRUWHG DV FRQWDLQLQJ SXUH QRLVH %HFDXVH RI WKLV :HEHU FRXOG QR ORQJHU
FODLPWRKDYHFRQYLQFLQJO\HOLPLQDWHGWKHSRVVLELOLW\WKDWDOORIWKHGLVWXUEDQFHV
KH ZDV VHHLQJ LQ ERWK GHWHFWLRQV ZHUH GXH WR WKH FKDQFH FRLQFLGHQFH RI ORFDO
FDXVHV
6HFRQGO\DV:HEHUFRQWLQXHGKLVH[SHULPHQWDQGGLGIXUWKHUDQDO\VLVRIKLV
GDWD KH ZDV IRUFHG WR UHWUDFW KLV FODLP RI VLGHUHDO FRUUHODWLRQ )LQDOO\ DQG
SHUKDSVPRVWIXQGDPHQWDOO\DQXPEHURIRWKHUH[SHULPHQWVXVLQJVLPLODUDQG
PRUHVHQVLWLYHDSSDUDWXVIDLOHGWRUHSOLFDWH:HEHU¶VUHVXOWV+HUHWKHDUJXPHQW
LV WKDW LI LQ IDFW JUDYLWDWLRQDO UDGLDWLRQ ZDV SOD\LQJ D FDXVDO UROH LQ WKH
SURGXFWLRQRI:HEHU¶VGDWDVXFKUDGLDWLRQRXJKWWRLQWHUDFWFDXVDOO\ZLWKRWKHU
VLPLODU GHYLFHV FRQYHUVHO\ IDLOXUH WR GHWHFW VXFK UDGLDWLRQ ZLWK D VLPLODU
DSSDUDWXV ZKLOH LW GRHV QRW WHOO XV ZKLFK DOWHUQDWLYH FDXVH SURGXFHG :HEHU¶V
GDWDGRHVXQGHUPLQHWKHFODLPWKDWLWZDVGXHWRJUDYLWDWLRQDOUDGLDWLRQ
0XFK RI ZKDW ZH KDYH VDLG DERXW WKH DGYDQWDJHV RI WKH QRWLRQ RI JHQHUDO
UHOLDELOLW\YLVjYLV,56VW\OHDFFRXQWVKROGVDVZHOOIRUORFDOUHOLDELOLW\:KHQ
-DPHV%RJHQDQG-DPHV:RRGZDUG
ZHPDNHDMXGJHPHQWRIORFDOUHOLDELOLW\DERXWFHUWDLQGDWD±ZKHQZHFRQFOXGH
IRUH[DPSOHWKDWVRPHVHWRIYLEUDWLRQVLQ:HEHU¶VDSSDUDWXVZHUHRUZHUHQRW
HYLGHQFH IRU WKH H[LVWHQFH RI JUDYLWDWLRQDO UDGLDWLRQ ± ZKDW QHHGV WR EH
HVWDEOLVKHG LV QRW ZKHWKHU WKHUH REWDLQV VRPH DSSURSULDWH IRUPDO RU ORJLFDO
UHODWLRQVKLSRIWKHVRUW,56PRGHOVDWWHPSWWRFDSWXUHEXWUDWKHUZKHWKHUWKHUH
LVDQDSSURSULDWHFDXVDOUHODWLRQVKLSOHDGLQJIURPWKHSKHQRPHQRQWRWKHGDWD
-XVWDVZLWKJHQHUDOUHOLDELOLW\WKHFDXVDOUHODWLRQVKLSVQHHGHGIRUGDWDWRFRXQW
DVORFDOO\UHOLDEOHHYLGHQFHIRUVRPHSKHQRPHQRQFDQKROGHYHQLIGDWDODFND
QDWXUDO VHQWHQWLDO UHSUHVHQWDWLRQ WKDW VWDQGV LQ WKH ULJKW IRUPDO UHODWLRQVKLS WR
WKHSKHQRPHQRQFODLPLQTXHVWLRQ
&RQYHUVHO\ D VHQWHQWLDO UHSUHVHQWDWLRQ RI WKH GDWD FDQ VWDQG LQ ZKDW
DFFRUGLQJ WR VRPH ,56 DFFRXQWV RI FRQILUPDWLRQ LV WKH ULJKW IRUPDO
UHODWLRQVKLS WR D K\SRWKHVLV DQG \HW QRQHWKHOHVV IDLO WR HYLGHQWLDOO\ VXSSRUW LW
:HEHU¶VH[SHULPHQWDOVRLOOXVWUDWHVWKLVSRLQW:HEHUREWDLQHGGDWDZKLFKRUVR
KHZDVSUHSDUHGWRDUJXHZHUHMXVWZKDWZRXOGEHH[SHFWHGLIJHQHUDOUHODWLYLW\
ZHUHWUXHDQGJUDYLWDWLRQDOUDGLDWLRQH[LVWHG2QDWOHDVWVRPHQDWXUDOZD\VRI
UHSUHVHQWLQJ GDWD E\ PHDQV RI REVHUYDWLRQ VHQWHQFHV WKHVH VHQWHQFHV VWDQG LQ
MXVW WKH IRUPDO UHODWLRQVKLSV WR JHQHUDO UHODWLYLW\ ZKLFK DFFRUGLQJ WR +' DQG
SRVLWLYH LQVWDQFH DFFRXQWV DUH QHFHVVDU\ IRU FRQILUPDWLRQ 1RQHWKHOHVV WKLV
FRQVLGHUDWLRQ GRHV QRW VKRZ WKDW :HEHU¶V GDWD ZHUH UHOLDEOH HYLGHQFH IRU WKH
H[LVWHQFHRIJUDYLWDWLRQDOUDGLDWLRQ7RVKRZWKLV:HEHUPXVWVKRZWKDWKLVGDWD
ZHUHSURGXFHGE\DFDXVDOSURFHVVLQZKLFKJUDYLWDWLRQDOUDGLDWLRQILJXUHV7KLV
LV H[DFWO\ ZKDW KH WULHV DQG IDLOV WR GR 7KH FDXVDOO\ GULYHQ VWUDWHJLHV DQG
DUJXPHQWVGHVFULEHGDERYHZRXOGPDNHOLWWOHVHQVHLIDOO:HEHUQHHGHGWRVKRZ
ZDVWKHH[LVWHQFHRIVRPHDSSURSULDWH,56VW\OHIRUPDOUHODWLRQVKLSEHWZHHQD
WUXH VHQWHQWLDO UHSUHVHQWDWLRQ RI KLV GDWD DQG WKH FODLP WKDW JUDYLWDWLRQDO
UDGLDWLRQ H[LVWV 6LPLODUO\ DV ZH KDYH DOUHDG\ KDG RFFDVLRQ WR QRWH PHUHO\
SURGXFLQJEXEEOHFKDPEHUSKRWRJUDSKVWKDWKDYHMXVWWKHFKDUDFWHULVWLFSDWWHUQV
WKDWZRXOGEHH[SHFWHGLIQHXWUDOFXUUHQWVZHUHSUHVHQW±SURGXFLQJGDWDZKLFK
FRQIRUPWRWKLVK\SRWKHVLVRUZKLFKKDYHVRPHGHVFULSWLRQZKLFKLVGHULYDEOH
IURP WKH K\SRWKHVLV ± LV QRW E\ LWVHOI JRRG HYLGHQFH WKDW QHXWUDO FXUUHQWV DUH
SUHVHQW7RGRWKLVRQHPXVWUXOHRXWWKHSRVVLELOLW\WKDWWKLVGDWDZDVFDXVHGE\
DQ\WKLQJEXWQHXWUDOFXUUHQWV$QGDVZHKDYHQRWHGWKLVLQYROYHVWDONLQJDERXW
WKHFDXVDOSURFHVVWKDWKDVSURGXFHGWKHGDWD±DFRQVLGHUDWLRQZKLFKLVRPLWWHG
LQPRVW,56DFFRXQWV
$V ZH KDYH DOVR DUJXHG D VLPLODU SRLQW KROGV LQ FRQQHFWLRQ ZLWK WKH
(GGLQJWRQ VRODU HFOLSVH H[SHGLWLRQ :KDW (GGLQJWRQ QHHGV WR VKRZ LV WKDW WKH
DSSDUHQWGHIOHFWLRQRIVWDUOLJKWLQGLFDWHGE\WKHSKRWRJUDSKLFSODWHVLVGXHWRWKH
FDXVDO LQIOXHQFH RI WKH VXQ¶V JUDYLWDWLRQDO ILHOG DV GHVFULEHG E\ JHQHUDO
UHODWLYLW\UDWKHUWKDQWRPRUHORFDOVRXUFHVVXFKDVFKDQJHVLQWKHSODWHVGXHWR
YDULDWLRQV LQ WHPSHUDWXUH 2QFH ZH XQGHUVWDQG (GGLQJWRQ¶V UHDVRQLQJ DV
UHDVRQLQJWRWKHH[LVWHQFHRIDFDXVHLQDFFRUGDQFHZLWKDQHOLPLQDWLYHVWUDWHJ\
YDULRXVIHDWXUHVRIWKDWUHDVRQLQJWKDWVHHPSX]]OLQJRQ,56WUHDWPHQWV±WKDWLW
(YDGLQJWKH,56
LV QRW REYLRXV KRZ WR UHSUHVHQW DOO RI WKH HYLGHQWLDOO\ UHOHYDQW IHDWXUHV RI WKH
SKRWRJUDSKVLQWHUPVRIWUXHREVHUYDWLRQVHQWHQFHVDQGDX[LOLDULHVDQGWKDWWKH
YDOXHVFDOFXODWHGIURPWKHSKRWRJUDSKVGRQ¶WH[DFWO\FRLQFLGHZLWK(EXWDUH
QRQHWKHOHVVWDNHQWRVXSSRUW(±IDOOQDWXUDOO\LQWRSODFH
,;
7KHUHLVDFRPPRQHOHPHQWWRDQXPEHURIWKHGLIILFXOWLHVZLWK,56PRGHOVWKDW
ZH KDYH GLVFXVVHG WKDW GHVHUYHV H[SOLFLW HPSKDVLV ,W LV DQ LPPHGLDWH
FRQVHTXHQFH RI RXU QRWLRQV RI JHQHUDO DQG ORFDO UHOLDELOLW\ WKDW WKH SURFHVVHV
WKDWSURGXFHRUJHQHUDWHGDWDDUHFUXFLDOWRLWVHYLGHQWLDOVWDWXV0RUHRYHULWLV
RIWHQKDUGWRVHHKRZWRUHSUHVHQWWKHHYLGHQWLDOUHOHYDQFHRIVXFKSURFHVVHVLQ
DQLOOXPLQDWLQJZD\ZLWKLQ,56VW\OHDFFRXQWV$QGLQIDFWWKHPRVWSURPLQHQW
,56PRGHOVVLPSO\QHJOHFWWKLVHOHPHQWRIHYLGHQWLDODVVHVVPHQW7KHWHQGHQF\
ZLWKLQ,56PRGHOVLVWRDVVXPHDVDSRLQWRIGHSDUWXUHWKDWRQHKDVDERG\RI
HYLGHQFHWKDWLWLVXQSUREOHPDWLFKRZWRUHSUHVHQWLWVHQWHQWLDOO\DQGWRWKHQWU\
WRFDSWXUHLWVHYLGHQWLDOUHOHYDQFHWRVRPHK\SRWKHVLVE\IRFXVLQJRQWKHIRUPDO
RUVWUXFWXUDOUHODWLRQVKLSRILWVVHQWHQWLDOUHSUHVHQWDWLRQWRWKDWK\SRWKHVLV%XWLI
WKH SURFHVVHV WKDW JHQHUDWHG WKLV HYLGHQFH PDNH D FUXFLDO GLIIHUHQFH WR LWV
HYLGHQWLDOVLJQLILFDQFHZHFDQ¶WDV,56DSSURDFKHVDVVXPHVLPSO\GHWDFKWKH
HYLGHQFHIURPWKHSURFHVVHVZKLFKJHQHUDWHGLWDQGXVHDVHQWHQWLDOUHSUHVHQWD
WLRQRILWDVDSUHPLVHLQDQ,56VW\OHLQGXFWLYHLQIHUHQFH
7RPDNHWKLVSRLQWYLYLGFRQVLGHU3DFROOHFWLRQRISKRWRJUDSKVZKLFKTXD
SKRWRJUDSKV DUH LQGLVWLQJXLVKDEOH IURP WKRVH WKDW LQ IDFW FRQVWLWXWHG HYLGHQFH
IRU WKH H[LVWHQFH RI QHXWUDO FXUUHQW LQWHUDFWLRQV LQ WKH &(51 H[SHULPHQWV RI
$UH WKH SKRWRJUDSKV LQ 3 DOVR HYLGHQFH IRU WKH H[LVWHQFH RI QHXWUDO
FXUUHQWV" $OWKRXJK PDQ\ SKLORVRSKHUV LQIOXHQFHG E\ ,56 PRGHOV RI
FRQILUPDWLRQ ZLOO KROG WKDW WKH DQVZHU WR WKLV TXHVWLRQ LV REYLRXVO\ \HV RXU
FODLPLVWKDWRQWKHEDVLVRIWKHDERYHLQIRUPDWLRQRQHVLPSO\GRHVQ¶WNQRZ±
RQH GRHVQ¶W NQRZ ZKHWKHU WKH SKRWRJUDSKV DUH HYLGHQFH IRU QHXWUDO FXUUHQWV
XQWLO RQH NQRZV VRPHWKLQJ DERXW WKH SURFHVVHV E\ ZKLFK WKH\ DUH JHQHUDWHG
6XSSRVH WKDW WKH SURFHVV E\ ZKLFK WKH SKRWRJUDSKV ZHUH SURGXFHG IDLOHG WR
DGHTXDWHO\FRQWUROIRUKLJKHQHUJ\QHXWURQV7KHQRXUFODLPLVWKDWSKRWRJUDSKV
DUH QRW UHOLDEOH HYLGHQFH IRU WKH H[LVWHQFH RI QHXWUDO FXUUHQWV HYHQ LI WKH
SKRWRJUDSKV WKHPVHOYHV ORRN QR GLIIHUHQW IURP WKRVH WKDW ZHUH SURGXFHG E\
H[SHULPHQWV OLNH WKH &(51 H[SHULPHQW LQ ZKLFK WKHUH ZDV DGHTXDWH FRQWURO
IRU WKH QHXWURQ EDFNJURXQG ,W LV WKXV D FRQVHTXHQFH RI RXU GLVFXVVLRQ RI
JHQHUDODQGORFDOUHOLDELOLW\WKDWWKHHYLGHQWLDOVLJQLILFDQFHRIWKHVDPHERG\RI
GDWDZLOOYDU\GHSHQGLQJXSRQZKDWLWLVUHDVRQDEOHWREHOLHYHDERXWKRZLWZDV
SURGXFHG
:H WKLQN WKDW WKH WHQGHQF\ WR QHJOHFW WKH UHOHYDQFH RI WKH GDWDJHQHUDWLQJ
SURFHVVHVH[SODLQVDWOHDVWLQODUJHPHDVXUHWKHIDPLOLDUSDUDGR[HVZKLFKIDFH
-DPHV%RJHQDQG-DPHV:RRGZDUG
,56 DFFRXQWV &RQVLGHU WKH UDYHQ SDUDGR[ EULHIO\ LQWURGXFHG LQ VHFWLRQ ,9
DERYH*LYHQRXUGLVFXVVLRQVRIDULWZLOOFRPHDVQRVXUSULVHWROHDUQWKDWZH
WKLQNWKHFXOSULWLQWKLVFDVHLVWKHSRVLWLYHLQVWDQFHFULWHULRQLWVHOI2XUYLHZLV
WKDW RQH MXVW FDQ¶W VD\ ZKHWKHU D SRVLWLYH LQVWDQFH RI D K\SRWKHVLV FRQVWLWXWHV
HYLGHQFH IRU LW ZLWKRXW NQRZLQJ DERXW WKH SURFHGXUH E\ ZKLFK WKH SRVLWLYH
LQVWDQFHZDVSURGXFHGRUJHQHUDWHG$SRVVLELOLW\RULJLQDOO\LQWURGXFHGE\3DXO
+RUZLFKPDNHVWKLVSRLQWLQ D YHU\ VWULNLQJ ZD\ VXSSRVH WKDW \RX DUH
WROG WKDW D ODUJH QXPEHU RI UDYHQV KDYH EHHQ FROOHFWHG DQG WKDW WKH\ KDYH DOO
WXUQHGRXWWREHEODFN<RXPD\EHWHPSWHGWRVXSSRVHWKDWVXFKREVHUYDWLRQV
VXSSRUW WKH K\SRWKHVLV WKDW K DOO UDYHQV DUH EODFN 6XSSRVH KRZHYHU \RX
WKHQ OHDUQ KRZ WKLV HYLGHQFH KDV EHHQ SURGXFHG D PDFKLQH RI VSHFLDO GHVLJQ
ZKLFKVHL]HVDOODQGRQO\EODFNREMHFWVDQGVWRUHVWKHPLQDYDVWELQKDVEHHQ
HPSOR\HGDQGDOORIRXUREVHUYHGUDYHQVKDYHFRPHIURPWKLVELQ,QWKHELQ
ZHILQGXQVXUSULVLQJO\LQDGGLWLRQWREODFNVKRHVROGWLUHVDQGSLHFHVRIFRDOD
QXPEHURIEODFNUDYHQVDQGQRQRQEODFNUDYHQV
5HFDOO WKDW RXU LQWHUHVW LQ GDWD LV LQ XVLQJ LW WR GLVFULPLQDWH DPRQJ
FRPSHWLQJ SKHQRPHQRQFODLPV 6LPLODUO\ ZKHQ ZH LQYHVWLJDWH WKH K\SRWKHVLV
WKDWDOOUDYHQVDUHEODFNRXULQWHUHVWLVLQREWDLQLQJHYLGHQFHWKDWGLIIHUHQWLDOO\
VXSSRUWVWKLVK\SRWKHVLVDJDLQVWRWKHUQDWXUDOFRPSHWLWRUV7KDWLVRXULQWHUHVWLV
LQZKHWKHUWKHUHLVHYLGHQFHWKDWSURYLGHVVRPHEDVLVIRUSUHIHUULQJRUDFFHSWLQJ
WKLV K\SRWKHVLV LQ FRQWUDVW WR VXFK QDWXUDO FRPSHWLWRUV DV WKH K\SRWKHVLV WKDW
UDYHQVFRPHLQPDQ\GLIIHUHQWFRORUVLQFOXGLQJEODFN,WLVFOHDUWKDWWKHEODFN
UDYHQV SURGXFHG E\ +RUZLFK¶V PDFKLQH GR QRW GLIIHUHQWLDOO\ VXSSRUW WKH
K\SRWKHVLV WKDW DOO UDYHQV DUH EODFN RU SURYLGH JURXQGV IRU DFFHSWLQJ LW UDWKHU
WKDQ VXFK FRPSHWLWRUV 7KH UHDVRQ LV REYLRXV WKH FKDUDFWHU RI WKH HYLGHQFH
JDWKHULQJ RU GDWDJHQHUDWLQJ SURFHGXUH LV VXFK WKDW LW FRXOG QRW SRVVLEO\ KDYH
GLVFRYHUHGDQ\HYLGHQFHZKLFKLVFRQWUDU\WRWKHK\SRWKHVLVWKDWDOOUDYHQVDUH
EODFNRUZKLFKGLVFULPLQDWHVLQIDYRURIDFRPSHWLWRUWRWKLVK\SRWKHVLVHYHQLI
VXFK HYLGHQFH H[LVWV 7KH REVHUYHG EODFN UDYHQV DUH SRVLWLYH LQVWDQFHV RI WKH
K\SRWKHVLV WKDW DOO UDYHQV DUH EODFN EXW WKH\ GR QRW VXSSRUW WKH K\SRWKHVLV LQ
WKHVHQVHRIGLVFULPLQDWLQJLQIDYRURILWDJDLQVWQDWXUDOFRPSHWLWRUVEHFDXVHRI
WKH ZD\ LQ ZKLFK WKRVH REVHUYDWLRQV KDYH EHHQ SURGXFHG RU JHQHUDWHG ,I
REVHUYDWLRQVRIDYHU\ODUJHQXPEHURIEODFNUDYHQVKDGEHHQSURGXFHGLQVRPH
RWKHUZD\±HJE\DUDQGRPVDPSOLQJSURFHVVZKLFKKDGDQHTXDOSUREDELOLW\
RIVHOHFWLQJDQ\UDYHQEODFNRUQRQEODFNRUE\VRPHRWKHUSURFHVVZKLFKZDV
VXFK WKDW WKHUH ZDV VRPH UHDVRQ WR WKLQN WKDW WKH HYLGHQFH LW JHQHUDWHG ZDV
UHSUHVHQWDWLYHRIWKHHQWLUHSRSXODWLRQRIUDYHQV±WKHQZHZRXOGEHHQWLWOHGWR
UHJDUGVXFKREVHUYDWLRQVDVSURYLGLQJHYLGHQFHWKDWIDYRUVWKHK\SRWKHVLVXQGHU
GLVFXVVLRQ %XW LQ WKH DEVHQFH RI D UHDVRQ WR WKLQN WKDW WKH REVHUYDWLRQV KDYH
EHHQ JHQHUDWHG E\ VRPH VXFK SURFHVV WKDW PDNHV IRU UHOLDELOLW\ WKH PHUH
DFFXPXODWLRQRIREVHUYDWLRQVRIEODFNUDYHQVSURYLGHVQRUHDVRQIRUDFFHSWLQJ
WKHK\SRWKHVLVWKDWDOOUDYHQVDUHEODFNLQFRQWUDVWWRLWVQDWXUDOFRPSHWLWRUV
(YDGLQJWKH,56
6LPLODU FRQVLGHUDWLRQV DSSO\ WR WKH TXHVWLRQ RI ZKHWKHU WKH REVHUYDWLRQ RI
QRQEODFNQRQUDYHQVVXSSRUWVWKHK\SRWKHVLVWKDWK³$OOQRQEODFNWKLQJV
DUHQRQUDYHQV´$VDSRLQWRIGHSDUWXUHOHWXVQRWHWKDWLWLVOHVVFOHDUWKDQLWLV
LQ WKH FDVH RI K ZKDW WKH ³QDWXUDO´ VHULRXV DOWHUQDWLYHV WR K DUH 7KH
K\SRWKHVLVKWKDW³$OOQRQEODFNWKLQJVDUHUDYHQV´LVDFRPSHWLWRUWRK±LW
LVLQFRQVLVWHQWZLWKKRQWKHVXSSRVLWLRQWKDWWKHUHLVDWOHDVWRQH QRQEODFN
WKLQJ ± EXW QRW D VHULRXV FRPSHWLWRU VLQFH HYHU\ LQYHVWLJDWRU ZLOO KDYH JUHDW
FRQILGHQFHWKDWLWLVIDOVHSULRUWREHJLQQLQJDQLQYHVWLJDWLRQRIK6RPHRQH
ZKRLVXQFHUWDLQZKHWKHUKLVWUXHZLOOQRWWDNHVHULRXVO\WKHSRVVLELOLW\WKDW
K LV WUXH LQVWHDG DQG IRU WKLV UHDVRQ HYLGHQFH WKDW PHUHO\ GLVFULPLQDWHV
EHWZHHQ K DQG K EXW QRW EHWZHHQ K DQG LWV PRUH SODXVLEOH DOWHUQDWLYHV
ZLOOQRWEHUHJDUGHGDVVXSSRUWLQJK7KXVZKLOHWKHREVHUYDWLRQRIDZKLWH
VKRHGRHVLQGHHGGLVFULPLQDWHEHWZHHQKDQGKWKLVIDFWE\LWVHOIGRHVQRW
VKRZ WKDW WKH REVHUYDWLRQ VXSSRUWV K 3UHVXPDEO\ WKH EHVW FDQGLGDWHV IRU
VHULRXV VSHFLILF DOWHUQDWLYHV WR K DUH YDULRXV K\SRWKHVHV VSHFLI\LQJ WKH
FRQGLWLRQVHJVQRZ\UHJLRQVXQGHUZKLFKQRQEODFNUDYHQVZLOORFFXU%XW
JLYHQ DQ\ SODXVLEOH DOWHUQDWLYH K\SRWKHVLV DERXW WKH FRQGLWLRQV XQGHU ZKLFK D
QRQEODFNUDYHQZLOORFFXUWKHREVHUYDWLRQRIDZKLWHVKRHRUDUHGSHQFLOGRHV
QRWKLQJ WR HIIHFWLYHO\ GLVFULPLQDWH EHWZHHQ K DQG WKLV DOWHUQDWLYH )RU
H[DPSOH WKHVH REVHUYDWLRQV GR QRWKLQJ WR GLVFULPLQDWH EHWZHHQ K DQG WKH
DOWHUQDWLYH K\SRWKHVHV WKDW WKHUH DUH ZKLWH UDYHQV LQ VQRZ\ UHJLRQV $V IDU DV
WKHVHDOWHUQDWLYHVJRWKHQWKHUHLVQRJRRGUHDVRQWRWKLQNRIDQREVHUYDWLRQRI
DZKLWHVKRHDVFRQILUPLQJK
7KHUH DUH RWKHU SRVVLEOH DOWHUQDWLYHV WR K WKDW RQH PLJKW FRQVLGHU )RU
H[DPSOH WKHUH DUH YDULRXV K\SRWKHVHV KS VSHFLI\LQJ WKDW WKH SURSRUWLRQ RI
UDYHQV DPRQJ QRQEODFN WKLQJV LV VRPH SUHVXPDEO\ YHU\ VPDOO SRVLWLYH
QXPEHU S IRU YDULRXV YDOXHV RI S 7KHUH LV DOVR WKH JHQHULF QRQVSHFLILF
DOWHUQDWLYH WR K ZKLFK LV VLPSO\ LWV GHQLDO K ³6RPH QRQEODFN WKLQJV DUH
UDYHQV´ )RU D YDULHW\ RI UHDVRQV WKHVH DOWHUQDWLYHV DUH OHVV OLNHO\ WR EH RI
VFLHQWLILFLQWHUHVWWKDQWKHDOWHUQDWLYHVFRQVLGHUHGLQWKHSUHYLRXVSDUDJUDSK%XW
HYHQLIZHSXWWKLVFRQVLGHUDWLRQDVLGHWKHUHLVDQDGGLWLRQDOSUREOHPZLWKWKH
VXJJHVWLRQ WKDW WKH REVHUYDWLRQ RI D ZKLWH VKRH FRQILUPV K EHFDXVH LW
GLVFULPLQDWHVEHWZHHQKDQGRQHRUPRUHRIWKHVHDOWHUQDWLYHV
7KLV KDV WR GR ZLWK WKH FKDUDFWHULVWLFV RI WKH SURFHVVHV LQYROYHG LQ WKH
SURGXFWLRQRIVXFKREVHUYDWLRQV,QWKHFDVHRIK³$OOUDYHQVDUHEODFN´ZH
KDYHVRPHVHQVHRIZKDWLWZRXOGPHDQWRVDPSOHUDQGRPO\IURPWKHFODVVRI
UDYHQV RU DW OHDVW WR VDPSOH D ³UHSUHVHQWDWLYH´ UDQJH RI UDYHQV HJ IURP
GLIIHUHQWJHRJUDSKLFDOORFDWLRQVRUHFRORJLFDOQLFKHVIURPWKLVFODVV7KDWLVZH
KDYHLQWKLVFDVHVRPHVHQVHRIZKDWLVUHTXLUHGIRUWKHSURFHVVWKDWJHQHUDWHV
UHOHYDQWREVHUYDWLRQVWREHXQELDVHGRUWRKDYHJRRGUHOLDELOLW\FKDUDFWHULVWLFV
,IZHREVHUYHHQRXJKUDYHQV WKDW DUH SURGXFHG E\ VXFK D SURFHVV DQG DOO WXUQ
RXW WR EH EODFN ZH PD\ UHJDUG WKLV HYLGHQFH DV XQGHUFXWWLQJ QRW MXVW WKRVH
FRPSHWLWRUVWRKWKDWFODLPWKDWDOOUDYHQVDUHVRPHXQLIRUPQRQEODFNFRORU
-DPHV%RJHQDQG-DPHV:RRGZDUG
EXW DOVR WKRVH DOWHUQDWLYH K\SRWKHVHV WKDW FODLP WKDW YDULRXV SURSRUWLRQV RI
UDYHQVDUHQRQEODFNRUWKHJHQHULFDOWHUQDWLYHK\SRWKHVLVWKDWVRPHUDYHQVDUH
QRQEODFN 5HODWHGO\ REVHUYDWLRQV RI QRQEODFN UDYHQV SURGXFHG E\ VXFK D
SURFHVVPLJKWFRQILUPVRPHDOWHUQDWLYHK\SRWKHVLVWRKDERXWWKHSURSRUWLRQ
RI UDYHQV WKDW DUH QRQEODFN RU WKH FRQGLWLRQV XQGHU ZKLFK ZH PD\ H[SHFW WR
ILQGWKHP
%\ FRQWUDVW QRWKLQJ OLNH WKLV LV WUXH RI K ,W LV KDUG WR XQGHUVWDQG HYHQ
ZKDWLWPLJKWPHDQWRVDPSOHLQDUDQGRPRUUHSUHVHQWDWLYHZD\IURPWKHFODVV
RI QRQEODFN WKLQJV DQG KDUGHU VWLOO WR HQYLVLRQ D SK\VLFDO SURFHVV WKDW ZRXOG
LPSOHPHQWVXFKDVDPSOLQJSURFHGXUH,WLVDOVRKDUGWRVHHRQZKDWEDVLVRQH
PLJKWDUJXHWKDWDSDUWLFXODUVDPSOHRIQRQEODFNWKLQJVZDVUHSUHVHQWDWLYHRI
WKHHQWLUHUDQJHRIVXFKWKLQJV$VDUHVXOWZKHQZHDUHSUHVHQWHGZLWKHYHQD
YHU\JHQHURXVFROOHFWLRQRIREMHFWVFRQVLVWLQJRIZKLWHVKRHVUHGSHQFLOVDQGVR
RQ LW LV KDUG WR VHH RQ ZKDW VRUW RI EDVLV RQH PLJKW GHWHUPLQH ZKHWKHU WKH
SURFHGXUH E\ ZKLFK WKLV HYLGHQFH ZDV SURGXFHG KDG WKH ULJKW VRUW RI
FKDUDFWHULVWLFVWRHQDEOHXVWRUHOLDEO\GLVFULPLQDWHEHWZHHQKDQGHLWKHUWKH
DOWHUQDWLYHVKSRUKDQGKHQFHKDUGWRDVVHVVZKDWLWVHYLGHQWLDOVLJQLILFDQFH
LV IRU K ,W LV WKXV XQVXUSULVLQJ WKDW ZH LQWXLWLYHO\ MXGJH WKH LPSRUW RI VXFK
HYLGHQFHIRUKWREHDWEHVWXQFOHDUDQGHTXLYRFDO
2QRXUDQDO\VLVWKHQDQLPSRUWDQWSDUWRIZKDWJHQHUDWHVWKHSDUDGR[LVWKH
PLVWDNHQ DVVXPSWLRQ FKDUDFWHULVWLF RI ,56 DSSURDFKHV WKDW HYLGHQWLDO VXSSRUW
IRU D FODLP LV MXVW D PDWWHU RI REVHUYDWLRQ VHQWHQFHV VWDQGLQJ LQ VRPH DSSUR
SULDWHVWUXFWXUDORUIRUPDOUHODWLRQVKLSWRDK\SRWKHVLVVHQWHQFHLQWKLVFDVHWKH
UHODWLRQVKLS FDSWXUHG E\ WKH SRVLWLYH LQVWDQFH FULWHULRQ LQGHSHQGHQWO\ RI WKH
SURFHVVHV ZKLFK JHQHUDWH WKH HYLGHQFH DQG LQGHSHQGHQWO\ RI ZKHWKHU WKH HYL
GHQFHFDQEHXVHGWRGLVFULPLQDWHEHWZHHQWKHK\SRWKHVLVDQGDOWHUQDWLYHVWRLW
,WPLJKWEHWKRXJKWWKDWZKLOHH[WDQW,56DFFRXQWVKDYHLQIDFWQHJOHFWHGWKH
UHOHYDQFHRIWKRVHIHDWXUHVRIGDWDJHQHUDWLQJSURFHVVHVWKDWZHKDYHVRXJKWWR
FDSWXUHZLWKRXUQRWLRQVRIJHQHUDODQGORFDOUHOLDELOLW\WKHUHLVQRWKLQJLQWKH
ORJLFRIVXFKDFFRXQWVWKDWUHTXLUHVWKLVRPLVVLRQ0DQ\,56DFFRXQWVDVVLJQDQ
LPSRUWDQWUROHWRDX[LOLDU\RUEDFNJURXQGDVVXPSWLRQV:K\FDQ¶WSDUWLVDQVRI
,56 UHSUHVHQW WKH HYLGHQWLDO VLJQLILFDQFH RI SURFHVVHV RI GDWD JHQHUDWLRQ E\
PHDQVRIWKHVHDVVXPSWLRQV"
:HGRQ¶WVHHKRZWRGRWKLVLQDZD\WKDWUHVSHFWVWKHXQGHUO\LQJDVSLUDWLRQV
RI WKH ,56 DSSURDFK DQG DYRLGV WULYLDOL]DWLRQ 7KH QHJOHFW RI GDWD JHQHUDWLQJ
SURFHVVHV LQ VWDQGDUG ,56 DFFRXQWV LV QRW DQ DFFLGHQWDO RU HDVLO\ FRUUHFWDEOH
IHDWXUHRIVXFKDFFRXQWV&RQVLGHUWKRVHIHDWXUHVRIGDWDJHQHUDWLRQFDSWXUHGE\
RXU QRWLRQ RI JHQHUDO UHOLDELOLW\ :KDW ZRXOG WKH EDFNJURXQG DVVXPSWLRQV
GHVLJQHG WR FDSWXUH WKLV QRWLRQ ZLWKLQ DQ ,56 DFFRXQW ORRN OLNH" :H KDYH
DOUHDG\DUJXHGWKDWLQRUGHUWRNQRZWKDWDQLQVWUXPHQWRUGHWHFWLRQSURFHVVLV
JHQHUDOO\ UHOLDEOH LW LV QRW QHFHVVDU\ WR SRVVHVV D JHQHUDO WKHRU\ WKDW H[SODLQV
WKH RSHUDWLRQ RI WKH LQVWUXPHQW RU WKH GHWHFWLRQ SURFHVV 7KH EDFNJURXQG
DVVXPSWLRQV WKDW DUH GHVLJQHG WR FDSWXUH WKH UROH RI JHQHUDO UHOLDELOLW\ LQ
(YDGLQJWKH,56
LQIHUHQFHVIURPGDWDWRSKHQRPHQDWKXVFDQQRWEHSURYLGHGE\JHQHUDOWKHRULHV
WKDW H[SODLQ WKH RSHUDWLRQ RI LQVWUXPHQWV RU GHWHFWLRQ SURFHVVHV 7KH LQIRUPD
WLRQWKDWJURXQGVMXGJHPHQWVRIJHQHUDOUHOLDELOLW\LVDVZHKDYHVHHQW\SLFDOO\
LQIRUPDWLRQIURPDYDULHW\RIGLIIHUHQWVRXUFHV±DERXWWKHSHUIRUPDQFHRIWKH
GHWHFWLRQSURFHVVLQRWKHUVLWXDWLRQVLQZKLFKLWLVNQRZQZKDWUHVXOWVWRH[SHFW
DERXW WKH UHVXOWV RI PDQLSXODWLQJ RU LQWHUIHULQJ ZLWK WKH GHWHFWLRQ SURFHVV LQ
YDULRXV ZD\V DQG VR IRUWK :KLOH DOO RI WKLV LQIRUPDWLRQ LV UHOHYDQW WR
UHOLDELOLW\QRVLQJOHSLHFHRILQIRUPDWLRQRIWKLVVRUWLVVXIILFLHQWWR JXDUDQWHH
UHOLDELOLW\ %HFDXVH WKLV LV WKH FDVH DQG EHFDXVH WKH FRQVLGHUDWLRQV ZKLFK DUH
UHOHYDQW WR UHOLDELOLW\ DUH VR KHWHURJHQHRXV DQG VR VSHFLILF WR WKH SDUWLFXODU
GHWHFWLRQ SURFHVV ZH ZDQW WR DVVHVV LW LV QRW FOHDU KRZ WR UHSUHVHQW VXFK
LQIRUPDWLRQ DV D FRQYHQWLRQDO EDFNJURXQG RU DX[LOLDU\ DVVXPSWLRQ RU DV D
SUHPLVHLQDQLQGXFWLYHLQIHUHQFHFRQIRUPLQJWRVRPH,56SDWWHUQ
2IFRXUVHZHFDQUHSUHVHQWWKHUHOHYDQWEDFNJURXQGDVVXPSWLRQVE\PHDQV
RI WKH EUXWH DVVHUWLRQ WKDW WKH LQVWUXPHQWV DQG GHWHFWLRQ SURFHVVHV ZLWK ZKLFK
ZHDUHZRUNLQJDUHJHQHUDOO\UHOLDEOH7KHQZHPLJKWUHSUHVHQWWKHGHFLVLRQWR
DFFHSW SKHQRPHQRQFODLP 3 RQ WKH EDVLV RI GDWD ' SURGXFHG E\ GHWHFWLRQ
SURFHVV 5 DV KDYLQJ VRPHWKLQJ OLNH WKH IROORZLQJ VWUXFWXUH ,I GHWHFWLRQ
SURFHVV5LVJHQHUDOO\UHOLDEOHDQGSURGXFHVGDWDKDYLQJIHDWXUHV'LWIROORZV
WKDW SKHQRPHQRQFODLP 3 ZLOO EH WUXH ZLWK KLJK SUREDELOLW\ 'HWHFWLRQ
SURFHVV 5 LV JHQHUDOO\ UHOLDEOH DQG KDV SURGXFHG GDWD KDYLQJ IHDWXUHV '
WKHUHIRUHSKHQRPHQRQFODLP3LVWUXHZLWKKLJKSUREDELOLW\RUDOWHUQDWLYHO\
SKHQRPHQRQFODLP3LVWUXH7KHSUREOHP ZLWK WKLV RI FRXUVH LV WKDW WKH
LQIHUHQFH IURP GDWD WR SKHQRPHQRQ QRZ QR ORQJHU ORRNV OLNH DQ ,56VW\OH
LQGXFWLYH LQIHUHQFH DW DOO 7KH UHVXOWLQJ DUJXPHQW LV GHGXFWLYH LI LV WKH
FRQFOXVLRQ ,I LV WKH FRQFOXVLRQ WKH H[SOLFLWO\ LQGXFWLYH VWHS LV WULYLDO ± D
PDWWHU RI DGRSWLQJ VRPH UXOH RI DFFHSWDQFH WKDW DOORZV RQH WR DFFHSW KLJKO\
SUREDEOH FODLPV DV WUXH $OO RI WKH UHDO ZRUN LV GRQH E\ WKH KLJKO\ VSHFLILF
VXEMHFWPDWWHU GHSHQGHQW EDFNJURXQG FODLP LQ ZKLFK JHQHUDO UHOLDELOLW\ LV
DVVHUWHG 7KH RULJLQDO DVSLUDWLRQ RI WKH ,56 DSSURDFK ZKLFK ZDV WR UHSUHVHQW
WKH JRRGQHVV RI WKH LQIHUHQFH DV D PDWWHU RI LWV FRQIRUPLQJ WR VRPH KLJKO\
JHQHUDO VXEMHFW PDWWHU LQGHSHQGHQW SDWWHUQ RI DUJXPHQW ± ZLWK WKH VXEMHFW
PDWWHULQGHSHQGHQWSDWWHUQVXSSO\LQJVRWRVSHDNWKHLQGXFWLYHFRPSRQHQWWR
WKHDUJXPHQW±KDVQRWEHHQPHW

$OWKRXJKZHODFNWKHVSDFHIRUDGHWDLOHGGLVFXVVLRQZHWKLQNWKDWDVLPLODUFRQFOXVLRQKROGVLQ
FRQQHFWLRQZLWKMXGJHPHQWVRIORFDOUHOLDELOLW\,IRQHZLVKHGWRUHSUHVHQWIRUPDOO\WKHHOLPLQDWLYH
UHDVRQLQJ LQYROYHG LQ HVWDEOLVKLQJ ORFDO UHOLDELOLW\ WKHQ LW LV RIWHQ PRVW QDWXUDO WR UHSUHVHQW LW E\
PHDQVRIWKHGHGXFWLYHO\YDOLGDUJXPHQWSDWWHUQNQRZDVGLVMXQFWLYHV\OORJLVPRQHEHJLQVZLWKWKH
SUHPLVH WKDW VRPH GLVMXQFWLRQ LV WUXH VKRZV WKDW DOO RI WKHGLVMXQFWV VDYH RQH DUH IDOVH DQG
FRQFOXGHVWKDWWKHUHPDLQLQJGLVMXQFWLVWUXH%XWDVLQWKHFDVHRIWKHUHSUHVHQWDWLRQRIWKHDUJXPHQW
DSSHDOLQJWRJHQHUDOUHOLDELOLW\FRQVLGHUHGRQSDERYHWKLVIRUPDOUHSUHVHQWDWLRQRIHOLPLQDWLYH
UHDVRQLQJ LV REYLRXV DQG WULYLDO WKH UHDOO\ LQWHUHVWLQJ DQG GLIILFXOW ZRUN WKDW PXVW EH GRQH LQ
FRQQHFWLRQZLWKDVVHVVLQJVXFKDUJXPHQWVKDVWRGRZLWKZULWLQJGRZQDQGHVWDEOLVKLQJWKHWUXWKRI
WKHLUSUHPLVHVKDVRQHUHDOO\FRQVLGHUHGDOOWKHDOWHUQDWLYHVGRHVRQUHDOO\KDYHJRRGJURXQGVIRU
-DPHV%RJHQDQG-DPHV:RRGZDUG
+HUHLVDQRWKHUZD\RISXWWLQJWKLVPDWWHUVRPHRQHZKRDFFHSWVDQG
ZLOOILQGKLVEHOLHIVDERXWWKHWUXWKRI3VLJQLILFDQWO\FRQVWUDLQHGDQGFRQVWUD
LQHG E\ HPSLULFDO IDFWV DERXW HYLGHQFH 1RQHWKHOHVV WKH NLQG RI FRQVWUDLQW
SURYLGHG E\ DQG LV YHU\ GLIIHUHQW IURP WKH NLQGV RI QRQGHGXFWLYH
FRQVWUDLQWVRQK\SRWKHVLVFKRLFHVRXJKWE\SURSRQHQWVRI,56PRGHOV&RQVLGHU
DJDLQWKHSDVVDJHTXRWHGIURP+HPSHOLQVHFWLRQ,,$VWKDWSDVVDJHVXJJHVWV
WKHDLPRIWKH,56DSSURDFKLVWRH[KLELW WKH JURXQGV IRU EHOLHI LQ K\SRWKHVHV
OLNH RU LQ D ZD\ WKDW DYRLGV UHIHUHQFH WR ³SHUVRQDO´ RU ³VXEMHFWLYH´
IDFWRUVDQGWRVXEMHFWPDWWHUVSHFLILFFRQVLGHUDWLRQV,QVWHDGWKHDLPRIWKH,56
DSSURDFKLVWRH[KLELWWKHJURXQGVIRUEHOLHILQRUDVUHVXOWLQJIURPWKH
RSHUDWLRQRIVRPHVPDOOQXPEHURIJHQHUDOSDWWHUQVRIQRQGHGXFWLYHDUJXPHQW
RUHYLGHQWLDOVXSSRUWZKLFKUHFXUDFURVVPDQ\GLIIHUHQWDUHDVRILQTXLU\,I
LVDKLJKO\VXEMHFWPDWWHUVSHFLILFFODLPDERXWVD\WKHUHOLDELOLW\RIDFDUERQ
GDWLQJ SURFHGXUH ZKHQ DSSOLHG WR D FHUWDLQ NLQG RI IRVVLO RU HYHQ ZRUVH D
FODLPWKDWDVVHUWVWKHUHOLDELOLW\RIDSDUWLFXODUSDWKRORJLVWLQFRUUHFWO\GLVFULPL
QDWLQJEHQLJQIURPPDOLJQDQWOXQJWXPRUVZKHQVKHORRNVDW[UD\SKRWRJUDSKV
UHIHUHQFHWR³VXEMHFWPDWWHUVSHFLILF´RU³SHUVRQDO´FRQVLGHUDWLRQVZLOOQRWKDYH
EHHQ DYRLGHG $ VDWLVIDFWRU\ ,56 DQDO\VLV ZRXOG EHJLQ LQVWHDG ZLWK VRPH
VHQWHQWLDO FKDUDFWHUL]DWLRQ RI WKH GDWD SURGXFHG E\ WKH UDGLRDFWLYH GDWLQJ
SURFHGXUHRUWKHGDWDORRNHGDWE\WKHSDWKRORJLVWDQGWKHQVKRZXVKRZWKLV
GDWD FKDUDFWHUL]DWLRQ VXSSRUWV RU E\ VWDQGLQJ LQ VRPH IRUPDOO\
FKDUDFWHUL]DEOHUHODWLRQVKLSWRLWWKDWFDQEHLQVWDQWLDWHGLQPDQ\GLIIHUHQWDUHDV
RILQTXLU\7KDWLVWKHHYLGHQWLDOUHOHYDQFHRIWKHGDWDWRRU VKRXOG EH
HVWDEOLVKHGRUUHSUHVHQWHGE\WKHLQVWDQWLDWLRQRIVRPHDSSURSULDWH,56SDWWHUQ
QRWE\DKLJKO\VXEMHFWPDWWHUVSHFLILFK\SRWKHVLVOLNH,IRXUFULWLTXHRI,56
LVFRUUHFWWKLVLVMXVWZKDWFDQQRWEHGRQH
$VWKHSDVVDJHTXRWHGIURP+HPSHOPDNHVFOHDU,56DFFRXQWVDUHGULYHQLQ
ODUJH PHDVXUH E\ D GHVLUH WR H[KLELW VFLHQFH DV DQ REMHFWLYH HYLGHQWLDOO\
FRQVWUDLQHG HQWHUSULVH :H IXOO\ DJUHH ZLWK WKLV SLFWXUH RI VFLHQFH :H WKLQN
WKDW LQ PDQ\ VFLHQWLILF FRQWH[WV HYLGHQFH KDV DFFXPXODWHG LQ VXFK D ZD\ WKDW
RQO\ RQH K\SRWKHVLV IURP VRPH ODUJH FODVV RI FRPSHWLWRUV LV D SODXVLEOH
FDQGLGDWHIRUEHOLHIRUDFFHSWDQFH2XUGLVDJUHHPHQWZLWK,56DFFRXQWVKDVWR
GRZLWKWKHQDWXUHRUFKDUDFWHURIWKHHYLGHQWLDOFRQVWUDLQWVWKDWDUHRSHUDWLYHLQ
VFLHQFH QRW ZLWK ZKHWKHU VXFK FRQVWUDLQWV H[LVW $FFRUGLQJ WR ,56 DFFRXQWV
WKHVH FRQVWUDLQWV GHULYH IURP KLJKO\ JHQHUDO GRPDLQLQGHSHQGHQW IRUPDOO\
FKDUDFWHUL]DEOHSDWWHUQVRIHYLGHQWLDOVXSSRUWWKDWDSSHDULQPDQ\GLIIHUHQWDUHDV
RI VFLHQWLILF LQYHVWLJDWLRQ :H UHMHFW WKLV FODLP DV ZHOO DV +HPSHO¶V LPSOLHG
VXJJHVWLRQ WKDW HLWKHU WKH ZD\ LQ ZKLFK HYLGHQFH FRQVWUDLQV EHOLHI PXVW EH
FRQVLGHULQJ DOO EXW RQH WR EH IDOVH" $QVZHULQJ VXFK TXHVWLRQV W\SLFDOO\ UHTXLUHV D JUHDW GHDO RI
VXEMHFWPDWWHUVSHFLILFFDXVDONQRZOHGJH-XVWDVLQWKHFDVHRIJHQHUDOUHOLDELOLW\WKHRULJLQDO,56
DVSLUDWLRQRIILQGLQJDVXEMHFWPDWWHULQGHSHQGHQWSDWWHUQRILQGXFWLYHDUJXPHQWLQZKLFKWKHIRUPDO
IHDWXUHVRIWKHSDWWHUQGRLQWHUHVWLQJQRQWULYLDOZRUNRIDVRUWWKDWPLJKWEHVWXGLHGE\SKLORVRSKHUV
KDVQRWEHHQPHW
(YDGLQJWKH,56
FDSWXUDEOHZLWKLQDQ,56VW\OHIUDPHZRUNRUHOVHZHPXVWDJUHHWKDWWKHUHDUH
QRVXFKFRQVWUDLQWVDWDOO2QWKHFRQWUDVWLQJSLFWXUHZHKDYHVRXJKWWRSURYLGH
WKH ZD\ LQ ZKLFK HYLGHQFH FRQVWUDLQV EHOLHI VKRXOG EH XQGHUVWRRG LQVWHDG LQ
WHUPV RI QRQIRUPDO VXEMHFWPDWWHU VSHFLILF NLQGV RI HPSLULFDO FRQVLGHUDWLRQV
WKDWZHKDYHVRXJKWWRFDSWXUHZLWKRXUQRWLRQVRIJHQHUDODQGORFDOUHOLDELOLW\
2QRXUDFFRXQWPDQ\ZHOONQRZQGLIILFXOWLHVIRU,56DSSURDFKHV±WKHYDULRXV
SDUDGR[HV RI FRQILUPDWLRQ DQG WKH SUREOHP RI H[SODLQLQJ WKH FRQQHFWLRQ
EHWZHHQ D K\SRWKHVLV VWDQGLQJ LQ WKH IRUPDO UHODWLRQVKLSV WR DQ REVHUYDWLRQ
VHQWHQFH HPSKDVL]HG LQ ,56 DFFRXQWV DQG LWV EHLQJ WUXH ± DUH DYRLGHG $QG
PDQ\IHDWXUHVRIDFWXDOVFLHQWLILFSUDFWLFHWKDWORRNRSDTXHRQ,56DSSURDFKHV±
WKH HYLGHQWLDO VLJQLILFDQFH RI GDWD JHQHUDWLQJ SURFHVVHV RU WKH XVH RI GDWD WKDW
ODFNVDQDWXUDOVHQWHQWLDOUHSUHVHQWDWLRQRUWKDWLVQRLV\LQDFFXUDWHRUVXEMHFWWR
HUURU±IDOOQDWXUDOO\LQWRSODFH
5()(5(1&(6
%RJHQ-DQG:RRGZDUG-6DYLQJWKH3KHQRPHQD7KH3KLORVRSKLFDO5HYLHZ
BBBBBBBBB2EVHUYDWLRQV7KHRULHVDQGWKH(YROXWLRQRIWKH+XPDQ6SLULW3KLORVRSK\RI
6FLHQFH
%UDLWKZDLWH56FLHQWLILF([SODQDWLRQ&DPEULGJH&DPEULGJH8QLYHUVLW\3UHVV
&ROOLQV + 0 7KH 6HYHQ 6H[HV $ 6WXG\ LQ WKH 6RFLRORJ\ RI D 3KHQRPHQRQ RU WKH
5HSOLFDWLRQRI([SHULPHQWVLQ3K\VLFV6RFLRORJ\
BBBBBBBBB 6RQ RI 6HYHQ 6H[HV 7KH 6RFLDO 'HFRQVWUXFWLRQ RI D 3K\VLFDO 3KHQRPHQRQ
6RFLDO6WXGLHVRI6FLHQFH
&RQDQW-%7KH2YHUWKURZRIWKH3KORJLVWRQ7KHRU\7KH&KHPLFDO5HYROXWLRQRI
,Q-%&RQDQW/.1DVKHGV+DUYDUG&DVH+LVWRULHVLQ([SHULPHQWDO6FLHQFHYRO
&DPEULGJH0DVV+DUYDUG8QLYHUVLW\3UHVV
'DYLV37KH6HDUFKIRU*UDYLW\:DYHV&DPEULGJH&DPEULGJH8QLYHUVLW\3UHVV
'RQRYDQ$/DXGDQ/DQG/DXGDQ56FUXWLQL]LQJ6FLHQFH'RUGUHFKW5HLGHO

:HKDYHLJQRUHG%D\HVLDQDFFRXQWVRIFRQILUPDWLRQ:HEHOLHYHWKDWLQSULQFLSOHVXFKDFFRXQWV
KDYHWKHUHVRXUFHVWRGHDOZLWKVRPHDOWKRXJKSHUKDSVQRWDOORIWKHGLIILFXOWLHVIRU,56DSSURDFKHV
GHVFULEHGDERYH+RZHYHULQSUDFWLFHWKH%D\HVLDQWUHDWPHQWVSURYLGHGE\SKLORVRSKHUVRIWHQIDOO
SUH\ WR WKHVH GLIILFXOWLHV SHUKDSV EHFDXVH WKRVH ZKR FRQVWUXFW WKHP FRPPRQO\ UHWDLQ WKH VRUWV RI
H[SHFWDWLRQV DERXW HYLGHQFH WKDW FKDUDFWHUL]H ,56 VW\OH DSSURDFKHV 7KXV ZKLOH WKHUH VHHPV QR
EDUULHULQSULQFLSOHWRLQFRUSRUDWLQJLQIRUPDWLRQDERXWWKHSURFHVVE\ZKLFKGDWDKDVEHHQJHQHUDWHG
LQWRD%D\HVLDQDQDO\VLVLQSUDFWLFHPDQ\%D\HVLDQVQHJOHFWRURYHUORRNWKHHYLGHQWLDOUHOHYDQFHRI
VXFKLQIRUPDWLRQ±%D\HVLDQFULWLFLVPVRIUDQGRPL]DWLRQLQH[SHULPHQWDOGHVLJQDUHRQHFRQVSLFXRXV
H[SUHVVLRQ RI WKLV QHJOHFW )RU D UHFHQW LOOXVWUDWLRQ RI KRZ%D\HVLDQV FDQ FDSWXUH WKH HYLGHQWLDO
UHOHYDQFHRIGDWDJHQHUDWLQJSURFHVVHVLQFRQQHFWLRQZLWKWKHUDYHQVSDUDGR[VHH(DUPDQIRU
DUDWKHUPRUHW\SLFDOLOOXVWUDWLRQRIDUHFHQW%D\HVLDQDQDO\VLVWKDWIDLOVWRUHFRJQL]HWKHUHOHYDQFHRI
VXFKFRQVLGHUDWLRQVVHHWKHGLVFXVVLRQRIWKLVSDUDGR[LQ+RZVRQDQG8UEDFK
$V DQRWKHU LOOXVWUDWLRQ RI WKH UHOHYDQFH RI WKH GLVFXVVLRQ LQ WKLV SDSHU WR%D\HVLDQ DSSURDFKHV
FRQVLGHU WKDW PRVW %D\HVLDQ DFFRXQWV UHTXLUH WKDW DOO HYLGHQFH KDYH D QDWXUDO UHSUHVHQWDWLRQ E\
PHDQVRIWUXHVHQWHQFHV7KHVHDFFRXQWVWKXVPXVWEHPRGLILHGRUH[WHQGHGWRGHDOZLWKWKHIDFWWKDW
VXFKDUHSUHVHQWDWLRQZLOOQRWDOZD\VH[LVW)RUDYHU\LQWHUHVWLQJDWWHPSWWRGRMXVWWKLVVHH-HIIUH\
-DPHV%RJHQDQG-DPHV:RRGZDUG
(DUPDQ - %D\HV RU %XVW" $ &ULWLFDO ([DPLQDWLRQ RI %D\HVLDQ &RQILUPDWLRQ 7KHRU\
&DPEULGJH0DVV0,73UHVV
(DUPDQ - DQG *O\PRXU & 5HODWLYLW\ DQG (FOLSVHV ,Q -/ +HLOEURQ HG+LVWRULFDO
6WXGLHVLQWKH3K\VLFDO6FLHQFHVYRO3DUW,
)H\HUDEHQG3.3UREOHPVRI(PSLULFLVP&DPEULGJH&DPEULGJH8QLYHUVLW\3UHVV
)UDQNOLQ$([SHULPHQW5LJKWRU:URQJ&DPEULGJH&DPEULGJH8QLYHUVLW\3UHVV
)ULHGPDQ07UXWKDQG&RQILUPDWLRQ7KH-RXUQDORI3KLORVRSK\
*DOLVRQ3+RZ([SHULPHQWV(QG&KLFDJR8QLYHUVLW\RI&KLFDJR3UHVV
*O\PRXU&7KHRU\DQG(YLGHQFH3ULQFHWRQ3ULQFHWRQ8QLYHUVLW\3UHVV
*ROGPDQ$(SLVWHPRORJ\DQG&RJQLWLRQ&DPEULGJH0$+DUYDUG8QLYHUVLW\3UHVV
+DFNLQJ,5HSUHVHQWLQJDQG,QWHUYHQLQJ&DPEULGJH&DPEULGJH8QLYHUVLW\3UHVV
+HPSHO&*$VSHFWVRI6FLHQWLILF([SODQDWLRQ1HZ<RUN7KH)UHH3UHVV
+RZVRQ & DQG 8UEDFK 3 6FLHQWLILF 5HDVRQLQJ 7KH %D\HVLDQ $SSURDFK /D 6DOOH ,OO
2SHQ&RXUW
+XPSKUH\V37KH&KDQFHVRI([SODQDWLRQ3ULQFHWRQ3ULQFHWRQ8QLYHUVLW\3UHVV
-HIIUH\53UREDELOL]LQJ3DWKRORJ\3URFHHGLQJVRIWKH$ULVWRWHOLDQ6RFLHW\
/DYRLVLHU$(OHPHQWVRI&KHPLVWU\7UDQVODWHGE\:&UHHFK1HZ<RUN'RYHU
/HZLQ5%RQHVRI&RQWHQWLRQ1HZ<RUN6LPRQDQG6FKXVWHU
0DFNLH - / 7KH 3DUDGR[ RI &RQILUPDWLRQ7KH %ULWLVK -RXUQDO IRU WKH 3KLORVRSK\ RI
6FLHQFH
0HUULOO*+&RQILUPDWLRQDQG3UHGLFWLRQ3KLORVRSK\RI6FLHQFH
0LOOHU5)DFWDQG0HWKRG3ULQFHWRQ3ULQFHWRQ8QLYHUVLW\3UHVV
3DLV $ µ6XEWOH LV WKH /RUG¶ 7KH 6FLHQFH DQG /LIH RI $OEHUW (LQVWHLQ 2[IRUG 2[IRUG
8QLYHUVLW\3UHVV
3RSSHU.57KH/RJLFRI6FLHQWLILF'LVFRYHU\1HZ<RUN+DUSHU5RZ
3ULHVWOH\-([SHULPHQWVDQG2EVHUYDWLRQVRQ'LIIHUHQW.LQGVRI$LUDQG2WKHU%UDQFKHVRI
1DWXUDO 3KLORVRSK\ &RQQHFWHG ZLWK WKH 6XEMHFW 9RO 5HSULQWHG IURP WKH HGLWLRQ RI %LUPLQJKDP7KRPDV3HDUVRQ1HZ<RUN.UDXV5HSULQW&R
5HLFKHQEDFK + ([SHULHQFH DQG 3UHGLFWLRQ $Q $QDO\VLV RI WKH )RXQGDWLRQV DQG WKH
6WUXFWXUHRI.QRZOHGJH&KLFDJR8QLYHUVLW\RI&KLFDJR3UHVV
6FKOHVLQJHU*&RQILUPDWLRQDQG&RQILUPDELOLW\2[IRUG&ODUHQGRQ3UHVV
7D\ORU-$Q,QWURGXFWLRQWR(UURU$QDO\VLV2[IRUG2[IRUG8QLYHUVLW\3UHVV
:LOO&:DV(LQVWHLQ5LJKW"1HZ<RUN%DVLF%RRNV
:RRGZDUG-*O\PRXURQ7KHRU\&RQILUPDWLRQ3KLORVRSKLFDO6WXGLHV
BBBBBBBBB'DWDDQG3KHQRPHQD6\QWKHVH