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Conflicts of Interest - VI(A) Disclosure of Conflicts


a. demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations of issues involving issues of personal integrity

b. distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards

c. recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct

What are the primary directives of Standard VI(A)? Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employers. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.

Can conflicts of interest be avoided all the time in the investment industry? No, often conflicts can’t be avoided and full disclosure is necessary.

What three parties can conflicts occur between? 1. The interests of clients 2. The interests of the employer 3. Your own personal interests

Do you need to disclose your ownership of securities or other investments that somebody else could potentially thing would impair your objectivity? Yes

What four categories of conflicts do you need to disclose? 1. Material ownership in the member’s firm’s investment account 2. Market-making activities 3. Corporate finance relationships 4. Directorships

What is the most obvious form of conflict that arises? When you own stock in a company that you’re recommending to your clients.

Why should a sell-side member disclose ownership in a security? Because they might be enticed to write reports or make recommendations in their own benefit.

Why should buy-side members disclose their procedures for reporting requirements for personal transactions? A buy-side analyst might face conflicts as a bank exercises its underwriting and security-dealing powers.

What three risks does service as a director of another firm pose? 1. A possible conflict between the director’s fiduciary duty to his or her clients and the director’s duty to the shareholders of the firm. 2. A director may receive options to purchase securities or actual securities in his or her firm as part of a remuneration package. This may entice the director to push up the price of the firm’s securities. 3. A director is likely to become aware of material nonpublic information, which may place him or her in a position of possible conflict.

What kind of compensation agreements should a member disclose, with approval from the employer, which might conflict with the client’s best interests? If the member has a bonus based on short-term performance, commissions, performance fees, incentive fees, or referral fees.

What are two approaches to avoid potential conflicts of interest? 1. Avoidance: Personal investment through “blind trust” or “mutual fund,” in which you have no influence on investment decisions. 2. Disclosures: As soon as the member has made full disclosure of the potential conflict, the client has all the relevant information to allow him or her to make a decision regarding the investment.

What three types of conflicts should you disclose to your employer? 1. All matters, such as beneficial interest (ownership of securities), corporate directorships, trusteeships and any special relationships, that reasonably could be expected to interfere with your duties to your employer or abilities to make unbiased and objective recommendations. 2. Comply with any prohibitions on activities imposed by your employer if a conflict of interest exists. 3. Discuss any action involving conflict of interest with your firm’s compliance officer.

If your firm allows you to buy investments and participate in board memberships, is it OK for you to do so? Yes