Standard VI(A) – Disclosure of Conflicts

Standard VI – Conflicts of Interest

Within any business organization, there are bound to be conflicts of interest and loyalty, leading to an ethical dilemma.  Standard VI specifies that CFA members and candidates must disclose any potential conflicts between clients and employers, individual interests, and the like.  The purpose of this is to protect employers from an unknown clash of concerns that may promote unethical decisions.

Standard VI(A) – Disclosure of Conflicts

Standard VI(A) – Disclosure of Conflicts dictates that CFA members must disclose any and all circumstances which might result in a conflict of independence and objectivity, or interfere with loyalty to clients or employer.

Compliance

The most effective means of compliance with Standard VI(A) – Disclosure of Conflicts is to avoid conflicts or the appearance of conflicts. However, conflicts of interest or loyalty often arise within the financial services industry, most frequently related to compensation.

As it relates to compensation packages that could cause conflicts of interest related to client loyalty, such as performance fees or referral fees, the best practice is to publish compensation policies within promotional literature. Additionally, if a member is able to obtain option securities as part of his/her compensation, the amount and expiration of these options should be published in a public forum.

When a conflict cannot be avoided, then disclosure is the best way to solve this ethical dilemma. Reportable circumstances include any event that disables an investment professional from being independent and objective (see Standard I(B) – Independence and Objectivity).  For example, an analyst’s spouse may be gifted a significant amount of stock in a company for which s/he makes recommendations.  It is in the analyst’s personal interests to encourage the purchase of this stock to foster increased demand.  However, professionally analysts must remain impartial in their review and recommendation.  Therein lies a conflict of interest. In this case, to comply with Standard VI(A) – Disclosure of Conflicts an analyst should disclose personal circumstances to an employer and request to be removed from the firm’s research team for this security.

Conflicts can also occur between departments of a firm.  For example, to gain business from a company, a marketing professional may ask an analyst to write a favorable recommendation for that company.  This would result in a lack of objectivity required of members.  Members and their firms must attempt to resolve such conflicts through disclosure and evaluation.

Violation

As previously stated, the most effective means of compliance with Standard VI(A) –Disclosure of Conflicts is to avoid conflicts or the appearance of conflicts. Additionally, if a member’s firm does not permit disclosure of conflicts, then the investment professional should consider disassociating from the activity.

Question

Augusto Martinez is employed as an investment manager for Mondo Principal, a large brokerage firm. While Martinez is employed by the firm, Wealth Assets Inc. seeks Martinez’ advice on client portfolios.  Wealth Assets specifies that the work can be done during evenings or weekends and that a fee will be provided to Martinez for his effort. Martinez received written consent three months ago from his immediate supervisor at Mondo to undertake this outside work for a limited period of 8 weeks.

Which of the following is an accurate statement related to Standard IV(A) – Loyalty?

A. Martinez did not violate Standard IV(A) – Disclosure of Conflicts.

B. Martinez violated Standard IV(A) – Disclosure of Conflicts.

C. Martinez may have violated Standard IV(A) – Disclosure of Conflicts if he continues to work for Wealth Assets.

Solution

The correct answer is C.

Martinez received written permission from his immediate supervisor at Mondo Principal, thereby alleviating concern related to employee loyalty and conflicts.  However, since that permission was given for a specified period of eight weeks, Martinez may be in violation of Standard IV(A) – Disclosure of Conflicts if his work for Wealth Assets continues three months later.

 

Reading 3 LOS 3a

demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity

Reading 3 LOS 3b

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

Reading 3 LOS 3c

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

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