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Standard VI – Conflicts of Interest

This standard has three parts:

A. Disclosure of Conflicts

This standard states that the members must make full and fair disclosures of all matter that could give rise to a conflicting situation with clients or employers, for example, any act that could interfere with the member’s duties towards its employer. The member should also ensure that the disclosure information is communicated effectively.

Examples of Violation

  • Example 1: An analyst has to write a research report about a company. The analyst’s firm actually has a special interest in the company being researched as the firm has business relationship with the company. This is a conflict of business interest; therefore, the analyst must disclose in his research report their special relationship with the company.
  • Example 2: An analyst inherits a huge amout of stocks in a company from his relatives. At the same time, he has published a report with a buy recommendation for the same stock. Even if the analyst’s recommendation is fair, it’s a conflict of interest, and he must disclose his ownership of the stock.
  • Example 3: An investment firm has recently linked the performance of its portfolio managers with peer performance and benchmark indices. Given this change, a portfolio manager in an attempt to improve his portfolio performance deviates from his fund’s objectives and starts investing in high-risk stocks. He does not disclose this to his clients the new compensation structure, which has created a conflict of interest. This is a violation of the standard.
  • Example 4: An investment analyst has recently invested in a few foreign notes. Later he recommends his firm to invest in the same bond without disclosing his personal ownership of the notes. This is a violation of the standard.

B. Priority of Transactions

This standard states that for a member the investment transactions for his clients and employers should take priority over his personal investment transactions.

Examples of Violation

  • Example 1: An analyst has come across a shining stock. Before making a purchase recommendation for the stock to his clients, he purchases the stock in his personal account. This is a violation of the standard.
  • Example 2: A portfolio manager, who manages funds for several of his clients and also his own parents, first allocates any new IPOs to other clients, and any remaining shares to his parents account. He actually does so to avoid any blame for favoring his parents. However, he is violating the standard because his parents are also paying clients like others to his firm.

C. Referral Fees

This standard states that if a member receives any referral fees (compensation or benefit) for recommending a product or service, he must disclose it to the concerned people such as employer and clients.

Examples of Violation

  • Example 1: A manager working for a bank has an arrangement with a brokerage firm, where the brokerage firm gives him a referral fee for every person to open an account with the brokerage firm. The manager refers several of his bank clients to the brokerage firm, however he does not disclose this arrangement to his bank. This is a violation of the standard.
  • Example 2: An investment firm’s trading desk conducts its business with a variety of brokers. The portfolio manager in that firm tells the trading desk to direct a large portion of its trades to one of his friend’s brokerage firm. The brokerage firm in return of this favor, recommends the investment firm’s advisory services to its own clients. This arrangement is not disclosed to the portfolio manager’s firm or to the clients of the brokerage house. This is a violation of the law.
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