This standard has three parts:
- A. Disclosure of Conflicts
- B. Priority of Transactions
- C. Referral Fees
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 amount 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.
