Ethics - Standard VI - Conflicts of Interest

Start 5:00 pm

Standard VI - Conflicts of Interest

VI(A) Disclosure of Conflicts
MCs must make full and fair disclosure of all material matters that could reasonably be expected to impair their IO or interfere with duties to clients, prospects, and employer.  MCs must ensure disclosures are prominent, are delivered in plain language, and communicate relevant information effectively.

• Avoid conflicts proactively whenever possible
• When not possible, disclose in full
• Applies to actual and potential conflicts

Disclosure to employers

• Mere appearance of a conflict may create problems
• Outside board membership, personal trading, etc. might just be prohibited altogether
• MCs must take reasonable steps to avoid and if they occur report to employer
• Again, do nothing to hurt employer

Disclosure to clients

• Most obvious conflicts are relationships between issuer/firm, beneficial ownership
• Fee arrangements, subadvisors, other non-standard fees should be disclosed

Cross-departmental conflicts

• Divisions/issuers might ask an analyst to cover a certain company
• Venture capital - broker LPs often asked to hock shares after IPO

Conflicts with stock ownership

• Easiest way to deal is prohibit ownership, but this is overly burdensome and discriminates against certain MCs
• Personal investing covered more below

Conflicts as a Director

• Clients versus shareholders - who comes first?
• Compensation comes in form of shares or options of company - potential for trading fraud to boost value of those shares
• Potential for MNPI - put up firewalls to prevent

Notes from examples:

• Examples all look quite silly - you should really just always disclose if in doubt
• Usually also a violation of I(B) - Independence and Objectivity

VI(B) Priority of Transactions

Investment transactions for clients and employers must have priority over investment transactions in which the MC is the beneficial owner.

• Avoid potential conflicts
• Nothing is inherently unethical about MCs making money on personal trades
• So long as 
• client is not disadvantaged by trade
• MC does not benefit personally from trades done for clients
• MC complies with regulations
• Sometimes the MC based on personal circumstances has to run counter to client recommendations - not a problem so long as adhering to the above
• Personal trading is secondary to trading for clients
• Standards for NPI
• Cannot tell a person NPI if you are the actual beneficial owner via relation
• Impact on all accounts with beneficial ownership
• MCs can act only after all clients/employers have had a chance to act
• Family accounts that are client accounts receive same treatment as all other clients

Notes from examples:

• All pretty straightforward - do not place personal trades ahead of employer's

VI(C) Referral Fees

MC's must disclose to employer, clients and prospects as appropriate any compensation, consideration, or benefit received from or paid to others for recommendation of products or services.

• Appropriate disclosure means must advise client before entering into formal agreement
• Must also disclose nature of the compensation

These are all pretty straightforward, no need to walk through examples.

End of Standard VI.

End - 5:40 pm

Approximately .75 hours