Page 40 - FINAL CFA II SLIDES JUNE 2019 DAY 1

READINGS 1 AND 2: CFA INSTITUTE CODE OF ETHICS AND STANDARDS OF
MODULE 2.9: STANDARD VI PROFESSIONAL CONDUCT GUIDANCE FOR STANDARDS I–VII
VI Conflicts of Interest
VI(A) Disclosure of Conflicts.

Disclosure to Clients: The requirement that all potential areas of conflict be disclosed allows clients and prospects to judge motives and
potential biases for themselves. Disclosure of broker/dealer market-making activities would be included here. Board service is another area of
potential conflict.

The most common conflict which requires disclosure is actual ownership of stock in companies that the member recommends or that clients
hold.
Another common source of conflicts of interest is a member’s compensation/bonus structure, which can potentially create incentives to take
actions that produce immediate gains for the member with little or no concern for longer-term returns for the client. Such conflicts must be
disclosed when the member is acting in an advisory capacity and must be updated in the case of significant change in compensation
1
structure.
Disclosure of Conflicts to Employers: Members must give the employer enough information to judge the impact of the conflict. Take
reasonable steps to avoid conflicts, and report them promptly if they occur.

Recommended Procedures of Compliance
Any special compensation arrangements, bonus programs, commissions, and incentives should be disclosed.

Application of Standard VI(A) Disclosure of Conflicts
Vignette 1: Hunter Weiss is a research analyst with Farmington Company, a broker and investment banking firm. Farmington’s merger and
acquisition department has represented Vimco, a conglomerate, in all of its acquisitions for 20 years. From time to time, Farmington officers sit on the
boards of directors of various Vimco subsidiaries. Weiss is writing a research report on Vimco.

Analysis:
• Weiss must disclose in his research report Farmington’s special relationship with Vimco. Broker/dealer management of and participation in public
offerings must be disclosed in research reports.
• Because the position of underwriter to a company presents a special past and potential future relationship with a company that is the subject of
investment advice, it threatens the independence and objectivity of the report and must be disclosed.
Review examples 2-10