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A. Disclosure of Conflicts.
#analyst-notes #and-actions #code-of-ethics-and-standards-of-professional-conduct #vi-conflicts-of-interest

You must make full and fair disclosure of all maters that could reasonably impair your independence and objectivity or interfere with respective duties to your clients, prospective clients, and employers. You must ensure that such disclosures are prominent, delivered in plain language, and communicate the relevant information effectively.

Conflicts can occur between the interest of clients, the interests of employers, and your own personal interest. In the investment industry, a conflict or the perception of a conflict often cannot be avoided and full disclosure is required.

1. Disclosure to Clients

You shall disclose to clients and prospects all matters, including beneficial ownership of securities or other investments, that reasonably could be expected to impair the members' ability to make unbiased and objective recommendations.

You must disclose to clients/prospects the following conflicts:

  • Material ownership in the member's firm's investment account.
  • Market-making activities.
  • Corporate finance relationships.
  • Directorships.

    The most obvious conflict that arises is when members own stocks in a company that they recommend to their clients.

  • Sell-side members must disclose any material beneficial ownership in a security. A sell-side analyst working for a broker or dealer may be enticed, for example, by corporate issuers to write research reports about certain companies.
  • Buy-side members should disclose their procedures for reporting requirements for personal transactions. A buy-side analyst will be faced with similar conflicts as banks exercise their underwriting and security-dealing powers. The marketing division may ask an analyst to recommend the stock of a certain company in order to obtain business from that company.
  • Service as a director of another firm poses three possible conflicts:

  • A possible conflict between the director's fiduciary duty to his or her clients and the director's duty to the shareholders of the firm.
  • A director may receive options to purchase securities or actual securities in his or her firm as part of a remuneration package. This may entice the director to push up the price of the firm's securities.
  • A director is likely to become aware of material nonpublic information, which may place him or her in a position of possible conflict.
  • Members should also disclose, with approval from their employers, special compensation arrangements with the employer that might conflict with clients' interests, such as bonuses based on short-term performance, commissions, performance fees, incentive fees, and referral fees.

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