Standard VI: Conflicts of Interest

VI(A): what counts as a conflict and how to disclose it

A conflict of interest is anything that could reasonably be expected to impair independence and objectivity, or make people question whether a decision is free of bias. Conflicts can arise between clients, employers and the member's own interests. Pay structures that reward short-term results are a common source.

Avoid conflicts, and the appearance of them, where you reasonably can. Where you cannot, disclose them so clients and employers can judge your motives themselves. Effective disclosure is prominent, in plain language and genuinely informative; buried boilerplate does not count. Update disclosures when a conflict changes materially, for example when bonuses switch from annual to quarterly profits. When unsure, err towards disclosing.

To employers: report stock ownership in companies you cover or recommend, outside board seats, and financial or other pressures that might affect your decisions, with enough detail for the employer to judge the impact. Follow any employer restrictions on personal trading or outside directorships.

To clients: the most obvious conflicts, which must always be avoided or disclosed, are relationships between an issuer and you or your firm: a directorship or consultancy, investment banking or underwriting, market making, and material beneficial ownership of the stock. Disclose conflicts in fee arrangements, subadvisory agreements and rebates of fund service fees, and any compensation structure that pulls against the client's objectives.

Ownership, cross-departmental pressure and board seats

Beneficial ownership means a direct or indirect financial interest in a security, or the power to vote or to dispose of it. Owning a stock you recommend is the most common conflict requiring disclosure. Banning all such ownership would avoid the conflict, but is often too restrictive.

Cross-departmental conflicts arise when sales, investment banking or the issuer itself pushes an analyst to cover or praise a company, or when a broker-sponsored partnership expects analysts to promote its issues after they go public. Resolve them or disclose them.

Serving as a board member creates three conflicts: duties to the company's shareholders may clash with duties to clients; directors often receive shares or options, which can tempt them to trade in ways that lift the price; and directors receive material nonpublic information. A member who is a director should be separated from investment decisions by firewalls.

VI(B) Priority of Transactions

Transactions for clients and the employer must come before transactions in securities of which the member is a beneficial owner. Personal transactions include those for your own account, for family members (spouse, children, other immediate family) and for any account where you have a direct or indirect financial interest, such as a trust or retirement account.

Personal investing is not wrong in itself. It is acceptable when (1) clients are not disadvantaged, (2) you do not benefit personally from trades made for clients, and (3) you follow applicable rules. These same tests apply when you must trade against your own advice, for example selling a stock rated 'buy' to pay a tuition bill: it is allowed if clients are not harmed.

Holding the same securities as clients is not automatically a conflict, and some clients want managers to co-invest. Members with knowledge of pending client trades or unpublished research must not pass that nonpublic information to anyone whose account they beneficially own, or to anyone at all if the information is material.

Family accounts that are regular client accounts should be treated like any other client account: neither favoured nor disadvantaged. If the member is a beneficial owner of such an account, preclearance or reporting rules may still apply.

• Limit participation in equity IPOs: buying them can look like taking opportunities from clients or receiving a reward; preclear any participation.
• Strictly limit private placements: they can be favours designed to influence future decisions, and give an incentive to recommend the company later.
• Set blackout or restricted periods before client trades so staff cannot front-run (trade personally ahead of clients).
• Reporting: disclose holdings at hire and at least annually; send the firm duplicate confirmations of personal trades; preclear personal trades.
• Disclose the firm's personal-trading policies to investors in useful terms, not boilerplate.

VI(C) Referral Fees

Members must disclose to their employer, clients and prospective clients, as appropriate, any compensation, consideration or benefit received from or paid to others for recommending products or services. Consideration includes cash, soft dollars and in-kind benefits such as research or commissions directed in return.

Disclosure must come before the client enters any formal agreement, and must state the nature of the benefit (flat fee or percentage, one-off or continuing, performance-based, research or other non-cash) and its estimated value. This lets clients judge any partiality in the recommendation and the full cost of the service.

Referral payments within a firm, for example a bonus for sending trust clients to the firm's brokerage arm, must be disclosed just like payments from outside parties. Firms may ban referral fees outright; if they allow them, they should set approval steps, notify clients of approved programmes and require at least quarterly reports to the employer on the amount and nature of fees received.