3.6) Conflict of interest VI(A): Disclosure of Conflicts Flashcards
What is standard VI?
VI. Conflict of Interest
What is substandard VI(A)?
Disclosure of Conflicts
How is complaince with disclosure of conflicts perfromed? (2)
- Must make full and fair disclosure of all matters that could reasonably be expected to impair independence and objectivity or interfere with respective duties to clients, prospective clients, and employer.
- Must ensure that disclosures are prominent, delivered in clear language and communicated effectively.
What are examples of conflicts? (5)
- Direct or indirect beneficial ownership of shares.
- Relationships with company management etc.
- Financial interest or relationship (or potential thereof) between analysts and his/her company with companies, brokers etc.
- Directorships.
- 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.
How is Disclosure of conflicts implemnted for members?
- Full disclosure required of all actual and potential conflicts of interest that can reasonably be perceived as able to affect objectivity.
- Disclosures must be clearly stated.
- Conflict of interest both with employers and clients.
Example 44: Sven Tate is an senior portfolio manager at the small asset management firm, C&M. He has recently agreed to become a trustee of the charitable Alba Group. Tate argues that as the Alba Group is not a competitor of
C&M, he does not have to inform his employer of his involvement with the Alba Group. Is Tate correct? Explain your answer.
Solution: No, Tate will be in contravention of Standard VI(A) if he does not inform his employer of his trusteeship and obtain approval for this trusteeship. Not only will
Tate probably be involved in investment decisions at Alba (which may lead to conflicts of interest), but his new responsibilities at a very large foundation may impact his focus on his current work.
Example 45: Jake Johns, an analyst at South Star, is writing a research report on Foxy Fresh. South Star has several divisions. Foxy Fresh is a client of its Advisory
and Legal Division, and CEO Alan Jayne has in the past served as a non-executive director of Foxy Fresh. Johns makes no conflict of interest disclosures on the report. Is he in compliance with Standard VI(A)?
Solution: There are two potential conflicts of interest. Johns must disclose clearly in his report that South Star is a legal advisor to Foxy Fresh and that its CEO has served as non-executive director of Foxy Fresh, otherwise he will be in breach of Standard IV(A).
Example 46: Silindile Mkhize is asked to write a report on Refinement Roofing, a company in which her husband owns a small number of shares. What should Mkhize do to ensure that she complies with Standard VI(A)?
Solution: It would be best for Mkhize to request that another analyst be asked to write this report. However, if she clearly indicates her indirect beneficial interest in Refinement Roofing in her report, she will be in compliance with Standard VI(A).
Example 47: Annabel Rajah is an analyst who has been following the share market for 15 years. She is convinced that Alpha, a small health foods manufacturer, is about to revolutionise the industry with a new product. She decides to buy R10,000 worth of Alpha shares for her own account, with the intention of selling them in three months’ time. Shortly after her purchasing these shares, her CIO requests Rajah to write a report on Alpha. Is Rajah in contravention of Standard VI(A)? Explain your answer.
Solution: No, but even though Rajah’s holding in Alpha is small, she has to disclose it in her report. Any “Buy” recommendation from her (which she would have made even if she did not hold the stock), may be seen as being tainted by her ownership of Alpha shares. Rajah is an experienced analyst, and her “Buy” recommendation may well lead to a large increase in Alpha’s share price from
which she, as a holder of its shares, would of course also benefit.
