COI Flashcards
What is a conflict of interest?
A situation where a person with a duty to act in the interest of another person is subject to interference from another interest that hampers their ability to fulfill that duty.
What does Recital 45 Reg. 565/2017 specify about conflicts of interest?
It includes conflicts between the interests of the investment firm and the duty owed to a client, or differing interests of two or more clients.
True or False: It is sufficient for an investment firm to gain a benefit for there to be a conflict of interest.
False
What typically causes conflicts between investment firms and clients?
When the investment firm is involved as a counterparty to the client.
Give an example of a situation that can cause a conflict of interest between clients.
Providing corporate finance services to issuers while advising and managing portfolios for investors.
What are the three essential elements of a conflict of interest in MiFID II?
- Duty to act in the best interest of a client
- Another interest may influence this duty
- The influence may harm the client
What are the two main types of organizational measures to prevent conflicts of interest?
- Prevention
- Monitoring and management
What does the preliminary stocktaking in MiFID II address regarding conflicts of interest?
It identifies the duty to act in a client’s best interest, potential influencing interests, and possible harm to clients.
What is a multi-layered defense in managing conflicts of interest?
A combination of organizational measures and conduct-of-business rules.
What does Reg. 565 specifically address in underwriting or placing services?
The risk that sell-side clients’ interests prevail over those of buy-side clients.
What is the organizational measures IF must account for in conflicts of interest policy?
- Identification of conflicts
- Measures to prevent conflicts
- Measures to manage arising conflicts
- Disclosure as a last resort
What criteria are used to identify (map) relevant conflicts of interest?
- Financial gain/avoidance of loss at the expense of the client
- Distinct interests in service outcomes
- Incentives to favor another client
- Being a competitor of the client
What is required of investment firms regarding conflicts of interest policies?
They must establish, implement, and maintain written policies proportional to their size and organization.
Fill in the blank: Inducements are ______ paid or received by any third party in relation to the provision of services to clients.
[fees, commissions, monetary or non-monetary benefits]
True or False: Inducements are prohibited under MiFID II.
True, except for certain exceptions.
violate duty of loyalty
What overarching duty do investment firms have when executing orders?
To obtain the best possible result for their clients.
What factors are considered under the best execution duty?
- Price
- Costs
- Speed
- Likelihood of execution and settlement
- Size and nature of the order
- Any other relevant considerations
What is the distinction in the best execution duty between retail and professional investors?
For retail investors, the total consideration is the only guiding criterion.
What must investment firms disclose regarding their execution policy?
They must disclose it to clients in advance of service performance.
What does the conflicts of interest policy entail?
- Description of the general nature and sources of COI
- Specific description of COI arising during service
- Steps undertaken to mitigate risks
What should the COI policy include when managing underwriting and placing?
Consideration of refraining from engaging in self-placement if conflicts cannot be managed.
What is the purpose of the disclosure duties during the service?
To inform clients when organizational arrangements are insufficient to prevent damage to their interests.
What is meant by ‘self-placement’ in relation to conflicts of interest?
Conflicts arising from the placement of financial instruments issued by the investment firm itself.
Elements of IF COI Policy
- Proportinal to size of IF
- Identify circs that give rise to COI
- Procedures to prevent COI
- Anual review of COI policy
- recordkeeping to support review
Examples of measures to prevent COI
- control info exchanges
- supervise groups w/ COI risk separatly
- remove link between remuneration of RB and revenue generated by conficts adjacent activities
- limit involvment of of RP in separate IS and AS where involvment impairs COI management
how are exceptions to the inducements regime regualted?
Regulation of Inducements varies by type of service
In transactional services, what are the exceptions to the inducements ban
- fees paid by clients
- “proper fees” (admin fees)
- fees paid by 3P under limited conditions
this is the general regime
when can 3P pay inducements?
General regime => transactional services
Fee:
* enhances service to C
* does not impair duty to act in C’s best inerest
* disclosed and transfered to C
In fiduciary services what are the exception to the inducements ban?
minor non-monetary benefit:
* enhaces service
* disclosed to C
* does not impair best interst
Also
* payments by/for C
* recieve/transfer to C
How is best execution duties regulated?
Best Execution varies by client classification
What is best execution for RC
minimize price + costs
Best execution for PC
(1) maintain execution policy
(2) follow policy when executing orders
OTC FI requires C approval
What is in the execution policy
- execution venues
- factors that impact EV choice
- V that consistanty enable BE & warnings about OTC prod
- describes crteria for determinations
Best execution for Elligible Counterparties
none
