Lecture #9 Flashcards
what are causes of Conflict of Intrest?
Causes of Conflicts of Interests
- Self Interest: bribes, kickbacks, gifts, special advantages, special treatment of families, excessive flattery
- Fraud (personal bad interest): stealing funds, cheating on expense reports, falsifying documents, stealing cash, falsifying results to obtain bonuses
- Misunderstanding: confused signals from management, boss i.e., “everyone is doing it; therefore, it must be normal or acceptable”
- Slippery Slope: small favours (e.g., sporting event tickets, free travel, gifts) lead to a need for payback and ever larger demands in the future
[LIST] what are the 3 types of conflict of interest and the 3 ways to manage it
Types of conflicts of interest: Apparent, Potential, Actual
Managing conflict of interest: Avoid (sometimes this is not possible), Disclose (it), Report (to management)
Define Conflict of Interest
You’re likely to face conflicts of interest in your career. If you put your own benefit ahead of a client’s or your company’s—without disclosure—that’s fraud.
* Example: Recommending a product that helps you earn more, while pretending it’s best for the client.
Conflicts are closely tied to fraud and are punished seriously by regulators and courts.
To avoid issues:
- Disclose all potential conflicts clearly and early
- Take steps to mitigate or manage them
- Always act with integrity and transparency
”” is essential in financial services—clients rely on professionals to act in their best interest.
If a conflict of interest is suspected or visible, “” “” “”
Once “” is lost, clients will leave and warn others, leading to lost business and “”.
trust, trust is broken, trust, reputation
Define the 3 Types of Conflict of Interest
Apparent Conflict:
- Looks like a conflict, even if no personal gain occurs.
- Must still be declared and avoided.
- Example: A government official reviews a grant from an organization run by a college friend. Even if impartial, it appears biased.
Potential Conflict:
- A risk that personal ties or beliefs could influence decisions.
- Includes family ties, past favors, biases, or financial interests.
- Example: A nonprofit board member owns shares in a company bidding for a contract—judgment may be swayed by personal gain.
Actual Conflict:
- When someone acts in their own interest at the expense of their duty.
- Example: A city official invests in a real estate project they later approve and adjust rules for—direct personal benefit.
What are some examples of things you must diclose to your employer
- Disclose all gifts over a certain value as dictated by company policy
- Disclose doing business with your own family
- Disclose other family members working in the company
- Disclose permission to do “other work” “ part time jobs” “ consulting” etc.
- Disclose volunteer positions
KEEP EVERYTHING OPEN WITH AN EMPLOYER AND IN WRITING.
- When you receive permission from your company to do business with your family or to hold volunteer positions always ask for a “” “” “” “”.
Remember that your boss can change! Failing that confirm your agreement by email. Always: “” “” “”
signed letter of permission
KEEP A RECORD
What is the key thing to have when disclosure
- Objectivity is crucial when advising clients—if it’s influenced by self-interest, the advice becomes unreliable or untrustworthy.
- Clients will lose confidence if they sense bias.
You must disclose if:
- You own the stock you recommend
- You receive special compensation for selling a product
- Your firm has a relationship with the company (e.g., board membership)
- You have any other special interest
Always start with: “In the interest of FULL DISCLOSURE…” to maintain transparency and trust
Cross-departmental Conflicts of Interest
Examples,
- Marketing department “recommends” the sale of a security of a certain company whose business it is trying to attract. (Disclosure required )
- “Suggestion” that you research a company where the president of your firm is on the board of directors (Research paper must disclose the relationship)
Disclosure of Stock Ownership
Investment professionals must disclose their ownership of a stock or a security which they are recommending
please read
There is one basic rule on priority of transactions, what is it?
In all cases the client’s interests come first. PEROID.
what is conflict of interest with front running?
“Front running” is the unethical and illegal practice of an investment professional or a financial planner executing orders on a security for his or her own account before clients are in a position to do so.
- You can only take action on a security you own in your personal portfolio AFTER clients have had an opportunity to act on the advice or recommendation given
Must advise clients or prospective clients before providing services of any “” or “” received for recommending any services or products
fees or benefits
What happens when you own the saem stock as your client?
you can own the same stock as your clients, but you must disclose it to the client.
Can an investor disclose nonpublic infromation to a family member (or anyone that could benefit)? What is this usually called?
If non-public information about a security is made available to the investment professional, he or she cannot convey the information to the client, to his own family, to anyone else who could potentially benefit from such information, “tipping”
An investment professional might need to take personal actions that differ from client advice—e.g., selling a stock personally that they still recommend to clients (like to buy a house).
This is allowed only if: (3 ways)
- Clients are not disadvantaged by the personal trade
- The professional doesn’t profit from trades made for clients
- All regulations and company policies are strictly followed
should family accounts be treated equally as clients?
Where family members are clients, family accounts must be treated in the same way as other clients and neither preferential treatment nor substandard treatment should be given to them
