In the investment industry, a conflict, or the perception of a conflict, often
cannot be avoided. The most obvious conflicts of interest, which should always
be disclosed, are relationships between the member, candidate, or their firm and
an issuer (such as a directorship or consultancy), investment banking, underwriting
and financial relationships, broker/dealer market-making activities, and
material beneficial ownership of stock. A member or candidate must take
reasonable steps to determine if a conflict of interest exists and disclose to clients any conflicts of the member or candidate’s firm when known. Disclosure of
broker/dealer market-making activities alerts clients that a purchase or sale might
be made from or to the firm’s principal account and that the firm has a special
interest in the price of the stock.
Service as a director poses three basic conflicts of interest. First, a conflict
may exist between the duties owed to clients and the duties owed to shareholders
of the company. Second, investment personnel who serve as directors may
receive the securities or the option to purchase securities of the company as
compensation for serving on the board, which could raise questions about trading
actions that could increase the value of those securities. Third, board service
creates the opportunity to receive material non-public information involving the
company. Even though the information is confidential, the perception could be
that information not available to the public might be communicated to a director’s
firm—whether a broker, investment advisor, or other type of organization. When
members or candidates providing investment services also serve as directors, they
should be isolated from those making investment decisions by the use of fire walls
or similar restrictions.
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