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CFA Level I · CFA Level I Exam · Guidance for Standard VI: Conflicts of Interest

An investment management firm sells a 25% interest in its partnership to a bank holding company. Immediately afterward, the firm's president upgrades her recommendation on the bank's common stock from sell to buy. At a minimum, the president is most likely required to:

At minimum the president must disclose the new relationship with the bank to all of the firm's clients. Best practice would be to stop covering the bank, but disclosure is the minimum required response to the ownership interest that creates the conflict.

  1. Adisclose the new ownership relationship to all firm clientsCorrect
  2. Bobtain written consent from the bank before changing the rating
  3. Creverse the upgrade until the ownership interest is sold

Explanation

The guidance says best practice is to discontinue coverage of the bank, but at minimum the president must disclose the new relationship to all clients. Portfolio managers must also disclose the ownership when making recommendations on the bank's securities. Reversing the rating or seeking the bank's consent is not what the Standard requires.

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