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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. Which action is the best practice for the president?

Best practice is for the president to discontinue research coverage of the bank, because the new ownership interest creates a conflict of interest. At minimum she must disclose the relationship to all clients. Disclosing only to a regulator or waiting for client questions is inadequate.

  1. ADiscontinue research coverage of the bank.Correct
  2. BKeep covering the bank and disclose the relationship only to the firm's regulator.
  3. CKeep the buy rating and wait for clients to ask about the new ownership.

Explanation

The new ownership creates a conflict. Best practice is to stop covering the bank, and the minimum is disclosure of the relationship to all clients. Telling only a regulator or waiting for questions does not satisfy the disclosure duty.

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