CFA Level IEthical and Professional StandardsMedium
An equity analyst serves as an independent director on the board of a publicly traded company that his firm actively covers and recommends to clients. He has not informed his employer of this board seat. This situation is best addressed under which standard, and what is the required action?
- AStandard I(B) Independence and Objectivity; he must resign from the board immediately
- BStandard V(A) Diligence and Reasonable Basis; he must obtain written client consent before publishing research
- CStandard VI(A) Disclosure of Conflicts; he must disclose the board position to his employer and in relevant research
- DStandard IV(A) Loyalty to Employer; no disclosure is required since board service is a personal activity
Show answer & explanationAnswer & explanation
Correct answer: C. Standard VI(A) Disclosure of Conflicts; he must disclose the board position to his employer and in relevant research
Standard VI(A) requires members to disclose all matters that could reasonably be expected to impair objectivity or create a conflict of interest, including board memberships in covered companies, to both employers and, where relevant, in research communications.
Why the other options are wrong
- A. Resignation is not automatically required; disclosure and management of the conflict is the standard remedy.
- B. This is a disclosure issue, not a diligence/basis-for-recommendation issue.
- D. Board service in a covered company is a clear conflict requiring disclosure, not exemption.
Disclosure of Conflicts (VI(A))
Members must disclose all actual and potential conflicts of interest to employers, clients, and prospective clients in a manner that ensures transparency.
- Board memberships in covered companies are classic conflicts
- Disclosure must be prominent and in plain language
- Conflicts should be disclosed before, not after, providing advice
Memory trick: Sunlight is the best disinfectant for conflicts.