COI Flashcards
What is a conflict of interest?
A situation where a person with a duty to act in the interest of another person is subject to interference from another interest that hampers their ability to fulfill that duty.
What does Recital 45 Reg. 565/2017 specify about conflicts of interest?
It includes conflicts between the interests of the investment firm and the duty owed to a client, or differing interests of two or more clients.
True or False: It is sufficient for an investment firm to gain a benefit for there to be a conflict of interest.
False
What typically causes conflicts between investment firms and clients?
When the investment firm is involved as a counterparty to the client.
Give an example of a situation that can cause a conflict of interest between clients.
Providing corporate finance services to issuers while advising and managing portfolios for investors.
What are the three essential elements of a conflict of interest in MiFID II?
- Duty to act in the best interest of a client
- Another interest may influence this duty
- The influence may harm the client
What are the two main types of organizational measures to prevent conflicts of interest?
- Prevention
- Monitoring and management
What does the preliminary stocktaking in MiFID II address regarding conflicts of interest?
It identifies the duty to act in a client’s best interest, potential influencing interests, and possible harm to clients.
What is a multi-layered defense in managing conflicts of interest?
A combination of organizational measures and conduct-of-business rules.
What does Reg. 565 specifically address in underwriting or placing services?
The risk that sell-side clients’ interests prevail over those of buy-side clients.
What is the organizational measures IF must account for in conflicts of interest policy?
- Identification of conflicts
- Measures to prevent conflicts
- Measures to manage arising conflicts
- Disclosure as a last resort
What criteria are used to identify (map) relevant conflicts of interest?
- Financial gain/avoidance of loss at the expense of the client
- Distinct interests in service outcomes
- Incentives to favor another client
- Being a competitor of the client
What is required of investment firms regarding conflicts of interest policies?
They must establish, implement, and maintain written policies proportional to their size and organization.
Fill in the blank: Inducements are ______ paid or received by any third party in relation to the provision of services to clients.
[fees, commissions, monetary or non-monetary benefits]
True or False: Inducements are prohibited under MiFID II.
True, except for certain exceptions.
violate duty of loyalty
What overarching duty do investment firms have when executing orders?
To obtain the best possible result for their clients.
What factors are considered under the best execution duty?
- Price
- Costs
- Speed
- Likelihood of execution and settlement
- Size and nature of the order
- Any other relevant considerations
What is the distinction in the best execution duty between retail and professional investors?
For retail investors, the total consideration is the only guiding criterion.
What must investment firms disclose regarding their execution policy?
They must disclose it to clients in advance of service performance.
What does the conflicts of interest policy entail?
- Description of the general nature and sources of COI
- Specific description of COI arising during service
- Steps undertaken to mitigate risks
What should the COI policy include when managing underwriting and placing?
Consideration of refraining from engaging in self-placement if conflicts cannot be managed.
What is the purpose of the disclosure duties during the service?
To inform clients when organizational arrangements are insufficient to prevent damage to their interests.
What is meant by ‘self-placement’ in relation to conflicts of interest?
Conflicts arising from the placement of financial instruments issued by the investment firm itself.
Elements of IF COI Policy
- Proportinal to size of IF
- Identify circs that give rise to COI
- Procedures to prevent COI
- Anual review of COI policy
- recordkeeping to support review
