Conflict Of Interest

A representative wants to sell a private placement of his own outside company -- a business he personally founded and owns -- to several of his brokerage customers. What must the principal recognize about this arrangement?

1. A.This is acceptable as long as the representative discloses his ownership informally to each customerWrong. Informal disclosure alone does not satisfy the required notice-and-approval process, nor does it resolve the conflict of interest.
2. B.This should be processed as a routine private securities transaction like any other referralWrong. This misses the significant additional conflict-of-interest dimension created by the representative's personal ownership of the company.
3. C.This raises both Rule 3280 private securities transaction requirements and a serious conflict of interest requiring heightened scrutinyCorrect. The representative's personal ownership creates a serious conflict of interest layered on top of the Rule 3280 notice-and-approval requirement.
4. D.This is not a private securities transaction at all, since the representative owns the company being soldWrong. Personal ownership does not remove the transaction from Rule 3280's scope; if anything, it heightens the concern.

Why: This raises overlapping concerns: it is a private securities transaction requiring notice and firm approval under Rule 3280, and it presents a significant conflict of interest given the representative's personal ownership stake. The principal must treat this with heightened scrutiny, not process it as a routine private placement referral.

A branch manager who also produces her own revenue by selling to customers is currently responsible for reviewing her own trades. What must the firm's WSPs address regarding this arrangement?

1. A.Prohibit the branch manager from producing any revenue going forwardWrong. The rule requires addressing the conflict through appropriate review arrangements, not necessarily banning production altogether.
2. B.Require the branch manager to review her own trades twice as frequentlyWrong. Increasing the frequency of self-review does not resolve the underlying independence problem.
3. C.Nothing specific, since any documented WSP review process is sufficient regardless of who performs itWrong. This ignores the specific conflict created when a producing manager reviews her own business.
4. D.Provide for alternate or heightened review of the producing manager's own business, since self-review presents a conflictCorrect. WSPs must specifically address the conflict inherent in a producing manager supervising her own production.

Why: Supervising one's own production presents an inherent conflict of interest. WSPs must specifically address supervision of producing managers, generally through some form of alternate or heightened review of their own business, rather than allowing unchecked self-review.

Regulation Best Interest is satisfied through four component obligations. They are...

1. A.Suitability, Know Your Customer, Fair Dealing, and Best ExecutionThese are related rules but not the four named Reg BI obligations.
2. B.Care, Loyalty, Prudence, and ImpartialityThese describe fiduciary-style duties, not the four Reg BI obligations.
3. C.Disclosure, Diligence, Documentation, and DeliveryThis is not the correct list of Reg BI obligations.
4. D.Disclosure, Care, Conflict of Interest, and ComplianceCorrect — these are the four component obligations of Reg BI.

Why: Reg BI comprises the Disclosure, Care, Conflict of Interest, and Compliance obligations. Meeting all four fulfills the overall best-interest standard.

In the context of a broker-dealer's disclosure obligation, what is a "conflict of interest"?

1. A.A situation in which a customer's investment objectives conflict with each other, such as wanting both growth and safety.Wrong. That describes a tension within the customer's own profile, not an incentive on the firm or representative's side.
2. B.A financial or other incentive to the firm or the representative that could reasonably be expected to affect the objectivity of a recommendation.Correct. A conflict of interest is defined by an incentive on the recommending party's side that could bias the recommendation.
3. C.Any communication about a security that uses promotional language.Wrong. Promotional language is a communications-standards issue, not what defines a conflict of interest.
4. D.A discrepancy between the firm's books and records and the customer's own account statement.Wrong. A recordkeeping discrepancy is unrelated to whether an incentive exists that could bias a recommendation.

Why: A conflict of interest is a financial or other incentive to the firm or the representative that could reasonably be expected to affect the objectivity of a recommendation. It is distinct from a tension between a customer's own competing goals, from promotional communications, and from recordkeeping discrepancies -- none of which involve an incentive on the firm or representative's side.