Reading 2: Conflict of Interest (Dover & Roe)

CFA Level III Ethics
#1

reading 2, page 152, example 2 about “Dover & Roe” selling their 25% stake in a multinational bank holding, then immediately changing their specific investment recommendation on the stock from “Sell” to “Buy”. Additionally, D&S adds the bank’s CP to its approved list for purchase.

  • I assume ‘the new relationship’ relates to the approved list of purchase for CP. Am I right?

  • Is there any conflict of interest when D&S sells its bank holding share while issuing a ‘Buy’ recommendation? Why would D&S sell its share while it recommends its clients to “buy” the bank holding stock?

I am thinking there could be strategic (non-financial) for D&S to sell its share.

Any comment from those more familiar with those transactions and topics?

#2

All things remaining same, it is a conflict. First they front run their clients , second they are in a bit of market making for their own benefit.

I could be wrong.

#3

This is how I understood this case:

D&R sold part of its partnership to FoNY. After this fact D&R changes recommendation for FoNY to buy from sell. This might create appearance of prior unofficial agreement about extra benefits for FoNY to buy partnership (agreement of rising recommendation).

Then, the new relationship of becoming partners with FoNY must be disclosed to clients because they receive buy/sell recommendations from D&S for FoNY security.

In addition, this relationship must also be disclosed to clients by the firm’s portfolio managers because PMs might buy FoNY CPs for their clients using approved list for purchase.