A research analyst discovers a colleague has a stake in a company under consideration for a client; the analyst should:

• A. Trade in the company’s stock before information becomes public.
• B. Wait until the information becomes public before trading.
• C. Disclose the conflict to the employer and client and recuse from the recommendation.
• D. Ignore the conflict if it benefits the client.

Answer: (C)

Conflicts of interest must be disclosed and managed to preserve independence and client trust. When you learn that a colleague has a financial stake in a company being considered for a client, that stake could bias judgment or create the appearance of bias in the recommendation. The appropriate course is to disclose the nature of the conflict to both the employer and the client and to recuse from the decision or recommendation related to that company, so the client receives an impartial assessment. Trading in the stock before information becomes public would raise concerns about unfair advantage or insider trading, waiting until information is public doesn’t remove the conflict or its appearance, and ignoring the conflict undermines ethics and client welfare.