The facts of this case relate to CFA Institute Standard IV(B): Additional Compensation Arrangements, which requires members to obtain written consent from their employer when they accept any gift, benefit, or compensation that might reasonably be expected to create a conflict of interest with their employer. In this case, Estevez receives a benefit from companies that are selected by BIR to receive research coverage. Because Estevez is involved in the process of choosing the companies that BIR agrees to research, that presents a conflict of interest because she might favor those companies that pay her the bonus.
Issuer-paid research itself is not automatically unethical and does not automatically compromise the analyst’s independence and objectivity. But this area is fraught with conflicts, so important safeguards must be in place. BIR must adopt strict procedures protecting the inviolability of the analyst’s opinion from influence by the company. Such safeguards must also include full disclosure of any conflicts of interests on the part of the analyst conducting the research, full disclosure of any compensation arrangements, including the source of the payment for the research, and policies that disconnect the findings of the research from the level or nature of the payment. In this case, Estevez would have to disclose to her company that she is receiving the benefit from the issuer and BIR would have to disclose to the users of the report that the company paid Estevez the bonus and is paying for the research. The research could be considered independent and objective if Estevez did not use material nonpublic information from the company and if BIR’s compensation for the research from the company was not tied to the specifics of the report. But even if that was the case, it would not alleviate the issue of Estevez accepting bonuses from the covered companies without informing her employer. Choice D is the best answer, although it is incomplete because full disclosure is needed as well.