Question

Consider the following cases about the management of investment funds. In each case state if there is potential conflict of interest that may result in unethical conduct and describe why.

a) The manager of a mutual fund invests in a small firm for which his spouse is an independent auditor.

b) The research analysis and rating department and the investment management department of an investment company are headed by the same person.

c) The compensation of the mutual fund manager is based on the turnover of the fund.

d) An actively managed mutual fund provides only one annual report to clients.

e) The mutual fund manager invests in a company managed by his former college classmate.

Answer 1

a) "Conflict of Interest" - as the spouse is considered to be the immediate family of the manger, so investing in the company will make the mutual fund a shareholder. Then his spouse may not want to come up with a bad report which may affect the share value.

b) "Conflict of Interest" - It should never be done. There should always be firewall between the research department and the investment banking department. If investment banking department is providing service to a company and the revenue depends on the share price, then the research department will not be able to issue adverse report if headed by same manager

c) "No -Conflict of Interest" - Its good that the compensation is linked with performance, the manager will try to perform better

d) "No - Conflict of Interest" - This is not conflict of interest. An Actively managed fund should disclose all his previous performances, that is annual reports. This is performance disclosure. This doesn't come under conflict of interest

e) "Conflict of Interest" - The mutual fund manager may not have done thorough analysis of the company as the owner is classmate. So this open scopes for conflict of interest.