Know-Your-Client (KYC) & suitability

A conflict of interest exists where the firm's or the representative's interest could pull against the client's interest. The rules require the client's interest to come first, and they require a process, not a good intention.

The order of the process is the exam answer, and the order matters:

1. Identify the conflict.
2. Avoid it where avoidance is possible. Declining the business is a legitimate answer.
3. Address it where avoidance is not possible, through controls, supervision, or a changed arrangement.
4. Disclose it clearly, in language the client can use in a decision.

Disclosure alone is not management. A candidate who answers "disclose the conflict" to every conflict question has answered the fourth step and skipped the first three. Disclosure is what you do after you have done everything you can to remove or control the conflict.

At the firm level, the syllabus asks for the machinery: effective controls, qualified supervision, a due diligence process for approvals, and record keeping that lets someone reconstruct the decision later. A conflict policy that exists and is not followed is worse than none, because it documents the gap.

Examples worth recognizing:

• Recommending a security you personally hold, without disclosing it.
• Recommending a product because it pays you more, where a cheaper product fits better.
• A firm underwriting an issuer while its representatives recommend that issuer.
• A compensation grid that rewards a product line.