Explanation

Correct Answer: B (Recommendation 2)

Analysis of Each Recommendation:

1. Recommendation 1: "Investment banking personnel should approve any changes in investment recommendations from the research side."

   • This is NOT consistent with the Standards because it creates a conflict of interest. Investment banking personnel have incentives to influence research recommendations to benefit banking deals. Research analysts must maintain independence and objectivity.

2. Recommendation 2: "Firewalls should separate reporting structures for personnel on the research side and personnel on the investment banking side."

   • This is consistent with the Standards. Firewalls (also called "Chinese walls") are essential to prevent conflicts of interest and maintain the independence of research analysts from investment banking pressures.

3. Recommendation 3: "Compensation arrangements should link research analyst remuneration directly to investment banking assignments in which analysts may participate as team members."

   • This is NOT consistent with the Standards. Linking analyst compensation to investment banking deals creates a direct conflict of interest and compromises analyst independence and objectivity.

Key Principles from CFA Standards:

• Standard I(B): Independence and Objectivity - Members must maintain independence and objectivity in their professional activities.
• Standard VI(A): Disclosure of Conflicts - Members must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity.
• Research analysts must be insulated from investment banking pressures to ensure unbiased research recommendations.

Conclusion: Only Recommendation 2 (establishing firewalls between research and investment banking) aligns with CFA Institute Standards of Professional Conduct.