Standard VI. Conflicts of Interest Flashcards
CFA Standard VI. Conflicts of Interest:
Standard VI(A): Avoid or Disclose Conflicts
Standard VI(A) – Avoid or Disclose Conflicts
Requirement:
Members and candidates must avoid conflicts of interest when possible. If avoidance is not feasible, they must disclose conflicts fully and fairly to clients, prospective clients, and employers. These disclosures must be clear, prominent, and in plain language.
Key Points:
- Conflicts of interest can impair independence and objectivity, raising concerns about bias in investment decisions.
- Sources of conflicts include personal investments, compensation structures, relationships with companies, and board memberships.
- Best practice is to avoid conflicts, but if avoidance is not possible, full disclosure must be made.
- Employers must also be informed about conflicts so they can assess their impact.
Examples of Conflicts That Require Disclosure:- Stock ownership: If a member owns stock in a company they recommend, it must be disclosed.
- Compensation structures: If a bonus is based on short-term performance, but clients have long-term investment objectives, this must be disclosed.
- Board memberships: Serving on a board while providing investment recommendations on the company presents a conflict.
- Relationships: If an investment manager directs business to a friend’s firm without proper justification, the conflict should be disclosed
✅ Dos
* Avoid conflicts of interest when feasible.
* Fully disclose all material conflicts if they can’t be avoided.
* Use clear, prominent, and understandable language when disclosing.
* Inform employers of any potential conflicts to allow proper oversight.
Disclose:
- ○ Stock ownership in companies you recommend.
- ○ Compensation structures that misalign with client objectives (e.g. short-term bonuses vs. long-term investments).
- ○ Board memberships where you’re involved in decisions or analysis.
- ○ Relationships that could impair objectivity (e.g. directing business to a friend’s firm).
❌ Don’ts
* Don’t ignore or hide conflicts of interest.
* Don’t delay disclosure or wait until someone asks.
* Don’t assume that your objectivity is obvious without disclosure.
* Don’t make recommendations based on personal gain.
* Don’t stay silent about friendships or affiliations that could impact decision-making.
* Don’t continue work if your independence or objectivity is compromised and not addressed.
Standard VI(B) – Priority of Transactions
what is the 3 priorities of transactions
Standard VI(B) – Priority of Transactions
Requirement:
PRIORITY OF TRANSACTIONS
In the following order
1. Client
2. Employer
3. Employee
* Client transactions must take precedence over personal or corporate transactions
Conflicts of interest may occur but they must be explained and documented before any action is taken i.e. sale of security for personal reasons counter to advice being given to clients.
Key Points:
* Clients’ transactions must come first: Members cannot execute personal trades before completing client trades, especially if they have access to nonpublic material information.
* Personal trades must not disadvantage clients: Employees can invest personally but must not front-run client trades.
* Disclosure of personal trading policies: Firms may require disclosure and approval of personal trades to prevent conflicts.
Examples of Violations:
* An analyst refrains from recommending a stock for clients because they want to buy it first.
* A portfolio manager allocates hot IPO shares to their family before clients get access.
* An employee trades securities before releasing a research report that would affect stock prices.
✅ Dos
- Prioritize client and employer trades before executing personal transactions.
- Disclose and follow firm policies regarding personal trading, including preclearance and reporting.
- Ensure fair allocation of investment opportunities, such as IPOs, across all eligible clients before family or personal accounts.
- Document and justify any personal trades that differ from current client strategies.
- Treat family accounts the same as any other client account—no preferential or unfair treatment.
- Disclose beneficial ownership in any account involved in trades.
❌ Don’ts
- Don’t front-run client orders by trading on the same securities beforehand.
- Don’t withhold recommendations from clients to secure personal advantage (e.g., delaying a recommendation to buy a stock so you can buy it first).
- Don’t allocate hot IPOs or limited investment opportunities to personal or family accounts before clients.
- Don’t trade on material nonpublic information for personal gain.
- Don’t bypass employer procedures for preclearance or trade reporting.
- Don’t assume personal trades are harmless—even appearances of conflict can violate the standard.
Standard VI(C) – Referral Fees
Standard VI(C) – Referral Fees
Requirement:
Members and candidates must disclose any compensation, benefits, or considerations received from or paid to others for referring clients or services.
Key Points:
- Transparency in referral arrangements: Clients and employers should be aware of any incentive payments influencing recommendations.
- Full disclosure helps clients evaluate objectivity: If an investment professional receives fees for recommending a product, this must be made clear.
- Potential conflict of interest: Receiving undisclosed fees from third parties can compromise trust and lead to biased recommendations.
Example of Violation:
A broker recommends a specific mutual fund to clients without disclosing that they receive extra commission from that fund provider.
✅ Dos
- Disclose all referral arrangements to employers, clients, and prospective clients before entering into formal agreements.
- Specify the nature and value of any referral benefits—e.g., cash fee, percentage of assets, performance-based rewards, or in-kind benefits.
- Inform all parties whether you are receiving or paying referral compensation.
- Ensure disclosures are timely, clear, and made at the time of referral.
- Encourage employer policies that outline referral arrangements and require regular reporting.
- Report referral income regularly (e.g., quarterly) if part of a formal program.
❌ Don’ts
- Don’t withhold disclosure of referral agreements, even if they are internal within the same organization.
- Don’t assume disclosure isn’t needed because the arrangement seems harmless or standard.
- Don’t delay informing clients or employers until after business is secured.
- Don’t omit details about the form or value of the referral benefit.
- Don’t ignore compliance policies regarding approval or reporting of such arrangements.
A consultant helps a pension fund select asset managers but receives undisclosed compensation from the managers selected.
A) VI(A)
B) VI(B)
C) VI(C)
c
A research analyst covers a firm her employer’s M&A department has represented for decades and where the firm holds board seats.
A) VI(A)
B) VI(B)
C) VI(C)
A
An entry-level employee trades shares ahead of the firm updating its “buy” list and doesn’t report it to compliance.
A) VI(A)
B) VI(B)
C) VI(C)
B
A portfolio manager alters her investment strategy to boost short-term performance and hit her annual bonus, despite deviating from client objectives.
A) VI(A)
B) VI(B)
C) VI(C)
A
A trust department employee earns internal referral bonuses by sending clients to the investment management department—without informing the clients.
A) VI(A)
B) VI(B)
C) VI(C)
C
A portfolio manager buys shares for her husband’s account in a hot IPO before allocating shares to her clients.
A) VI(A)
B) VI(B)
C) VI(C)
B
An investment adviser directs client trades to a friend’s brokerage in return for referrals, but never discloses this to clients or his firm.
A) VI(A)
B) VI(B)
C) VI(C)
C
A manager treats her parents’ retirement account worse than her clients’ accounts in an effort to avoid favoritism.
A) VI(A)
B) VI(B)
C) VI(C)
B
An analyst is asked to write a follow-up report on a stock after his spouse inherits a large stake in the company.
A) VI(A)
B) VI(B)
C) VI(C)
A
A representative is paid extra compensation from a stock promoter to push specific securities—without telling his employer.
A) VI(A)
B) VI(B)
C) VI(C)
A
A company president alters her recommendation on a stock after selling her firm’s shares to the company involved.
A) VI(A)
B) VI(B)
C) VI(C)
A
A firm trades options based on an analyst’s recorded comments before the analyst’s written report is distributed to clients.
A) VI(A)
B) VI(B)
C) VI(C)
B
An analyst trades heavily in penny stocks for personal gain, then is assigned to write about the micro-cap sector.
A) VI(A)
B) VI(B)
C) VI(C)
A
A client receives a stock recommendation from an adviser who never discloses that the stock’s company is a major shareholder in the adviser’s firm.
A) VI(A)
B) VI(B)
C) VI(C)
A
A CIO of a pension fund allocates capital to a fund managed by a former classmate, without disclosing the relationship.
A) VI(A)
B) VI(B)
C) VI(C)
A
An investment manager fails to disclose an arrangement where a broker refers clients in exchange for trade volume.
A) VI(A)
B) VI(B)
C) VI(C)
C
Fargmon’s wife inherits $3 million worth of Kincaid stock—a company he previously covered—and he’s now asked to write an updated report.
What’s the best course of action for Fargmon?
a. Write the report but downplay his connection
b. Disclose his wife’s holding in the report and to his employer
c. Decline to report unless his wife sells the stock
d. Mention the stock ownership only if the report recommends a purchase
b. Disclose his wife’s holding in the report and to his employer
Violation: Failing to disclose a family member’s significant holdings in a covered company violates Standard VI(A): Disclosure of Conflicts.
Snead receives quarterly performance-based bonuses from her firm and shifts her long-term portfolios into high-beta stocks without informing clients or updating IPSs.
What is the problem in this scenario?
a. No issue if the new strategy performs well
b. The bonus system should be disclosed to clients, especially if it influences strategy
c. High-beta stocks are acceptable if permitted by the firm
d. Client consent is not needed for minor changes
b. The bonus system should be disclosed to clients, especially if it influences strategy
Violation: Not disclosing an incentive structure that influences investment decisions breaches Standard VI(A): Disclosure of Conflicts.
Carter accepts extra compensation from a stock promoter to sell shares of Badger Company without informing clients or his employer.
What is the main issue here?
a. Only employer notification is required
b. Accepting outside compensation is fine if the stock is sound
c. Clients must be informed about additional compensation that could influence recommendations
d. Disclosure isn’t needed for private companies
c. Clients must be informed about additional compensation that could influence recommendations
Violation: Carter’s failure to disclose this arrangement to clients and his employer violates Standard VI(A): Disclosure of Conflicts.
Toffler manages her parents’ retirement account at the same firm where she works. When new IPO shares are available, she allocates them to her other clients first and places leftovers—if any—into her parents’ account.
Which of the following best describes the issue here?
a. Favoritism is only a concern when managing non-family accounts
b. Family accounts should receive allocations last to avoid conflicts
c. Clients, including family, should be treated equally in allocation decisions
d. It is acceptable if her parents don’t complain
c. Clients, including family, should be treated equally in allocation decisions
Violation: Toffler violated Standard VI(B): Priority of Transactions by disadvantaging her parents’ account solely due to their relationship, even though they are fee-paying clients.
Papis reallocates a retirement fund’s real estate investments to a firm owned by his old business school classmate, without disclosing their relationship in advance.
What should Papis have done?
a. Handled the change discreetly, since performance was average
b. Disclosed his personal relationship with Nagle before making the decision
c. Made the change but noted it in the next fund summary
d. Deferred to the annual report for any disclosures
b. Disclosed his personal relationship with Nagle before making the decision
Violation: Papis failed to disclose a personal relationship that could impair his judgment, violating Standard VI(A): Disclosure of Conflicts.
Weiss is writing a research report on Jimco, a company that has long-standing ties with Weiss’s firm, Williamsburg. The firm has provided advisory services for all Jimco acquisitions over the last two decades, and some executives even sit on Jimco’s subsidiary boards.
Which of the following best describes Weiss’s responsibility?
a. Omit any mention of the relationship unless Jimco is a current investment banking client
b. Disclose the firm’s historical ties to Jimco in the research report
c. Avoid writing about Jimco altogether
d. Recommend Jimco stock only to internal clients
b. Disclose the firm’s historical ties to Jimco in the research report
Violation: Failing to disclose this relationship would violate Standard VI(A): Disclosure of Conflicts. The report must disclose any special relationships that could impair objectivity.
Long is a research analyst who identifies a promising stock. Instead of recommending it for his employer’s pension fund, he delays the recommendation and buys the stock for himself first.
What ethical issue is present in Long’s behavior?
a. None, since he eventually recommends the stock
b. He prioritized his personal interests over his employer’s
c. He failed to disclose his personal trading to the compliance department
d. He violated insider trading laws
b. He prioritized his personal interests over his employer’s
Violation: Long violated Standard VI(B): Priority of Transactions by using his insight for personal gain before allowing his employer to benefit from the recommendation.
Handley receives internal compensation for referrals he makes from his bank’s trust department to its personal financial management division. He makes several referrals but never informs his clients of the compensation structure.
Which of the following best describes Handley’s ethical failure?
a. He failed to disclose a conflict of interest created by internal compensation
b. He recommended unsuitable services
c. He violated insider trading policies
d. He misrepresented the services offered by the financial department
a. He failed to disclose a conflict of interest created by internal compensation
Violation: Handley violated Standard VI(C): Referral Fees by not disclosing internal compensation that could bias his referral, even though it occurred within the same firm.
Baker manages a mutual fund and holds a personal brokerage account under her husband’s name. When limited “hot issues” become available, she directs the brokers to allocate shares to her husband’s account, often leaving her clients without access.
What is the key ethical violation in this case?
a. She failed to disclose the purchases to clients
b. She allowed her spouse to trade on insider information
c. She gave preferential access to personal accounts over client accounts
d. She misrepresented the fund’s returns
c. She gave preferential access to personal accounts over client accounts
Violation: Baker violated Standard VI(B): Priority of Transactions by placing her husband’s trades ahead of client opportunities and failing to disclose the conflict to her employer.
After selling a 25% interest to a large bank, Hobbs—president of Dover & Roe—changes her firm’s investment stance on the bank’s securities and does not inform clients of the ownership change.
What is Hobbs expected to do at a minimum?
a. Ignore the change since ownership doesn’t directly impact clients
b. Disclose the new ownership relationship when making investment recommendations
c. Continue publishing recommendations without modification
d. Advise clients that the bank is now a priority investment
b. Disclose the new ownership relationship when making investment recommendations
Violation: Hobbs failed to disclose a material conflict of interest created by the firm’s partial ownership, violating Standard VI(A): Disclosure of Conflicts.
Roberts holds a personal position in Drew Mining, a stock expected to rise following her upcoming research report. She was assigned to write the report without disclosing her ownership.
Which action is most appropriate for Roberts?
a. Write the report and disclose her holdings internally
b. Decline to write the report or disclose her conflict in the report
c. Sell the stock before the report is released
d. Publish the report without mentioning her personal holdings
b. Decline to write the report or disclose her conflict in the report
Violation: Failing to disclose personal holdings that pose a potential bias in a published recommendation would violate Standard VI(A): Disclosure of Conflicts.
Michaels works in both the research and investment departments of a firm. He repeatedly buys stocks just before they are added to the firm’s “buy” list and avoids filling out required personal trading disclosures. George, his supervisor, is aware but takes no action.
Who is in violation, and why?
a. Only Michaels, for self-dealing
b. Only George, for inadequate supervision
c. Both, for violating personal trading and supervisory duties
d. Neither, since Michaels isn’t a senior employee
c. Both, for violating personal trading and supervisory duties
Violation: Michaels violated Standard VI(B): Priority of Transactions by placing personal trades ahead of firm recommendations. George violated Standard IV(C): Responsibilities of Supervisors by failing to enforce required disclosures.
Wilson, an analyst, broadcasts a negative view on a stock in a firmwide meeting. Minutes after her presentation, Riley—head of trading—sells the firm’s call options and buys puts before the report is publicly released.
What did Riley do wrong?
a. She traded on non-public insider information
b. She reacted too quickly without confirming the report
c. She traded for the firm’s benefit before allowing clients a chance to act
d. She based trades on rumors
c. She traded for the firm’s benefit before allowing clients a chance to act
Violation: Riley violated Standard VI(B): Priority of Transactions by executing trades that benefited the firm before giving clients access to the report and a fair chance to act on the information.
White, a partner at Lewis Brothers, secures a new client who was referred by Hill from Brady Securities. White does not mention that Lewis Brothers has a financial referral arrangement with Brady, which includes access to research, market reviews, and commission benefits.
What should White have done in this situation?
a. Inform the client about Brady’s general relationship with Lewis Brothers
b. Disclose the specific referral fee arrangement with Brady Securities to the client
c. Omit the referral details since the client came voluntarily
d. Let Brady handle disclosure responsibilities
b. Disclose the specific referral fee arrangement with Brady Securities to the client
Violation: By not disclosing this referral arrangement, White violated Standard VI(C): Referral Fees, which requires full disclosure of the nature and value of any referral benefits that may affect the advice given.
Roberts instructs her firm’s trading desk to send business to Naushon, a brokerage run by her friend, even though Naushon is more expensive and produces weak research. In return, Naushon refers high-net-worth clients to Roberts—but this arrangement is not disclosed to Katama or the clients.
What is the main ethical issue in this case?
a. Naushon should have improved its research quality
b. Roberts failed to seek best execution for her clients
c. Roberts did not disclose a referral arrangement that may influence her actions
d. Roberts violated Standard IV(C) by misusing company resources
c. Roberts did not disclose a referral arrangement that may influence her actions
Violation: By failing to disclose the referral exchange, Roberts violated Standard VI(C): Referral Fees, as the undisclosed relationship presents a potential conflict of interest.
Arronski is hired by a public pension plan to help choose a manager. He recommends Overseas Investments, who performs well. Later, it’s revealed that Arronski was also paid by Overseas when they were awarded the account. He never disclosed this to the pension plan.
How should this situation be handled?
a. No action is needed since the selected firm performed well
b. Arronski should disclose payments from managers he recommends
c. Only the pension plan needs to be informed after the fact
d. Arronski can accept dual compensation as long as outcomes are positive
b. Arronski should disclose payments from managers he recommends
Violation: Arronski violated Standard VI(C): Referral Fees by failing to disclose that he was paid by a party he recommended, which could compromise the integrity and objectivity of his advice.
