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)
B
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.