Welcome to Standard VI: Conflicts of Interest

Welcome to one of the most practical and frequently tested areas of the CFA Level II Ethics curriculum! If you think of the Standards as a guidebook for professional integrity, Standard VI: Conflicts of Interest is the section that deals with the "gray areas" where personal gain might bump into professional duty.

At Level II, you won't just be asked to define these terms; you will be given complex vignettes (mini-cases) where you must spot hidden conflicts and recommend how to handle them. Don't worry if it feels like a lot to juggle—we are going to break this down into three clear sub-sections that will help you navigate even the trickiest exam questions.

Standard VI is divided into three parts:
1. VI(A) Disclosure of Conflicts
2. VI(B) Priority of Transactions
3. VI(C) Referral Fees


Standard VI(A): Disclosure of Conflicts

The core philosophy here is simple: Sunlight is the best disinfectant. As a CFA Charterholder or Candidate, you must disclose any matter that could reasonably be expected to interfere with your independence or objectivity.

Key Requirements

  • Full and Fair Disclosure: You shouldn't hide details in the fine print. Disclosures must be prominent.
  • Plain Language: If a client needs a law degree to understand your disclosure, you’ve failed the standard. Keep it simple and clear.
  • To Whom? You must disclose conflicts to clients, prospective clients, and your employer.

Common Conflict Scenarios

In a Level II vignette, look out for these common "red flags" that require disclosure:

  • Stock Ownership: If you are recommending a company that you (or your immediate family) own shares in.
  • Board Service: If you serve on the board of directors of a company you are researching.
  • Brokerage Relationships: If your firm has an investment banking relationship with the company you are writing a report on.

Quick Tip: If you find yourself wondering, "Should I disclose this?", the answer in the world of the CFA Institute is almost always YES. Even the appearance of a conflict can be as damaging as an actual conflict.

Key Takeaway: Disclosure doesn't necessarily mean you have to stop what you're doing; it means you have to be honest about your incentives so the client can decide if they still trust your advice.


Standard VI(B): Priority of Transactions

This standard is all about the "order of operations." When it comes to buying or selling securities, there is a very strict "pecking order" you must follow to ensure you aren't profiting at the expense of your clients.

The "Waiting List" Rule

Transactions for Clients and Employers must always take priority over personal transactions. Think of it like a restaurant: the customers get served first, the boss eats next, and the waiter (you) eats last.

Recommended Procedures for Firms

To prevent violations, firms should implement these safeguards:

  • Limited Participation in IPOs: Personal investing in "hot" Initial Public Offerings (IPOs) is often restricted because it can look like you are taking an opportunity away from clients.
  • Blackout/Restricted Periods: Managers involved in an investment decision should be prohibited from trading that security for a certain period before and after the firm trades.
  • Reporting Requirements: You should provide the firm with duplicate confirmation of trades and disclose your personal holdings annually.

Common Mistake to Avoid: A common "trick" in exam vignettes is a manager who trades at the same time as the client but doesn't get a better price. This is still a violation! The client must always have the first opportunity to trade.

Key Takeaway: Put the client first, the firm second, and yourself last. Always.


Standard VI(C): Referral Fees

Standard VI(C) deals with those situations where you receive a "thank you" (in the form of cash or other benefits) for referring a client to a service, or when you pay someone else to send a client to you.

What is Required?

You must disclose any compensation, consideration, or benefit received for the recommendation of products or services. This disclosure must happen before the client signs any agreement.

Why does this matter?

If you recommend a specific sub-advisor to a client because that advisor is the best in the world, that’s great. But if you recommend them because they are paying you a \( \$5,000 \) referral fee, the client needs to know that! It allows the client to evaluate if your recommendation is truly objective or if you are just chasing the fee.

What should the disclosure include?

  • The nature of the benefit (Is it cash? A trip? Future business?).
  • The estimated value of the benefit (e.g., \( 10\% \) of the annual management fee).

Did you know? This standard applies even if the referral fee is non-monetary. If a fellow professional agrees to refer their clients to you in exchange for you referring your clients to them (a "quid pro quo"), that is a referral benefit that must be disclosed!

Key Takeaway: Referral fees aren't illegal, but secret referral fees are a violation. Total transparency is the requirement.


Level II Exam Strategy: Standard VI

Because Level II uses Item Sets, you will see these standards applied in a narrative format. Here is how to approach them:

  1. Identify the Parties: Who is the Member/Candidate? Who is the Client? Who is the Employer?
  2. Look for the Timeline: When did the trade happen? When was the disclosure made? (Remember: Disclosures should happen before the action).
  3. Check for "Plain Language": If the vignette mentions that the conflict was buried in a 100-page prospectus, it likely violates VI(A) because it wasn't "prominent" or "clear."
  4. Evaluate Personal Ownership: If the analyst owns the stock they are recommending, check if they disclosed it and if they traded only after the clients had the chance.

Quick Review Box:
- Standard VI(A): Disclose EVERYTHING that might look like a conflict.
- Standard VI(B): Clients trade first; you trade last.
- Standard VI(C): Disclose referral benefits to all parties involved before the deal is done.

Note: For more details on your duties to those you work for, see "Guidance for Standard IV: Duties to Employers."