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CFA® Level I · Ethical and Professional Standards · free lesson
Guidance for Standard VI: Conflicts of Interest
Conflicts of interest are unavoidable in finance: professionals own securities, earn bonuses, sit on boards and receive referrals. Standard VI does not pretend otherwise; it requires that conflicts be avoided where reasonable and otherwise disclosed prominently and in plain language, that clients' and employers' transactions come before personal ones, and that payments for referrals be disclosed. Since 2024 the first of these rules is titled Avoid or Disclose Conflicts, signalling that disclosure is not always enough.
What you will learn
1. Apply Standard VI(A) Avoid or Disclose Conflicts to personal holdings, directorships, compensation arrangements and firm relationships, and evaluate whether a disclosure is adequate.
- Avoid conflicts that could reasonably impair independence or duties; disclose fully and fairly where avoidance is not reasonable.
- Disclosures must be prominent, in plain language and effective.
- Common conflicts: personal holdings, directorships, firm business relationships and compensation arrangements.
- Conflicts with the employer must be disclosed to the employer.
- Boilerplate or buried disclosures do not satisfy the Standard.
2. Apply Standard VI(B) Priority of Transactions to personal trading, family and beneficially owned accounts, front-running and IPO participation, and identify appropriate firm procedures.
- Client and employer transactions take priority over transactions in which the member is a beneficial owner.
- Beneficial ownership includes accounts of a spouse or dependants and other accounts in which the member has a financial interest.
- Front-running client orders or research changes is prohibited.
- Fee-paying family accounts should be treated like other client accounts, neither favoured nor disadvantaged.
- Firm controls: pre-clearance, blackout periods, holdings and trade reporting, limits on IPO participation.
3. Apply Standard VI(C) Referral Fees to compensation and other benefits received or paid for recommending products or services, including the timing and content of disclosure.
- Disclose to employer, clients and prospects any compensation or benefit received or paid for referrals.
- Covers payments in both directions and non-cash or reciprocal arrangements.
- Disclose before the client enters into the agreement for the service.
- Describe the nature of the consideration and its estimated value.
- Local rules may ban some referral payments outright; follow the stricter rule.
Module at a glance
- VI(A): avoid conflicts where reasonable; otherwise disclose fully, prominently and in plain language.
- Personal holdings, directorships, firm relationships and compensation are the classic conflicts.
- Buried or boilerplate disclosure is not disclosure.
- VI(B): clients and employer first; front-running is prohibited; beneficial ownership includes joint and spouse accounts.
- Fee-paying family accounts are treated like other client accounts; IPO participation needs employer approval.
- VI(C): disclose referral compensation, paid or received, cash or not, before the client commits, with its nature and estimated value.
This free module has 3 lessons, 14 practice questions with full explanations.