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CFA® Level II · Ethical and Professional Standards · free lesson
Guidance for Standard VI: Conflicts of Interest
Conflicts of interest are unavoidable in investment firms that own securities, sell products, pay incentives and refer business. Standard VI requires members to avoid or clearly disclose conflicts, to put clients and employers ahead of their own trading, and to disclose referral arrangements. Level II vignettes test the quality of disclosures, front-running and family accounts, internal referral bonuses and the design of personal trading policies. This module explains each sub-standard, including the 2024 change to 'avoid or disclose', with cases and the procedures that keep conflicts under control.
What you will learn
1. Identify conflicts that must be disclosed and judge whether a disclosure is prominent and in plain language.
- Since 2024, Standard VI(A) is Avoid or Disclose Conflicts: either route is acceptable, and avoidance is sometimes the only sensible one.
- Disclose to clients, prospective clients and the employer as appropriate.
- Typical conflicts: ownership, banking and market-making relationships, directorships, incentive pay, personal relationships.
- Disclosure must be specific, prominent, in plain language and timely.
- Disclosure does not cure conduct that violates other Standards.
2. Apply the priority-of-transactions rule to personal trading by members and their families.
- Clients first, employer second, member last.
- Beneficial ownership includes accounts of family members, trusts and clubs where the member has an interest or influence.
- Front-running and scalping are classic violations.
- Family members who are fee-paying clients are treated like other clients; the member's own account comes last.
- Avoid personal participation in hot IPOs and pre-clear private placements; respect blackout periods.
3. Determine when referral fees and similar benefits must be disclosed.
- Disclose any compensation or benefit received from or paid to others for recommending products or services.
- Covers cash and non-cash benefits, in both directions, including internal referral bonuses.
- Disclose before the client enters an agreement for the service.
- Describe the nature of the benefit and its estimated value or how it is calculated.
- Disclose to the employer as well as clients and prospective clients.
4. Recommend procedures that help prevent violations of Standard VI.
- Maintain a conflicts register and decide which conflicts to avoid rather than disclose.
- Use standard, prominent, plain-language disclosures and keep them current.
- Personal trading controls: limited IPO participation, private placement pre-approval, blackout periods, pre-clearance and reporting.
- Apply trading rules to all accounts in which the employee has a beneficial interest.
- Approve referral arrangements in advance and disclose them to clients with a standard form.
Module at a glance
- Standard VI(A) is now Avoid or Disclose Conflicts: either avoid the conflict or disclose it fully and fairly.
- Disclosures must be specific, prominent, in plain language and made before clients rely on the advice.
- Clients come first, the employer second and the member's own transactions last.
- Beneficial ownership includes family accounts the member benefits from or influences; family members who are fee-paying clients are treated like other clients.
- Avoid personal participation in hot IPOs, pre-clear private placements and respect blackout periods.
- Disclose referral benefits of any kind, in either direction and including internal bonuses, before the client commits.
- Policies need a conflicts register, pre-clearance, reporting of all beneficially owned accounts and monitoring.
This free module has 4 lessons, 15 practice questions with full explanations.