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CFA® Level III · Ethical and Professional Standards · free lesson
Guidance for Standard VI: Conflicts of Interest
Conflicts of interest are everywhere in investment management: in personal trading, in-house products, compensation schemes, board seats and referral arrangements. Standard VI requires members to avoid conflicts where they reasonably can and otherwise to disclose them clearly, to put clients' trades ahead of their own, and to disclose referral compensation. At Level III you must judge whether a disclosure is adequate and recommend the firm procedures that keep conflicts under control.
What you will learn
1. Identify conflicts of interest that must be avoided or disclosed to clients and employers, and judge whether a disclosure is adequate.
- Avoid conflicts where reasonably possible; otherwise make full and fair disclosure (VI(A), revised 2024).
- Disclosure must be prominent, plain-language and effective, and made before the client acts.
- Key conflicts: personal or firm ownership, proprietary products, compensation design, banking relationships, board seats, competing vehicles.
- Disclose to the employer anything that could interfere with duties, such as holdings and outside roles.
- Disclosure never makes an unsuitable or disloyal action acceptable.
2. Apply priority-of-transactions rules so that client and employer trades come before personal trades, and design personal trading procedures.
- Client and employer transactions come before any trade in which the member has a beneficial interest.
- Beneficial ownership includes family accounts, trusts and partnerships in which the member has an interest.
- Front-running, trading against clients and taking scarce IPO shares are prohibited.
- A family member's genuine client account is treated like any other: neither favoured nor disadvantaged.
- Procedures: IPO and private placement limits, blackout periods, holdings reports, duplicate confirmations and pre-clearance.
3. Evaluate referral-fee arrangements and recommend firm procedures for managing conflicts of interest.
- Disclose any compensation or benefit received from or paid to others for recommending products or services.
- Disclose nature, estimated value and parties to employer, clients and prospects, before the client commits.
- The duty covers fees paid to introducers as well as fees received.
- Intra-group referral bonuses and product-dependent distribution payments are covered.
- Firms need a conflicts register, avoidance where possible, aligned pay, plain disclosure and periodic review.
Module at a glance
- VI(A): avoid conflicts where reasonably possible; otherwise disclose them prominently, plainly and before the client acts.
- Typical conflicts: personal and firm holdings, proprietary products, pay design, banking relationships, board seats and proprietary funds.
- Disclosure never makes an unsuitable or disloyal action acceptable.
- VI(B): client and employer trades come before any trade in which the member has a beneficial interest.
- Family client accounts are treated like any other client account; family personal accounts count as beneficial ownership.
- Personal trading controls: IPO and private placement limits, blackout periods, pre-clearance, duplicate confirmations, holdings reports.
- VI(C): disclose the nature and estimated value of referral compensation, received or paid, before the client commits.
This free module has 3 lessons, 14 practice questions with full explanations.