CFA Level I · CFA Level I Exam

Guidance for Standard VI: Conflicts of Interest: formula sheet

Full chapter guide

Key formulas

Core duty of Standard VI(A): Conflict that could impair independence/objectivity or interfere with duties → avoid it, or make full and fair disclosure; Disclosure is owed to clients, prospective clients and the employer, as relevant.
Quality of disclosure: Disclosure must be prominent + in plain language + communicate the relevant information effectively; Technical or hidden wording does not satisfy the Standard.
Test for what to disclose: Matters that could reasonably be expected to impair independence and objectivity or interfere with duties; Think of how a reasonable client or employer would see it, not only how you see it.
Disclosure to employers: Disclose to the employer: beneficial ownership of securities, board service, and other potential conflicts; Give enough detail for the employer to decide how to manage the conflict, ideally in writing.
Disclosure to clients: Disclose: broker or firm referral arrangements, ownership in recommended securities, and the firm's business relationships with covered issuers; Clients need this to judge the objectivity of advice.
Standard VI(A) core rule: Disclose all matters that could reasonably be expected to impair independence and objectivity or interfere with duties to clients, prospective clients and the employer; The test is what could reasonably be expected to impair objectivity, not what actually did.
Disclosure quality: Disclosure must be prominent, in plain language, and communicate the relevant information effectively; Small print or vague wording fails the standard.
Who receives disclosure: Clients, prospective clients and the employer; Ownership conflicts should be disclosed to all of these parties, not just one.
Disclose and avoid: VI(A) requires disclosure; the Handbook also advises avoiding conflicts where possible; firewalls support but do not replace disclosure; If a conflict is too serious to be managed by disclosure, avoid it.
Standard VI(B) core rule: Client and employer transactions > Member or Candidate's personal transactions; Official wording: investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.
Front-running test: Personal trade placed before a client order that you know about, for gain = violation; The violation is trading ahead of clients on knowledge of their pending orders. Timing and knowledge are the key facts.
Typical compliance procedures: Recommended firm procedures: pre-clearance + restricted periods + reporting of personal trades + prior employer approval for limited offerings (IPOs, private placements); These are recommended practices from the guidance on Standard VI(B), not wording of the Standard itself. Not having one does not by itself prove a violation, but ignoring client priority does.
Beneficial ownership: Beneficial owner = person with a financial interest in the account, directly or indirectly; Trades in accounts you control or benefit from can fall under the Standard, not just accounts in your own name.
Standard VI(C) core duty: Disclose to employer, clients and prospective clients, as appropriate, any compensation, consideration or benefit received from, or paid to, others for recommending products or services; This is the official wording of the duty. Learn the key words: received or paid, and recommendation.
Who must be told: Employer + clients + prospective clients; Disclosure to the employer alone does not satisfy the duty to clients, and the reverse is also true.
Timing and content: Disclose before the service is provided, and state the nature of the consideration; Late or vague disclosure is a typical violation. The client must be able to evaluate the recommendation.
Scope of benefit: Cash or non-cash, direct or indirect, received or paid; Gifts, reciprocal referrals and fee splits all count if linked to recommending products or services.
VI(A) Avoid or Disclose Conflicts: Conflict that could impair independence, objectivity or duties → full and fair disclosure (prominent, plain language) to clients, prospects and employer; VI(A) requires disclosure to clients, prospective clients and the employer. The 'as appropriate' qualifier belongs to VI(C), not VI(A). If disclosure cannot remove the problem, avoid the conflict.
VI(B) Priority of Transactions: Client and employer trades first → personal trades after; Applies to transactions where you are the beneficial owner. Do not trade ahead of clients.
VI(C) Referral Fees: Any compensation or benefit paid or received for recommending products or services → disclose to employer, clients and prospects, as appropriate; The Standard says 'as appropriate'. Disclosing before the service is provided is the recommended procedure, so clients can evaluate the recommendation. It is not separate wording in the Standard.
Recommended procedures for VI(B): Limited participation in IPOs and private placements (limited offerings) + pre-clearance + blackout/restricted periods + reporting of personal holdings and trades; These are tools to protect client priority. They support compliance but do not replace the Standard.

Quick revision

Standard VI has three parts: VI(A) Disclosure of Conflicts, VI(B) Priority of Transactions, VI(C) Referral Fees.
VI(A): avoid conflicts, or make full and fair disclosure of those that could impair independence and objectivity.
Disclosure must be prominent, in plain language, and clear enough for the recipient to understand.
Disclose to clients, prospective clients and your employer where relevant.
Owning shares in a company you cover is a conflict that needs disclosure.
Pressure between departments, such as investment banking and research, can threaten objectivity and must be managed.
VI(B): client and employer transactions have priority over your personal transactions. The Standard does not rank clients against the employer.
Do not trade ahead of clients or take investment opportunities that belong to them.
VI(C): disclose any compensation or benefit you give or receive for referring clients or services.
Referral compensation or benefits must be disclosed to the employer, clients and prospective clients, as appropriate. Disclose before the formal agreement for services and describe the nature of the consideration.
Look for clue words: ownership, gifts, bonus, referral, personal trade.
Pick the answer that discloses or avoids the conflict, not one that ignores it or only hides it.

Common mistakes

Thinking a conflict of interest is itself a violation. Fix: The violation is failing to avoid or disclose it properly. A properly disclosed conflict can be acceptable.
Choosing an answer that discloses only to the employer when clients are affected (or the reverse). Fix: Identify every party whose interests or decisions are affected. Disclosure may be owed to clients, prospective clients and the employer.
Thinking owning stock in a covered company is prohibited. Fix: Ownership is allowed. It must be disclosed, and avoided if it would impair objectivity.
Disclosing only when the analyst's view was actually biased. Fix: The test is whether the matter could reasonably be expected to impair objectivity.
Thinking any personal trading is a violation. Fix: Remember the Standard allows personal trades that do not disadvantage clients. It sets order and fairness, not prohibition.
Assuming disclosure cures front-running. Fix: Under VI(B), disclosure does not excuse trading ahead of clients. Client trades must come first, so disclosure cannot cure a priority breach.
Thinking disclosure to the employer is enough. Fix: Remember VI(C) names employer, clients and prospective clients. Each needs to be told as appropriate.
Assuming only cash payments count. Fix: The standard says compensation, consideration or benefit. Gifts, favours and reciprocal referrals count too.
Treating disclosure as a cure for trading ahead of clients under VI(B). Fix: For VI(B), the issue is order of trades. Client and employer trades must come first.
Disclosing only to the employer and not to clients. Fix: VI(A) requires disclosure to clients, prospective clients and the employer. VI(C) requires disclosure of referral compensation to the employer, clients and prospective clients, as appropriate. The 'as appropriate' wording is in VI(C) only.

Exam tips

Read the stem for who is affected. The right answer usually names the correct party for disclosure.
Prefer answers that say disclose clearly and prominently. Reject silence and fine print.
Do not pick an option just because it says avoid. The Standard allows disclosure when the conflict can be managed.
Watch for look-alike Standards: I(B) for gifts and influence, IV(B) for extra pay from others, VI(B) for personal trading, VI(C) for referral fees.
With three options and no penalty for a wrong answer, always answer. Eliminating the silent option usually leaves two choices.
Look for the words disclose, prominent and plain language. They point to Standard VI(A).
Reject options that say no action is needed because the holding is legal.
If an option leaves the conflict hidden, it is almost always wrong.