Guidance for Standard VI: Conflicts of Interest: formula sheet

Key formulas

Core duty

Avoid conflicts where possible; otherwise make full and fair disclosure

Applies to matters that could reasonably be expected to impair independence and objectivity or interfere with duties to clients, prospects and employer.

Quality of disclosure

Prominent + plain language + effective communication

Fine print, jargon or vague wording does not satisfy the Standard.

Who must be told

Clients and prospects for conflicts affecting advice; employer for conflicts affecting duties to the employer

Some conflicts require both.

Test for a reportable conflict

Could it reasonably be expected to impair independence, objectivity or duties?

The test is reasonable expectation, not proof of actual harm.

Default position

When in doubt, disclose

The Handbook encourages erring on the side of disclosure.

Standard VI(A) core duty

Conflict that could impair independence or objectivity → make full and fair disclosure

Disclosure must be prominent, in plain language, and reach clients, prospects and the employer. Guidance: avoid conflicts where possible and disclose those that remain.

Who must receive disclosure

Clients + prospective clients + employer

Disclosure to the employer is also needed when your personal holdings could conflict with your duties.

Test for a conflict

Could the interest reasonably be expected to impair objectivity? Yes → disclose

Actual bias need not be proven. The appearance of bias counts.

Information barrier purpose

Firewall between research, investment banking and sales

Keeps analysts independent. Does not remove the need to disclose a firm's holdings or banking relationships.

Avoid and disclose

Avoid conflicts where possible; disclose those that remain

This comes from the Standards' guidance. The Standard's own wording requires full and fair disclosure.

Core rule

Client and employer transactions > personal transactions

Members and candidates must not act in a way that disadvantages clients or employer for personal benefit.

Front-running test

Personal trade before a known client trade in the same security, to profit from the expected price impact = violation

Applies even if the client later receives a fair price. The misuse of knowledge of client trading is the problem.

Scope of accounts

Own accounts + accounts where you have beneficial ownership (for example, family accounts you influence)

Do not assume a spouse's or relative's account is outside the Standard.

Limited opportunities

IPOs and private placements: clients and employer first; personal participation needs pre-approval

Handbook compliance recommends restricting these and requiring prior approval from the employer.

Recommended compliance procedures

Limit participation in IPOs; restrict private placements; pre-clearance; reporting; blackout/restricted periods; disclosure of policies

Know these as the supporting procedures, not as separate Standards.

Core rule

Disclose any compensation or benefit received or paid for a recommendation → to employer, clients and prospects

Applies to both receiving and paying. It covers cash and non-cash benefits.

Timing

Disclose before the client enters the service agreement

Late disclosure, after the client has already committed, does not meet the Standard.

Content of disclosure

Nature of the benefit + value or basis + who pays whom

Must let the client evaluate the cost of the service and any bias in the recommendation.

Audiences

Employer AND clients/prospects

Both must be told. Telling one does not satisfy the duty to the other.

Standard VI(A) Disclosure of Conflicts

Disclose all matters that could reasonably be expected to impair independence and objectivity or interfere with duties to clients, prospects and employer

Disclosure must be prominent, in plain language and effective. Ownership of shares, board seats, and employer relationships with an issuer are typical triggers.

Standard VI(B) Priority of Transactions

Transactions for clients and employers have priority over investment transactions in which the member is the beneficial owner

Do not trade your own account ahead of client or employer transactions. Follow your firm's pre-clearance and reporting rules for personal trading.

Standard VI(C) Referral Fees

Disclose to employer, clients and prospects any compensation or benefit paid to or received from others for recommending products or services

Disclose before the client enters a service agreement, so the client can judge the recommendation's value.

Preface rule of use

Preface = summary of changes; Standard and guidance text = what you apply

Answer from the Standard, not from memory of what changed between editions.

Quick revision

• Standard VI(A): disclose all matters that reasonably could impair your independence and objectivity or interfere with duties to clients, prospective clients and your employer.
• Disclosures must be prominent and in plain language, and they must communicate the information effectively.
• Ownership of stock in a company you cover is a conflict that should be disclosed.
• Research analysts must be protected from pressure by investment banking, sales or corporate finance.
• Board service at a covered company can create a conflict that should be disclosed. The firm should consider restricting the analyst's coverage or otherwise managing the conflict.
• Standard VI(B): transactions for clients and your employer have priority over transactions for your own benefit. Fair dealing under III(B) governs how you treat clients.
• Do not trade ahead of clients or take investment opportunities that clients should have first.
• Pre-clearance, blackout periods and personal trading reporting help firms manage VI(B) risk.
• Standard VI(C): disclose any compensation or benefit you receive or pay for recommending or referring services.
• Disclose referral arrangements to your employer, clients and prospective clients before any formal agreement for services, so they can judge any bias.
• Disclosure is the usual remedy, but disclosure alone does not excuse a breach of another Standard.
• Always name the Standard that applies before choosing the answer.

Common mistakes

• Thinking a conflict of interest is itself a violation. Fix: A conflict can be allowed if properly disclosed or managed. The violation is failing to avoid or disclose it.
• Treating any disclosure as sufficient. Fix: Check that it is prominent, in plain language and effectively communicated. Tiny print or jargon fails the Standard.
• Thinking a conflict is only a violation if the analyst actually acted on it Fix: The Standard is about conflicts that could reasonably impair objectivity. Disclosure is required even if no harm occurred.
• Assuming a firewall removes the need to disclose Fix: A firewall supports independence, but the firm's holdings or banking ties may still need disclosure to clients.
• Thinking personal trading is prohibited. Fix: Personal trading is allowed. It must not disadvantage clients or the employer, and clients come first.
• Ignoring family accounts. Fix: Include accounts in which the member has beneficial ownership or influence, such as a spouse's account.
• Thinking disclosure to the client alone is enough. Fix: Remember the employer must also be told, so it can judge the conflict and approve or restrict the arrangement.
• Treating referral fees as prohibited. Fix: The Standard requires disclosure, not a ban. A properly disclosed arrangement is acceptable.
• Treating the preface as a Standard and trying to memorise every edit. Fix: Use the preface for orientation only. Learn and apply the Standard VI text and its guidance.
• Disclosing a conflict to the employer only. Fix: VI(A) covers clients, prospective clients and the employer. VI(C) also requires disclosure to all three.

Exam tips

• Look for hidden interests in vignettes: spouse holdings, board seats, banking ties, bonus structures and in-house products.
• Judge the quality of disclosure, not just its existence. Words like prominent, plain and specific signal the correct answer.
• If one option avoids the conflict and another discloses it, check whether disclosure is enough given the facts. Serious conflicts may call for stepping aside.
• Be clear about the audience. Employer-related conflicts go to the employer, advice-related ones to clients and prospects.
• When the choice is between disclosing and staying silent, the Handbook leans toward disclosure.
• Look for the words in the vignette that signal a conflict: owns shares, banking client, fee, bonus linked to ratings, supervisor pressure.
• When one option says disclose and another says do nothing because no harm occurred, disclose is usually right.
• Watch for the difference between telling the employer and telling clients. The correct answer often needs both.