CFA Level III · Level III Core

Guidance for Standard VI: Conflicts of Interest: formula sheet

Full chapter guide

Key formulas

Core rule of Standard VI(A): Conflict that could reasonably impair independence or objectivity → full and fair disclosure (or avoid it); Test is a reasonable expectation of impairment, not proof that you were actually biased.
Disclosure quality: Disclosure must be prominent, plain and understandable to the client; Burying it in fine print does not satisfy the Standard.
Stock ownership: Own or firm holds stock you cover → disclose the holding (and consider avoiding the conflict); Applies to personal holdings and firm holdings that could affect your recommendation.
Cross-departmental conflict: Research independence + firewall + restricted/watch lists + disclosure of remaining conflicts; Controls manage the conflict. They do not remove the duty to disclose what remains.
Issuer-paid research: Issuer pays for research → disclose payment and its nature; keep the opinion independent; Fixed compensation not linked to the conclusion is safer than success-based pay.
Core rule: Client and employer transactions > transactions where you are the beneficial owner; Clients and employer come first. Your own trades must not disadvantage them.
Front-running test: Member trades personally ahead of a pending client or employer transaction, or in a way that disadvantages them (or ahead of a recommendation change before clients can act) = violation; Trading ahead of a pending client trade is front-running. It breaches priority because the Member's interests came first, whether or not the price moved. Other personal trades breach VI(B) if they disadvantage clients or the employer.
Recommendation change: Change in recommendation → give clients and the employer time to act → then personal trading; Do not trade personally on a new or changed recommendation before clients have had a fair chance to act.
Procedures list: Disclosure of holdings, pre-clearance, blackout/restricted periods, transaction reporting, restricted lists; Compliance tools that support the standard. Know what each does.
Beneficial ownership: Beneficial owner = direct or indirect economic interest in the account; Accounts you control or benefit from are treated as your own for this standard.
Core rule of Standard VI(C): Disclose to employer + clients + prospective clients any compensation or benefit received or paid for recommending products or services; It applies in both directions: fees you receive and fees you pay.
Timing rule: Disclose before the client enters a formal agreement or acts on the recommendation; Late disclosure, after the client has committed, does not meet the standard.
Content rule: Disclosure = who pays whom + nature of the compensation or benefit + how it may affect the recommendation; The client must be able to evaluate the objectivity of the advice.
Suitability still applies: Disclosure ≠ permission to recommend an unsuitable product; Link to Standards III(C) and I(B). Disclosure alone is not a defence.
Standard VI(A) Disclosure of Conflicts: Full and fair disclosure of matters that could impair independence and objectivity or interfere with duties to clients, prospective clients and employer; Handbook guidance: disclosures should be prominent and in plain language that communicates the relevant information effectively. Boilerplate buried in documents is weak.
Standard VI(B) Priority of Transactions: Client and employer transactions > personal (beneficial-owner) transactions; Investment transactions for clients and employers must have priority over those in which the member is the beneficial owner. VI(B) does not itself rank clients against the employer. Do not trade ahead of clients or in a way that disadvantages them.
Standard VI(C) Referral Fees: Disclose any compensation or benefit paid or received for recommending products or services; Disclose to employer, clients and prospective clients before the client enters into a formal agreement for services, so they can evaluate the full cost of the services and any partiality in the recommendation.
Recommended procedures for compliance: Written conflicts policy + disclosure + personal-trading controls + monitoring + referral-fee disclosure; Firms should adopt and enforce these. Members should support them and report breaches.

Quick revision

VI(A): make full and fair disclosure of matters that could impair your independence and objectivity, so clients, prospects and employers can judge it.
Disclosure must be full, fair, prominent and in plain language.
Conflicts can come from stock ownership, compensation or outside relationships.
Research analysts need independence from investment banking and other pressure.
Firms use information barriers and policies to manage cross-departmental conflicts.
VI(B): transactions for clients and employers have priority over personal transactions.
Personal trading must not disadvantage clients or exploit their trades.
VI(C): disclose any compensation or benefit given or received for referrals.
Disclosure of referral fees must be made before services are provided.
In a case, name the conflict, the standard, and the action in that order.
Check whether disclosure was actually made and in time before you call it a violation.
Use the guidance exactly as in the current Handbook text.

Common mistakes

Thinking owning the stock means you can never write about it Fix: The Standard requires disclosure, and avoidance where the conflict cannot be managed. It does not ban coverage of every owned stock.
Believing a firewall removes the need to disclose Fix: A firewall is a control. If a conflict could still reasonably impair objectivity, disclose it.
Saying all personal trading is prohibited. Fix: State that personal trading is allowed if clients are not disadvantaged and firm rules are followed.
Ignoring accounts of family members. Fix: Check beneficial ownership. Accounts where the Member has a direct or indirect economic interest count.
Thinking referral fees are banned. Fix: Remember the standard requires disclosure, not prohibition. Accepting a fee is allowed if properly disclosed.
Disclosing only to the client and not to the employer. Fix: Three audiences: employer, clients and prospective clients. Check each one.
Treating any conflict as a violation in itself. Fix: A conflict is not a violation if it is properly disclosed or avoided. The breach is the failure to disclose or manage it.
Thinking disclosure to the employer is enough when clients are affected. Fix: Check who needs to be told. Referral fees and objectivity issues usually require disclosure to clients and prospective clients as well.

Exam tips

In a conflict vignette, the correct option usually combines disclosure with a practical control. Prefer that over silence or a control alone.
Wrong options often say a firewall makes disclosure unnecessary or that honest opinions need no disclosure. Eliminate them.
In essays, name the conflict, state the Standard, and give the action in one or two short lines each.
Check who must receive the disclosure: clients for recommendations, the employer for personal interests.
Watch for issuer-paid research. The answer is disclose the payment and its nature, not refuse the work.
Draw a quick timeline of trades. Most questions are decided by who traded first and what the Member knew.
Link the verdict to the client being disadvantaged or exploited. A bare label scores less than a label with the reason.
In action questions, list firm procedures: pre-clearance, blackout or restricted periods, reporting, and holdings disclosure.