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CFA Level I · CFA Level I Exam

Standard VI: Conflicts of Interest Guidance for CFA Level I

Standard VI covers conflicts of interest in three parts: VI(A) Disclosure of Conflicts, VI(B) Priority of Transactions, and VI(C) Referral Fees. You must avoid or disclose conflicts, put client and employer transactions ahead of personal trades, and disclose any referral compensation. In questions, find the conflict, then pick the disclosure or avoidance action.

What this chapter covers

This chapter covers Standard VI of the Code of Ethics and Standards of Professional Conduct. It has three parts. Standard VI(A) is about disclosing conflicts of interest. Standard VI(B) is about the order in which you trade. Standard VI(C) is about referral fees. The guidance also looks at stock ownership, and at conflicts that arise between departments inside one firm.

The core idea is simple. Your clients, your employer and the public must be able to judge your objectivity. If something could cloud your independence, you either remove it or tell the people affected, in plain and prominent terms. For VI(B), clients' and employers' transactions come before your own. For VI(C), anyone who might be affected must know about payments you give or receive for recommending services.

This chapter links closely to the other Standards. Standard I(B) on independence and objectivity, Standard III(A) on loyalty, prudence and care, Standard III(B) on fair dealing, and Standard V(B) on communication with clients all overlap with it. Many exam questions test whether you can tell which Standard fits best. Learn the wording of VI well and the rest of the ethics section becomes easier. Ethics is one of the largest topics on the Level I exam, so this chapter pays back your effort.

Ethical and Professional Standards carries one of the highest topic weights at Level I (10-15%), and Standard VI questions are usually short and rule-based. That makes them good marks to win. The three Standards have clear conditions, so once you know them you can eliminate two of the three options quickly. Because every question is worth the same and there is no penalty for a wrong answer, steady accuracy here is cheap to earn. Ethics scenarios are also where careless reading costs the most, so practice matters.

Guidance for Standard VI: Conflicts of Interest: topics in the order to study them

  1. 1Standard VI(A): Avoid or Disclose ConflictsStart here because it sets the main principle (avoid or disclose) that the rest of the chapter builds on.
  2. 2Conflicts with Stock Ownership and Cross-Departmental ConflictsNext, see how VI(A) applies to real firm situations such as holdings in a covered company and clashes between research and investment banking.
  3. 3Standard VI(B): Priority of TransactionsOnce disclosure is clear, learn the rule on trade order, where client and employer trades come before personal ones.
  4. 4Standard VI(C): Referral FeesThis is the shortest Standard and easy to learn after the other two, as it is also based on disclosure.
  5. 5Handbook Revision on Conflicts and Application CasesFinish with revision points and cases so you can practise picking the right Standard under exam conditions.

How to prepare Guidance for Standard VI: Conflicts of Interest

Aim to know the wording of each Standard and then practise applying it to short scenarios. Do not try to memorise cases word for word.

  1. Read the text of VI(A), VI(B) and VI(C) from the official Standards and write each in one line of your own words.
  2. For VI(A), list the typical conflict sources: ownership, compensation, gifts, board service and cross-department pressure. Note who must be told: clients, prospects and the employer.
  3. For VI(B), learn the rule: transactions for clients and employers must have priority over transactions in which you are the beneficial owner. The Standard does not rank clients against the employer. Note how investment-related trades of family members and your own are treated in the guidance.
  4. For VI(C), remember that you must disclose to your employer, clients and prospective clients, as appropriate, any compensation or benefit received or paid for recommending products or services. The disclosure should come before the formal agreement for services and should describe the nature of the consideration.
  5. Do application cases in sets of five. For each, name the Standard first, then name the violation or the correct action before looking at the options.
  6. Compare VI with I(B), III(A), III(B) and V(B) and note the clue words that point to each Standard.
  7. In the last week, do timed mixed ethics questions at about 90 seconds each and review every wrong answer by Standard.

Common mistakes in Guidance for Standard VI: Conflicts of Interest

  • Mixing up VI(A) with I(B) Independence and Objectivity

    Fix: Ask whether the issue is a conflict that needs disclosure (VI(A)) or an influence on your judgment such as a gift or pressure (I(B)). The question's focus decides.

  • Thinking disclosure is always enough

    Fix: Disclosure must be full, fair and prominent. Some situations still need action, such as stopping a trade or removing yourself from the matter.

  • Getting the order in VI(B) wrong

    Fix: Remember that client and employer transactions have priority over personal transactions. The Standard does not rank clients against the employer. Personal trades must never disadvantage clients or the employer.

  • Ignoring referral fees that are not cash

    Fix: VI(C) covers any compensation or benefit, so gifts and in-kind returns count too.

  • Disclosing to the wrong party or too late

    Fix: Check who is affected. Under VI(C), disclosure goes to the employer, clients and prospective clients, as appropriate. It should come before the formal agreement for services and should describe the nature of the consideration.

  • Memorising cases instead of principles

    Fix: Exam cases are new. Learn the rule and the clue words, then apply them to unfamiliar facts.

Last-day revision: Guidance for Standard VI: Conflicts of Interest

  • 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.

Guidance for Standard VI: Conflicts of Interest practice questions

Guidance for Standard VI: Conflicts of Interest in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Guidance for Standard VI: Conflicts of Interest: frequently asked questions

What are the three parts of Standard VI?

Standard VI(A) is Disclosure of Conflicts, VI(B) is Priority of Transactions, and VI(C) is Referral Fees. Each one protects clients and employers by making sure your personal interests do not hide or override theirs.

How is VI(B) different from front-running rules?

VI(B) says transactions for clients and employers must have priority over transactions in which you are the beneficial owner. It does not rank clients against the employer. Trading ahead of a client order to gain from it would breach this rule. Read the scenario to see whose trade was delayed or disadvantaged.

Who must I tell about a referral fee under VI(C)?

You must disclose any compensation or benefit received or paid for recommending services to your employer, clients and prospective clients, as appropriate. The disclosure should come before the formal agreement for services. It should describe the nature of the consideration so the client can judge the recommendation.

How should I answer Standard VI questions in the exam?

Name the Standard first, then find the conflict. Remove the two options that ignore it or only partly address it. The right option usually avoids the conflict or discloses it fully to the right people. You have about 90 seconds, so decide quickly and move on.