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CFA Level II · CFA Level II Exam

Guidance for Standard VI: Conflicts of Interest

Standard VI covers three duties: disclose conflicts that could impair your independence or your service to clients (VI(A)), put clients and employers ahead of your own trades (VI(B)), and disclose any referral fees you give or receive (VI(C)). In item sets, you name the Standard, spot the conflict in the vignette, and pick the action that fixes it.

What this chapter covers

Standard VI is the sixth of the seven Standards in the Code and Standards. It deals with situations where your own interests, or your employer's, could pull against your clients' interests or cloud your judgement. It has three parts: VI(A) Disclosure of Conflicts, VI(B) Priority of Transactions, and VI(C) Referral Fees.

The common thread is transparency and priority. If a conflict exists, the default answer is full, plain disclosure so that clients and employers can judge your objectivity for themselves. Where trading is involved, client and employer transactions have priority over your own personal trades. Where you receive or pay something for a referral, the people affected must know before they commit to the service.

This chapter links to the rest of the Ethics material. It overlaps with Standard I(B) Independence and Objectivity, Standard III(A) Loyalty, Prudence and Care, Standard III(B) Fair Dealing, and Standard IV(B) Additional Compensation Arrangements. Level II tests it inside item sets, so you must read a vignette about a firm or an analyst and decide which Standard is violated, or what the person should do next. The guidance and application examples for Standard VI in the Handbook show how the wording is applied in practice.

Ethical and Professional Standards carries a topic weight of 10-15% at Level II. Ethics is in the highest weight band, which it shares with Financial Statement Analysis, Equities, Fixed Income and Portfolio Construction. Standard VI is a compact, learnable part of it. The rules are short, the wording is consistent, and the same logic repeats across cases, so careful study turns directly into points. Because there is no minimum passing score per topic, strong Ethics results can offset weaker areas elsewhere. The risk is carelessness: the answer options are often all plausible, and only exact knowledge of the Standards separates them.

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

  1. 1Standard VI(A): Disclosure of ConflictsIt is the core rule of the chapter, and disclosure is the default remedy you will apply in almost every conflict question.
  2. 2Conflicts with Stock Ownership and Cross-Departmental ConflictsIt applies VI(A) to the most common real-world cases, such as holding shares in covered companies and pressure between investment banking and research.
  3. 3Standard VI(B): Priority of TransactionsOnce disclosure is clear, you can learn the priority rule for trades: client and employer transactions come before transactions for your own benefit.
  4. 4Standard VI(C): Referral FeesIt is a short, separate duty about disclosing payments for referrals, and it is easier to learn after the other two parts.
  5. 5Standard VI guidance and application examples in the HandbookRead these last to see how the three parts work in realistic cases, and to practise naming the Standard and the corrective action.

How to prepare Guidance for Standard VI: Conflicts of Interest

Standard VI is small, so you can master it quickly. Aim for exact wording plus fast recognition in vignettes.

  1. Read the text of VI(A), VI(B) and VI(C) from the official Standards and write each in one sentence of your own.
  2. For each Standard, list who must be told, what must be disclosed, and when. Note that disclosure should be prominent, plain and in clear language.
  3. Study the guidance on stock ownership and cross-departmental conflicts, and note the reasons research independence must be protected from banking and sales pressure.
  4. Learn the transaction priority rule for VI(B), and link it to Standard III(B) on fair dealing, which governs how clients are treated, and to rules on pre-clearance, blackout periods and personal trading disclosure.
  5. Practise item sets. In each vignette, underline the relationship, the benefit or payment, and who knows about it. Then name the Standard before reading the options.
  6. Review wrong answers by writing which Standard applied and why the other options failed. Repeat this for any case that mixes Standard VI with I(B), III(A) or IV(B).

Common mistakes in Guidance for Standard VI: Conflicts of Interest

  • Treating disclosure as a cure for every conflict.

    Fix: Check whether another Standard is also breached, such as trading ahead of clients under VI(B) or III(B). Disclose, and also remove or manage the conduct.

  • Misstating the priority rule in VI(B).

    Fix: Remember that client and employer transactions have priority over transactions for your own benefit. Fair dealing under III(B) governs how clients are treated relative to each other. Test each trade in a vignette against these rules.

  • Missing the timing of referral fee disclosure.

    Fix: Under VI(C), disclose to your employer, clients and prospective clients before any formal agreement for services, so they can weigh the referral. Look for late or absent disclosure in the vignette.

  • Confusing VI(A) with I(B) Independence and Objectivity.

    Fix: Use I(B) when the issue is a gift, pressure or influence on your opinions. Use VI(A) when the issue is the need to disclose a conflict of interest. Many cases cite both.

  • Choosing options that sound cautious but are not required.

    Fix: Pick the action the Standards actually require, usually disclosure or a reasonable control. Reject answers that go beyond what the case needs.

  • Ignoring who the conflict affects.

    Fix: VI(A) covers clients, prospective clients and the employer. Check each party in the vignette and see who has not been told.

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

  • 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.

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?

VI(A) is Disclosure of Conflicts, VI(B) is Priority of Transactions, and VI(C) is Referral Fees. Together they require you to disclose conflicts, put clients and employers before yourself in trading, and disclose referral payments.

How is Standard VI tested at Level II?

It appears inside item sets, where a vignette describes a person or firm and you must answer from it. You usually identify the violated Standard or choose the best corrective action. Read the facts carefully, as questions cannot be answered from memory alone.

Does Standard VI(A) apply only to clients?

No. It requires disclosure to clients, prospective clients and the employer. Your employer must know about conflicts that could affect your independence or your duties to them.

Is owning shares in a covered company always a violation?

Not by itself. It is a conflict that should be disclosed, and the firm should manage it so that research stays objective. A violation arises when it is hidden or when it actually compromises your advice.

How should I study Standard VI with the other Standards?

Study it alongside I(B), III(A), III(B) and IV(B), because many cases involve more than one. After each practice set, write down every Standard that applies and why, to build the habit of cross-checking.