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CFA Level I · CFA Level I Exam · Code of Ethics and Standards of Professional Conduct

A member's firm will pay her a bonus based on the number of clients who move into the firm's proprietary funds. She recommends those funds to a client when a lower-cost external fund fits the client's objectives equally well. She has not told the client about the bonus. Her conduct most likely violates:

She most likely violates Standard VI(A), because the bonus is a conflict that could impair her objectivity and she neither avoided nor disclosed it to the client. Priority of Transactions and Referral Fees do not address a compensation incentive tied to the firm's own products.

  1. AStandard VI(B) Priority of Transactions only
  2. BStandard VI(A) Avoid or Disclose Conflicts, and the client is deprived of information on her objectivityCorrect
  3. CStandard VI(C) Referral Fees, because no referral was made to a third party

Explanation

The bonus is a conflict that could reasonably impair her independence and objectivity in making recommendations. She neither avoided nor disclosed it, which breaches Standard VI(A). Standard VI(B) concerns the order of transactions, and VI(C) concerns payments for referring clients or prospects to others, which is not the situation here.

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