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CFA Level I · CFA Level I Exam · Guidance for Standard VI: Conflicts of Interest

A portfolio manager's bonus is currently based on annual profits. Her firm plans to base it on each quarter's profits instead. Under Standard VI(A), the manager's firm is most likely expected to:

The disclosures should be updated. Moving from annual to quarterly profit bonuses worsens the conflict by rewarding short-term results, and best practice under Standard VI(A) is to update disclosures when a conflict changes materially, erring on the side of caution.

  1. Aupdate its conflict disclosures because the conflict has materially worsened.Correct
  2. Bleave the existing disclosures unchanged because a bonus structure is always disclosed.
  3. Cremove all incentive pay because compensation structures cannot be disclosed adequately.

Explanation

Best practice is to update disclosures when the nature of a conflict changes materially, and the guidance gives the shift from annual to quarterly profit bonuses as an example of a worsening conflict. Eliminating incentive pay is not required.

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