VI(A) Avoid or Disclose Conflicts

Core Concepts

1. If something could pull my judgment away from being fair, I should first try to avoid it. If I cannot avoid it, I must clearly disclose it.
2. A conflict exists when some relationship, side benefit, ownership interest, or personal motive could make my advice less trustworthy.
3. Disclosure must be easy to notice, written in normal language, and given to the people who actually need to know.
4. Sometimes I need to tell both my employer and the client. Telling only one side is often not enough.
5. Common CFA conflict facts are family relationships, personal holdings, outside board roles, special fee deals, and situations where my firm benefits from the recommendation.

Violation Traps

1. I thought telling my employer is enough. Wrong logic: once compliance knows, the conflict problem is solved. Correct logic: if the conflict could affect the client's trust in my recommendation, I may also need to tell the client directly. Tested angle: employer disclosure does not automatically replace client disclosure.

2. I thought a vague warning is enough. Wrong logic: a line like "conflicts may exist" covers me. Correct logic: the disclosure must say what the actual conflict is in a way a normal reader can understand. Tested angle: hidden boilerplate is not real disclosure.

3. I thought family ties matter only if money changes hands. Wrong logic: if my father, spouse, or sibling is connected to the investment but I get no cash, there is no conflict. Correct logic: close family ties can still pull judgment or make clients reasonably doubt my judgment, so they may need to be disclosed. Tested angle: CFA often tests relationship-based conflicts, not just cash payments.

4. I thought charity work or outside board service is too respectable to create a conflict. Wrong logic: a nonprofit or outside role is automatically harmless. Correct logic: even a good cause can still create pressure, divided loyalty, or a reason for others to question my objectivity. Tested angle: the facts look innocent on purpose.

5. I thought being right cures the conflict. Wrong logic: if the recommendation is genuinely good, the relationship behind it no longer matters. Correct logic: even a strong recommendation still needs conflict disclosure if the relationship could affect or seem to affect judgment. Tested angle: good idea does not erase bad disclosure.

6. I thought only stock in my own name counts. Wrong logic: if the holding is in my spouse's account, a family trust, or some controlled structure, it is outside the standard. Correct logic: if I benefit financially or control the account, CFA may still treat it as my interest. Tested angle: the exam likes hidden ownership through family or controlled accounts.

7. I thought an old friendship or old business relationship is too minor to matter. Wrong logic: being former classmates or old colleagues is just background color. Correct logic: if that relationship could influence manager selection or recommendation judgment, it may need disclosure. Tested angle: CFA often hides the whole question inside one personal tie.

8. I thought only proven bias counts. Wrong logic: if I personally feel honest and fair, there cannot be a conflict problem. Correct logic: CFA also cares about situations where a reasonable client or employer would think, "Maybe this person's judgment is being pulled by something else." Even if you feel neutral inside, the situation may still need disclosure. Tested angle: the exam often asks whether the situation looks capable of influencing judgment, not whether bias has already been proven.

9. I thought my firm's stricter conflict rule is optional if CFA itself would allow the conduct. Wrong logic: if the Code does not ban it, I can ignore the firm's tighter rule. Correct logic: your employer can set stricter rules than CFA's minimum. If the firm says "do not do this at all," you still must follow that stricter rule. Tested angle: CFA often tests the difference between the minimum ethical floor and a tougher internal policy.

Not-a-Violation Traps

1. I thought every conflict means I must walk away from the situation. Wrong logic: disclosure is never enough. Correct logic: some conflicts can be handled through full and clear disclosure when avoiding them is not practical. Tested angle: VI(A) is not an automatic recusal rule in every case.

2. I thought recommending a related party is always banned. Wrong logic: if my relative or my firm has any connection to the investment, I must reject it automatically. Correct logic: the recommendation may still be allowed if it is truly appropriate and the conflict is fully disclosed. Tested angle: the standard is often about disclosure, not automatic prohibition.

3. I thought once I disclosed the conflict once, I never need to mention it again. Wrong logic: an old disclosure covers all future changes. Correct logic: if the conflict becomes bigger, changes form, or becomes more serious, I should update the disclosure. Tested angle: changing bonus plans and deepening relationships often flip the answer.

4. I thought telling the client is enough even when the conflict also affects my employer. Wrong logic: if the client knows, the employer does not matter. Correct logic: if the conflict could also interfere with my duty to the employer, I may need to report it there too. Tested angle: who needs to know depends on who is exposed to the conflict.

5. I thought conflicts come only from money. Wrong logic: without direct cash, there is no real conflict issue. Correct logic: social pressure, prestige, loyalty to friends, outside titles, and family relationships can all create conflicts. Tested angle: noncash motives are very alive in CFA questions.

VI(B) Priority of Transactions

Core Concepts

1. Client trades and employer trades must come before my own trades.
2. "My own trades" includes not only my personal account but also accounts where I benefit financially or control the decision, including some family accounts.
3. The main danger is using knowledge of upcoming client activity to help myself first.
4. Initial public offerings, private placements, blackout periods, preclearance, and duplicate confirmations are the common CFA testing vehicles here.
5. Even if my firm forgot to write a policy, the basic duty still exists.

Violation Traps

1. I thought a tiny personal trade cannot hurt anyone. Wrong logic: small size makes the ethics issue disappear. Correct logic: front-running is still front-running even when the trade is small. Tested angle: the exam often uses a tiny trade to make the misconduct feel harmless.

2. I thought my spouse's or family account is not really mine. Wrong logic: if the account is not under my own name, VI(B) does not apply. Correct logic: if I benefit from it, control it, or have a real financial interest in it, CFA may still treat it like my own interest. Tested angle: family-account fact patterns are classic here.

3. I thought the order of trading does not matter if clients never notice. Wrong logic: private advantage is fine if no one sees the harm. Correct logic: I must give clients and employers a real chance to act before I trade for myself. Tested angle: secrecy does not cure the violation.

4. I thought no firm policy means no personal-trading violation. Wrong logic: if the company forgot to write rules, I am free to trade first. Correct logic: the Code still says clients come first even if the internal system is weak or missing. Tested angle: lack of policy is not a defense.

5. I thought family clients should be placed last to avoid looking biased. Wrong logic: treating them worse solves the favoritism problem. Correct logic: family members who are real clients should be treated like any other client, not pushed ahead and not pushed behind. Tested angle: CFA tests both favoritism and unfair under-treatment.

6. I thought hot new issues are fine for me if I can get personal access. Wrong logic: if my broker offers me the shares, it is my personal opportunity. Correct logic: scarce opportunities can create a conflict if my clients should have had the chance first. Tested angle: IPO scarcity is one of CFA's favorite VI(B) setups.

7. I thought trading the opposite way from my recommendation proves there is no conflict. Wrong logic: if my trade is in the other direction, I cannot be abusing client information. Correct logic: opposite-side personal trading can still create conflict and still needs careful review under firm rules. Tested angle: opposite direction is not an automatic safe harbor.

Not-a-Violation Traps

1. I thought I can never own the same investments as my clients. Wrong logic: matching a client position is automatically unethical. Correct logic: owning the same investment is not automatically wrong if clients are not hurt and I still respect trade priority. Tested angle: co-investing is not the problem; unfair order of trading is.

2. I thought any personal trade that goes against my client advice must violate the standard. Wrong logic: my own liquidity or tax needs never matter. Correct logic: personal reasons may justify a different trade, as long as I am not using client information or harming client priority. Tested angle: motive and timing are what matter.

3. I thought every family account must be treated as my personal account. Wrong logic: if my parents are clients, they always move behind everyone else. Correct logic: if it is a genuine client account and not really my personal money in disguise, it should be treated like any other client account. Tested angle: CFA tests whether you can tell "family client" from "my own beneficial account."

4. I thought a vague sentence about personal-trading policy is enough disclosure. Wrong logic: one boilerplate sentence answers every client concern. Correct logic: if clients ask, the explanation should be specific enough to actually help them understand the safeguards. Tested angle: empty policy language does not build real trust.

5. I thought there is no violation if I lose money. Wrong logic: a losing front-run is less serious than a winning one. Correct logic: the violation is taking priority away from the client, not whether my trade made money. Tested angle: outcome does not decide the ethics.

6. I thought I need full legal ownership before VI(B) applies. Wrong logic: without formal title, the account is outside the rule. Correct logic: control, indirect financial benefit, or power over the trading decision can be enough. Tested angle: CFA reads this idea broadly.

7. I thought preclearance and reporting are just back-office paperwork. Wrong logic: if the forms are messy, it is only an operations issue. Correct logic: those procedures exist to stop employees from helping themselves before clients. Tested angle: the paperwork matters because it protects the real ethical rule.

VI(C) Referral Fees

Core Concepts

1. If I get something for sending a client to a product or service, or if I pay someone for sending a client to me, that must be disclosed.
2. Referral fees are not automatically banned. The real issue is whether the client and employer know about them in time.
3. The disclosure should happen before the client agrees to the service, not after the deal is already done.
4. The disclosure should explain what I am getting or paying and roughly how much it is worth.
5. Cash, research support, internal bonus arrangements, directed commissions, and other noncash benefits can all count.

Violation Traps

1. I thought internal referrals inside one firm do not count. Wrong logic: only outside kickbacks trigger VI(C). Correct logic: even if the money moves between departments inside the same firm, it can still be a referral fee that must be disclosed. Tested angle: one firm name does not remove the conflict.

2. I thought disclosure is optional if the recommendation is actually good. Wrong logic: quality of the service cures the conflict. Correct logic: even a genuinely good recommendation still needs referral-fee disclosure. Tested angle: good advice and good disclosure are separate questions.

3. I thought telling the client later is close enough. Wrong logic: as long as I eventually confess the arrangement, the problem is fixed. Correct logic: the client must know before agreeing, so they can judge whether my recommendation is being influenced. Tested angle: timing is one of the biggest VI(C) traps.

4. I thought noncash benefits do not count. Wrong logic: research help, reciprocal business, or commission flow is not "real payment." Correct logic: anything of value can count if it is given because of the referral. Tested angle: CFA likes to hide the fee inside side benefits.

5. I thought a generic statement is enough. Wrong logic: saying "there is an arrangement" covers the rule. Correct logic: I should explain what the benefit is and give a reasonable estimate of its value. Tested angle: vague disclosure is not enough for the client to judge bias.

6. I thought trust makes disclosure less necessary. Wrong logic: if the client already trusts me or the referring person, there is less risk. Correct logic: trust makes disclosure more important, because the client may otherwise rely too heavily on the recommendation without seeing the hidden incentive. Tested angle: warm introductions are exactly where hidden fees become dangerous.

7. I thought my employer does not need to know if the client knows. Wrong logic: telling one side is always enough. Correct logic: the employer may also need to know so the firm can judge the conflict and supervise it properly. Tested angle: CFA often tests who must be told, not just whether anyone was told.

8. I thought a small referral fee does not matter. Wrong logic: only big kickbacks are ethically relevant. Correct logic: the issue is the existence of the incentive, not whether it looks large or small. Tested angle: CFA uses small amounts to tempt you into relaxing the rule.

Not-a-Violation Traps

1. I thought every referral arrangement is unethical. Wrong logic: taking or paying any referral fee automatically violates the Code. Correct logic: referral arrangements can be allowed if they are fully and timely disclosed. Tested angle: the standard is about transparency, not a total ban.

2. I thought only the person receiving the fee must disclose it. Wrong logic: paying for referrals is less problematic than receiving a fee. Correct logic: paying someone for a referral can also create a conflict and can also require disclosure. Tested angle: VI(C) runs in both directions.

3. I thought I can wait until the client asks. Wrong logic: silent unless questioned is acceptable. Correct logic: the client should not have to discover the conflict by accident or by asking the perfect question. Tested angle: disclosure must be proactive.

4. I thought one-time and ongoing fees are ethically different categories. Wrong logic: a one-time fee is too minor to count. Correct logic: both count; the difference is only in how I describe the arrangement. Tested angle: one-time versus recurring changes the detail, not the duty.

5. I thought research support or directed commissions are too indirect to count as referral fees. Wrong logic: if cash is not handed over directly, VI(C) does not apply. Correct logic: indirect economic benefits can still bias recommendations and still need disclosure. Tested angle: substance matters more than the label.

6. I thought later proof that the recommendation was good cures the earlier nondisclosure. Wrong logic: if an outside review later says the chosen manager was appropriate, the hidden fee no longer matters. Correct logic: the violation already happened when the referral arrangement was hidden at the time the client needed to judge my recommendation. Tested angle: later good results do not erase earlier hidden bias.