Standard VI(A): Avoid or Disclose Conflicts
Avoid any matter that could reasonably be expected to impair your independence and objectivity or interfere with your duties to clients, prospects and your employer. If avoiding it is not reasonable, disclose it fully and fairly, prominently and in plain language, so the reader actually understands it.
Before this: Standard IV(B): Additional Compensation Arrangements
On the exam
- Demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity
- Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct
- Identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards
Demonstrate VI(A), recommend compliance practices and identify compliant conduct. Expect stock-ownership, board-seat and compensation conflicts. Since the 2023 revision, the keys are avoid first, then a disclosure that is prominent, in plain language and effective.
How deeply to learn each part
- Know the idea
- Understand it in general. It frames other topics, but you will not calculate with it.
- Use it
- Understand it well enough to solve a question with it. Recognize when it applies.
- Memorize
- Learn it by heart. The exam will not give it to you.
You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.
You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.
What does Standard VI(A) require?
Avoid, or make full and fair disclosure of, anything that could reasonably be expected to impair your independence and objectivity or interfere with your duties to clients, prospective clients and your employer. A conflict of interest is any personal or professional interest that could bias your judgment, or make it fair to question whether your decisions are free of bias.
Memorize
The Standard sets a sequence, which we call avoid or disclose . Best practice is to avoid actual conflicts and even the appearance of them. Where that is not reasonable, you disclose.
- Rung 1: avoid Memorize preferred; where reasonably possible
- Sell or do not take the holding
- Decline the outside role or extra pay
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- Rung 2: disclose Memorize when avoiding is not reasonable
- Prominent not in a footnote
- Plain language no jargon or legalese
- Effective the reader understands it
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- Who must be told Use it
- Clients and prospects
- The employer promptly, with enough detail to assess it
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What makes a disclosure good enough?
A disclosure that cannot be missed and can be understood. Since the 2023 revision the Standard spells this out: a prominent plain-language disclosure is placed where the reader will see it, uses everyday words, and communicates the relevant information effectively.
You decide how often and in what manner to disclose, so err on the side of caution. Update a disclosure when the conflict changes materially. For example, a bonus that moves from an annual to a quarterly profit measure makes the conflict worse, so the old wording is out of date.
Exam tip A footnote in 6-point type fails “prominent”. Jargon fails “plain language”. A disclosure nobody understands fails “effective”.
Whom must you tell?
Clients and prospects need to know what could bias your advice, so they can judge your motives for themselves. Your employer needs to know anything that could interfere with your duties or push you to act against its interests, promptly and with enough detail to assess the effect.
Employers may go further and ban an activity outright, such as outside board seats or personal trading in covered names, to avoid even the appearance of a conflict. You must comply with those rules.
Where do conflicts come from?
- Compensation structures Use it bonuses tied to short-term results or banking revenue
- Stock ownership Use it beneficial ownership of securities you recommend
- Board membership Use it duties to shareholders, MNPI, option grants
- Cross-departmental ties Use it research, banking, sales and marketing pressure
- Issuer relationships Use it directorship, consultancy, underwriting, market making
- Compensation structures . Bonuses that reward short-term results, or revenue from companies you cover, give you a personal reason to lean one way.
- Stock ownership conflicts . The most common conflict. Beneficial ownership of a security you recommend, or that clients hold, must be disclosed. Beneficial ownership means a direct or indirect financial interest, or the power to vote or sell the shares.
- Board membership . Serving as a director creates three problems: duties to shareholders can clash with duties to clients, directors may receive shares or options, and the seat can bring material nonpublic information. Isolate directors from investment decisions with firewalls.
- Cross-departmental conflicts . Banking, sales or marketing may press an analyst for a favorable view of a company that is, or could become, a client of the firm.
Issuer relationships such as directorships, consultancies, underwriting and market making are the most obvious conflicts, and they must always be avoided or disclosed. Take reasonable steps to find out whether a conflict exists, and disclose your firm’s known conflicts too, such as market making in a stock or a share of fund fees paid back to the firm.
Where do the lines fall?
| Situation | Verdict |
|---|---|
| An analyst recommends a stock she owns, disclosing it in a 6-point footnote on page 30 | Violation (not prominent or effective) |
| The same disclosure placed clearly on page 1 in plain words | Acceptable if avoiding was not reasonable |
| A manager joins the board of a company in which client funds are invested and tells no one | Violation |
| An analyst’s bonus depends on banking revenue from companies she covers, undisclosed | Violation |
| A manager sells a personal holding before starting coverage to avoid the conflict | Consistent (avoid) |
Try this 0 of 3
- Get the footnote and the front-page box right first time
- Catch the conflict that has nothing to do with pay
- Find the case where the conflict was avoided, not disclosed
Case 1 of 4 The footnote
Lena Sorensen, CFA, covers food producers at Northgate Securities. She is a beneficiary of a family trust that holds a large stake in Rivermill Foods, and the trustees, not Lena, decide when to sell. Lena is Northgate's only food analyst, and the firm, which knows about the trust, has decided she keeps the coverage. She publishes a 32-page report rating Rivermill a Buy. The report says "The author owns shares in Rivermill Foods through a family trust and cannot sell them before 2029." The sentence is accurate and in plain words, but it sits in 6-point type in a footnote on page 30.
Step 1 of 6 Rung 1: can it be avoided?
Can the conflict reasonably be avoided?
Read the case, then answer each step. 4 cases.
Compliance practices
- Disclose compensation arrangements that could create conflicts, such as bonuses tied to banking revenue.
- Disclose holdings in recommended securities.
- Require employees to report outside roles, and keep a restricted list.
- Ask first whether a conflict can be avoided before relying on disclosure.
Go deeper Why the 2023 revision added avoid and plain language
The older wording, “Disclosure of Conflicts”, asked only for full and fair disclosure. A disclosure could be complete on paper and still be easy to miss or hard to follow. The revised text closes that gap. Avoidance is the preferred response, and a disclosure only counts if the reader can find it, read it and grasp it. On the exam, a conflict that could reasonably have been avoided and was merely disclosed is the case to watch.
Go deeper Firewalls and cross-departmental pressure
Where research, banking and sales sit in one firm, pressure to say nice things about a client company is a standing conflict. Firewalls limit what passes between departments. They also help with material nonpublic information (see Standard II(A)). A director who also provides investment services should be kept away from those who make investment decisions.
Memorize this
MemorizeStandard VI(A): what to know cold
| Point | The rule |
|---|---|
| Trigger | Anything that could reasonably be expected to impair independence and objectivity or interfere with duties to clients, prospects and the employer |
| Step 1 | Avoid actual or apparent conflicts where reasonably possible |
| Step 2 | If not reasonable, disclose fully and fairly |
| Good disclosure | Prominent, in plain language, effective at getting the message across |
| Who | Clients, prospects and the employer, as relevant |
| Update | When the conflict changes materially; err on the side of caution |
| Classic sources | Pay structures, stock you own, board seats, cross-departmental ties |
Memory hook Avoid it, or make it impossible to miss: if the reader needs a magnifying glass, it is not disclosed.
Know it cold Avoidable conflict left in place, or disclosure that is buried or jargon-filled = violation. Since 2023 the title is "Avoid or Disclose", not just "Disclosure".
- Rung 1: avoid Memorize preferred; where reasonably possible
- Sell or do not take the holding
- Decline the outside role or extra pay
-
- Rung 2: disclose Memorize when avoiding is not reasonable
- Prominent not in a footnote
- Plain language no jargon or legalese
- Effective the reader understands it
-
- Who must be told Use it
- Clients and prospects
- The employer promptly, with enough detail to assess it
-
- Compensation structures Use it bonuses tied to short-term results or banking revenue
- Stock ownership Use it beneficial ownership of securities you recommend
- Board membership Use it duties to shareholders, MNPI, option grants
- Cross-departmental ties Use it research, banking, sales and marketing pressure
- Issuer relationships Use it directorship, consultancy, underwriting, market making
How it is asked
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Own the stock you cover
An analyst cannot reasonably sell a large position in a company she covers. What should she do?
Disclose it prominently, in plain language. Traps: small print at the end, or silence because she bought first.
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Undisclosed board seat
A manager joins the board of a company held by clients and tells nobody. Violation?
Yes, VI(A). Trap: "board service is a personal matter".
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Preferred response
Under the current Standard, what is the preferred response to a conflict?
Avoid it where reasonably possible, then disclose what remains. Trap: "disclose in all cases".
Exam traps
- Assuming disclosure alone is always enough. The Standard says avoid first, then disclose.
- Treating a buried disclosure as adequate. Small print on page 30 is not prominent.
- Missing that a board seat is a conflict, even when unpaid.
- Thinking you only disclose to clients. The employer must be told too.
Checkpoint
3 exam-style questions. About 90 seconds each.
1An analyst holds a large personal position in a company she covers and cannot reasonably sell it. To comply with Standard VI(A), she most appropriately:
2A portfolio manager accepts a seat on the board of a company held in client portfolios. She tells neither her employer nor her clients. Did she violate the Standards?
3Under the current Standard VI(A), the preferred response to a conflict of interest is to:
Key takeaways
- Avoid conflicts where reasonably possible.
- If you cannot, disclose fully: prominent, plain language, effective.
- Tell clients, prospects and the employer, and update when the conflict changes.
- Watch pay structures, holdings, board seats and cross-departmental ties.
All Ethical and Professional Standards formulas, every lesson
Practice exam-style questions on Guidance for Standard VI: Conflicts of Interest
Questions about this lesson?
Where this comes back
- Standard VI(B): Priority of Transactions Guidance for Standard VI: Conflicts of Interest
Questions candidates ask
What does Standard VI(A) Avoid or Disclose Conflicts require?
Avoid, or make full and fair disclosure of, any matter that could reasonably be expected to impair your independence and objectivity or interfere with your duties to clients, prospects and your employer. Avoid where reasonably possible. Disclose the rest.
What changed in Standard VI(A) in the latest revision?
The title and text now say avoid or disclose, so avoidance is the preferred response. Disclosures must also be prominent, in plain language and effective at communicating the information. The older wording only required disclosure.
What makes a conflict disclosure adequate?
It must be prominent, not buried in small print, written in plain language, and designed so the reader actually understands the conflict. It should reach clients, prospects and the employer, and be updated when the conflict changes materially.
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