Standard IV(B): Additional Compensation Arrangements

What does Standard IV(B) require?

You must not accept gifts, benefits, compensation or consideration that competes with, or might reasonably be expected to create a conflict with, your employer’s interests, unless you obtain written consent from all parties involved. Any outside additional compensation that fits that description needs permission first.

Memorize

The Standard covers direct pay from a client and indirect benefits from third parties alike. Typical examples are performance bonuses from clients, paid directorships, consulting fees and trips. The point is that such arrangements can affect your loyalty and objectivity. Disclosure lets the employer weigh the arrangement when it judges your actions and motives, and lets it know the true cost of the services you provide.

If you work part time, raise any limits on competing activity when you negotiate the job. The Standard then applies to the limits you agreed.

What counts as written consent from all parties?

Written consent means any communication that can be documented and retrieved, such as an email. A conversation in a corridor does not qualify, even if a senior person said yes.

The words all parties involved cover the employer and the party offering the compensation. In practice, you report the arrangement to your employer in writing and the offering party confirms the details. Obtain consent before you accept, not after.

Extra pay or benefit from someone other than your employercash, trips, directorships, fees

• Does it compete or risk a conflict? Memorize if not, IV(B) is not triggered
  • Client bonus tied to performance
  • Paid directorship or consulting fee
  • Payments from a broker or supplier
• Written consent first Memorize
  • All parties involved in practice the employer, with the payer's terms confirmed
  • Written, including email verbal is not enough
  • Before accepting never afterward
• What the written report states Use it
  • Nature of the compensation
  • Approximate amount
  • Duration of the arrangement

What should the written report say?

Make an immediate written report to your supervisor and compliance officer. State the terms of the arrangement:

• the nature of the compensation or benefit;
• the approximate amount;
• the duration of the agreement.

Have the party offering the compensation, including a client offering a performance incentive, confirm the details. Then wait for the employer’s written consent.

Where do the lines fall?

Situation	Verdict
A client offers a manager a holiday if her account beats the index by 5%. She tells her boss verbally	Violation (consent must be written)
A manager gets written approval by email before accepting a paid seat on a company board	Fine
An analyst accepts a one-off thank-you gift card of modest value from a client and reports it	Fine under I(B). IV(B) bites when the benefit is tied to future performance or competes
A trader accepts monthly “consulting fees” from a broker the firm uses	Violation (conflict without consent)

How does IV(B) differ from I(B) and VI(A)?

Three Standards touch outside benefits, and exam questions test which one applies.

• I(B) Independence and Objectivity asks whether a gift or benefit threatens your independent judgment. A modest thank-you from a client is usually an I(B) question.
• IV(B) asks whether pay or benefits compete with, or conflict with, your employer’s interests, and requires written consent. A client bonus for future performance or a paid outside directorship are the classic cases.
• VI(A) Avoid or Disclose Conflicts requires full and fair disclosure of conflicts to employers, clients and prospects.

Exam tip When a question says “unless the employer agrees in writing” or “tells her supervisor”, look at the form of the consent first.

Go deeper Why client performance bonuses are risky

A bonus tied to one client’s returns gives the manager a personal reason to favor that account. She might take more risk in it, give it the best trade ideas or trade ahead of the firm’s other clients. The firm’s other clients and the employer could be hurt, and the employer cannot manage a risk it does not know about. That is why the employer must hear about the arrangement, and consent in writing, before the benefit is accepted.