You manage a client portfolio. Your spouse owns 50,000 shares of a stock you are about to upgrade. Your custodian offers free vacation tickets for referring new accounts. Standard VI tells you what disclosure, sequencing, and reporting each of these scenarios demands.
Standard VI of the Standards of Professional Conduct splits into three sub-standards. Each targets a different conflict mechanism. VI(A) Avoid or Disclose Conflicts covers any matter that could impair objectivity or interfere with duties to clients, prospective clients, or employer. VI(B) Priority of Transactions governs the order of trades when you, your firm, and your clients all want the same security. VI(C) Referral Fees governs any compensation paid or received in connection with directing business.
KEY: A conflict of interest is not automatically a violation. The violation arises from failing to avoid or disclose, failing to prioritize correctly, or failing to manage. A member who owns stock in a recommended company has a conflict.
The Standards give two ways to comply with VI(A): avoid the conflict, or make full and fair disclosure of it.
Common mistakes
- Treating disclosure as a cure for every conflict. Some conflicts are too severe. A board seat at a covered company, a family member who runs the issuer, or compensation that overwhelms judgment all require removal or recusal, not just disclosure. Trap: selecting "disclose the relationship and continue coverage" when the right answer is "decline coverage."
- Confusing beneficial ownership with legal title. VI(B) applies to any account where the member has economic interest or control. Spouse, minor children, household members, and controlled trusts all count as the member's accounts. Trap: assuming a trade in a spouse's name is exempt from priority-of-transactions rules.
- Disclosing referral fees only by request or only in fine print. VI(C) requires proactive, prominent, quantified disclosure before engagement. "Available on request" language fails. Trap: a client who signs an engagement letter in January and learns of a 15 bps referral fee in December has not been adequately informed.
Bottom line
- VI(A) Avoid or Disclose: avoid the conflict when that is reasonable; otherwise disclose it fully, fairly, and prominently in the document the client actually reads, before the conflict can taint judgment, not after.
- VI(B) Priority: clients first, employer second, personal accounts last. Personal includes spouse, minor children, household members, and controlled trusts (beneficial ownership).
- VI(C) Referral fees: disclose existence, nature, and value before the client engages, not at year-end.
- Non-cash compensation (free trips, conference passes, soft dollars) counts as referral consideration under VI(C) just like cash.
Exam shortcut
When a vignette presents a conflict, ask three questions in order: Was it avoided, or disclosed prominently before the client could act? Were client transactions executed before personal ones? Were all referral payments named and quantified up front? Any "no" maps to a violation of VI(A), VI(B), or VI(C) respectively.
The full lesson (about 2,870 words, 19 min read) adds 5 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- standard VI conflicts of interest
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