A firm offers a performance fee that is not adequately disclosed or is contingent on performance. Violation?

• A. Standard I.D Misconduct
• B. Standard III.B Additional Compensation Arrangements
• C. Standard IV.B Fair Dealing
• D. Standard VII.B Reference to CFA Institute

Answer: (B)

The issue tests how to manage conflicts of interest arising from compensation arrangements. Performance-based fees create an incentive for the advisor to take actions that boost the fee, not just the client’s best interests. That makes transparency crucial. CFA Institute requires that any additional compensation arrangement that could influence or bias investment decisions be fully disclosed to both the employer and the client. If a performance fee is not adequately disclosed or is contingent on performance, the firm cannot demonstrate that it has managed the potential conflict, so this violates that standard.

Other standards aren’t focused on compensation arrangements: misconduct deals with illegal acts or policy violations, fair dealing relates to treating all clients fairly and avoiding misrepresentation in communications, and references to CFA Institute govern how the Institute is mentioned in communications. The key issue here is the disclosure and management of compensation-related conflicts, which is why this is the correct standard.