A member negotiates a side letter granting preferential terms to a single client. Which Standard is violated?

• A. Standard VI.B Priority of Transactions
• B. Standard VI.A Disclosure of Conflicts
• C. Standard VI.A Disclosure of Conflicts and VI.B Priority of Transactions
• D. Standard IV.D (GIPS)

Answer: (B)

When you have a conflict of interest, you must disclose it to clients and obtain appropriate consent or take steps to mitigate, so your advice and actions remain fair and objective. Negotiating a side letter that grants preferential terms to a single client creates a direct conflict between the interests of that client and other clients, or the integrity of the advisory process. Because this could influence how services or terms are provided, it must be disclosed to affected clients (and managed) to maintain transparency and trust. Failing to disclose such a preferential arrangement violates the standard on Disclosure of Conflicts.

This issue isn’t primarily about the ordering or prioritization of transactions in the sense of execution priority, so Priority of Transactions isn’t the closest fit here. And GIPS relates to performance reporting, not conflicts of interest, so it isn’t applicable.