CFA Level IEthical and Professional StandardsEasy
An investment adviser refers clients to a mortgage broker and receives $500 for each referral that results in a closed loan. Under the CFA Institute Code and Standards, what must the adviser do?
- ADecline all referral fees regardless of disclosure, since they are inherently prohibited
- BDisclose the referral arrangement and compensation to clients and to the adviser's employer
- CNothing, because the fee is paid by the mortgage broker rather than the client
- DDisclose the arrangement only if the referral fee exceeds 10% of the adviser's annual compensation
Show answer & explanationAnswer & explanation
Correct answer: B. Disclose the referral arrangement and compensation to clients and to the adviser's employer
Standard VI(C), Referral Fees, requires members and candidates to disclose to employers, clients, and prospective clients any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services. Referral fees are not prohibited outright, but must be fully disclosed regardless of size.
Why the other options are wrong
- A. Referral fees are permitted as long as they are disclosed; they are not banned.
- C. The source of payment does not eliminate the disclosure obligation.
- D. There is no materiality threshold; all referral compensation must be disclosed.
Referral Fees (VI(C))
Members must disclose to clients and employers any compensation or benefit received for referring clients to other service providers.
- Applies to both cash and non-cash benefits
- Disclosure must be made before the client acts on the referral
- No minimum dollar threshold triggers the disclosure duty
Memory trick: "Every referral dollar must be disclosed, not withheld."