Put the Additional Compensation Arrangements standard, IV(B), into practice
The idea
Members must not accept gifts, benefits, compensation or consideration that competes with, or might reasonably be expected to create a conflict of interest with, their employer's interest, unless they obtain written consent from all parties involved. The Standard is about the employer's ability to assess the conflict, so the consent must be written and must describe the terms — the amount, the duration and the nature of the benefit. A performance bonus offered directly by a client is the classic case: it is not forbidden, but it must be disclosed and consented to before it is accepted.
A practice question
What form must consent take under Standard IV(B)?
- Verbal notice to the immediate supervisorWhy not: Notice is not consent, and nothing records the terms the employer is said to have accepted.
- Written consent from all parties involved — correct
- Disclosure in the firm's annual reportWhy not: An annual report reaches shareholders long after the incentive has begun operating.
Standard IV(B) Additional Compensation Arrangements requires written consent from all parties involved, so the employer can see the arrangement and monitor it.
A harder one
A client offers a portfolio manager a personal bonus for beating a benchmark. Is this permitted?
- No, such arrangements are prohibited outrightWhy not: The Standard regulates them rather than banning them, and consent is what makes one acceptable.
- Yes, without conditions, since it rewards good performanceWhy not: The reward creates a reason to favour that client's portfolio, which is precisely why consent is required.
- Yes, with the employer's prior written consent — correct
Standard IV(B) permits such an arrangement provided written consent describing its terms is obtained from the employer beforehand, since the employer must be able to weigh the incentive.
The hardest tier
Why must the written consent describe the amount and duration rather than merely note that an arrangement exists?
- Because the employer cannot judge an incentive it cannot see — correct
- Because regulators publish the detailsWhy not: Such arrangements are not generally published, and the disclosure runs to the employer rather than to a regulator.
- Because the amount determines the tax treatmentWhy not: Tax is a separate matter and is not what the Standard is protecting.
Standard IV(B) exists so the employer can assess and monitor the conflict. Without the size and the term, it cannot judge how strong the incentive is.
In the app: 9 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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