Guidance for Standard III: Duties to Clients

Standard III is the heart of the client relationship: who the client is and what loyalty means in practice, how to treat many clients fairly when recommendations change and trades are allocated, how to make sure each investment fits the client, how to report performance honestly, and how to protect what clients tell you. It is heavily tested because the situations are everyday ones: block trades, hot IPOs, unsolicited orders, marketing material and client data.

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What you will learn

1. Apply Standard III(A) Loyalty, Prudence, and Care, including identifying the client, seeking best execution, using client brokerage and voting proxies.

Act for the benefit of clients and put their interests before the employer's and your own.
For a pension plan the duty is owed to the participants and beneficiaries, not the sponsor.
Client brokerage is a client asset: seek best execution and use soft dollars only for research that benefits clients.
Vote proxies in clients' interests; a disclosed cost-benefit policy may justify not voting some proxies.
Act with the care and prudence of a knowledgeable professional.

2. Apply Standard III(B) Fair Dealing to the dissemination of investment recommendations, the allocation of trades and IPOs, and differentiated levels of service.

Fairly does not mean equally; no client may be favoured at another's expense.
Disseminate new and changed recommendations to all entitled clients at about the same time.
Allocate block trades and oversubscribed IPOs fairly, usually pro rata; clients come before personal accounts.
Premium service levels are acceptable if disclosed, available to all and not harmful to other clients.
Adopt written, disclosed allocation procedures and time-stamp orders.

3. Apply Standard III(C) Suitability, including the investment policy statement, unsolicited trade requests and managing a portfolio to a stated mandate.

Before advising, inquire into experience, objectives and constraints; update the information regularly.
Judge suitability in the context of the client's total portfolio, guided by a written IPS.
Review the IPS at least annually and whenever circumstances change materially.
For unsuitable unsolicited requests, explain the inconsistency; small trades may proceed, material ones need an IPS update or a separate account.
Funds and mandates must be managed within their stated objectives and constraints.

4. Apply Standard III(D) Performance Presentation to composites, terminated accounts, simulated results and brief presentations.

Performance information must be fair, accurate and complete.
Do not cherry-pick accounts or periods, or exclude terminated accounts from composites.
Simulated results are acceptable only if clearly labelled with key assumptions disclosed.
Brief presentations are acceptable if not misleading and fuller information is available on request.
GIPS compliance is one way to meet the Standard but is not required.

5. Apply Standard III(E) Preservation of Confidentiality to current, former and prospective clients and recognise the permitted exceptions.

Keep information about current, former and prospective clients confidential.
Exceptions: illegal activities by the client, disclosure required by law, or client permission.
Cooperating with a CFA Institute Professional Conduct Program investigation is not a breach.
Confidentiality covers storage, transmission and destruction of data, not just conversations.
When illegal activity is suspected, follow the law and firm procedures, which may forbid tipping off the client.

Module at a glance

III(A): loyalty to clients first; for pension plans the client is the participants and beneficiaries.
Client brokerage is a client asset; seek best execution and use soft dollars only for research that benefits clients.
III(B): fair, not identical, treatment; simultaneous dissemination and pro rata allocation, clients before personal accounts.
III(C): know the client, keep the IPS current, judge suitability at portfolio level and stay within mandates.
III(D): fair, accurate, complete performance; no cherry-picking, no dropping terminated accounts, label simulations.
III(E): protect current, former and prospective clients' information; exceptions are illegal activity, legal requirement and consent.

This free module has 5 lessons, 14 practice questions with full explanations.

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