Home › CFA® Level II › Ethical and Professional Standards
CFA® Level II · Ethical and Professional Standards · free lesson
Guidance for Standard III: Duties to Clients
Standard III is where ethics meets day-to-day portfolio management: whose interests come first, how trades and new issues are shared out, whether an investment fits the client, how results are reported and what must be kept confidential. Level II vignettes test these duties through proxy votes, soft-dollar arrangements, partly filled orders, changing client circumstances and marketing material. This module explains each sub-standard, works through realistic allocation and suitability problems, and sets out the procedures that keep a firm compliant.
What you will learn
1. Apply the duties of loyalty, prudence and care, including in proxy voting and soft-dollar arrangements.
- Clients come first, then the employer, then the member; identify the true client, such as pension beneficiaries.
- Prudence means the care and skill of a knowledgeable professional, judged at the level of the whole portfolio and the mandate.
- Commissions are client assets: seek best execution and use soft dollars only for research that benefits those clients.
- Vote proxies in clients' interests under a disclosed policy; not voting can be justified by a documented cost-benefit analysis.
- Keep client assets in custody separate from the firm's and the member's own.
2. Apply fair dealing to recommendations, trade allocation and IPO distribution.
- Fair is not identical: disclosed service tiers are fine if they do not disadvantage other clients.
- Disseminate recommendation changes simultaneously to all clients entitled to them.
- Allocate partial fills pro rata at the same average price, decided before execution and based on time-stamped orders.
- Hot IPOs go to suitable clients pro rata; no keeping shares for oneself or rewarding clients for extra business.
- Family accounts that are fee-paying clients are treated like any other client.
3. Assess suitability, including the use of investment policy statements and updates to client circumstances.
- Inquire about experience, objectives and constraints before advising, and update regularly.
- Judge suitability in the context of the total portfolio.
- For a fund or mandate, suitability means consistency with the stated strategy and constraints.
- Review the IPS at least annually and after any material change in circumstances.
- Unsuitable unsolicited trades: explain, document, and consider an IPS update or signed acknowledgment if the impact is material.
4. Evaluate performance presentations for fairness and completeness, and apply the duty to keep client information confidential.
- Performance must be fair, accurate and complete: all similar accounts, including terminated ones.
- Label simulated or backtested results clearly and never present them as actual.
- State gross or net of fees, the benchmark and the period; GIPS compliance is recommended, not required.
- Confidentiality covers current, former and prospective clients.
- Exceptions: illegal activity by the client, disclosure required by law, or client permission; the PCP is also allowed access.
5. Recommend procedures that help prevent violations of Standard III.
- Written, disclosed policies on best execution, soft dollars and proxy voting support III(A).
- Time-stamped orders and a disclosed pro rata allocation policy support III(B).
- Written IPSs reviewed annually and after life changes support III(C).
- GIPS-style composites including terminated accounts support III(D).
- Role-based access, encryption, logging and training protect client data under III(E).
Module at a glance
- Put clients first; for pension plans the clients are the participants and beneficiaries, not the sponsor.
- Commissions are client assets: best execution, and soft dollars only for research that benefits the paying clients.
- Vote proxies in clients' interests under a disclosed policy; not voting can be justified by documented cost-benefit analysis.
- Fair dealing means simultaneous dissemination and pro rata allocation at the same price; disclosed service tiers must not disadvantage others.
- Suitability is judged against an up-to-date IPS and the total portfolio, or against the stated mandate for funds.
- Performance must be fair, accurate and complete: include terminated accounts, label simulations, state fees.
- Keep client information confidential unless it concerns illegal activity, disclosure is required by law, or the client consents.
This free module has 5 lessons, 17 practice questions with full explanations.