Guidance for Standard III: Duties to Clients

Standard III is the heart of a portfolio manager's ethical duties: loyalty to the client, fairness among clients, suitable investments, honest performance figures and confidentiality. Level III cases test these duties in realistic settings such as pension plans with demanding sponsors, scarce IPO allocations, clients whose lives have changed and marketing teams eager to show the best numbers. This module explains each part of Standard III and the procedures that turn it into daily practice.

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What you will learn

1. Apply the duties of loyalty, prudence and care and the requirement to deal fairly with all clients when managing portfolios.

Loyalty is owed to the client: for a pension plan, its participants and beneficiaries, not the sponsor.
Client brokerage is the client's asset: seek best execution and use soft dollars only for research that benefits those clients.
Proxy voting is part of the fiduciary duty; have, follow and disclose a voting policy.
Fair dealing means fair, not identical: disclosed service tiers are allowed, favouritism is not.
Never favour accounts for their size, fees, family ties or marketing value when disseminating changes or allocating trades.

2. Assess the suitability of recommendations and investment actions against a client's investment policy statement, mandate and total portfolio.

Before advising, inquire into experience, objectives and constraints; update regularly and after material changes.
Suitability is judged against the written IPS and the total portfolio, not holding by holding.
For mandated funds, suitability means staying true to the stated strategy or style; style drift is a breach.
Unsolicited unsuitable requests: explain, document, follow firm policy; if risk changes materially, update the IPS or decline.
Understand complex products over the client's holding period before recommending them.

3. Evaluate whether performance is presented fairly, accurately and completely, and whether confidential client information is properly protected.

Performance must be fair, accurate and complete: no cherry-picked accounts, survivorship bias or unlabelled back-tests.
Use size-weighted composites of all similar accounts, including terminated ones, with fee and benchmark disclosure.
GIPS compliance is the recommended, but not required, way to meet Standard III(D).
Confidentiality covers current, former and prospective clients.
Exceptions: illegal activity by the client, disclosure required by law, or client consent; cooperating with the PCP is allowed.

4. Recommend procedures for trade allocation, the dissemination of investment changes and client communication that put fair dealing into practice.

Limit who knows about a change, shorten the delay and release it to all relevant clients at the same time.
Allocate pro rata by order size, at the same average price and commission for every account in a block.
Firm, employee and family accounts come last in oversubscribed issues.
Disclose allocation procedures and service levels; review accounts systematically for favouritism.
Compliance should test allocations for cherry-picking and document every exception.

Module at a glance

III(A): loyalty is owed to the client (for a pension plan, its beneficiaries); act prudently and put clients first.
Client brokerage belongs to clients: best execution, soft dollars only for research that benefits them, a disclosed proxy policy.
III(B): fair is not identical; disclosed service tiers are fine, favouritism in dissemination or allocation is not.
III(C): know the client, use a written IPS, judge the total portfolio and update after material changes; funds must follow their mandate.
III(D): fair, accurate, complete performance; include terminated accounts, label back-tests, disclose fees; GIPS recommended.
III(E): protect current, former and prospective client data except for illegal activity, legal requirement or consent.
Procedures make fairness real: simultaneous release, pro rata allocation, systematic review and compliance testing.

This free module has 4 lessons, 16 practice questions with full explanations.

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