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Use Standard III (Duties to Clients) to judge a case

CFA® Level I · Ethical and Professional Standards · Guidance for Standard III: Duties to Clients · ET.4.a

The idea

Standard III governs what is owed to clients. Loyalty, prudence and care place the client's interest ahead of the employer's and of one's own, and require the care a prudent person would apply to their own affairs. Fair dealing means recommendations and changes reach all clients fairly — not identically, since mandates differ, but with nobody systematically served last. Suitability requires an investment to be judged in the context of the client's whole portfolio and written objectives, so a sound investment can still be an unsuitable one. Performance presentation must be fair, accurate and complete, and confidentiality survives the end of the relationship.

A practice question

From the question bank, with the reason each wrong option is wrong.

Under the duty of loyalty, prudence and care, a member must place the interests of:

  1. the client ahead of self and employer — correct
  2. the employer, who pays them, firstWhy not: Who pays the member is precisely the pressure the ordering is written to withstand.
  3. the employer's shareholders firstWhy not: The firm's own shareholders are not the client, and their interest ranks behind the client's.

Standard III(A) Loyalty, Prudence and Care orders the interests: the client's come ahead of the member's own and ahead of the employer's.

A harder one

A manager releases a new recommendation to the largest clients an hour before everyone else. This most likely violates:

  1. suitability, III(C)Why not: Standard III(C) asks whether the investment fits the client, not who was told about it first.
  2. fair dealing, III(B) — correct
  3. confidentiality, III(E)Why not: Standard III(E) protects client information, and a firm's own recommendation is not a client's confidence.

Standard III(B) Fair Dealing is violated. An hour's head start lets those clients trade before the others, which is priority on price-sensitive information.

The hardest tier

A member manages both a pension fund and personal money in the same strategy. Allocating the best fills to the personal account violates:

  1. suitability alone, III(C)Why not: Suitability asks whether the investment fits the client, and the wrong here is in who received which price.
  2. no Standard at all, if it is disclosedWhy not: Disclosure does not reorder the priority, and telling a client they came second does not make it acceptable.
  3. loyalty and fair dealing, III(A) and III(B) — correct

Standard III(A) puts the client first and Standard III(B) requires even-handed treatment. Taking the best fills personally breaches both, and Standard VI(B) besides.

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