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Put the Fair Dealing standard, III(B), into practice

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

The idea

Members must deal fairly and objectively with all clients when making recommendations, taking investment action or providing other professional services. Fair does not mean identical: differing service levels are permitted provided they are disclosed and available to all who qualify. What is required is that a change in recommendation reach every client entitled to it through a process that gives each a fair opportunity to act, with the gap between decision and dissemination kept short so that no client is systematically placed ahead of the others, and that allocations of limited opportunities such as an oversubscribed offering follow a pre-established, disclosed and systematic method rather than being decided case by case.

A practice question

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

Does fair dealing require that all clients receive identical service?

  1. Yes, all clients must receive the same level of serviceWhy not: Fair means even-handed rather than uniform, and the Standard permits tiers that are open to all who qualify.
  2. No, tiered service is allowed if disclosed — correct
  3. No, service levels need not be disclosedWhy not: Disclosure is what makes a tier defensible, since an undisclosed one is indistinguishable from favouritism.

Standard III(B) Fair Dealing prohibits discrimination against clients, not tiered service. A service level is fair when it is disclosed and available to everyone who qualifies for it.

A harder one

How should an oversubscribed new issue be allocated among suitable clients?

  1. By a pre-established, disclosed method — correct
  2. To the clients who have generated the most commissionWhy not: Allocating by what a client is worth to the firm is the favouritism the Standard is written to prevent.
  3. To the clients who request it firstWhy not: A race rewards whoever was told earliest, which reintroduces the advantage fair dealing removes.

Standard III(B) requires a pre-established, disclosed and systematic method such as pro rata. The protection comes from the method existing before the opportunity does.

The hardest tier

A firm plans to downgrade a stock. Some clients hold it and some do not. What does fair dealing require about communication?

  1. Holders should be told first so they can sell before the price fallsWhy not: A head start for holders is an advantage taken from the clients told second, who may be buying into the fall.
  2. The downgrade should be published only after the firm has tradedWhy not: Trading ahead of one's own published recommendation puts the firm before every client.
  3. All entitled clients must get a fair chance to act — correct

Standard III(B) requires the downgrade to reach everyone entitled to it through a process that disadvantages none of them, which in practice means keeping the gap between decision and dissemination as short as the firm can manage. Extra care for holders is permitted, but only once everyone has had the information.

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