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Duties to Clients - III(A) Loyalty Prudence and Care


What is Standard III(A)? Loyalty, Prudence, and Care

What is the primary directive of Standard III(A), Loyalty, Prudence, and Care? Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.

To whom does Standard III(A) Loyalty Prudence and Care primarily relate? This standard relates principally to members who have discretionary authority over the management of client’s assets.

a. demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations of issues involving issues of personal integrity

Flash cards

What is fiduciary duty? Fiduciary duty refers to the obligations of loyalty and care in regard to the responsibility of managing someone else’s assets. A fiduciary duty is a position of trust.

b. distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards

Flash cards

What are the five primary duties of fiduciary duty? 1. A fiduciary is someone with the duty of acting for the benefit of another party. 2. Loyalty is owed to clients and prospects. 3. Clients’ interests come before yours. 4. A heightened level of fiduciary duty arises if the fiduciary has “custody” or effective control of the client’s assets. 5. Governing documents (e.g., trust documents and investment management agreements) are primary determinants of a fiduciary’s powers and duties.

When managing personal assets of an individual, to whom does the investment manager owe loyalty? It is owed to the client

When managing portfolios of a pension fund, to whom does the investment manager owe loyalty? The investment manager owes duty to the beneficiaries of the plan or trust (i.e., the “client”), not the employer who hired the manager.

What should guide the investment manager’s choice of which broker to direct client’s trades through? The manager should seek “best price and execution”.

If an investment manager directs trades through a broker who does not offer the best price, but instead offers other range of services like research services, or “soft dollars”, is this is violation of Standard III(A) Loyalty Prudence and Care? No, this is not a violation of III(A) because “soft dollars” may purchase other beneficial services, but the manager should disclose “soft dollar” arrangements.

Is it a violation of the Loyalty rule to defray administrative expenses? No, this falls under the “soft dollars” arrangement and should be disclosed to the client.

When managing a portfolio of funds must every investment decision be suitable on it’s own? No, every investment decision must be suitable within the context of the entire portfolio when considering diversification, correlation, etc.

c. recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct

Flash cards

What two things should primarily be taken into account when establishing the investment objectives of the client? 1. The clients needs and circumstances 2. The investments basic characteristics

Under what case should a portfolio not be adequately diversified? Portfolios should always be diversified unless the plan guidelines state otherwise

Under what circumstance should a conflict of interest NOT be disclosed? Never. Always disclose conflicts of interest.

How should an investment manager vote proxy solicitations? Always vote in the best interests of beneficiaries.

Should the “best execution” available always be provided to clients? Yes, unless there is a “soft dollar” arrangement where the investment manager is received other beneficial services and the arrangement has been disclosed to the client.