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Duties to Clients - III(B) Fair Dealing


What is the primary directive of Standard III(B) Fair Dealing? Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.

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 does the word “fairly” mean in “must deal fairly and objectively with all clients”? “Fairly” implies that members must not discriminate against or favor any clients. Fairness shall be maintained in quality and timing of services, and allocation of investment opportunities.

Why does CFA use the word “fairly” and not “equally” in Standard III(B)? The term “fairly,” rather than “equally,”, is used because it would be physically impossible to reach all customers at the same exact instant, and not all recommendations or investment actions are suitable for all clients.

Under Standard III(B) should all clients be treated equally? No, it is impossible to treat everybody equally (due to communication, availability, etc), but everybody should be treated Fairly.

Are CFA members required to give the same level of services to all clients? Members are NOT required to give the same level of services to all clients. For example, you can give more information and research to discretionary clients than to transaction-only clients.

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

Flash cards

How should information be disseminated to clients? All clients should be informed of investment recommendations at approximately the same time.

How should a member decide who should receive specific information? How should it NOT be decided? The decision should be based on suitability and known interest, not on preferred or favored status.

Should clients in discretionary accounts be treated the same as those who are not in discretionary accounts? Yes

What four things should trade allocation procedures ensure? 1. Fairness to clients (both in priority of execution and allocation of price obtained on block trades) 2. Timeliness of execution 3. Accuracy of trade records 4. Client positions

What should the investment manager do if an allocation is oversubscribed? Members should forego any sales to themselves or their immediate families.

Should members disclose to clients their trade allocation procedures? Yes, and also how they can affect the client and prospects.

Is it ok for members to withhold “hot issue” securities from clients for their own benefit? No

Is it OK for members to use “hot issue” securities as a reward or incentive for a client or somebody else? No

Can members trade ahead of the dissemination of research reports or before recommendations are given to clients? No

If your uncle is a fee-paying client like all your other clients, can you allocate your uncle shares in a hot IPO stock with limited availability along with your other clients? Yes, if the uncle is fee-paying he has the same right to fairness as all other clients do.

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

Flash cards

What are eight procedures for compliance with Standard III(B) Fair Dealing? 1. Limit the number of people involved. 2. Shorten the time frame between decision and dissemination. 3. Publish personnel guidelines for pre-disseminations. 4. Disseminate information simultaneously to all parties. 5. Maintain a list of clients and their holdings. 6. Develop and disclose written trade allocation procedures. 7. Establish systematic account review. 8. Disclose levels of service.

What are seven steps a firm must take to ensure adequate trade allocation? 1. Obtain advance indications of client interest for new issues. 2. Allocate new issues by client rather than by portfolio manager. 3. Adopt a pro rata or similar objective method or formula for allocating trades. 4. Treat clients fairly in terms of both trade execution order and price. 5. Execute orders in an efficient and timely manner. 6. Keep accurate records of trades and client accounts. 7. Periodically review all accounts to ensure that all clients are being treated fairly.

You have many clients in a particular security. The company releases news shortly before close of trading that will move the stock downward. Who should you talk to first? Given the limited timeline for action, you should contact the clients with the largest positions in the security first because they have the greater concern.