Reading 91 · Part B

Standard III(A) Loyalty, Prudence, and Care

Client interests always come first. Although this Standard does not impose a fiduciary duty where one did not already exist, it does require members and candidates to act in their clients' best interests and recommend products that are suitable given their clients' investment objectives and risk tolerances. Members and candidates must:

• Exercise the prudence, care, skill, and diligence under the circumstances that a person acting in a like capacity and familiar with such matters would use.
• Manage pools of client assets in accordance with the terms of the governing documents (e.g., trust documents, investment management agreements).
• Make investment decisions in the context of the total portfolio.
• Inform clients of any limitations in an advisory relationship (e.g., an advisor who may only recommend her own firm's products).
• Vote proxies in an informed and responsible manner. Due to cost-benefit considerations, it may not be necessary to vote all proxies.
• Client brokerage, or "soft dollars" / "soft commissions," must be used to benefit the client.
• The "client" may be the investing public as a whole rather than a specific entity or person.

Recommendations for Members. Submit to clients, at least quarterly, itemized statements showing all securities in custody and all debits, credits, and transactions.

Encourage firms to address these topics when drafting policies and procedures regarding fiduciary duty:

• Follow applicable rules and laws.
• Establish investment objectives of client.
• Consider suitability of a portfolio relative to the client's needs and circumstances, the investment's basic characteristics, or the basic characteristics of the total portfolio.
• Diversify.
• Deal fairly with all clients in regard to investment actions.
• Disclose conflicts.
• Disclose compensation arrangements.
• Vote proxies in the best interest of clients and ultimate beneficiaries.
• Maintain confidentiality.
• Seek best execution.

Standard III(B) Fair Dealing

Do not discriminate against any clients when disseminating recommendations or taking investment action. "Fairly" does not mean "equally." In the normal course of business, there will be differences in the time emails, faxes, and other communications are received by different clients.

Different service levels are acceptable, but they must not negatively affect or disadvantage any clients. Disclose the different service levels to all clients and prospects, and make premium levels of service available to all those willing to pay for them.

Give all clients a fair opportunity to act on every recommendation. Clients who are unaware of a change in the recommendation for a security should be advised of the change before an order for the security is accepted.

Treat clients fairly in light of their investment objectives and circumstances. Treat both individual and institutional clients in a fair and impartial manner. Members and candidates should not take advantage of their position in the industry to disadvantage clients (e.g., taking shares of an oversubscribed IPO).

Recommendations for Members:

• Encourage firms to establish compliance procedures requiring proper dissemination of investment recommendations and fair treatment of all customers and clients.
• Maintain a list of clients and holdings — use to ensure that all holders are treated fairly.

Recommendations for Firms:

• Limit the number of people who are aware that a change in recommendation will be made.
• Shorten the time frame between decision and dissemination.
• Publish personnel guidelines for pre-dissemination — guidelines prohibiting personnel who have prior knowledge of a recommendation from discussing it or acting on the pending recommendation.
• Disseminate new or changed recommendations simultaneously to all clients who have expressed an interest or for whom an investment is suitable.
• Develop written trade allocation procedures — ensure fairness to clients, timely and efficient order execution, and accuracy of client positions.
• Disclose trade allocation procedures.
• Establish systematic account review — ensure that no client is given preferred treatment and that investment actions are consistent with the account's objectives.
• Disclose available levels of service.

Standard III(C) Suitability

In advisory relationships, members must gather client information at the beginning of the relationship in the form of an investment policy statement (IPS). Consider clients' needs and circumstances and, thus, their risk tolerance. Consider whether or not the use of leverage is suitable for the client.

If a member is responsible for managing a fund to an index or other stated mandate, he must select only investments that are consistent with the stated mandate.

Unsolicited Trade Requests

An investment manager may receive a client request to purchase a security that the manager knows is unsuitable, given the client's IPS. The trade may or may not have a material effect on the risk characteristics of the client's total portfolio, and the requirements differ for each case. In either case, the manager should not make the trade until he has discussed with the client the reasons (based on the IPS) that the trade is unsuitable for the client's account.

• Minimal effect on the risk/return profile: after discussing how the trade does not fit the IPS goals and constraints, the manager may follow firm policy regarding unsuitable trades. The client must acknowledge the discussion and an understanding of why the trade is unsuitable.
• Material impact on the risk/return profile: one option is to update the IPS so the client accepts a changed risk profile that would permit the trade. If the client will not accept a changed IPS, the manager may follow firm policy, which may allow the trade in a separate client-directed account. In the absence of other options, the manager may need to reconsider whether to maintain the relationship with the client.

Recommendations for Members:

• For each client, put the needs, circumstances, and investment objectives into a written IPS.
• Consider the type of client and whether there are separate beneficiaries, investor objectives (return and risk), investor constraints (liquidity, expected cash flows, time, tax, regulatory and legal circumstances), and performance benchmarks.
• Review the investor's objectives and constraints periodically to reflect any changes in client circumstances.

Standard III(D) Performance Presentation

Members must not misstate performance or mislead clients or prospects about their investment performance or their firm's investment performance.

Members must not misrepresent past performance or reasonably expected performance, and must not state or imply the ability to achieve a rate of return similar to that achieved in the past.

For brief presentations, members must make detailed information available on request and indicate that the presentation has offered only limited information.

Recommendations for Members:

• Encourage firms to adhere to Global Investment Performance Standards (GIPS).
• Consider the sophistication of the audience to whom a performance presentation is addressed.
• Present the performance of a weighted composite of similar portfolios rather than the performance of a single account.
• Include terminated accounts as part of historical performance and clearly state when they were terminated.
• Include all appropriate disclosures to fully explain results (e.g., model results, gross or net of fees).
• Maintain data and records used to calculate the performance being presented.

Standard III(E) Preservation of Confidentiality

If illegal activities by a client are involved, members may have an obligation to report the activities to authorities.

The confidentiality Standard extends to former clients as well.

The requirements of this Standard are not intended to prevent members and candidates from cooperating with a CFA Institute Professional Conduct Program (PCP) investigation.

Recommendations for Members:

• Members should avoid disclosing information received from a client except to authorized coworkers who are also working for the client.
• Members should follow firm procedures for storage of electronic data and recommend adoption of such procedures if they are not in place.

Standard IV(A) Loyalty

This Standard applies to employees. Independent contractors instead have a duty to abide by the terms of their agreements.

Members must not engage in activities that would injure the firm, deprive it of profit, or deprive it of the advantage of employees' skills and abilities. Members should always place client interests above interests of their employer, but consider the effects of their actions on firm integrity and sustainability.

There is no requirement to put employer interests ahead of family and other personal obligations; employers and employees are expected to discuss and balance such matters.

There may be isolated cases where a duty to one's employer may be violated in order to protect clients or the integrity of the market, when the actions are not for personal gain. Some firms are required to have whistleblowing procedures in place to allow anonymous reporting of illegal or unethical acts.

Independent practice for compensation is allowed if a notification is provided to the employer fully describing all aspects of the services — including compensation, duration, and the nature of the activities — and the employer consents to all terms before it begins.

When leaving an employer, members must continue to act in their employer's best interests until their resignation is effective. Activities that may constitute a violation include:

• Misappropriation of trade secrets.
• Misuse of confidential information.
• Soliciting employer's clients prior to leaving.
• Self-dealing.
• Misappropriation of client lists.

Employer records on any medium (e.g., home computer, tablet, cell phone) are the property of the firm.

Once an employee has left a firm, simple knowledge of names and existence of former clients is generally not confidential. There is also no prohibition on the use of experience or knowledge gained while with a former employer. If an agreement exists among employers (e.g., the U.S. Protocol for Broker Recruiting) that permits brokers to take certain client information when leaving a firm, a member may act within the terms of the agreement without violating the Standard.

Members and candidates must adhere to their employers' policies concerning social media. When planning to leave an employer, they must ensure that their social media use complies with the employer's policies for notifying clients about employee separations.

Recommendations for Members: Members are encouraged to give their employer a copy of the Code and Standards. Best practice is to use separate social media accounts for personal and professional communications.

Recommendations for Firms: Employers should not have incentive and compensation systems that encourage unethical behavior.

Standard IV(B) Additional Compensation Arrangements

Compensation includes direct and indirect compensation from a client and other benefits received from third parties. Written consent from a member's employer includes email communication.

Understand the difference between an additional compensation arrangement and a gift from a client:

• If a client offers a bonus that depends on the future performance of her account, this is an additional compensation arrangement that requires written consent in advance.
• If a client offers a bonus to reward a member for her account's past performance, this is a gift that requires disclosure to the member's employer to comply with Standard I(B) Independence and Objectivity.