Standard III – Duties of Clients

This standard has 5 parts:

A. Loyalty, prudence, and Care

Members 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' interest before their employer's or their own interest.

Examples of Violation:

  • Example 1: A money manager indulges in excessive trading using his client's money because he gets commission on the trading volume. Even if all the trades are suitable for the client, it's a violation of the law.

  • Example 2: An investment advisor, in order to get more clients/business from a broker, starts directly more and more of his client's trades through this broker, without clients’ knowledge and/or considering best execution practices.

  • Example 3: An investment manager, who workers for an investment trust, conducts all the transactions through a particular broker, because that broker provides him personal benefits, such as lower transaction costs on his personal trades.

  • Example 4: The investment manager directs all trades to a broker in return for certain products and services (pay soft dollars).

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.

Examples of Violation:

  • Example 1: An analyst selectively shares the purchase recommendation of a new company with a few clients before the recommendation is sent to all clients.

  • Example 2: A company's pension fund is managed by a bank. The company finds out that the company's fund managed by the bank has underperformed compared to the bank's own similar fund. On investigation it is found out that the banks pension fund manager, gives priority to the bank's own funds over the client's funds. For example, when there is a new purchase recommendation for a security, the securities are first purchased for the bank's own fund and then for the client's funds.

  • Example 3: The investment manager at a money management firm is on the verge of losing a client because of poor performance. In order to retain the client, the investment manager buys certain securities and holds them for a few days without allocating them. After that it allocates the profitable ones to the losing client, and the loss making securities to other clients. This way it is able to improve the performance for this client and manages to retain it.

  • Example 4: An investment manager sends new recommendations to all clients by email, but to a selected few he calls and informs personally.

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