- Six Components of Code of Ethics
- CFA Seven Standards of Professional Conduct
- Standard I - Professionalism (Standards of Professional Conduct)
- Standard II – Integrity of Capital Markets
- Standard III – Duties of Clients
- Standard IV – Duties to Employers
- Standard V – Investment Analysis, Recommendations, and Actions
- Standard VI – Conflicts of Interest
- Standard VII - Responsibilities of a CFA Institute Member or CFA Candidate
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.
C. Suitability
a. Before making an investment recommendation or action, the members must reasonably enquire into the client's investment experience, his risk/return objectives, and any limitations.
b. Before making an investment recommendation or action, the members must determine that the investment being advised is suitable for the client in terms of the client's objectives, financial goals, and limitations.
c. The member must also ascertain whether the investment being recommended is suitable in context of the client's overall portfolio.
Examples of Violation:
Example 1: An investment manager recommends two different clients with different risk profiles the same portfolio allocation.
Example 2: An investment manager learns that one of his client's financial situation has changed as he lost lots of money in his business. This affects the client's investment objectives but the investment manager does not update his investment policy statement to reflect the change objectives.
Example 32: For a particular high-income mutual fund, an investment manager decides to purchase a growth sock. This is against the fund's investment mandate.
4. Performance Presentation
The members must ensure that the investment performance being communicated to the clients is fair, accurate, and complete.
Examples of Violation:
Example 1: An investment manager reports to his client that they can expect a 20% growth in the next year. This calculation is based only on the past two years' performance of the fund. In their disclosure they should have mentioned that this forecast is based on only past two years' performance.
Example 2: An investment firm claims compliance with the GIPS standards, but the return calculations are actually not as per the requirements of GIPS standards.
Example 3: While promoting an investment product, the manager promotes to clients by showing the performance results for a certain period. The performance results are actually simulated, but this information is not disclosed to the clients.
5. Preservation of Confidentiality
The members must maintain the confidentiality of all their client's information (pas, current, or prospective), unless there is some illegal activity, a requirement from the law, or the client itself permits disclosure.
Example of Violation:
- An investment manager knows that his client is planning to donate a large sum of money. She passes this information to the head of her favorite donation group asking them to follow up on this with her client.
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