Standard III - Duties to Clients (cont.)
III(A) Loyalty, Prudence, Care (cont.)
Practices
- Quarterly reports with good detail, show where assets are and when they are moved
- Ask the client in uncertain situations (duh)
- Must consider client needs/circumstance, investment characteristics, and portfolio characteristics
- Disclose conflicts of interest both actual and potential
- MUST seek best execution unless specifically asked by client as ultimate beneficiary - thus a pension manager cannot ask for a certain non-best execution broker since he is not the ultimate beneficiary
- Place client interests first
Notes from examples:
- Must vote proxies in best interest of client - proxies have economic value
- But Cost-Benefit might show that voting all proxies may not benefit client - MC should disclose proxy voting policies
- Must seek best price and best execution on all trades - can't just use a broker because you like them
- Must allocate efforts across all your clients - don't exclude someone suitable (like a fam member) just because it might look like a conflict. However if a fam member is outside the normal fee structure for the firm, it is OK to exclude
- If hired to be an expert witness, 'client' is not well-defined - must give IO opinion
- If two CFAs in different firms serve the same client, they do not 'share' responsibility to the client - your activities should not be influenced by what another does
III(B) Fair Dealing
MCs must deal fairly and objectively with all clients
- Must disseminate investment recommendations to all clients fairly
- 'Fairly' means taking care not to discriminate against clients - different than 'equally'
- Clients who pay higher service fees can get better service but this service must be available to all
Investment Recommendations
- Targeted at those MCs whose primary job is preparation of recommendations to be acted on by others
- Reco is any opinion expressed by a MC in regard to purchasing/selling/holding a given security or investment
- Can be oral as well
- This statute goes over how information is to be disseminated so all clients have a fair opportunity to act on every recommendation
- Firms should come up with a system on how to disseminate outside the firm - many practical challenges
- Subsequent research (i.e. rating changes) are perhaps more critical than initial analyses - particular care should be given to make sure info reaches those who have acted on past advice
Investment Action
- Targeted at those MCs whose job is to take investment actions based on recommendations
- Cannot favor certain clients by given them bigger allocations of good ideas
- If oversubscribed, must prorate it to all subscribers on round-lot basis, and give up any personal/family allocation for benefit of clients, unless family is on same basis (no special treatment) - but MC is still excluded
- Must exercise care to treat all clients fairly (does this mean the rule does not per se require fair treatment, only that one exercise care to treat all fairly?)
- Should disclose your allocation procedures
- MC's duty to clients CANNOT ever be overridden by client consent to patently unfair allocation procedures
- Cannot abuse position of privilege to detriment of clients/for personal gain (e.g. hot IPOs)
Implementation
- Can publish short research notes w main points in advance of longer notes
- Should establish procedures to inform people at approximately the same time
- Restrict trades for employees
- Process/execute on a FIFO basis and bundle when appropriate for an asset class/security
Notes from examples:
- Must allocate trade wins and losses across all investors in those trades - no favoritism
- You can talk to select big clients right after you disseminate - they presumably pay higher fees and this is not special treatment because you have disseminated
- Pro rata is to be based on the minimum lot size - e.g. 3 clients request 10k, 2 request 50k, 130k total, but only 55k available - allocated 5k to each of the first 3 (15K) and 20k to each of the other two (not sure if there is standard math for these round lot problems...)
III(C) Suitability
Must make reasonable inquiry into clients' situation, experience, objectives and update regularly; determine that an investment is suitable to situation and consistent with written mandates/constraints; judge in context of entire portfolio
AND
When managing to a specific mandate, can only make recos and take action consistent with mandate's objectives and constraints.
- If you receive an unsolicited trade you know is not suitable, either do not make trade or seek affirmative statement from client that suitability is not a consideration
- Developing an investment policy for client - must understand risk profile before investing
- Leverage inherent in some synthetic vehicles is a particularly important risk
- Update investment policies AT LEAST annually and prior to material changes
- Effective only if the MC sees the whole portfolio even that not managed by them
- But MCs can only be responsible for acting on what they see/know
- Index - responsibility is to follow the index fund mandate
- Written investment policy statements focusing on client identification, goals, situation, risks, constraints, performance benchmarking etc.
- Annual review is reasonable unless there are other reasons (market etc.) to go more frequent
- Must always consider in context of the whole portfolio, not just single investments
- When clients ask for international diversification, time to update IPS
- Cannot select a submanager on the sole basis of cost - must consider suitability
III(D) Performance Presentation
MC must make reasonable effort to ensure fair, accurate, and complete investment performance information.
- Applies to clients as well as prospective clients
- Cannot state or imply that past results are an indicator of future performance
- Must provide supporting data if presentation is brief - include a reference to the limited nature of the data provided
Procedures
- Apply GIPS standards
- Or, in absence of GIPS, consider audience, present composites rather than single 'representative' account, include terminated accounts, clearly state if gross/net, and maintain data/records used to produce the performance data being presented
Notes from examples:
- Don't claim GIPS compliance unless you actually do it - must be asset weighted, e.g.
- Cannot post investment performance while at a previous employer unless you state it was at the previous employer
- Must indicate when results are simulated
III(E) Preservation of Confidentiality
Members must keep info on current, former and prospective clients confidential unless (1) info concerns illegal activities of the client, (2) disclosure is required by law, OR (3) client or prospective client permits disclosure.
- Confidentiality is protected even when no longer a client of the MC, unless expressly permitted
- MCs as a general matter must comply with law
- If law requires disclosure, must disclose
- If law requires confidentiality, must keep confidential even if information concerns illegal activity on part of the client
- Consult compliance/legal if in doubt
- Should understand firm procedures for electronic data (laptops etc.)
- Does not preclude participation in CFAI PCP investigations - PCP is an extension of the MC (when permissible under applicable law) and so you can provide client info when the investigation is into your own conduct. PCP keeps strict confidence. You can always forward info to PCP and it is not a violation of confidence.
Procedure
- Default is to only share with other authorized employees working for client
- But there are exceptions
- Consider context in which info is disclosed, i.e. if it is relevant to the work for the client, and if this will enable the MC to improve client service
- Follow electronic storage procedures of your firm
Notes from examples:
- First step if you see a violation (e.g. tax evasion) is to tell your manager
End of Standard III
1:45 pm
Approximately 1.75 hours
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