Ethics - Standard III - Duties to Clients part 1 of 2

Start - 11:15 PM

Watching the golf and it looks like Rory is running away with it again - I've seen this before...

So I thought I'd take a quick look at Standard III - Duties to Clients.

This is a hefty standard and it should be - 5 subsections, each with its own detailed sub-subsections and many detailed examples.  I'm going to be skimming for grey area issues as usual and likely will skim over anything that looks like a 'duh.'

Standard III - Duties to Clients

III(A) Loyalty, Prudence, and Care
MCs have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment.  Must act for benefit of their clients and place their clients' interests before their employer's or their own.

• Client interests are paramount - point of III(A) is to set minimum standards
• Prudence requires caution and discretion
• Not a substitute for knowing local rules and laws
• Custody requires even greater care - defined as having any access direct or indirect to client funds
• Defining the client
• Individual case is obvious - it's the individual
• For portfolios of pension plans/trusts, clients are the ultimate beneficiaries of the plan, not the person who hired the manager
• Sometimes no client - e.g. managing to an index - owe duty then to the mandate - client care for the individuals lies with those advising the individuals to get the index
• Must avoid real or potential conflicts of interest
• Must look at roles and responsibilities when deciding what defines a client
• Developing a client's portfolio
• Manager knows more so client must trust manager
• Must make sure clients goals are realistic and risks are appropriate
• Avoid conflicts and when cannot avoid, disclose to client
• Follow all guidelines set by client - e.g. pensions and trusts
• Decisions must be judged in context of entire portfolio, not by individual investment
• Soft Commissions - manager has discretion in using client broker, and then purchases research from broker - benefits investment manager but not client and must disclose to client.  Paying a higher commission that does not benefit the client is a violation.
• If however a client directs manager to xyz broker ('directed brokerage')  this is not an issue because brokerage commission is used to benefit client
• MC must seek best price and best execution - best execution means maximize portfolio value within client guidelines - when directed, should notify client it may not be best execution

Sleepy - continue later

End - 12:00, about 45 minutes