Standard III(A)–(B): Loyalty, Prudence, Care and Fair Dealing

III(A): whose interests come first, and how much care

Loyalty means acting solely in the client's interest. Prudence means the care, skill and diligence that a reasonable person in the same role and familiar with such matters would use: follow the client's guidelines and balance risk and return. Care means avoiding harm to the client.

The standard sets a minimum for every member, whatever the job title or local law. It does not turn every member into a legal fiduciary; any fiduciary duty imposed by law must be met as well. Members with custody (direct or indirect access to client funds) carry heightened responsibility, and the governing documents (trust deed, management agreement) set the limits of their powers.

The content of the duty depends on the role. An execution-only broker owes loyalty, prudence and care through best execution and following the client's instructions, with no fiduciary duty. In a blended role offering advice on a limited product shelf, tell the client up front that advice is limited (for example, to the firm's own products) and recommend suitable products from that shelf.

First, identify the client. For a pension plan or trust, the duty runs to the participants and beneficiaries, not to the company that hired you. A fund manager running money to an index or mandate owes the duty to that mandate, not to any individual fund investor (their adviser owes them the duty). Sometimes, as with an expert witness or an analyst writing for the public, the 'client' is the investing public, and independence matters most.

Judge each investment in the context of the whole portfolio: its risk and return, diversification, liquidity, taxes and cash-flow needs. Excessive trading to generate commissions (churning) breaches loyalty even if every security is appropriate.

Soft commissions, directed brokerage and proxy voting

Brokerage commissions are an asset of the client. Using them to buy research (soft dollars) is acceptable only if the research benefits the client and the commissions are reasonable for the value received. Paying higher commissions to buy services that do not benefit the client, such as office rent, firm overheads or a manager's education, breaches the duty of loyalty.

In directed brokerage, the client tells the manager to route its trades to a particular broker, often to obtain services for the client itself. Because it is the client's asset, this is allowed. The manager must still seek best price and best execution where possible and should tell the client that directing trades may cost it best execution.

Voting proxies is part of managing the assets because votes have economic value. Failing to vote, voting without thought, or always siding with management on non-routine issues can breach III(A). A cost-benefit analysis may show some votes are not worth casting. Disclose the proxy voting policy to clients.

III(A): recommended procedures

Members with control of client assets should send each client an itemised statement at least quarterly, tell clients where assets are held and when they move, and keep client assets separate from everyone else's, including their own.

When in doubt, ask what you would expect if you were the client; if still unsure, disclose the issue in writing and get the client's approval.

• Follow all applicable laws and the Code and Standards.
• Establish the client's objectives, experience, risk and return needs and constraints before acting.
• Consider the client's needs, the investment's features and the whole portfolio together.
• Diversify unless the guidelines say otherwise; review accounts regularly against governing documents.
• Deal fairly with all clients; disclose conflicts and all forms of manager compensation.
• Vote proxies in the beneficiaries' interest; keep client information confidential; seek best execution unless the client directs otherwise.

III(B) Fair Dealing: recommendations

Members must deal fairly and objectively with all clients when giving analysis, making recommendations or taking investment action. The word is fairly, not equally: you cannot reach everyone at the same instant, and premium service levels are allowed. But a higher service level must not disadvantage other clients, must be disclosed, and must be available to anyone willing to pay for it.

A recommendation is any opinion to buy, sell or hold, whether in a full report, a short update, a change to a recommended list or a phone call. Disseminate it so that all clients have a fair chance to act. Telling favoured clients first, even informally over lunch or in a quick social media post, violates III(B). Calling your biggest clients to discuss a recommendation is fine after it has gone to everyone.

Changes to a recommendation are even more sensitive than initial ones. Communicate a material change to all current clients, with special care for those who acted on the old advice. If a client who has not yet heard of the change places an order contrary to it, tell the client about the change before accepting the order. If the client still wants the trade, execute it.

• Limit the number of people who know a recommendation is coming.
• Shorten the time between the decision and dissemination; publish a brief 'flash' summary if the full report will take weeks.
• Bar staff who know of a pending recommendation from discussing it or trading on it.
• Disseminate simultaneously to clients and within the firm; keep a list of clients and their holdings so all holders can be notified.

III(B) Fair Dealing: investment action and trade allocation

When buying or selling for several accounts, treat each fairly in light of its objectives. For new issues, offer them to every client for whom they are suitable, following the firm's allocation policy. If an issue is oversubscribed, prorate it among subscribers in round lots, and the member and immediate family should step aside to free up shares, unless a family account is a regular fee-paying client account, in which case it must be treated like any other client.

'Hot issues' (new issues expected to trade at a premium) must go to clients in a genuine public distribution, not be kept for yourself or used as rewards. Disclosing an unfair allocation policy does not make it fair: client consent cannot cure a patently unfair procedure.

Also recommended: disclose allocation procedures and service levels to clients and prospects, and have supervisors review accounts regularly so no client is quietly favoured (for example, by comparing holdings and returns across accounts with the same strategy).