Subject 8. Standard III (B) Fair Dealing

III. DUTIES TO CLIENTS

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.

"Fairly" implies that members must not discriminate against or favor any clients. Fairness shall be maintained in quality and timing of services, and allocation of investment opportunities. The term "fairly," rather than "equally,", is used because it would be physically impossible to reach all customers at the same exact instant, and not all recommendations or investment actions are suitable for all clients.

Members and candidates are NOT required to give the same level of services to all clients. For example, you can give more information and research to discretionary clients than to transaction-only clients.

Members and candidates are required to adhere to the standard in:

  • Dissemination of recommendations: Establish procedures for simultaneous dissemination of recommendations; all clients must be informed at approximately the same time.

    An investment recommendation is any opinions on buying, selling, or holding a security or other investment. Good business practice dictates that initial recommendations be made available to all customers who indicate interest. Although a member need not communicate a recommendation to all customers, the selection process by which customers receive information should be based on suitability and known interest, not on any preferred or favored status. A common practice to ensure fair dealing is to communicate recommendations within the firm and to customers simultaneously.

    A material change in a firm's recommendation is one that could be expected to affect a client's judgment. A change in the recommendation from buy to sell is a material change; this standard needs to be abided by in disseminating the change.

  • Investment actions: Develop trade allocation procedures to ensure fairness to clients (both in priority of execution and allocation of price obtained on block trades), timeliness of execution, accuracy of trade records, and client positions.

    Clients in discretionary accounts should be treated the same as those who are not in discretionary accounts. Note that investment action can affect the market value of a security.

    If an issue is oversubscribed, members should forgo any sales to themselves or their immediate families. Members must disclose to clients or prospects the allocation procedures, and how they can affect the clients or prospects. Members shall not withhold "hot issue" securities for their own benefits or use such securities as rewards or incentives for others. Members shall not trade ahead of the dissemination of research reports or recommendations to clients.

Procedures for compliance

  • Limit the number of people involved.
  • Shorten the time frame between decision and dissemination.
  • Publish personnel guidelines for pre-disseminations.
  • Disseminate information simultaneously to all parties.
  • Maintain a list of clients and their holdings.
  • Develop and disclose written trade allocation procedures.
  • Establish systematic account review.
  • Disclose levels of service.

Members and their firms are required to take the following steps to ensure that adequate trade allocation practices are followed:

  • Obtain advance indications of client interest for new issues.
  • Allocate new issues by client rather than by portfolio manager.
  • Adopt a pro rata or similar objective method or formula for allocating trades.
  • Treat clients fairly in terms of both trade execution order and price.
  • Execute orders in an efficient and timely manner.
  • Keep accurate records of trades and client accounts.
  • Periodically review all accounts to ensure that all clients are being treated fairly.

Example 1

After attending an analysts' briefing, you decide to re-evaluate your research report on Horton Industries. You conclude that the company is no longer a "buy" but is instead a "strong buy." The report is scheduled for release to your clients next week but you call several large clients to inform them of this change. You have not treated all clients fairly.

Example 2

An analyst tells a client that he will soon issue a recommendation. He violates the standard because he should send the information to all clients before discussing it with any specific client(s).

Example 3

Just 30 minutes before the close of the market, Huntington Biomedical releases a report indicating that EPS for the upcoming quarter will be materially lower than previously expected and that sales growth for the firm will also be below expectations for the next four quarters. You only have three clients with significant positions in Huntington. You contact each of those clients and two of them direct you to liquidate their holdings in the firm immediately. The third client elects to hold her position. Even if you have other clients with small positions in this firm, you have treated all clients fairly. You have shown preference to clients with greater concern about the news release.

Example 4

An analyst's employer low-balls earning projection for company XYZ. The analyst is confident that the earnings should be higher, but goes along with the firm when issuing his own recommendation. Then he passes his real estimate to his large clients. He violates the standard by not sharing his recommendation with all clients and not treating all clients fairly.

Example 5

An analyst, Jessica, follows the mining industry. She finds that a small mining house has just signed some significant deals with companies she researches or follows. She then investigates it further and decides to write a report recommending the company purchase. While the report is still in the draft stage, Jessica organizes a breakfast for her biggest and best clients and discusses this small company with them. At the breakfast she tells her best clients that she has a buy recommendation on the report (which will be released in three days). Jessica has violated the standard because she disseminated investment recommendation information that was contained in a research report to her best clients before the report had been disseminated to all her clients fairly.

User Contributed Comments 12

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nosaku: What is the initially advertised that upon payment of a higher fees certain clients would be privilaged to get 'hot news' and then only would the rest of the normal fee paying customers get the news. IS anything being violated?
sandee: It seems unethical to charge fee-paying clients additional fees for research which should be provided as part of the "package".
sdivietr: what is the difference between discretionary clients and transaction-only clients?
DonDon: Discretionary clients give the fund manager or broker the complete autonomy to make investment decisions (buy/sell. For the most part, a client that gives discretionary authority to a fund manager or broker tend to be a fee based client. The opposite of a fee based client is a transaction only client. A transaction only client pays per transaction as the name suggest. Please note that a transaction only client can still give a fund manager or broker discretion over their transaction. The only difference here is they don't want to pay a fee based, but instead want to pay per transaction.
Swetha: Example 3.....I don't understand how all clients were treated fairly. Don't the following statements contradict one another ? "Even if you have other clients with smaller positions in the firm, you have treated all clients fairly. You have shown preference to clients that show greater concern to the news release".
shawn: You don't need to notify all clients that have positions in that company, as clients with small (non-significant) positions in the company would not be affected that much by the news. That's fair treatment.
StanleyMo: on example 3:

You have shown preference to clients with greater concern about the news release.

Is consider treating all clients fair. A tricky question.
jorgeman81: The key is that fairly is not same as equally
NikolaZ: The key to Example 3 is the 30 minute time constraint. Given your limitation, you did everything you could to deal fairly with your clients. In this case, dealing fairly implies dealing with the clients who have the significant holdings first. You did not choose preference for any one of the three clients with significant holdings, but acted out of logical priority. This is not a violation of the Code because we have to take into account the limitation of the situation (30 minutes to act).
andyblake: Example three is very tricky! Thanks for the explanation guys!
Tlhogi: But isn't showing preference inherently not fair? By not informing the other clients maybe by email, THEN discussing it with the 3 others in detail, aren't you treating them unfairly? because they also have an interest in the firm even if its small... Shouldn't they also be given a chance to make a timely exit?
johntan1979: The key to understanding this CFA Standard:

Fair is not the same as equal.