Level 1 CFA® Exam Ethics, Standards III (A) & III (B)

Last updated: October 06, 2022

CFA Exam: Loyalty, Prudence, and Care

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As we move on to Standard III, we focus on the duties to clients.

Standard III sets out some common guidelines to be followed by CFA members and candidates regardless of different legal regulations, cultural backgrounds, or fiduciary duties that may affect relationships with clients. The preservation of loyalty, prudence, and care discussed in Standard III (A) is one of such guidelines.

As a CFA member or candidate, you must act in an appropriate manner, which includes:

  • preserving loyalty in relationships with your clients, and
  • basing actions on prudence and reasonable care.

Client Interest

Remember that you are always obliged to act to the benefit of your clients and that their interests are of paramount importance.

The client is always at the top of the hierarchy. Then, comes the employer. Your interest should be placed after the client’s interest and your employer’s interest.

According to the Code and Standards, client interest always comes first!

Identifying the Client

To take good care of the client’s interest, you should get to know your client well. First, you need to identify the client, i.e. be able to say whether you serve:

  • an individual client,
  • beneficiaries of a pension plan, or
  • e.g. whether you manage a fund to an index.

Sometimes the client will be easily identifiable and sometimes not. If you are not able to identify your client, it does not mean you do not serve one – the general public may also be considered a client and it has to be served well.

Individual Client

In the case of managing the portfolio of an individual client, you have to familiarize yourself with the client’s investing profile, experience, possibilities, etc.


Summing up, Standard III (A) ensures that the client is given professional and loyal assistance in his investment actions and that is your responsibility to ensure that he really is. When we think about the maze of legal regulations and the whole complexity regarding the system of financial services, we should understand that clients can be often unsure of what to do and how to behave. It is your role to make investing as safe an adventure as possible.

Lesson Video

CFA Exam: Fair Dealing

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Standard III (B) is about fair dealing.

As a CFA member or candidate, you have to treat all your clients fairly, i.e. you must not favor one client over the other.

The provisions of Standard III (B) account for the possibility that services provided to various clients may differ, but it also states that these differences in service provided by the professional should be known to all clients, and not only to the selected group of clients.

Giving an Investment Recommendation

When an investment recommendation is given:

  • make sure that information will be disseminated to all of your clients ‘simultaneously’,
  • although it is not possible to reach all clients at the same time, you should make sure that no selective or discriminatory disclosure takes place when a recommendation or any other investment information is spread,
  • the space of time between issuing the recommendation and its dissemination should be as short as possible.

Taking an Investment Action

When an investment action is taken:

  • the distribution, allocation, or any other investment action must follow procedures that ensure equitable treatment of clients,
  • it is also important that you take into consideration the criterion of suitability while making investment decisions for your clients.

Benefiting the Client

Example 2 (Standard IIIB)

Suppose there’s an exceptionally high demand for an IPO. What do you do with the “hot issue” IPO to comply with the Code and Standards?

The Code and Standards require that you give priority to your client's interests. So, you must attend to the needs of the client rather than allocate the security to your own or your family member’s account.

Example 3 (Standard IIIB)

Assume, however, that – for example – your sister opens an account with your firm. Can you allocate the "hot issue" securities to her now?

Your sister becomes a client of your company and, even though she’s your next of kin, you are bound to treat her equally and let her know about the “hot issue” IPO simultaneously with other clients.

So, oversubscribed or "hot issue" securities should be left to clients rather than allocated to your account. They will be allocated to your family members’ accounts only if they have the status of client accounts. To follow the provisions of the Code and Standards, you should not engage in this kind of trades and allow your clients to benefit from them as much as possible.

Summing up, regardless of whether your duty involves issuing recommendations or allocating investments, you are obliged to provide fair and impartial service to all of your clients. To make it possible, it is a good idea to develop a list of clients and regularly go over their accounts to make sure that none of them is given unfair treatment. Also, any policies applicable either to different levels of services and different fees or to trades allocations or any other investment actions should be communicated to all of the clients.

Level 1 CFA Exam Takeaways for Ethics, Standards III (A) & III (B)

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  1. Always act to the benefit of your clients.
  2. Client interest always comes first. Then, comes the employer. Your interest should be at the bottom of the hierarchy.
  3. You should be able to identify the client and get to know your client well.
  4. There are many good practices when dealing with individual clients, including the creation of the Investment Policy Statement.
  5. Treat all your clients fairly, i.e. never favor one client over the other.
  6. Make sure no selective or discriminatory disclosure takes place when a recommendation is given.
  7. While making investment decisions for your clients, the suitability criterion should be taken into account (cf. Standard III (C)).

Some Compliance Concerns & Responsibilities

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CFA Exam: Loyalty, Prudence, and Care

  1. LEGAL REQUIREMENTS: There may be different regulations across the investment industry depending on, e.g., your job function, the existence of an adviser/client relationship, or the nature of the recommendations being offered.
  2. PLACING YOUR INTERESTS FIRST? Nope! Your client’s interest comes before yours, you know that!
  3. ACTING IN THE CLIENT’S BEST INTEREST: Whether in an adviser/client relationship or just acting as a trade execution professional – always work in the client’s interest, i.e., seek the best price and best execution for the client.
  4. FAVORABLE TERMS: Never trade any of your clients’ accounts on favorable terms BUT always make sure that the trades executed for a given client are on the most favorable terms that can be achieved for this client.
  5. LONG-TERM OBJECTIVES: Mind the client’s long-term objectives and circumstances when recommending an investment strategy.
  6. CLIENTS’ GUIDELINES: Follow the guidelines set by the clients for the management of their assets, e.g., limited investment options to certain types or classes of investment set by charitable organizations vs aggressive policies that set criteria based on the portfolio’s total risk and return.
  7. FIDUCIARY DUTY: Fiduciary means that there’s an enhanced position of trust. Often, in a situation when an individual or institution is charged with the duty of acting for the benefit of another party, e.g., managing investment assets, the law imposes a fiduciary duty, which can be very strict. You must obey such law if there is one (cf. Standard I (A)) BUT no fiduciary duty is imposed on you by the Code and Standards per se.
  8. “SOFT DOLLARS” or “SOFT COMMISSIONS”: It’s when you pay client brokerage to purchase research services. NEVER pay a higher brokerage commission than normal to allow the purchase of goods or services without corresponding benefit to the client – this would violate the duty of loyalty to the client.
  9. “DIRECTED BROKERAGE”: When the client directs you to use their brokerage to purchase goods or services for the client – that’s no violation ‘cos the brokerage commission is an asset of the client and is used to benefit that client.
  10. DIVERSIFICATION: Unless it is contrary to the account objectives or against guidelines, diversify investments to reduce the risk of loss. ALSO, investment decisions must be judged in the context of the total portfolio rather than by individual investments within the portfolio.
  11. CLIENT LOYALTY: This term does not apply to situations when, e.g., the client tries to influence your independence and objectivity or you refrain from correcting an omission or a mistake ‘cos you know that this correction will be unpleasant to the client and result in a loss or lower profit.

CFA Exam: Fair Dealing

NO’ to:

  • FAVORITISM in any form from the quality and timing of services to the allocation of investment opportunities,
  • DISCRIMINATION against any of the clients,
  • SELECTIVE PROVISION of different levels of service to different clients,
  • EXCESSIVE TRADING that could disadvantage some of the clients to enhance a relationship with a preferred client.

YES’ to:

  • UNIQUE NEEDS of individual clients,
  • DIFFERENTIATION OF SERVICES provided to clients as long as different levels of service do not disadvantage or negatively affect any of the clients,
  • DISCLOSED TRADE ALLOCATION PROCEDURES to all clients as soon as they become clients,
  • MINIMUM LOT ALLOCATIONS ensuring that each client received at least the minimum lot size established for some securities,
  • PRO RATA DISTRIBUTION which is a systematic approach to allocating the trades that ensures that each client receives their share.