A.   Loyalty, Prudence, & Care

a.  Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment.

b.  Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.

A.1. Guidance

a.  In some of the jurisdictions, the duty of care is fiduciary or a legal requirement. It should be noted that this standard is not a substitute for any legal obligation. As per standard 1A (i.e. Knowledge of Law), the stricter obligation applies.

b.  If the members and the candidates have direct custody of the client’s assets or indirect access to their funds, there is a heightened level of responsibility.

A.1.1. Identifying the Actual Investment Client

a.  The actual investment client is actually the beneficiary of the investment. For example, if a pension fund or a trust hires the portfolio manager, it is not the fund that is the client; the actual clients are the beneficiaries of the fund.

b.  Sometimes there may not be any beneficiaries either (for example in the case of an index fund). In such cases, the decisions do not have to be based on beneficiary requirements, but they should confirm the necessary mandates.

A.1.2. Developing the Client’s Portfolio

a.  While developing the portfolio of the client, the manager should ensure that the goals and objectives of the clients are not based on their whims and fancies; rather they should be realistic and achievable. The goals of the clients should be suitable to their current situation of the financial position.

b.  To build a suitable portfolio, the risk and returns should be matched in context with the total portfolio of the client and not concerning any individual investment.

c.  The portfolio manager needs to disclose all the potential conflicts of interest to the client, such as any commissions, etc. received for selling any particular security.

d.  The manager should take special care towards following the guidelines of the clients.

A.1.3. Soft Commission Policies

a.  Sometimes the clients are billed by the portfolio managers for the services that they have not benefited from. For example, the portfolio manager may take the help of professionals such as expert analysts and may charge their services to the clients, whereas these should be a part of the management fees and should be borne by the manager.

b.  In such cases, the portfolio manager should give a detailed disclosure of the fees charged by the manager.

c.  On the contrary, if it is a directed brokerage, i.e. the client has directed the management to purchase certain goods and services on their behalf; it is acceptable to be charged from the client without the violation of this standard. The client should, however, receive the best services at the minimum prices.

A.1.4. Proxy Voting Policies

a.  The managers should make a proper disclosure of when and how the proxies are/can be voted.

A.2. Recommended Procedures for Compliance

a.  The clients should be provided with the regular account information, such as:

     i.  Quarterly reports concerning funds, securities, transactions, etc.

    ii.  Disclosures concerning the custody of assets, i.e. where and how the assets are maintained.

b.  There should be segregation/separation of the client’s assets from the manager’s assets.

c.  The manager should seek the client’s approval when in doubt about the course of action.

d.  The firm should follow the following main policies:

     i.  They should follow all the applicable laws and rules.

    ii.  They should establish the investment objectives of the client.

   iii.  They should consider all the information such as suitability of the portfolio for the client, client security, returns, etc. while taking the action.

   iv.  There should be appropriate diversification of the portfolio.

    v.  There should be a regular review of investments and the client’s objectives.

   vi.  The manager should deal fairly with all the clients concerning the investment actions.

  vii.  The firm should make appropriate disclosure of conflicts of interest.

 viii.  There should be disclosure concerning the compensation arrangement of the manager.

   ix.  There should be a disclosure of how the vote proxies are maintained.

    x.  The firm should maintain confidentiality concerning all the information they have of the client.

   xi.  They should seek the best execution of the investment policies at the minimum prices.

  xii.  The client’s interest should be placed above their own interest.

B.   Fair Dealing

a.  As per this standard, the 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.

b.  It should be noted here that fairly does not imply equally here, it rather means equitably. The members and clients must not discriminate against any clients while making recommendations and taking action.

c.  The clients of the firm may be at a different level of service and different levels of the fee. In such cases, the level of services and fees should be disclosed to the clients. Different levels of services should not result in unfair treatment to the clients.

B.1. Guidance

B.1.1. Investment Recommendations

a.  Investment recommendation is any opinion expressed by a member of a candidate about purchasing, holding, or selling that may be disseminated to the customers or clients only or the public in general.

b.  According to this standard, all the clients must have a fair opportunity to act on the recommendations.

c.  The managers must prevent selective/discriminatory disclosure to their clients, and the clients should be aware of the type of communication they will receive.

d.  The changes in recommendations are more critical than the initial recommendations made by the members and candidates. The changes should be communicated to all the current clients, especially those who have acted on the previous advice.

e.  The clients who place contrary orders should be advised before their order is accepted.

B.1.2. Investment Action

a.  This standard requires the members and candidates to treat all the clients fairly in light of their investment objectives.

b.  If some issue is oversubscribed, the personal allotment should be foregone to ensure fairness in the allotment. For the oversubscribed issue, the allotment should be made on a pro-rata basis. If the relatives of the members and candidates are given the same treatment as any other client, then it is acceptable to make an allotment to them.

c.  The members and candidates should disclose the allotment procedures to the clients.

d.  The members and candidates must never use allocated securities as rewards to gain any benefit.

B.2. Recommended Procedures for Compliance

a.  Develop Firm Policies: The firm should develop and maintain firm policies for all the procedures followed by it and ensuring compliance with all the applicable laws and regulations. While formulating such policies the basic guiding rule is that no client or any other person should receive preferred or favored status; everyone should get equitable treatment.

b.  Limit the number of users: The firms should try and pass the recommendations to as few people as possible.

c.  There should be a very short time frame between the decision and dissemination of the issue.

d.  There should be written and published guidelines for the pre-dissemination behavior for any recommendation.

e.  There should be simultaneous disclosure of information both internally and to clients. The members and associates of the firm should not receive the information ahead of it being published.

f.  The firms should maintain a list of the clients and their holdings.

g.  The firms should develop and document the trade allocation procedures that:

     i.  ensures fairness to advisory clients in priority of execution and allocation of price,

    ii.  ensures timeliness and efficiency in order execution and

   iii.  ensures an accurate record of members and candidates and their clients.

h.  Allocations: The allocations that are made should be such that:

     i.  All the orders are time stamped.

    ii.  The orders are processed on a FIFO basis. They may be bundled if it increases efficiency.

   iii.  For the group trades, there should be processes to determine the execution prices and partial fills.

   iv.  All the group orders should get the same execution price.

    v.  Pro-rata distribution should be made in case of partial fills of the oversubscribed

   vi.  The allocation should be by the clients rather than the portfolio manager.

i.  The members and candidates should disclose the allocation procedures. However, if the allocation process is unfair, the mere disclosure does not exempt the members and candidates from this section.

j.  There should be a systematic account review to ensure that it is suitable for the client’s needs and that there is no preferential treatment to

k.  There should be a disclosure of the level of services and it should not be offered selectively.

C.   Suitability

a.  When Members and Candidates are in an advisory relationship with a client, they must:

     i.  Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints before making any investment recommendation or taking investment action and must reassess and update this information regularly.

    ii.  Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action.

   iii.  Judge the suitability of investments in the context of the client’s total portfolio.

b.  It should be noted that the term ‘suitability’ does not mean the absence of losses.

c.  In the absence of an advisory relationship, it is difficult for the members and candidates to determine suitability.

d.  When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make only investment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio.

e.  If it comes to the member’s and candidate’s knowledge that any particular order is unsuitable, they should get the client to acknowledge their awareness of the fact.

C.1. Guidance

a.  Developing an Investment Policy: The investment policy must be developed after considering the client’s investment objectives and risk tolerance.

b.  Understanding the Client’s Risk Profile: The client’s needs should appropriately be matched with their circumstances that define their risk tolerance.

c.  Updating Investment Policy: Nothing is permanent but change, so is the case with the client’s risk-return profile; they keep changing with time. Thus, the manager must keep updating the investment policy to match the suitability.

d.  Diversification: The manager needs to diversify the portfolio to match the suitability of the risk-return-based investment objectives.

e.  Unsolicited Trading Request: Some trading requests made by the clients are not appropriate considering their risk-return profile. It is necessary that they are informed about the inappropriateness of their trade request and the appropriate course of action should be explained to them.

f.  Managing to an Index or Mandate: At times, the members and candidates are not responsible for managing the portfolio of individuals. They simply manage the funds that are dependent upon an index or an expected mandate.

     i.  In such cases, the members and the candidates do not have any advisory relationship with the client. Their decision should be consistent with the mandate.

    ii.  When managing a portfolio in line with a specific mandate, strategy, or style, the members and the candidates must act in accordance with that mandate.

C.2. Recommended Procedure for Compliance

a.  The members and candidates should have a written investment policy statement having details about the client, their objectives, and constraints.

b.  It is necessary to regularly update and review such policy statements.

c.  The members and candidates need to conduct the suitability test on the policies, concerning:

     i.  the impact on diversification,

    ii.  appropriateness concerning the risk tolerance, and

   iii.  suitability with the investment objectives.

D.   Performance Presentation

When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.

D.1. Guidance

a.  The members and candidates must provide credible performance information to clients and prospective clients

b.  The members and candidates must avoid misstating performance or misleading clients both in presentation and measurement

c.  If the presentation is brief make available to clients and prospects, on request, detailed supporting information

d.  The members and candidates should not make any statements that indicate or imply that the clients will experience past performance levels

e.  The analysts who are promoting hit ratio (i.e. the ratio of correct calls made to the total calls) must present the information accurately and completely

D.2. Recommended Procedures for Compliance

a.  The members and candidates showing their historical performance should apply the GIPS Standards while reporting

b.  When reporting, not in compliance with GIPS standards, the members, and candidates:

     i.  consider the knowledge and sophistication of the audience

    ii.  present the performance of the weighted composite of similar portfolios rather than using a single representative account

   iii.  include all accounts including terminated accounts and the loss-making accounts as part of performance history

   iv.  include disclosures that fully explain the performance results being reported (which is gross and net of the fees, taxes, and inflation)

    v.  maintain the data and records used to calculate the performance being presented

E.   Preservation of Confidentiality

According to this standard, the members and candidates must keep the information about current, former, and prospective client’s confidential information unless:

The information concerns illegal activities on the part of the client;

a.  Disclosure is required by law; or

b.  The client or prospective client permits disclosure of the information.

D.1. Guidance

a.  It should be noted that, despite the illegality of activities of the client, if the law requires the members and candidates to preserve confidentiality and not disclose the information to anyone, the law must be followed.

b.  To prevent the confidentiality of the clients, many firms have policies about storing the client’s information on personal laptops and other portable devices.

c.  This standard does not prevent the members and candidates from cooperating with the CFA Institute’s Professional Conduct Program (PCP).

D.2. Recommended Procedures for Compliance

a.  The simplest, most conservative, and most effective way to comply with Standard III(E) is to avoid disclosing any information received from a client except to authorized fellow employees who are also working for the client.

b.  It is acceptable to disclose the information if it is outside the scope of the confidential relationship and does not involve illegal activity.