CFA Level III · Level III Core

Guidance for Standard III: Duties to Clients: formula sheet

Full chapter guide

Key formulas

Three duties: Loyalty + Prudence + Care; Loyalty: client interests first. Prudence: reasonable-person judgment. Care: diligent, careful handling of the client's affairs.
Priority of interests: Client interests come first, ahead of both the employer's and the member's own interests.; Disclosure and consent help manage conflicts, but you may not harm the client.
Client identification: Client = the party to whom the duty is owed (e.g. beneficiaries, fund investors), not always the person who hired you; Decide this first. If unclear at the start, ask and document the client.
Fiduciary rule: Where a legal fiduciary duty applies, comply with it; the Standard applies in any case; Follow the stricter of the law and the Code and Standards.
III(A) vs I(B): III(A): whose interests you serve. I(B): keeping your judgment independent and objective.; Cite the standard that matches the facts; some facts breach both.
Core rule: Fair dealing = fair and objective treatment of all clients ≠ identical treatment; Different service levels are acceptable if disclosed and offered to all, and if no client is disadvantaged.
Dissemination: Recommendation or change → all affected clients get it in a fair, timely way; Do not let some clients act before others on a change in recommendation without a legitimate reason.
Trade allocation: Allocate by pre-set written policy, before the trade is executed (e.g. pro rata); Partial fills are shared pro rata or by a disclosed, fair method. No favouring accounts with higher fees or performance fees.
IPO allocation: Offer available shares to all eligible clients for whom the IPO is suitable; Do not allocate IPO shares to your own accounts or to favoured clients first. If oversubscribed, allocate pro rata.
Fair dealing vs loyalty: III(B): client vs client. III(A): client vs you or your firm; Use this split to choose the right standard in a case.
Core duty: Reasonable inquiry + IPS + suitable action + regular updates; Know the client, document objectives and constraints, act within them, and review periodically.
IPS contents (risk and return): Return objective + Risk tolerance (willingness and ability); Ability is driven by wealth, horizon and liquidity needs. Willingness is attitude. As a conservative convention, the lower of the two generally determines the risk tolerance used in the IPS.
IPS constraints (LTTLU): Liquidity, Time horizon, Taxes, Legal and regulatory, Unique circumstances; These are the five constraints. Return and risk are the objectives, so the full list of IPS inputs is return, risk, then these five constraints. Check each recommended action against every constraint.
Level of analysis: Suitability is judged in the total portfolio context; Do not reject or approve a security in isolation.
Updating: Review at regular intervals and after material changes; Update the client's information and the IPS, not only the portfolio.
Mandate rule: Investments must be consistent with the stated mandate; For a fund or institution, follow the documented objectives and limits.
Core duty: Keep confidential all information about current, former and prospective clients; Applies to identity, holdings, finances, goals and advice, and continues after the relationship ends.
Three exceptions: Disclose only if (1) the information concerns illegal activity, (2) disclosure is required by law, or (3) the client permits disclosure; If none applies, do not disclose. Client permission should be clear and preferably documented.
Need-to-know sharing: Share only with supervisors or colleagues who are working with the client on the matter; Sharing is limited to what the work requires.
III(E) versus II(A): III(E): do not disclose client information. II(A): do not act or cause others to act on MNPI; Different duties. One fact can trigger both.

Quick revision

Clients come first: act for their benefit, ahead of your employer's and your own interests.
Loyalty, prudence and care means acting with the care a prudent person would use, and placing client interests first.
Fiduciary duty is not limited to asset management. In each client relationship (for example trustee, adviser or manager), work out whether a legal fiduciary duty exists, and act in the client's best interest. Follow the mandate and the governing documents.
Fair dealing means treating clients fairly, not identically. Different service levels are fine if disclosed and not unfair.
Disseminate recommendation changes fairly and allocate trades by pre-set, fair procedures.
Suitability: gather client objectives and constraints, put them in an IPS, and update them regularly.
Check that each recommendation fits the client's whole portfolio, not only the single security.
Performance presentation must be fair, accurate and complete. Do not misstate or cherry-pick results.
Confidentiality covers client information. Disclose only when the information concerns illegal activity by the client, when disclosure is required by law, or when the client permits it.
If you are unsure, pick the answer that protects the client and follows firm procedures.
Read who the client is before choosing the standard.

Common mistakes

Treating the person who hired you as the client Fix: Ask who the duty is owed to. For a plan, trust or fund, it is the beneficiaries or investors.
Thinking disclosure alone cures a conflict that harms the client Fix: Disclosure is needed, but you still cannot place your or the employer's interest above the client's.
Thinking fair dealing means every client must get exactly the same result. Fix: Remember that the standard allows different service levels and different suitability-based decisions. It bans unfair or undisclosed favouritism.
Confusing III(B) with III(A) Loyalty, Prudence and Care. Fix: Use the split: III(B) compares clients with each other. III(A) concerns acting in a client's best interest versus your own.
Judging a security as unsuitable because it is risky on its own. Fix: Assess the effect on total portfolio risk and return. A small risky position can be suitable.
Using only risk tolerance and ignoring constraints. Fix: Check liquidity, horizon, tax, legal and unique needs every time.
Thinking the duty ends when the client leaves. Fix: Remember the Standard names current, former and prospective clients.
Treating confidentiality as the same as the MNPI rule. Fix: III(E) bars disclosing client information. II(A) bars acting on MNPI. Check which one the facts trigger, or both.

Exam tips

Always name the client before anything else; many wrong options fail on this.
In essays, give the standard, the client, and the action in few words, matching the command word.
If two standards fit, choose the one that matches the facts most directly and mention the other only if asked.
Do not assume disclosure or client consent excuses every conflict; check whether the client is still put first.
Watch for trap options that follow the employer or a sponsor over the beneficiaries.
For short questions, find the one client who got a better deal and ask why. If the reason is fees or a relationship, the answer is a violation.
Know the standard fixes by heart: pro rata allocation, pre-set written policy, simultaneous dissemination and disclosure of service tiers.
If a question compares III(A) and III(B), say III(B) is about fairness between clients and III(A) is about acting in the client's best interest.