CFA Level II Exam · Guidance for Standard III: Duties to Clients
Fair Dealing Under Standard III(B) for CFA Level II
Updated 7 October 2026 · Fact-checked
Standard III(B) requires you to deal fairly and objectively with all clients and prospects when you give investment analysis, make recommendations, take investment action, or engage in other professional activities. Fair does not mean equal. You may treat clients differently for valid reasons, but you must not disadvantage one group in favour of another.
Understand Fair Dealing (Standard III(B))
Standard III(B) says 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.
The key idea is fairness, not equality. Clients can pay different fees, have different mandates, and choose different service levels. A client who pays for premium service can receive it. What you cannot do is give some clients a timing or access advantage over others who are entitled to the same treatment, such as telling a favoured client about a rating change first.
The Standard covers two areas. The first is investment recommendations: when you issue a recommendation or change one, you must make sure all clients who are affected can get the information at a similar time. The second is investment action: when you trade for clients or allocate securities, no client should be systematically favoured.
The Standard also applies to new issues. When a primary offering is oversubscribed, you cannot give your best clients all the shares or favour accounts that pay higher fees. You should treat client accounts equitably, usually by allocating pro rata to each account's order size, and you should not take shares for yourself or your firm ahead of clients. Priority of transactions rules in Standard VI(B) also apply.
The Standard does not require you to communicate every recommendation to every client at the same instant. It requires reasonable procedures so that no client group is put at a disadvantage. Firms with different delivery channels, such as email, web posting and phone, should manage timing so that those who get the information by slower channels are not harmed.
Key formulas to remember
- Core rule
- Fair dealing = fair and objective treatment of all clients, not identical treatment
- Different treatment is acceptable when it rests on valid, non-discriminatory reasons such as mandate, fee level or stated service level.
- Recommendation dissemination
- Limit the number of people who know in advance; give all affected clients a fair chance to act
- Clients who hold or are suited to the security should be able to receive the recommendation at a similar time.
- Changed recommendation
- Rating change communicated to all affected clients before or alongside trading on it
- Do not trade for favoured accounts first and then tell others.
- Oversubscribed issue allocation
- Client allocation = shares available × (client order ÷ total client orders)
- Pro rata is the typical fair method. Apply it consistently, and do not give shares to your own or your firm's accounts ahead of clients.
- Trade allocation
- Allocate by a documented, pre-set policy such as pro rata, and give each account the same average price on a block trade
- Average pricing is a way to price a block trade fairly across accounts, not an allocation method. Do not allocate after the fact to benefit selected accounts.
How to solve Fair Dealing (Standard III(B)) questions
Use this method on any Standard III(B) item. Read the vignette for who gets what information or trade, when, and why they differ.
- 1Identify the activity: dissemination of a recommendation, a change in a recommendation, a trade, or a primary offering allocation.
- 2List the client groups involved and any difference in treatment, such as timing, access, or allocation size.
- 3Ask why the groups differ. Is the reason valid, such as a different mandate, suitability or a disclosed fee-based service level?
- 4Check whether any client is disadvantaged, for example by getting information later or by receiving fewer shares than a fair allocation.
- 5Check for personal or firm interest, such as favouring accounts that pay performance fees or the employer's own account.
- 6Decide if there is a violation, and name Standard III(B), and where relevant VI(B) or III(A).
- 7Pick the answer that gives the compliant action: broad simultaneous dissemination, pro rata allocation, written policies, and disclosure of levels of service.
Quickest way: Fair, not equal: the two-question test
When to use it: Use when you have limited time and the options differ on who gets information or shares first.
- Ask: is any client group given an advantage in timing or allocation for a reason that is not valid?
- If yes, it is a violation. If the difference rests on mandate, suitability or disclosed service level, it is usually fine.
- For oversubscribed issues, choose the option that allocates pro rata or by a written policy applied to all.
- For recommendation changes, choose the option that tells all affected clients promptly, not just the biggest or favourite ones.
- Eliminate options that hold back clients' information to let the firm or favoured accounts trade first.
Common mistakes in Fair Dealing (Standard III(B))
Treating fair dealing as identical treatment for every client.
The word fair is read as equal.
Fix: Remember that different service levels are allowed if disclosed and not discriminatory. The Standard bans unfair disadvantage, not difference.
Thinking you must contact every client at the exact same moment.
Students overstate the rule on dissemination.
Fix: The expectation is reasonable procedures that give clients a fair opportunity to act, and that limit the number of people who know in advance.
Allocating an oversubscribed IPO to the largest or most profitable clients.
Commercial instinct overrides the Standard.
Fix: Allocate pro rata to order size or by a documented policy, and do not give preference because of fees or relationship.
Allowing performance-fee accounts to receive better allocations than fixed-fee accounts.
The manager's incentive is mistaken for a valid reason.
Fix: Fee structure does not justify better trade or issue allocation. Treat the accounts equitably.
Confusing Standard III(B) with Standard III(C) suitability.
Both involve recommendations to clients.
Fix: III(B) is about fair access and treatment across clients. III(C) is about whether a recommendation fits one client's circumstances. A recommendation need not go to clients for whom it is unsuitable.
Forgetting the firm's or the member's own account in a hot issue.
Focus stays on client-versus-client fairness.
Fix: Check VI(B) as well. Client transactions come before personal or employer transactions.
Worked examples
Example 1
Vignette: Nisha Rao is a portfolio manager at a global asset manager. Her firm upgrades a stock from Hold to Buy. She first calls three large institutional clients and they buy. She then emails the rating change to the remaining 400 retail clients two days later. Question: Does Rao violate Standard III(B), and what should she have done?
Show the solution
- Identify the activity: a change in a recommendation.
- Identify the groups: three large clients got the change first, and 400 retail clients got it two days later.
- Ask whether the difference is valid. Account size alone does not justify giving some clients the information early when all are affected.
- Conclude that retail clients were disadvantaged because the stock could move during the delay.
Answer: Yes, she violates Standard III(B). She should have used a procedure to disseminate the change to all affected clients at a similar time, for example by simultaneous distribution, and not let favoured clients trade first.
Example 2
Vignette: An investment bank's asset management arm has orders from three client accounts for a hot new bond issue: Account A ₹10,00,000, Account B ₹20,00,000 and Account C ₹20,00,000. Only ₹25,00,000 of the issue is available to be allocated among these three client accounts. Account A pays performance fees. The manager is considering a pro rata allocation. Question: What does a pro rata allocation give Account A, and is giving A more because of its fee structure acceptable?
Show the solution
- Total orders = 10,00,000 + 20,00,000 + 20,00,000 = ₹50,00,000.
- Allocation ratio = 25,00,000 ÷ 50,00,000 = 0.5.
- Account A gets 0.5 × 10,00,000 = ₹5,00,000. Accounts B and C each get 0.5 × 20,00,000 = ₹10,00,000, so the total is ₹25,00,000.
- Check the fee point: performance fees are not a valid reason to give an account a larger share of an oversubscribed issue.
Answer: Account A receives ₹5,00,000. Giving it more because it pays performance fees would violate Standard III(B). Pro rata allocation is the fair approach.
Exam tips
- Look for the words 'first', 'before', 'favoured' and 'largest' in answer options. They often signal a violation of fair dealing.
- If an option says clients with different service levels get different services and this is disclosed, it is usually compliant.
- For oversubscribed issues, pro rata or a written, consistently applied policy is the safe choice. Do the arithmetic if numbers are given.
- Separate III(B) from III(C): fair access across clients versus fit for one client.
- Prefer answers that add written compliance procedures, such as limiting those who know in advance and documenting allocation policy.
Fair Dealing (Standard III(B)) in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Fair Dealing (Standard III(B)): frequently asked questions
What is the difference between fair dealing and preferential treatment?
Fair dealing allows different treatment that rests on valid reasons such as mandate or a disclosed service level. Preferential treatment gives some clients an advantage in information or allocation that others should have shared. The first is acceptable and the second violates Standard III(B).
How should an oversubscribed IPO be allocated under Standard III(B)?
Allocate fairly, typically pro rata to each client's order, or under a written policy applied consistently. Do not favour accounts because of fees or relationship, and do not take shares for yourself or your firm ahead of clients.
Do I have to tell every client about a recommendation at the same time?
You need reasonable procedures so that clients are not disadvantaged. Limit the number of people who know in advance, and make sure all affected clients have a fair chance to act on the recommendation.
What compliance procedures support fair dealing?
Useful procedures include written policies for dissemination and allocation, limiting who sees recommendations before release, simultaneous distribution where practical, and records of how trades and new issues were allocated.