Standard III(A)

• III Duties to Clients
• III(A) Loyalty, Prudence, and Care. Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.

Guidance Client interests always come first. Although this Standard does not impose a fiduciary duty on members or candidates where one did not already exist, it does require members and candidates to act in their clients’ best interest and recommend products that are suitable given their clients’ investment objectives and risk tolerances.

• Exercise the prudence, care, skill, and diligence under the circumstances that a person acting in a like capacity and familiar with such matters would use.
• Manage pools of client assets in accordance with the terms of the governing documents, such as trust documents or investment management agreements. Make investment decisions in the context of the total portfolio.
• Inform clients of any limitations in an advisory relationship (e.g., an advisor who may only recommend her own firm’s products).
• Vote proxies in an informed and responsible manner. Due to cost benefit considerations, it may not be necessary to vote all proxies. Client brokerage, or “soft dollars” or “soft commissions” must be used to benefit the client.
• The “client” may be the investing public as a whole rather than a specific entity or person.

Recommended Procedures of Compliance Submit to clients, at least quarterly, itemized statements showing all securities in custody and all debits, credits, and transactions.

Encourage firms to address these topics when drafting policies and procedures regarding fiduciary duty:

• Follow applicable rules and laws. Establish investment objectives of client. Consider suitability of portfolio relative to client’s needs and circumstances, the investment’s basic characteristics, or the basic characteristics of the total portfolio.
• Diversify. Deal fairly with all clients in regards to investment actions. Avoid or disclose conflicts.
• Disclose compensation arrangements. Vote proxies in the best interest of clients and ultimate beneficiaries.
• Maintain confidentiality. Seek best execution. Place client interests first.

Application of Standard III(A) Loyalty, Prudence, and Care Example 1:

A member uses a broker for client account trades that has relatively high prices and average research and execution. In return, the broker pays for the rent and other overhead expenses for the member’s firm.

Comment:

This is a violation of the Standard because the member used client brokerage for services that do not benefit clients and failed to get the best price and execution for his clients.

Example 2:

In return for receiving account management business from Broker X, a member directs trades to Broker X on the accounts referred to her by Broker X, as well as on other accounts as an incentive to Broker X to send her more account business.

Comment:

This is a violation if Broker X does not offer the best price and execution or if the practice of directing trades to Broker X is not disclosed to clients. The obligation to seek best price and execution is always required unless clients provide a written statement that the member is not to seek best price and execution and that they are aware of the impact of this decision on their accounts.

Example 3:

A member does more trades in client accounts than are necessary to accomplish client goals because she desires to increase her commission income.

Comment:

The member is using client assets (brokerage fees) to benefit herself and has violated the Standard.