3.3) Duties to clients III (B) : Fair dealing

Question 1

Under standard 3 Duties to clients, what does substandard 39B) Fair dealing state? (1x2)

Answer 1

• Deal fairly and objectively with all clients when providing
  (i) investment recommendations and
  (ii) undertaking investment actions.

Question 2

Objective and fair dealing with all _________ (no discrimination) when disseminating ______________ or taking investment ________________.

Answer 2

clienmts
recommendtions
actions

Question 3

What does ‘fairly’ refer to and how is it implemeneted?

Answer 3

• “Fairly” does not mean “equally.” Different clients have different needs. Also, different service levels are acceptable, if disclosed, and not to the detriment of
  clients without their knowledge. [Premium service available to all clients willing to pay.]

Question 4

How is 3(B) fair dealing implemented for members? (4)

Answer 4

• Disseminate info/ investment recommendations to all clients at approximately the same time.
• Allocate on an impartial basis.
• Disclose allocation procedures.
• Do not take advantage of position in the industry to disadvantage clients (e.g., taking shares of an oversubscribed IPO).

Question 5

How is fair dealings recommended for firms? (7)

Answer 5

• Limit number of people aware of pending recommendation.
• Minimise the time frame between decision and dissemination.
• Develop a policy that those employees who have knowledge of a pending recommendation may not discuss it or take action on it.
  *Disseminate recommendations simultaneously to all clients.
• Develop written trade allocation procedures which ensure fairness to clients.
• Establish a systematic account review to ensure that no client is given preferential
  treatment.
• Disclose available levels of service.

Question 6

Example 21: Ivan Morris manages a number of Summit’s funds, including its flagship Mega Wealth Fund. Whenever one of the Summit’s analysts puts forward a strong buy recommendation, Morris buys first for his Mega Wealth
fund, and then, if there are still shares available, pro rata for the other funds. For a sell recommendation, he first sells out all shares in the Mega Wealth Fund,
and then pro rata from the remaining funds. In this way, he generally ensures that Mega Wealth Fund remains the best performing fund.

Do Morris’s actions contravene Standard III(B)?

Answer 6

Solution: Morris is in contravention of Standard III(B) as he is not treating all clients fairly, and should be allocating all trades pro rata between all funds, including the Mega Wealth Fund.

Question 7

Example 22: After extensive research Mamela Vusi comes to the conclusion that the analyst consensus earnings prediction for Cannabis Industries is too low. During a meeting, he discusses this opinion with his two biggest clients, but does not take any further action. Is Vusi’s behaviour in contravention of Standard III(B)?

Answer 7

Solution: Vusi is in contravention of Standard III(B). He is not treating all clients fairly by only letting his biggest clients know about his prediction. A better way
would have been to inform all his clients by e-mail.

Question 8

Example 23: Lindiwe Zulu manages a number of private client portfolios, including that of her wealthy father. Zulu takes great care to be as compliant with ethical investment requirements as she can possibly be. In order to remove any possible perception of unfair treatment of clients, Zulu always allocates new trades on a pro rata basis to all her other portfolios first, before allocating to her father’s portfolio if still possible. Is Zulu’s behaviour consistent with Standard III(B)?

Answer 8

Solution: Despite her good intentions, Zulu is in contravention of Standard III(B). She is not treating all clients on the same basis as she is disadvantaging her
father. She should see her father as just another client, and therefore should allocate all trades pro-rata to all her portfolios, including that of her father.

Question 9

Example 24: Siya Mabuza changes his recommendation on Health Wise from a Buy to a Hold. He e-mails all his clients informing them of this change, but then
calls his five biggest clients to discuss his reasoning telephonically with them. Is Mabuza’s behaviour consistent with Standard III(B)?

Answer 9

Solution: Mabuza is not violating Standard III(B). He did disseminate the new information to all his clients, and therefore treated them fairly. Mabuza is providing his bigger clients with an additional service, which they likely pay for. If he had discussed his changed recommendations with a few clients before disseminating it to all, he would have been in contravention of Standard III(B).