CFA Standards of practice - Duties to clients

Question 1

Explain how CFA Members and Candidates should deal with “Loyalty, prudence and care”

Answer 1

MaC must not engage in practices that distort prices or artificially inflate trading volume with the intention to mislead market participants

Question 2

Give the 7 guidances about loyalty, prudence and care

Answer 2

1. Client interests are paramount
2. All MaC are required to comply
3. This standard is not a substitute to legal or regulatory obligations
4. Identifying the actual investment client
5. Developing the client’s portfolio
6. Soft commission policies
7. Proxy voting policies

Question 3

Give the 3 elements of “Developing client’s portfolio”

Answer 3

1. IP possesses greater knowledge than client
2. When MaC cannot avoid conflicts between firm’s and client’s interests, they must provide clear and factual disclosures
3. Investment decisions must be judged in the context of the total portfolio

Question 4

Give the 3 elements about “Soft commission policies”

Answer 4

1. An IP often has discretion over the brokers executing transactions. Conflicts arise when an IP uses client brokerage to purchase research services that benefit the IP
2. If this does not benefit to client, MaC should disclose to clients the methods or policies followed in addressing the potential conflict
3. A MaC who pays a higher commission than he would normally pay violates the duty of loyalty to clients. A MaC is obligated to seek best prices and best execution

Question 5

Give the 3 elements to compliance regarding “Loyalty, prudence and care”

Answer 5

1. Create a regular account information
2. Always obtain the client approval if unsure
3. Encourage firms to draft statements containing policies and procedures responsibilities to clients

Question 6

Explain how CFA Members and Candidates should deal with “Fair dealing”

Answer 6

MaC and candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment actions, or engaging in other professional activities

Question 7

What does Fairly imply ?

Answer 7

It implies that the MaC must take care not to discriminate against any clients when disseminating investment recommendations or taking investment action

Question 8

Give the 3 elements describing “investment recommendations” (Fair dealing)

Answer 8

1. Each MaC is obligated to ensure that information is disseminated in such a manner that all clients have a fair opportunity to act on every recommendation
2. MaC should encourage firm to design an equitable system to prevent selective disclosure
3. The duties imposed by this standard may be more critical when MaC change their recommendations than when they make initial recommendations

Question 9

What are the investment actions ? (Fair dealing)

Answer 9

1. This standard requires that a MaC treat all clients fairly in the light of their investments objectives and circumstances
2. MaC should disclose to clients and prospectives clients the documented allocation procedures and how these would affect the clients or prospect

Question 10

Give the 4 elements that MaC can compliance “Fair dealing”

Answer 10

1. Develop firm policies: the selection process by which customers receive information should be based on suitability and known interests
2. Disclose trade allocation policies, these must be fair and equitable
3. Establish systematic account review so that no preferential treatment is given
4. disclose levels of service

Question 11

Explain how CFA Members and Candidates should deal with “Suitability”

Answer 11

1. When MaC are in an advisory relationship with a client they must do 3 things (in another question)
2. When MaC are responsible for managing a portfolio to a specific mandate, strategy or style, they must make only investment recommendations or actions that are consistent with the stated objectives and constraints of the portfolio

Question 12

When MaC are in an advisory relationship with a client they must do 3 things :

Answer 12

1. Make a reasonable inquiry into a client’s or future client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation to actions and must update this information regularly
2. Determine that an investment is suitable to client’s financial situation and consistent with the client’s objectives
3. Judge the suitability of investments in the context of client’s total portfolio

Question 13

More precisely, what should MaC do regarding “suitability”

Answer 13

1. Developing an investment policy
2. Understand client’s risk profile, tolerance
3. Updating an investment policy annually
4. The need for diversification, MaC can be responsible for assessing the the suitability of an investment
5. Managing to an index or mandate : consistency is key

Question 14

Give 3 elements that MaC can compliance regarding “suitability”

Answer 14

1. Investment policies statement takes into consideration client’s identification, investor objectives and constraints
2. Regular update and compare client’s constraints with capital market expectations to make an asset allocation
3. Suitability test policies

Question 15

Explain how CFA Members and Candidates should deal with “Performance presentation”

Answer 15

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

Question 16

Give the 2 elements that MaC can compliance regarding “Performance presentation”

Answer 16

1. Apply GIPS Standards

2. Compliance without GIPS Standards, a set of obligations apply

Question 17

Explain how CFA Members and Candidates should deal with “Preservation”

Answer 17

MaC must keep information about current, former and prospective clients confidential unless :

1. The information concern illegal activities
2. Disclosure is required by law
3. The client or futur client permits disclosure of the information

Question 18

The Standard about “preservation of confidentiality” is applicable when MaC receives information :

Answer 18

1. because of his special ability
2. that arises from or is relevant to that portion of the client’s business that is subject to the confidential relationship

Question 19

More specifically, Preservation of confidentiality involves 4 other points :

Answer 19

1. Protect the confidentiality of client information
2. Compliance with law and when in doubt consult with employer’s L&C department
3. Be aware of possible accidental disclosure because of electronic information and security
4. Use the professional conduct investigations by CFAI

Question 20

Give the element MaC can compliance “preservation of confidentiality”

Answer 20

1. The simplest, avoid disclosing any information received from a client except to authorised employees