chapter 10.3 Standard 3: duties to clients Flashcards
Recommended Procedures for Compliance
Standard III (B) Fair dealings
Limit how many people know a recommendation is forthcoming.
Shorten the time frame between decision and dissemination. A short conclusion could be published in advance of the full report.
Publish guidelines that prohibit people from taking action on pending recommendations.
Disseminate information to all clients at approximately the same time.
Maintain a list of clients and their holdings to aid in knowing who needs information.
Develop and document trade allocation procedures and disclose them to clients. This is especially important for block trades and new issues.
Client orders should be processed on a first-in-first-out basis, although orders may be bundled if this improves efficiency.
Assign the same execution price to all client accounts in a block trade and charge the same commission. When the block order cannot be fully executed, allocate the orders on a pro rata basis based on the order size.
Review accounts on a regular basis to ensure no preferential treatment.
Disclose service levels (and associated fees) to clients.
A written investment policy statement (IPS) for each client should include
financial circumstances, personal data, attitudes towards risk, and investment objectives
The IPS should also define the roles of advisors and be used to develop a strategic asset allocation.
Understanding the Client’s Risk Profile
The client’s tolerance for risk must be measured and investment strategy risk should be quantified. The member and candidate should carefully consider leverage and limited liquidity.
Updating an Investment’s Policy
The IPS should be updated when any material changes occur and at least annually. The client’s needs and circumstances will change over time. The suitability review is only valid if the client discloses all relevant information.
The Need for Diversification
Diversification is beneficial for most portfolios. Some managers are only responsible for a portion of the client’s investments, so diversification must really be considered for the client’s entire portfolio.
Managing to an Index or Mandate
Some members and candidates do not directly manage money for clients. Rather, they manage a fund based on an expected mandate. The manager must follow the objectives and constraints but is not responsible for determining the suitability for individual investors.
Standard III(D): Performance Presentation
When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.
Standard III(D): Performance Presentation
Recommended Procedures for Compliance
Compliance with GIPS standards is the best method to adhere to this Standard. If not using GIPS, then the manager should do the following:
Consider the knowledge of the audience for performance presentation.
Use the performance of a weighted composite rather than a single representative account.
Include terminated accounts.
Use disclosures to fully explain performance results.
Maintain the data used to calculate performance results.
Standard III(E): Preservation of Confidentiality
Members and Candidates must keep information about current, former, and prospective clients confidential unless:
The information concerns illegal activities on the part of the client;
Disclosure is required by law; or
The client or prospective client permits disclosure of the informatio
