Learning Outcomes
This article explains the practical application of CFA Institute Standards relating to duties to clients and employers, including:
- The hierarchy of duties among clients, employers, and investment professionals, and how this hierarchy guides ethical decision-making in exam scenarios.
- The requirements of the Loyalty, Prudence, and Care Standard, with emphasis on aligning investment recommendations with stated objectives and risk tolerance.
- The meaning of fair dealing, including appropriate dissemination of investment recommendations and avoidance of preferential treatment among clients.
- The scope of confidentiality obligations, the limited circumstances in which disclosure is permitted or required, and how these rules apply when client relationships end.
- The ethical and professional responsibilities owed to employers, particularly when personal interests, outside compensation, or new employment opportunities create potential conflicts.
- The rules governing additional compensation arrangements, required disclosures, and written consents needed to manage conflicts of interest.
- Appropriate conduct when planning to leave an employer, including restrictions on using client lists, proprietary research, and trade secrets.
- How to analyse short case studies, identify relevant Standards, and select the most defensible course of action under exam conditions.
CFA Level 1 Syllabus
For the CFA Level 1 exam, you are expected to understand and evaluate situations relating to professional standards, especially the application of duties to clients and employers, with a focus on the following syllabus points:
- Explaining the requirements and key principles of the Standards concerning duties to clients and duties to employers
- Identifying and resolving conflicts between duties to clients, employers, and the public
- Applying guidance for loyalty, prudence, and care, as well as confidentiality
- Recognising fair dealing and the appropriate management of conflicts of interest
- Distinguishing between preservation of confidentiality and the duty to act in the client’s/investor’s best interest
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- If a client instructs you to make a risky investment against your judgment, what is your primary duty as a CFA member?
- True or false? You may accept a higher bonus from a client for superior performance if no disclosure is made to your employer.
- When is it appropriate to disclose confidential client information?
- A CFA member is leaving her firm and plans to use a client list she developed. What are her obligations?
Introduction
Duties to clients and employers are essential pillars of the CFA Institute Standards. These Standards balance the duty to act with loyalty, prudence, and care, with fair treatment and robust employer relationships. CFA exam candidates must be able to apply these duties in a range of practical situations—particularly where conflicts arise.
Key Term: Loyalty, Prudence, and Care
A Standard requiring members to act for the benefit of their clients, placing client interests above their own or their employer’s and exercising diligence and reasonable care.Key Term: Fair Dealing
The obligation to deal fairly and objectively with each client when providing investment analysis, recommendations, actions, or in the execution of investment transactions.Key Term: Confidentiality
A Standard requiring members to preserve the confidentiality of information communicated by clients, except when disclosure is required by law or the client permits disclosure.Key Term: Additional Compensation Arrangements
A Standard dictating that members must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interests unless all parties provide written consent.
Duties to Clients
Loyalty, Prudence, and Care
CFA members must act for the benefit of their clients and place their clients’ interests above their own or those of their employer. You are expected to exercise diligence and reasonable care, making decisions consistent with the client’s goals and risk tolerance.
Exam Warning
The CFA exam frequently tests the order of obligations: client > employer > self. Always place client interests first, unless the law or regulation requires otherwise.
Fair Dealing
You are required to offer all clients fair and objective investment opportunities and recommendations. This includes disseminating recommendations in a way which ensures that no client is unfairly advantaged or disadvantaged.
Confidentiality
Members must preserve the confidentiality of client information unless disclosure is required by law or the client consents. Confidentiality extends beyond the termination of the client relationship.
Worked Example 1.1
Scenario:
An analyst discovers information that, if disclosed, would benefit one client at the expense of others.
Answer:
The analyst must treat all clients fairly and objectively; it is improper to selectively disclose information or act preferentially for one client.
Worked Example 1.2
Scenario:
A client asks you to invest in a startup with highly speculative characteristics that you believe exceed the client’s risk tolerance, but insists on proceeding.
Answer:
After disclosing your concerns regarding risk, if the client insists and the request is lawful and does not violate the Code and Standards, you must follow your client's lawful direction.
Duties to Employers
Loyalty
CFA members and candidates owe a duty of loyalty to their employer and are expected to act in the employer's best interest. However, this duty does not override your duty to act ethically and in the client’s best interest.
Additional Compensation Arrangements
You must not accept compensation or benefits that could create a conflict with your employer’s interests unless all parties consent in writing.
Responsibilities When Leaving an Employer
Members must not misappropriate trade secrets, solicit clients prior to leaving the employer (unless permitted by the employer), or use confidential client lists. You may make arrangements to work elsewhere, but must act in your employer’s best interests until your resignation is effective.
Worked Example 1.3
Scenario:
A portfolio manager is offered a cash bonus by a client for superior performance, outside her employer’s compensation structure.
Answer:
She must obtain written consent from her employer before accepting any additional compensation arrangement that might create a conflict.
Worked Example 1.4
Scenario:
You are planning to leave your firm and wish to use a database of client information you developed.
Answer:
The client information belongs to your employer. You may not use it after leaving unless your employer consents or you brought the clients with you from a previous employer (and this was documented).
Conflicts and Practical Issues
Members may sometimes be required to act contrary to their employer’s wishes when client interests or the Standards so dictate. All actions should be appropriately documented and communicated.
Confidentiality should be broken only if required by law, or if the information concerns illegal activities or danger to others.
Revision Tip
If asked to resolve an ethical dilemma, always identify (1) your obligations to clients, (2) possible conflicts, and (3) actions that satisfy both the letter and spirit of the Standards.
Key Point Checklist
This article has covered the following key knowledge points:
- Place client interests above those of the employer or self unless the law stipulates otherwise
- Exercise loyalty, prudence, and care in all dealings with clients
- Maintain fairness in providing information, recommendations, and services to all clients
- Observe strict client confidentiality, unless disclosure is required by law or client consent is given
- Seek written consent before accepting additional compensation that could create a conflict with your employer’s interests
- Do not misuse confidential or proprietary information when leaving an employer
Key Terms and Concepts
- Loyalty, Prudence, and Care
- Fair Dealing
- Confidentiality
- Additional Compensation Arrangements