## **Learning Outcomes**

This article explains the application of the CFA Institute Code and Standards to duties to clients and employers in exam-style case scenarios, including:

- Evaluating adviser conduct against Standards III (Duties to Clients) and IV (Duties to Employers) using structured, exam-ready reasoning.
- Distinguishing compliant from non‑compliant adviser behavior in areas such as suitability, loyalty, fair dealing, and treatment of different client segments.
- Assessing whether blanket recommendations, model portfolios, or allocation policies meet suitability and fair dealing requirements for varied client circumstances.
- Analyzing outside business activities, secondary employment, and additional compensation arrangements to determine when written employer consent and disclosure are required.
- Identifying and classifying conflicts of interest arising from personal trading, ownership stakes, or relationships connected to recommended investments.
- Applying the Diligence and Reasonable Basis Standard to judge the adequacy of research, documentation, and investment rationale in case vignettes.
- Formulating appropriate corrective actions and reporting steps when violations of the Code and Standards are suspected or confirmed.
- Strengthening exam technique by linking specific fact patterns in case narratives to the precise Standard and required professional response.

## **CFA Level 2 Syllabus**

For the CFA Level 2 exam, you are expected to understand how the Code and Standards apply in practice to real-world scenarios, with a focus on the following syllabus points:

- Identifying and addressing violations of Standards III (Duties to Clients) and IV (Duties to Employers)
- Applying Suitability and Fair Dealing principles in recommendations and investment actions
- Recognizing obligations to disclose conflicts and obtain permission for outside activities
- Assessing and justifying conduct under Diligence and Reasonable Basis requirements

## **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._

1. What action must a member take before engaging in an outside business that could compete with their employer’s interests?
2. True or False: Blanket recommendations to all clients are always permitted, provided thorough research is conducted.
3. What key steps must be taken if a member wishes to recommend a product in which they have a direct interest?
4. If a suspected violation of the Code relates to client account activity, what is the recommended first step?

## **Introduction**

Applying the CFA Institute Code and Standards to practical situations requires understanding both the spirit and the letter of professional obligations. This article explores common case issues involving duties to clients and employers, showing how the Code is used to evaluate adviser actions, identify breaches, and recommend compliance procedures. You will see why suitability, loyalty, fair dealing, diligence, and transparency are essential to ethical conduct.

## Addressing Duties to Clients in Case Practice

CFA charterholders must prioritize the interests of clients, acting with loyalty, prudence, and care. They also must ensure that all recommendations suit the client’s objectives and constraints, and that fair dealing is maintained across all clients.

> **Key Term: Suitability**
> The requirement that investment advice and actions are consistent with each client’s circumstances, objectives, mandates, and constraints.
>
> **Key Term: Fair Dealing**
> The principle that all clients must have an equitable chance to act on recommendations and benefit from adviser actions, without arbitrary preference or disadvantage.

Duties to clients further require that members act for the benefit of clients before the interests of their employer or themselves. The delivery of recommendations, product allocations, and service levels must never disadvantage any client or group. Blanket actions—such as uniform recommendations to all clients—may create suitability issues if individual client constraints are not fully considered.

## Managing Conflicts and Duties to Employers

Simultaneously, CFA members owe loyalty to their employer, which involves avoiding conflicts of interest and disclosing outside activities that compete or may create appearance of a conflict. Before starting external investment-related work or businesses—such as mining a cryptocurrency or consulting—members must disclose and receive written consent from their primary employer.

> **Key Term: Loyalty (to Employer)**
> The obligation to act in the employer’s best interest, avoid competitive activities absent permission, and communicate conflicts or additional compensation arrangements.
>
> **Key Term: Conflict of Interest**
> Any situation that could impair an adviser’s independence, effectiveness, or loyalty, including personal holdings in recommended investments or outside business activities.

Failure to secure consent before engaging in potentially competing activity, or to disclose personal investment holdings that overlap with client recommendations, can result in violations of both loyalty and conflict disclosure requirements.

## Diligence and Reasonable Basis in Case Recommendations

Investment actions must always be based on rigorous, documented research suited to the security and circumstances. Case decisions that use clients as a “test group,” or where recommendations are not premised on adequate diligence and investigation, violate the Standard of Reasonable Basis.

> **Key Term: Diligence and Reasonable Basis**
> The duty to exercise thorough research, analysis, and care in all recommendations and investment actions, ensuring adequate support and documentation for client advice.

## Disclosure of Conflicts in Practice

When an adviser stands to benefit financially from a client transaction—such as selling personal holdings to clients, or holding interests in a recommended investment—explicit disclosure to both the client and the employer is mandatory. Disclosure must also include any relationships or arrangements that could influence adviser judgment.

### **Worked Example 1.1**

**Case**: A portfolio manager recommends a new, thinly-traded security to all clients, including it at a 3% allocation in every portfolio. The manager has been mining this security privately for several months and offers to sell coins from her own account to larger clients—without prior employer approval.

> **Answer:**
> Multiple violations occur. Uniform 3% allocations may be unsuitable for all clients (violation of Suitability). Selling personal holdings directly to clients, especially without employer approval, presents both a Loyalty (to Employer) and Conflict of Interest breach. The manager should have reviewed each client’s mandate, disclosed personal holdings and mining activities to both clients and employer, and obtained written permission before transacting.

### **Worked Example 1.2**

**Case**: An adviser’s employer operates a crowdfunding platform that shares enhanced research reports only with high-volume users and pressures the adviser to screen in certain applicant companies for listing.

> **Answer:**
> Enhanced reports given only to select members may breach Fair Dealing, as some investors get preferential access. Adviser pressure to accept specific applicants could compromise Diligence and Reasonable Basis, especially if not thoroughly vetted. Adviser should implement compliance checks, document review processes, and ensure equal disclosure of all relevant information.

### **Exam Warning**

> A common error is failing to obtain written employer consent before starting outside activities that compete, or might appear to compete, with employer interests. Verbal notification is not sufficient.

## **Summary**

Duties to clients and employers in the CFA Code require that recommendations fit each client’s needs, fair dealing is maintained, conflicts are managed and disclosed, and all actions serve the interests of clients and, secondarily, employers. Written consent is essential for outside activities, and all recommendations must be thoroughly documented.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Duties to clients require suitability, loyalty, and fair dealing, applied case-by-case.
- Documented, thorough research and reasonable basis are needed for recommendations.
- Written employer consent is required before engaging in potentially competing side activities.
- Personal interests and conflicts must be clearly disclosed to clients and employer.
- Enhanced information or service offerings must not disadvantage any client group.
- Adviser conduct must be justified and compliant with applicable law, employer policy, and the CFA Code and Standards.

## **Key Terms and Concepts**

- Suitability
- Fair Dealing
- Loyalty (to Employer)
- Conflict of Interest
- Diligence and Reasonable Basis

Application of the Code and Standards - Duties to clients and employers case practice