## **Learning Outcomes**

This article explains the CFA Institute expectations for professionalism and client communication under the standards of fair dealing, loyalty, prudence, and care, including:

- Interpreting the requirements to place client interests first and to act with loyalty, prudence, and care in day‑to‑day portfolio management.
- Distinguishing between fair dealing and preferential treatment, and evaluating whether trade allocation, timing of recommendations, and service levels are consistent with the Standard.
- Identifying appropriate conduct when communicating investment risks, recommendations, and performance, and recognizing when omissions or exaggerations constitute misrepresentation.
- Analyzing typical exam-style scenarios involving conflicts between client and employer interests, and determining the correct standard of conduct in each case.
- Assessing whether use of client brokerage, research arrangements, and soft-dollar benefits is aligned with the client’s best interests and properly disclosed.
- Applying practical guidelines for record keeping, performance presentation, and disclosure so that client reports are complete, balanced, and consistent with CFA Institute expectations.
- Practicing how to spot subtle violations—such as excessive trading, selective disclosure, or biased performance reporting—and selecting the most appropriate corrective action on exam questions.

## **CFA Level 2 Syllabus**

For the CFA Level 2 exam, you are expected to understand the rules and best practices regarding professionalism and communication as they relate to ethical standards, with a focus on the following syllabus points:

- Explain the duty to act with loyalty, prudence, and care in dealings with clients and employers
- Describe the principle of fair dealing in delivering investment recommendations and taking investment actions
- Identify appropriate conduct relating to disclosure, suitability, and communication of investment information
- Apply the standards to practical scenarios, recognizing and correcting ethical missteps

## **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 is the primary duty a CFA member owes to clients under the principle of loyalty, prudence, and care?
2. If two clients receive investment recommendations at different times due to communication delays, has the Standard on fair dealing been breached? Explain.
3. State whether the following is a violation: A portfolio manager executes excessive trades in client accounts to increase her personal commission income.
4. How should a member handle a situation where there is a conflict between employer instructions and client interests?

## **Introduction**

Professionalism and clear communication are fundamental to ethical investment practice. The CFA Code and Standards require members to act with loyalty, prudence, and care, and to deal fairly with all clients. These duties are not only a matter of law or regulation, but represent the practical expectations for investment professionals globally.

Practitioners must consistently act in the client's best interests, maintain integrity, and communicate accurately. This involves understanding when your primary duty is to the client, ensuring actions are fair and objective, and being vigilant about conflicts of interest or potential misrepresentation.

> **Key Term: Fair dealing**
> Treating all clients equally and impartially when disseminating investment recommendations or taking investment actions.
>
> **Key Term: Loyalty, prudence, and care**
> A duty to act for the benefit of clients, putting their interests first, and exercising sound judgment and diligence in their service.
>
> **Key Term: Prudence**
> Exercising sound judgment, caution, and care in taking actions or making decisions affecting clients’ investments.
>
> **Key Term: Communication**
> Clearly, accurately, and timely conveying essential information to clients, including risks, changes, and rationale behind investment recommendations or actions.

## **FAIR DEALING**

CFA members must provide all clients with the same opportunity to act on investment recommendations or changes. This requirement extends to all forms of investment action, from recommendations to the allocation of block trades.

- All clients for whom an investment is suitable should be notified at the same time.
- Differences in service levels (e.g., research availability or response time) are permitted only if disclosed and available to all who desire and qualify for those services.
- Personal or firm trades must not be executed in advance of client transactions in the same security.

### **Worked Example 1.1**

**A research analyst changes a stock recommendation from 'hold' to 'buy'. She alerts a select group of her largest clients prior to alerting other clients. Has she complied with fair dealing?**

> **Answer:**  
> No, she has violated fair dealing. Communications about recommendations must not disadvantage any client group. All clients for whom the investment is suitable should receive recommendations simultaneously.

## **LOYALTY, PRUDENCE, AND CARE**

You have a fundamental duty to act in the best interest of your clients and must place their interests above those of your employer or yourself. This includes:

- Understanding client objectives, risk tolerance, and constraints
- Making investment decisions or actions that serve the client’s goals
- Disclosing conflicts of interest
- Avoiding actions (e.g., excessive trading) that benefit yourself at the expense of the client

### **Worked Example 1.2**

**A manager chooses a broker to execute trades for a pension fund, receiving poor execution and high fees in exchange for receiving research that mainly aids her own compensation. Is this proper?**

> **Answer:**  
> No, this breaches loyalty and prudence. Client assets must be used exclusively for the client’s benefit, not to benefit the manager or their firm unless disclosed and justified as also being in the client’s interest.

### **Exam Warning**

> It is a common error to confuse loyalty to the employer with loyalty to the client. When acting for a client, their interests must always come first—even above the employer’s—unless otherwise required by applicable law.

## **PRUDENCE AND COMMUNICATION**

Prudent investment managers do not take unnecessary risks with clients’ assets and avoid speculative activity unless it fits within the client’s stated objectives and constraints. Communication underpins this duty:

- Provide regular, clear, and comprehensive reports of investment activity and portfolio holdings
- Promptly disclose significant risks, material changes to investment strategy, or process
- Clearly distinguish facts from opinions in reports or recommendations

> **Key Term: Misrepresentation**
> Presenting false, misleading, or omitted information in communications regarding investment analysis, actions, or results.

## **Practical Guidelines**

- Itemize and report all transactions and holdings at least quarterly
- Disclose the basis for investment action and the risks involved
- Do not make guarantees regarding investment performance
- Retain documentation supporting recommendations and actions

### **Worked Example 1.3**

**A manager presents performance figures for her firm by including only the best-performing accounts and omitting those that have left the firm, giving a misleading impression. Is this a violation?**

> **Answer:**  
> Yes. This is misrepresentation and unfair dealing. All comparable accounts should be included in historical performance presentations, and terminated accounts must not be selectively excluded to inflate results.

### **Revision Tip**

> When in doubt about a possible conflict of interest or ambiguity in communication, err on the side of transparency and seek guidance from your firm’s compliance resources.

## **Summary**

Investment professionals must always act with loyalty, prudence, care, and fairness. The client’s interests come first. Transparency and thorough, accurate communication are essential. Violating these duties—whether by failing to treat clients fairly, by acting in self-interest, or by misrepresenting information—risks not only professional sanctions but also loss of client trust.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Understand the requirement to act with loyalty, prudence, and care toward clients
- Ensure fair and impartial treatment for all clients in recommendations and actions
- Exercise diligence in executing duties and avoid conflicted or self-serving actions
- Maintain accurate and transparent client communications, including performance and risk disclosure
- Recognize and avoid misrepresentation and ensure all recommendations have a reasonable basis
- Disclose conflicts of interest and act to resolve them in the client’s favor

## **Key Terms and Concepts**

- Fair dealing
- Loyalty, prudence, and care
- Prudence
- Communication
- Misrepresentation

Professionalism and communication - Fair dealing loyalty prudence and care