CFA Level 1 · Module 01 Ethical and Professional Standards · Chapter 5
Standard III is the heart of the client relationship. It is the largest client-facing Standard, with five sub-sections, and it turns the broad promise to put clients first into specific duties: to act loyally and prudently, to deal fairly with everyone, to recommend only what suits the client, to present performance honestly, and to keep client information confidential. Because so much of daily investment work touches these duties, Standard III generates a large share of exam questions.
The organizing idea is the fiduciary mindset. A member managing another person’s money is in a position of trust that demands more than ordinary commercial dealing: the client’s interest comes ahead of the employer’s and ahead of your own. Everything in this reading flows from that ordering, so if you ever lose the thread of a scenario, return to the question of what genuinely serves the client.
As throughout the module, MidhaFin teaches the duties in its own words and illustrates them with invented scenarios. No example, firm, or figure below is drawn from the source curriculum or any prep provider.
A member who manages or advises on a client’s assets stands in a relationship of trust that the law often calls fiduciary. A fiduciary is held to a higher standard than ordinary business dealing because the client is relying on the member’s care and honesty and usually cannot monitor the work closely. That reliance is exactly the vulnerability the Standard protects, and it is why the client’s interest is placed above both the employer’s and the member’s own.
One preliminary question runs through all of Standard III: who is the client? It is not always the person who signs the cheque. When a member manages a pension fund, the clients whose interests come first are the fund’s beneficiaries, the retirees and future retirees, not the company or the trustees who hired the manager. Identifying the true client correctly is often the first step to answering a Standard III question, because the duty of loyalty is owed to them.
It is useful to see how Standard III sits next to Standard IV, which you will meet in the next reading. Standard III owes duties to the client; Standard IV owes duties to the employer. Most of the time these align, serving clients well is exactly what a good employer wants, but when they genuinely collide, the client-first ordering of Standard III governs the client relationship: you may not harm a client to please an employer. Keeping the two Standards distinct in your mind prevents a common error, which is answering a client-duty question with an employer-duty rule or the reverse.
Fix the loyalty ordering before anything else: client first, employer second, self last. A striking number of Standard III scenarios are resolved simply by asking which choice serves the client, even when it costs the member or displeases the employer. And when the paying entity differs from the beneficiaries, as in a pension plan, the duty runs to the beneficiaries.
Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.
Verbatim wording of the Standard as published by CFA Institute; all explanation and examples below are MidhaFin’s own.
Standard III(A) requires loyalty to clients, the care and prudence of a careful professional, and action for the client’s benefit ahead of the employer’s or the member’s own. Prudence means acting with the caution and skill a knowledgeable professional would use, and loyalty means the client’s interest is the lodestar of every decision. Several recurring situations test this duty.
Soft commissions, or soft dollars. The brokerage commissions generated by trading a client’s account are an asset of the client, not of the manager. When a manager uses that client brokerage to buy research (a soft-dollar arrangement), the research purchased should benefit the client whose commissions paid for it, and the manager must still seek best execution. Paying a higher commission to obtain research that does not benefit the client, or to serve the manager’s own needs, breaches the duty of loyalty. Directed brokerage, where a client instructs the manager to send trades to a particular broker, is different because the client is directing the use of their own asset, but the manager should tell the client if the arrangement may cost them best execution.
Proxy voting. The right to vote shares held for clients has economic value and belongs to the client, so proxies must be voted in the client’s best interest. Voting is not automatic in every case, a sensible cost-benefit judgment can apply to trivial votes, but a member may not neglect voting or vote to serve their own or the employer’s interest. Firms should have a proxy-voting policy and disclose it to clients.
Best execution and the safekeeping of client assets. Loyalty and care also show up in the ordinary mechanics of managing money. When placing trades, the member must seek best execution, the most favourable overall terms reasonably available, because paying more than necessary quietly transfers value away from the client. Client assets must be kept separate and safe, not commingled with the firm’s own, and members should account for them accurately. A related duty is transparency after the fact: clients are entitled to regular reporting on the activity and valuation of their accounts, so they can see how their money is being handled. None of this is glamorous, but the fiduciary standard lives in exactly these routine obligations, and a scenario that shows sloppy record-keeping, commingled assets, or silence toward the client is pointing at III(A).
The soft-dollar and directed-brokerage cases are worth holding apart because they look alike but differ in who is deciding. In a soft-dollar arrangement, the manager chooses to spend the client’s brokerage on research, so the burden is on the manager to show the research benefits the client and that best execution was still obtained. In directed brokerage, the client chooses to send trades to a particular broker, perhaps to obtain services the client values, so the decision is the client’s to make; the manager’s duty is to warn the client if the direction may cost them best execution, and then to honour the instruction. In both, the guiding principle is the same: the brokerage belongs to the client, and its use must serve the client’s interest rather than the manager’s convenience or the manager’s own commercial relationships.
The fiduciary framing is worth restating because it explains why III(A) is stricter than ordinary commercial dealing. In a normal arm’s-length transaction, each side may look after its own interest; in a fiduciary relationship, one side has agreed to subordinate its interest to the other’s. That is a demanding promise. It means that when the member’s convenience, the employer’s revenue, or a broker relationship pulls against what serves the client, the client wins, and the member must be able to show that the client’s interest actually drove the decision.
Setup. Anjali, a manager at the fictional Kabini Investments, routes most client trades to a broker that charges above-market commissions because that broker gives her free access to a data terminal she uses for her own marketing, not for managing the clients whose accounts are charged.
Answer: the arrangement violates Standard III(A). Client brokerage must be used for the clients’ benefit with best execution; spending it on the manager’s own tools is a breach of loyalty.
Setup. Rohan manages an equity account for a family office at the fictional Tapti Asset Managers. The client instructs him to route all of its trades through one named broker, a firm connected to a family relative. Over the first quarter Rohan sees that this broker charges commissions of 30 basis points against 12 basis points at two other brokers he uses, and that its fills are consistently worse. He follows the instruction and says nothing to the client.
Answer: Rohan’s silence violates Standard III(A). Directed brokerage is permitted, yet the manager must warn the client when the arrangement may forgo best execution.
Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.
Verbatim wording of the Standard as published by CFA Institute; all explanation and examples below are MidhaFin’s own.
Standard III(B) requires you to deal fairly and objectively with all clients when making recommendations, taking investment action, or providing other services. Fair does not mean identical: clients legitimately differ in mandates, and a recommendation suitable for one may be wrong for another. What fairness forbids is favouring some clients over others in ways that disadvantage the rest, for example giving a valued client an early look at a recommendation, or filling one account ahead of others on a limited opportunity.
Two operational areas dominate the guidance. First, the dissemination of recommendations: when a new recommendation or a change goes out, all clients for whom it is appropriate should have a fair chance to act on it. The recommended practices are to limit the number of people who know before it is published, to shorten the time between decision and dissemination, and to communicate it to eligible clients as simultaneously as practical, so no one is systematically last in line.
Second, the allocation of trades, especially block trades and new issues such as oversubscribed IPOs. When many client accounts participate in one block, fairness calls for a pre-set, systematic allocation, typically a pro-rata share at the same average execution price, rather than an ad-hoc distribution that lets the manager favour some accounts. For hot new issues, obtaining advance indications of interest and allocating pro rata among eligible accounts prevents the manager from steering the best opportunities to favoured clients or to their own account.
Fairness in this context is best understood by its opposite. It is unfair to release a favourable recommendation to a preferred institutional client before the wider client base, to let some accounts trade on a change while others are still uninformed, or to reserve the most attractive part of a scarce allocation for the accounts that generate the most revenue for the member. Each of these gives an advantage that the disadvantaged clients had an equal right to, and each is a III(B) violation even though no client was actively deceived. The Standard asks not merely that you avoid lying to clients but that you avoid quietly ranking them by their value to you when a genuine opportunity or a timely recommendation is on the table.
The reason a written, advance allocation policy matters so much is that scarce opportunities are where the temptation to favour is strongest. If the rule for splitting a block or a hot issue is decided before anyone knows how it performs, no client can be quietly advantaged after the fact. A good policy fixes how execution prices are averaged, gives every participating account the same price, distributes partially filled orders pro rata, and sets objective criteria for who is eligible, so that allocation is mechanical rather than discretionary. The recommended practices for disseminating recommendations work the same way: by limiting who knows early and compressing the time before broad release, the firm removes the window in which a favoured client could act first.
It also helps to separate two things fairness governs: the spread of information and the spread of execution. Fair dissemination is about giving eligible clients an equal chance to learn of a recommendation; fair allocation is about giving them an equitable share of the resulting trades. A member can violate III(B) on either front, by tipping a favoured client to a change before others hear it, or by filling that client’s order on better terms once the trade is on. Watch a scenario for which of the two is really at stake.
Setup. Vivek, a manager at the fictional Periyar Capital, gets a small allocation of a sought-after new issue. He fills his largest client’s order completely and gives his personal account the next share, leaving several similar client accounts with nothing, with no written allocation policy.
Answer: the allocation violates Standard III(B). Scarce new issues should be distributed fairly among eligible clients, typically pro rata, with the member’s personal account never coming ahead of clients.
A manager tells one client to buy a stock and tells another to merely hold the same stock, because the two accounts run to different mandates. Has the manager necessarily breached fair dealing under III(B)?
No. Fair dealing requires fair and objective treatment, not identical treatment. Because the two clients have different mandates and suitability profiles, different recommendations can be entirely proper, and the differing advice alone is not a breach. A violation would arise only from favouring one client over another of equal standing, for example by releasing the recommendation to one before the other or filling one order on better terms.
Verbatim wording of the Standard as published by CFA Institute; all explanation and examples below are MidhaFin’s own.
Standard III(C) has two distinct branches, and the exam expects you to know which one applies. In an advisory relationship, where you are advising or managing for an individual or institution, you must first make a reasonable inquiry into the client’s circumstances, their investment experience, risk and return objectives, and financial constraints, then keep that picture current, and recommend or act only on what suits the client’s situation and written objectives, judged in the context of the client’s total portfolio rather than each holding in isolation. A security that looks risky alone may be perfectly suitable as part of a diversified whole.
The practical tool for all of this is the investment policy statement (IPS): a written document capturing the client’s risk tolerance, return requirements, and relevant constraints such as time horizon, liquidity needs, taxes, legal and regulatory factors, and any unique circumstances. The IPS is what makes suitability judgments possible and reviewable, and it should be revisited on a schedule and whenever the client’s situation changes. When you instead manage to a stated mandate, strategy, or style, for example running a fund with a defined objective, the suitability question shifts: your actions must be consistent with that stated mandate, and suitability is judged against the mandate rather than the personal circumstances of each underlying investor.
A few suitability nuances recur in exam questions. The total-portfolio view is central: an investment that would be reckless as a standalone bet can be entirely suitable as a small, diversifying part of a larger portfolio, and the reverse is also true, so a member must never judge a single holding in isolation. Unsolicited trades, where a client insists on a transaction that does not fit their IPS, need care: the member should explain the mismatch, and if the client still wishes to proceed, either decline, or document the client’s instruction and consider whether the trade is small enough not to distort the overall strategy, updating the IPS if the client’s objectives have genuinely changed and been reconfirmed in writing. And suitability is an ongoing duty, not a one-time check at onboarding: as a client ages, their circumstances shift, or markets move the portfolio away from its targets, the member must reassess whether the strategy still fits.
It is worth stressing why the written IPS carries so much weight. Memory and good intentions are not reviewable; a document is. When a member can point to a current IPS and show that a recommendation matched its objectives and constraints, the suitability judgment is defensible. When there is no IPS, or it is years out of date, the member has no anchor for the decision and no way to demonstrate that the client’s interest was served. That is why almost every suitability failure in practice traces back to a missing, stale, or simply ignored investment policy statement.
| Situation | What suitability means |
|---|---|
| Advisory relationship | Know the client, maintain an IPS, and recommend only what fits their objectives and total portfolio |
| Managing to a mandate | Take only actions consistent with the fund’s stated strategy, objectives, and constraints |
Setup. Meena advises a client at the fictional Gomti Wealth whose IPS specifies capital preservation and modest income for a short horizon. A concentrated, illiquid venture position has become available with a high expected return, and the client’s neighbour has made money on similar deals.
Answer: recommending the venture position would violate Standard III(C). Meena must recommend only what suits the client’s documented objectives, and if the client insists, revisit and update the IPS before acting.
A single holding in a client’s account looks highly speculative on its own. Does that alone make it unsuitable under III(C)?
No. In an advisory relationship, suitability is judged in the context of the client’s total portfolio, not holding by holding. A speculative position can be suitable as a small, diversifying part of a larger, well-balanced portfolio, just as a conservative security can be unsuitable if it works against the client’s objectives. What matters is fit with the IPS and the overall strategy. When managing to a stated mandate, the test shifts to consistency with the fund’s strategy rather than each investor’s circumstances.
When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.
Verbatim wording of the Standard as published by CFA Institute; all explanation and examples below are MidhaFin’s own.
Standard III(D) requires that any performance information you communicate be fair, accurate, and complete. The duty targets the temptation to flatter a track record: cherry-picking the best accounts or periods, excluding terminated accounts, presenting only gross returns without disclosing costs, or implying more certainty than the record supports. You do not have to include every conceivable detail in every format, but you must not create a misleading impression of performance.
The link to client trust is direct. A prospective client chooses a manager largely on the strength of a track record, so an inflated or selective presentation is not a harmless marketing flourish; it induces a decision on false premises, which is exactly the harm the client-first duty exists to prevent. Presenting results honestly can be less flattering in the moment, but it is what allows a client to compare managers on a true basis and to give informed consent to the relationship. Accuracy also protects the member: a record that can be reconstructed from real accounts and complete periods withstands scrutiny in a way that a curated highlight reel never can.
The recommended practices point toward fair, representative presentation: showing performance across all relevant accounts rather than a favourable subset, including the results of accounts that have since closed so survivors do not overstate the record, and giving enough context, such as the period and the basis, for a reader to understand what the numbers mean. Applying a recognized performance-presentation framework across the firm is the strongest way to ensure comparability and completeness, and it removes the discretion that makes selective presentation possible.
Two specific traps deserve naming. Survivorship is the quiet overstatement that results from dropping closed or poorly performing accounts from a track record, leaving only the survivors, which flatters the average; including terminated accounts corrects it. Selective periods are the same trick across time, showing a strong stretch while omitting weak ones. A member does not have to cram every number into every marketing line, but the impression left must be honest and representative. If a reader would draw a materially rosier conclusion from the presentation than the full record supports, the presentation is not complete, and III(D) is breached.
Setup. Priya markets the equity strategy at the fictional Sabarmati Advisors. In a pitch deck she reports a 15 percent average annual return, computed from the ten best-performing accounts over a three-year stretch that she chose because it skips a weak year, and she leaves out four accounts that closed after poor results. Across all relevant accounts over the full period, the figure is closer to 9 percent.
Answer: the presentation violates Standard III(D). A 15 percent number built from selected accounts and a chosen period is neither complete nor fair; the full, representative record must be shown.
Members and Candidates must keep information about current, former, and prospective clients confidential unless:
Verbatim wording of the Standard as published by CFA Institute; all explanation and examples below are MidhaFin’s own.
Standard III(E) requires you to keep information about current, former, and prospective clients confidential. The duty is broad and continues after the relationship ends, but it is not absolute. There are three exceptions, and knowing them precisely is a common exam target. Confidential information may be disclosed when it concerns illegal activities on the part of the client, when disclosure is required by law, or when the client permits the disclosure.
Two nuances matter. First, the fact that information concerns a client’s possible illegal activity does not compel you to broadcast it, but it removes the confidentiality bar and may trigger duties under the law or your firm’s procedures; the sensible path is usually to consult compliance or counsel. Second, cooperating with a lawful regulatory investigation is squarely within the “required by law” exception, so confidentiality is not a shield against a legitimate demand from an authority with jurisdiction. Outside these three exceptions, client information stays private, and members should limit who within the firm has access to it.
The scope of the duty is wider than many candidates expect. It covers prospective clients, not only current ones, so information gathered while pitching for business must be protected even if the relationship never forms, and it survives the end of the relationship, so a former client’s information cannot be shared afterward. It also applies regardless of how the information is held, on paper, in a database, or in messages, which is why firms limit internal access and secure electronic records. A useful default is that everything you learn about a client in the course of the relationship is confidential unless one of the three exceptions clearly applies; when unsure, treat it as confidential and ask compliance.
Confidentiality under III(E) is broad but bounded. The bar protects current, former, and prospective clients and every form of their information, yet it lifts in exactly three situations: the client’s illegal activity, a legal requirement to disclose, and the client’s own permission. Learn the three as a closed list, because exam questions turn on whether a disclosure fits one of them or breaches the duty.
| Exception | What it means |
|---|---|
| Client’s illegal activities | The information concerns illegal acts by the client or prospect |
| Required by law | Disclosure is compelled by applicable law or a lawful authority |
| Client permits | The client consents to the disclosure |
Setup. During routine work, Sanjay at the fictional Musi Advisors notices transactions in a client’s account that strongly suggest the client is laundering money. A regulator with jurisdiction later issues a lawful request for records related to that account.
Answer: confidentiality does not prevent Sanjay from responding. The client’s suspected illegality and the lawful regulatory demand both fall within the exceptions to Standard III(E).
Setup. Karan, formerly at the fictional Bhima Partners, is interviewing for a new role. To impress the prospective employer, he describes a former client’s portfolio holdings and strategy, details he learned only while managing that account. The former client has broken no law, no legal process compels the disclosure, and the client has not been asked for permission.
Answer: sharing the information violates Standard III(E). With no exception in play and the duty extending to former clients, disclosing to advance his own interest breaches confidentiality.
A member wants to share a current client’s portfolio details with a prospective business partner to help win a joint venture. The client has broken no law and has not been asked. Which, if any, confidentiality exception applies?
None. The three exceptions under III(E) are the client’s illegal activity, disclosure required by law, and the client’s permission. Winning a business deal is not among them, so the information stays confidential. The member would need the client’s consent before disclosing anything.
Standard III rewards knowing, for each sub-section, the specific procedure that keeps the duty. The table gathers the main ones together so you can revise the whole of the Standard efficiently as a set of duty-and-procedure pairs.
| Sub-section | Key recommended procedures |
|---|---|
| III(A) Loyalty, Prudence, and Care | Follow applicable rules; use client brokerage for the client’s benefit with best execution; vote proxies in the client’s interest and disclose the policy; report account activity to clients regularly |
| III(B) Fair Dealing | Limit who sees a recommendation before release; shorten decision-to-dissemination time; disseminate simultaneously; allocate blocks and new issues pro rata at the same price |
| III(C) Suitability | Build and maintain an IPS; assess suitability against the total portfolio; review the IPS on a schedule and when circumstances change |
| III(D) Performance Presentation | Present fair, complete performance across all relevant accounts; include terminated accounts; apply a recognized presentation framework |
| III(E) Preservation of Confidentiality | Keep client information private; limit internal access; disclose only within the three exceptions, consulting compliance when in doubt |
Route Standard III questions by the harm. A misuse of client commissions or votes points to III(A); one client favoured over others points to III(B); a recommendation that does not fit the client or mandate points to III(C); a flattering or selective track record points to III(D); and a disclosure of client information points to III(E), where you then check the three exceptions.
The investment policy statement is the connective tissue of Standard III(C). Almost every suitability question turns on whether the member knew the client, wrote it down, judged the investment against the whole portfolio, and kept the document current. If a scenario shows action taken without an up-to-date IPS, or against the objectives it records, suitability is the issue.
A manager uses client brokerage commissions to buy research that benefits a different set of clients. Is this acceptable under III(A)?
It is problematic. Client brokerage is the client’s asset, and soft-dollar research should benefit the client whose commissions paid for it, while the manager still seeks best execution. Using one set of clients’ commissions to benefit others, or the manager, breaches the duty of loyalty and care.
Does fair dealing under III(B) mean every client must be treated identically?
No. Fair dealing means treating clients fairly and objectively, not identically. Clients differ in mandates and suitability, so recommendations and actions can differ. What is prohibited is favouring some clients over others in ways that disadvantage the rest, such as selective early access or preferential allocation.
When managing a fund to a stated mandate, how is suitability judged?
Against the mandate. Your actions must be consistent with the fund’s stated strategy, objectives, and constraints, rather than the personal circumstances of each underlying investor. The advisory-relationship test of knowing each client applies when you advise or manage for that specific client.
Name the three exceptions that permit disclosing confidential client information under III(E).
The information concerns illegal activities by the client or prospect; disclosure is required by law; or the client permits the disclosure. Outside these three, client information (including for former and prospective clients) stays confidential.
III(A) Loyalty, Prudence, and Care; III(B) Fair Dealing; III(C) Suitability; III(D) Performance Presentation; and III(E) Preservation of Confidentiality. All five express the fiduciary duty to place the client’s interest ahead of the employer’s and the member’s own.
The party whose interest the duty of loyalty protects, which is not always the party who pays the fee. When a member manages a pension fund, the clients are the fund’s beneficiaries, the retirees and future retirees, not the sponsoring company or the trustees. Identifying the true client is often the first step in a Standard III question.
Soft dollars, or soft commissions, arise when a manager uses client brokerage to buy research. Because client brokerage is a client asset, the research should benefit the client whose commissions paid for it, and the manager must still seek best execution. Paying above-market commissions for research that does not benefit the client, or that serves the manager, breaches III(A).
No. Fair dealing means treating clients fairly and objectively. Because clients differ in mandates and suitability, recommendations and actions can legitimately differ. What is prohibited is favouring some clients over others, such as giving early access to a recommendation or steering scarce new issues to favoured accounts. Block trades and new issues should be allocated pro rata at the same price.
An IPS is a written record of a client’s risk tolerance, return requirements, and constraints such as time horizon, liquidity, taxes, and legal factors. It makes suitability judgments possible and reviewable. Under III(C) in an advisory relationship you must know the client, maintain the IPS, judge each investment against the total portfolio, and update the IPS on a schedule and when circumstances change.
That performance information be fair, accurate, and complete. It prohibits cherry-picking accounts or periods, excluding terminated accounts, and creating a misleading impression of the record. Presenting results across all relevant accounts and applying a recognized presentation framework are the recommended ways to ensure completeness and comparability.
In three cases: when the information concerns illegal activities by the client or prospect, when disclosure is required by law, or when the client permits it. The duty covers current, former, and prospective clients and continues after the relationship ends. Cooperating with a lawful regulatory investigation falls within the “required by law” exception.
Through scenarios asking whether conduct complies or violates and which sub-section applies. A helpful routing: misuse of client commissions or votes is III(A), favouring some clients is III(B), an unsuitable recommendation or one against the mandate is III(C), a selective or overstated track record is III(D), and a disclosure of client information is III(E), where you then apply the three exceptions.
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