Standard III(B) Fair Dealing

Members and candidates must follow their firm’s compliance procedures for treating clients fairly. The extent of the formality and complexity of such compliance procedures depends on the nature and size of the organization and the services it provides. Members and candidates should recommend appropriate procedures to management if none are in place. Members and candidates should also make management aware of possible violations of fair-dealing practices when they come to the attention of the member or candidate.

Members and candidates who have responsibility and authority to implement compliance procedures for their firm should work to implement formal written procedures to ensure that all clients receive fair investment action.

Members and candidates should consider the following points for fair-dealing compliance practices:

• Disseminate investment recommendations based on indications of interest and suitability: Make initial investment recommendations available to all clients who indicate an interest. Although a member or candidate need not communicate a recommendation to all customers, the selection process by which customers receive information should be based on suitability and known interest, not on any preferred or favored status. A common practice to ensure fair dealing is to communicate recommendations simultaneously within the firm and to customers.
• Limit the number of people involved: Members and candidates should make reasonable efforts to limit the number of people who are aware that a recommendation is going to be disseminated.
• Shorten the time frame between decision and dissemination: Members and candidates should make reasonable efforts to limit the amount of time that elapses between the decision to make an investment recommendation and the time the actual recommendation is disseminated. If a detailed recommendation could take two or three weeks to publish, a short summary report including the conclusion might be published in advance.
• Publish guidelines for predissemination behavior: Members and candidates who have prior knowledge of an investment recommendation should refrain from discussing or taking any action on the pending recommendation and must follow any firm policies regarding conduct prior to dissemination of investment recommendations.
• Simultaneous dissemination: Members and candidates should establish procedures for the timing of dissemination of investment recommendations so that all clients are treated fairly—that is, informed at approximately the same time. For example, if a firm is going to announce a new recommendation, supervisory personnel should time the announcement to avoid placing any client or group of clients at an unfair advantage relative to other clients. Once this distribution has occurred, the member or candidate may follow up separately with individual clients, but members and candidates must not give favored clients advance information when such advance notification may disadvantage other clients.
• Maintain a list of clients and their holdings: Members and candidates should maintain a list of all clients and the securities or other investments each client holds in order to facilitate notification of customers or clients of a change in an investment recommendation. If a particular security or other investment is to be sold, such a list can be used to ensure that all holders are treated fairly in the liquidation of that particular investment.
• Develop and document trade allocation procedures: When formulating procedures for allocating trades, members and candidates should develop a set of guiding principles that ensure,
  • fairness to advisory clients, both in priority of execution of orders and in the allocation of the price obtained in execution of block orders or trades,
  • timeliness and efficiency in the execution of orders, and
  • accuracy of the member’s or candidate’s records as to trade orders and client account positions.
    
    With these principles in mind, members and candidates should follow certain allocation practices, especially with regard to block trades and new issues. Practices to consider include,
  • requiring orders and modifications or cancellations of orders to be documented and time stamped;
  • processing and executing orders on a first-in, first-out basis with consideration of bundling orders for efficiency as appropriate for the asset class or the security;
  • developing a policy to address such issues as calculating execution prices and “partial fills” when trades are grouped, or in a block, for efficiency;
  • giving all client accounts participating in a block trade the same execution price and charging the same commission;
  • when the full amount of the block order is not received, allocating partially executed orders among the participating client accounts pro rata on the basis of order size while not going below an established minimum lot size for some securities (e.g., bonds); and
  • when allocating trades for new issues, obtaining advance indications of interest, allocating securities by client (rather than portfolio manager), and providing a method for calculating allocations.
• Disclose trade allocation procedures: Members and candidates should disclose to clients and prospective clients how they select accounts to participate in an order and how they determine the amount of securities each account will buy or sell. Trade allocation procedures must be fair and equitable, and disclosure of inequitable allocation methods does not relieve the member or candidate of this obligation.
• Establish systematic account review: Members and candidates who are supervisors should review each account on a regular basis to ensure that no client or customer is being given preferential treatment and that the investment actions taken for each account are suitable for each account’s objectives. Because investments must be based on individual needs and circumstances, an investment manager may have good reasons for placing a given security or other investment in one account while selling it from another account and should fully document the reasons behind both sides of the transaction. Members and candidates should encourage firms to establish review procedures, however, to detect whether trading in an account is being used to benefit a favored client.
• Disclose levels of service: Members and candidates must disclose to all clients whether the organization offers different levels of service to clients for the same fee or different fees. Different levels of service should not be offered to clients selectively.