A portfolio manager at a multi-strategy firm gets a block-trade allocation wrong, fills her largest hedge fund client first at a better average price, and tells herself the smaller accounts will catch up next quarter. Standard III is the section of the Code that names exactly what she just violated, and tells you which procedures would have prevented it.
Standard III binds members and candidates to put clients first across five distinct duties. The exam tests pattern recognition: given a fact pattern, name the sub-standard violated, name a recommended procedure, and identify whether conduct complies or violates.
Members must place client interests before employer and personal interests, act with the care and prudence of a reasonable person in similar circumstances, and identify the actual investor to whom the duty is owed. For a pension plan, the duty runs to the plan beneficiaries, not to the plan sponsor or the company that funds it. For a mutual fund manager, the duty runs to the fund shareholders, not the fund's distribution partners.
Common mistakes
- Confusing "fair" with "equal" in III(B). Fair dealing allows differentiated service levels and tiered offerings. The violation is preferential disadvantage. A premium service tier disclosed in advance is fine. Trap: marking "all clients must receive identical recommendations" as compliant.
- Treating the plan sponsor as the client in III(A). For pensions, the duty runs to the beneficiaries, not the sponsor. For mutual funds, to fund shareholders, not distribution partners. Trap: siding with the entity writing the contract instead of the entity whose money is at risk.
- Judging suitability at the security level instead of the portfolio level. A speculative security can be perfectly suitable as a small allocation in a diversified portfolio. Trap: marking "this stock is too risky for a retiree" without considering position size and total portfolio.
Bottom line
- Standard III has five sub-standards: III(A) Loyalty/Prudence/Care, III(B) Fair Dealing, III(C) Suitability, III(D) Performance Presentation, III(E) Preservation of Confidentiality.
- Client interests come before employer and personal interests; advisory duty creates fiduciary-like obligations.
- For pensions and pooled vehicles, the duty under III(A) runs to beneficiaries and fund shareholders, not sponsors or distribution partners.
- "Fair" dealing means no preferential disadvantage, not identical treatment; disclosed tiered service is permitted and pro rata at average execution price is the safe default.
Exam shortcut
For the five sub-standards, memorize LFSPC (Loyalty, Fair Dealing, Suitability, Performance, Confidentiality). For confidentiality exceptions, remember ILP (Illegal activity, Legal compulsion, PCP). For any III(B) fact pattern asking "who got hurt," look for selective early disclosure or a non-average execution price across a block. Those are the textbook violations. For suitability, the IPS is the answer roughly 80% of the time.
The full lesson (about 2,798 words, 19 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- standard III duties to clients
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