{"id":854,"date":"2019-07-12T17:36:00","date_gmt":"2019-07-12T17:36:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=854"},"modified":"2025-05-01T10:18:21","modified_gmt":"2025-05-01T10:18:21","slug":"standard-3a-loyalty-prudence-care","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/ethical-and-professional-standards\/standard-3a-loyalty-prudence-care\/","title":{"rendered":"Standard III(A) \u2013 Loyalty, Prudence, and Care"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Standard III \u2013 Duties to Clients and Prospective Clients (2025 LI CFA\u00ae Exam \u2013 Ethics\u2013Module 3)\",\n  \"description\": \"This video lesson covers Standard III \u2013 Duties to Clients and Prospective Clients from the CFA Level I Ethics and Professional Standards curriculum. It explains key responsibilities such as loyalty, prudence, care, fair dealing, suitability, confidentiality, proxy voting, and performance presentation. Practical examples and exam-style questions reinforce understanding of each ethical obligation.\",\n  \"uploadDate\": \"2022-08-24T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/coTBbAxXxTA\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=coTBbAxXxTA\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/coTBbAxXxTA\",\n  \"duration\": \"PT29M09S\"\n}\n<\/script>\n\n\n\n<h2>[vsw id=&#8221;coTBbAxXxTA&#8221; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;]<\/h2>\n<h2>III. Duties to Clients and Prospective Clients<\/h2>\n<p>Standard III addresses client loyalty, discretion, and care; fair dealing; suitability; performance presentation; and maintaining confidentiality. Investment professionals are obligated to put the interests of their clients before that of their organization or their personal interests.<\/p>\n<h2>Standard III(A)<\/h2>\n<p>Standard III(A) \u2013 Loyalty, Prudence, and Care compels CFA Members to put the interest of their clients before their employers or their own interests.<\/p>\n<h2>Compliance<\/h2>\n<p>Trust is key to developing a client relationship.\u00a0 More often than not, an investment manager has greater knowledge of the financial services industry than a client. Communication between investment professionals and clients will often reveal parameters set by a client.\u00a0 Those parameters must be maintained, in addition to the balance of risk and return.<\/p>\n<p>In addition to the paramount importance of client loyalty, prudence requires that investment professionals practice discretion and care.\u00a0 In other words, all CFA members must practice due diligence and caution when handling clients\u2019 finances.<\/p>\n<p>An aspect of ensuring that Standard III(A) \u2013 Loyalty, Prudence, and Care is maintained is to strictly adhere to Standard I(A) \u2013 Knowledge of the Law.\u00a0 Members are obligated to observe the strictest set of laws in any given client environment.<\/p>\n<p>Related to fiduciary responsibility, in not all cases is a member to be considered a fiduciary.\u00a0 This will be determined by the type of client, the level of advice, and the circumstances surrounding any given transaction. Fiduciary duties include acting for the best interests of a client, including managing investments.\u00a0 In essence, fiduciaries achieve an advanced level of trust.\u00a0 As a professional whose primary role is to facilitate transactions and not directly advise a client, the level of fiduciary duty is diminished from a legal standpoint.\u00a0 Regardless of this distinction, all investment professionals are obliged by Standard III(A) \u2013 Loyalty, Prudence, and Care to put the interest of their clients before their employers or their own interests.<\/p>\n<p>With regard to managing pensions or trusts, loyalty is not necessarily owed to the client hiring a firm but to the beneficiaries of that account. Likewise, in the event of an index fund, beneficiaries of an investment may not be known.\u00a0 In this case, it is incumbent upon a CFA Member to adhere to the stated mission of that fund. Conflict of interest can arise between hiring clients and plan beneficiaries.\u00a0 For example, perhaps a company whose pension is placed with an investment firm is the subject of a hostile takeover.\u00a0 Company leaders may urge the investment firm to use pension funds to purchase stock in the parent company to ward off the hostile investor.\u00a0 In this case, it is not corporate leadership to whom a member is obligated but the beneficiaries of the pension fund. Therefore, if the company\u2019s stock is overvalued, an investment professional must decline requests to purchase shares in that company.<\/p>\n<p>\u201cSoft commissions\u201d are addressed under Standard III(A) \u2013 Loyalty, Prudence, and Care.\u00a0 These are commissions that aren\u2019t paid in dollars\u00a0but on trade.\u00a0 For example, a trading brokerage may offer a third-party research firm the benefit of commission-free transactions in exchange for research reports.\u00a0 This allows the brokerage firm to show reduced expenses for research.\u00a0 Standard III(A) \u2013 Loyalty, Prudence, and Care cautions against soft commissions in cases that elevate the overall cost of this arrangement.\u00a0 Perhaps an actual expense paid in dollars would be less costly than a negotiated trade? In this case, the choice must be made to benefit one\u2019s client.<\/p>\n<p>To maximize adherence to Standard III(A) \u2013 Loyalty, Prudence, and Care, the following are recommended:<\/p>\n<ol style=\"margin-bottom: 15px;\">\n<li>Regular communication with clients, including written reports and up-to-date personal interaction.<\/li>\n<li>Client approval in cases where a member is uncertain if an investment decision is matched with the client parameters.<\/li>\n<li>Diversification of investments to limit the risk of loss. The exception to this is the case in which diversification runs counter to plan objectives.<\/li>\n<li>Impartiality among clients. CFA members should not favor some clients over others.<\/li>\n<li>Disclosure of potential conflicts of interests and compensation arrangements should be made available to clients so that they may evaluate that information.<\/li>\n<\/ol>\n<h2>Violation<\/h2>\n<p>Cases in which investment professionals do not practice due diligence as outlined in Standard I(A) \u2013 Knowledge of the Law, and Standard I(B) \u2013 Independence and Objectivity can be reviewed as a\u00a0violation of Standard III(A) \u2013 Loyalty, Prudence, and Care.<\/p>\n<p>An example of how Standard I(B) \u2013 Independence and Objectivity may relate to Standard III(A) \u2013 Loyalty, Prudence, and Care includes the undue influence of research and rating firms on investment decisions which could adversely affect client risk. Additionally, the question of soft commissions comes into play when an investment professional favors a brokerage firm with higher, non-dollar payment commissions over limiting costs to clients.<\/p>\n<blockquote>\n<h2>Question<\/h2>\n<p>The leadership team of Cracker Jack, Inc. has requested that Lisette Towle, portfolio manager for the company\u2019s pension fund, invest 45% of available funds in Cracker Jack. As a means of complying with Standard III(A) \u2013 Loyalty, Prudence, and Care, Towle may choose one of the following options:<\/p>\n<ol style=\"list-style-type: upper-roman;\">\n<li data-tadv-p=\"keep\">Invest 45% of available funds in Cracker Jack, Inc. if Towle can show that it is prudent to do so within the overall scope of the market, as well as portfolio diversification.<\/li>\n<li data-tadv-p=\"keep\">Invest less than 45% of available funds into Cracker Jack, Inc. if Towle believes a lower percentage of investable funds will limit risk within the portfolio.<\/li>\n<li data-tadv-p=\"keep\">Invest no funds in Cracker Jack, Inc. if Towle can demonstrate that Cracker Jack, Inc. is not a sensible investment as compared with other market securities.<\/li>\n<\/ol>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">I or II, only<\/li>\n<li data-tadv-p=\"keep\">II or III, only<\/li>\n<li data-tadv-p=\"keep\">Any of the above<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is C.<\/p>\n<p>Towle may choose any of the three provided options, so long as she practices loyalty, prudence, and care in determining which investment will result in a portfolio that is adequately diversified and limits the risk of losses for the plan\u2019s beneficiaries.\u00a0 In this instance, Lisette Towle owes her loyalty to the pension plan participant of Cracker Jack, Inc. rather than the company\u2019s leadership team.<\/p><\/blockquote>","protected":false},"excerpt":{"rendered":"<p>[vsw id=&#8221;coTBbAxXxTA&#8221; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;] III. Duties to Clients and Prospective Clients Standard III addresses client loyalty, discretion, and care; fair dealing; suitability; performance presentation; and maintaining confidentiality. Investment professionals are obligated to put the interests of their clients&#8230;<\/p>\n","protected":false},"author":18,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[3],"tags":[],"class_list":["post-854","post","type-post","status-publish","format-standard","hentry","category-ethical-and-professional-standards","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Loyalty, Prudence &amp; Care | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Standard III(A) requires CFA members to prioritize client interests above their own or their employers, ensuring ethical and prudent decision-making.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/ethical-and-professional-standards\/standard-3a-loyalty-prudence-care\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Loyalty, Prudence &amp; Care | CFA Level 1 - 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