The structure of client fair dealings is an investment industry practice that is often implemented in a sub-optimal manner. Treating investors fairly is at the forefront of reinforcing market confidence. Should the preponderance of market participants deem themselves to be unfairly treated, the market will be prone to fall apart. This article brings fair dealing into focus and talks to the fair dissemination of research and trade allocation.
Fair Does Not Mean Equal
At the core of fair dealing is the concept that managers cannot discriminate against their investor-clients. However, one thing to comprehend is the fact that fair treatment does not mean equal treatment. In fact each market participant has unique needs and it is incumbent upon the manager to ‘Know Their Client’. Within this spirit it is very natural that different service levels are offered to different clients. For instance, an investor with a long-term time horizon may not require daily position updates and related changes that were driven by the manager’s internal research. Meanwhile, another investor with a shorter term horizon would likely appreciate this kind of up-to-date information. Therefore, it is indeed possible to treat clients differently while still being fair. The imperative around information dissemination is that managers disclose to all clients the existence of difference service levels.
It should be noted that the dissemination of information is not just what is assumed for external utilization. Rather, it also refers to the internal dissemination of information that is used to assist others in making investment decisions.
Trading Systems Greatly Facilitated Fair Allocation
Trade allocation is greatly facilitated by the existence of a sound trading system. Conceptually, fair allocation is straightforward with the goal of being able to ensure that all clients are allocated as close as possible the same average purchase or sales price. It does not take long before the growth in the number of clients results in complexity which can make it very practical for the manager to employ a trading system that performs these allocations.
As the title of this article suggests fair dealing is an imperative to properly functioning markets. Managers need to do their part by implementing the proper policies, procedures and controls. Their very first task, however, is to articulate their fair dealing program in as much detail as possible in the firm’s compliance program. This is a dynamic process and as such should be annually updated. Issues with well-thought out fair dealing programs arise from to time. These provide opportunities to refine to make better for the future. A recommendation is to perform ongoing documentation providing as much transparency as possible. This most certainly will help to make adjustment to the fair dealing program upon its annual review. Moreover, it will cast managers in positive light with both regulators and investors
Standard III (B) Fair Dealing. CFA Institute © 2017. All rights reserved.PDF version