Does a paid research service constitute unfair dealing?

CAN YOU remember the time when you were unfairly treated as a kid? Some of us do. And if we do, it may be etched in our minds.

Kids keep score. They resent being treated unfairly. Parents should pay attention to such matters - more so during this stay-at-home period when school-going children are engaged in home-based learning due to the coronavirus pandemic.

Even if parents do not favour one child over another, they must be mindful of the perception of treating children differently. The key is communication. Parents must explain and justify to their children the differences in treatment to mitigate potential lasting psychological problems which includes low self-esteem, resentment, and other issues such as discord among siblings.

If we doubt the importance of treating children fairly, we need to look no further than our own workplaces. Perception of unfairness or downright unfair treatment - be it in pay or promotion opportunities - are demotivating factors. The aggrieved parties will be less engaged. They huddle together with others in the same boat and complain incessantly about their predicament. That, we know, is hardly productive and saps our energy.

The same goes for investors. If one group of investors always seems to be placed above the others without justifiable reasons, resentment will set in, and results in less participation in capital markets.

Duties to clients: the Fair Dealing Standard

The CFA Institute Standard on Fair Dealing requires that investment professionals deal fairly and objectively with all clients when providing investment analysis, making or changing recommendations, taking investment action, or engaging in other professional activities.

Only through the fair treatment of all parties can the investment management profession maintain the confidence of the investing public.

When an investment adviser has multiple clients, the potential exists for the adviser to favour one client over another. This favouritism may take various forms - from the quality and timing of services provided to the allocation of investment opportunities.

The term "fairly" implies that the adviser must take care not to discriminate against any clients when disseminating investment recommendations or taking investment action.

The Fair Dealing Standard does not state "equally" because members could not possibly reach all clients at exactly the same time - whether by printed mail, telephone (including text messaging), computer (including Internet updates and e-mail distribution), facsimile (fax), or wire.

Each client has unique needs, investment criteria and investment objectives - so not all investment opportunities are suitable for all clients.

In addition, investment firms may provide more personal, specialised or in-depth service to clients who are willing to pay for premium services through higher management fees or higher levels of brokerage.

Advisers and managers may differentiate their services to clients, but different levels of service must not disadvantage or negatively affect clients. In addition, the different service levels should be disclosed to clients and prospective clients and should be available to everyone (ie different service levels should not be offered selectively).

Presence of compliance procedures

Companies should establish compliance procedures, requiring all employees who disseminate investment recommendations or take investment actions to treat customers and clients fairly. At the very least, the investment professional should recommend appropriate procedures to management if none are in place. And he or she should make management aware of possible violations of fair-dealing practices within the firm when they come to light.

In its Guidelines on Fair Dealing, the Monetary Authority of Singapore (MAS) sets out its expectations on the board and senior management of financial institutions for delivering fair dealing outcomes to customers.

One of the five fair dealings outcomes stipulates that customers should have confidence that they are dealing with financial institutions where fair dealing is central to the company's corporate culture.

Case study: Providing investment research to clients

Today's case is based on a question sent to the CFA Institute Ethics Helpdesk.

Shamsul is the head of research at a large investment management company. He publishes monthly Recommendation Update Reports on the company's investment recommendations. These reports clarify whether the company has changed any of its investment recommendations.

The reports are sent to clients via e-mail on the first Friday of the month and posted on the company's website the following Monday. The internal policy of the firm is that any change in recommendation can only be made once a month through this report.

Shamsul also publishes weekly reports with information gathered by analysts that may implicitly signal a future change in recommendation or lead a reader to infer that a recommendation will be changed in the next monthly report.

Although the monthly Recommendation Update Reports are sent to all clients, the clients who want to see the weekly publication must pay a fee of S$1,000 per year. This option is available to any client and is fully disclosed as part of every client agreement. To comply with the CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards) Shamsul is required to:

A: do nothing because his actions comply with the Code and Standards.

B: publish the monthly reports on the firm's website at the same time it is sent to clients.

C: send the weekly reports to all clients at no additional charge.

D: restrict communication about investment recommendations to the monthly reports because that is when a recommendation is provided.

E: none of the above.

Analysis

The Fair Dealing Standard requires that information about investment recommendations be disseminated in such a manner that all clients have a fair opportunity to act on the information. Shamsul distributes the recommendation update reports to all clients simultaneously via e-mail, giving each an opportunity to act on the information. The Code and Standards do not require Shamsul to publish the reports to the public on the company's website.

Shamsul is also not limited by the Code and Standards to communicating with clients about investments only when an investment recommendation is provided and can provide updated or clarifying information to clients as appropriate.

The Code and Standards allow CFA Institute members to provide more personal, specialised, or in-depth service to clients who are willing to pay for premium services through additional fees, as long as those services do not disadvantage other clients who do not pay additional fees, the differing levels of service are disclosed to clients, and the services are made available to all. Choice A is the best response.

This column has been adapted from content by CFA Institute and is printed here with permission from CFA Institute.

• The writers are CFA Charterholders who volunteer with the Singapore society on advocacy issues with a view towards promoting financial literacy among retail investors and improving overall standards and integrity in the industry. Should you have comments and feedback, write to advocacy@cfasingapore.org