Members and Candidates must keep information about current, former and prospective clients confidential unless:
- the information concerns illegal activities on the part of the client or prospective client,
- disclosure is required by law, or
- the client or prospective client permits disclosure of this information.
Reasoning behind Standard III-E
Establishing a professional relationship with a client necessitates the gathering of personal information. For investment professionals, surveying a client's personal financial information is standard practice. It's a necessary prerequisite to fulfilling their jobs and establishing an investment policy statement that meets the client's risk tolerance and objectives. Of course, this discovery could reveal potentially sensitive or embarrassing issues from the past - everything from unfortunate business decisions to bankruptcy filings. Clients have an unambiguous right to privacy, as well as a right to have their personal information kept in the strictest confidence and not forwarded or revealed to a third party.
Standard III-E was developed to protect these rights, starting from the time of initial contact (prospect-member relationship) and covering the time the prospect formally becomes a client (client-member relationship). In the event that sensitive information is revealed by any employer in the course of its relationship with an employee, the same concept is expanded to protect confidentiality in the employer-member relationship.
Note that there are instances that would necessitate disclosure of a client's confidential information and which would not be considered violations of this Standard:
- Illegal Activities - For example, if a client is involved in illicit money-laundering activities and contributing the money to a managed account at the CFA member's institution, that portfolio manager is under no obligation to protect the client's confidentiality. In fact, knowingly continuing to invest and trade such an account might expose the portfolio manager to charges of criminal activity. If illegal activities are suspected, a firm's legal counsel must immediately be consulted on how best to proceed.
- Legally Required Disclosure - When the Securities and Exchange Commission requires certain client information to be disseminated, the CFA member is bound to abide by these regulations.
- Granted Permission by the Client or Prospective Client - An investment manager may need to forward client information to the client's accountant for tax preparation. So long as permission is granted, the CFA member is not violating the confidentiality Standard.
- Inquiry from the CFA Institute's Professional Conduct Program (PCP) - In the words of the Handbook (pg. 127), CFA members shall consider the PCP an extension of themselves. CFA members are encouraged to be fully supportive of PCP investigations, and to disclose any information requested in the course of an investigation. The PCP keeps all disclosed information in the strictest of confidence.
Applying Standard III-E
Keeping client information confidential is essential to building and developing a relationship of trust. On the CFA exam, cases involving this Standard are likely to test the exceptions that will require disclosures to be made.
Here are some examples of situations that may require disclosure of confidential information:
- Settlement Agreements - In a case where a manager and client have entered into a settlement agreement, the agreement cannot be written so as to prohibit co-operation with the CFA Institute's Professional Conduct Program (PCP) in the investigation of a CFA member (i.e. investigating whether that member violated the Code and Standards). So-called confidentiality clauses must explicitly allow both the member and the client to respond to requests for information, without restriction. Failing to provide information in a PCP investigation, even if based on a confidentiality clause, subjects the member to a summary suspension under CFA Institute bylaws, and his or her right to use the CFA charter may be revoked.
- Charitable Donation - A portfolio manager meets with a corporate client that can reduce its taxes by giving away money to charity and that has set aside $100,000 for this purpose. Would the portfolio manager violate Standard III-E by divulging to a local charity that the company has $100,000 to give away? In such a case, it would depend on whether the corporate client gave permission to the manager to reveal this information. If not, the manager would need to keep the information private and protect confidentiality.
- Illegal Activities - A portfolio manager suspects a client of illegal activity, but has no tangible evidence to support these suspicions. The portfolio manager understands her obligation to keep sensitive information confidential, but does not wish to support anything illegal. If such a case arises, doing nothing is not an option. She is best served by seeking legal counsel and informing her supervisor.
How to Comply
- Protect client information when received by not disclosing any gathered information to outside parties.
- Limit the number of employees with access to sensitive information regarding a client's financial or other activities.
- Seek legal counsel promptly if illegal activity is suspected.
- Seek legal counsel if asked to disclose confidential information as a result of an investigation, either by the CFA Institute's Professional Conduct Program or by legal authorities. Disclosure in these instances may ultimately be required but one is entitled to legal advice to determine how best to reveal this information.
Standard IV: Duties to Employers, Standard IV-A: Loyalty
Managing WealthInvestment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
Financial AdvisorYou can't control how they react to the market, but you can help them understand the reality of the situation.
Managing WealthEffective communication and disclosures go a long way towards easing minds and creating a lasting and trusting symbiotic relationship. Here are the four steps to making good disclosures.
InvestingConfidential treatment orders allow corporations to avoid disclosure and protect their secrets, but are they too easily granted?
Personal FinanceFiring the clients who take more of your time and effort than the revenue they contribute is a great way to improve your bottom line.
Small BusinessFiguring out how often an investment advisor should contact clients is not easy.
Personal FinanceDiscover the various ways in which private banking and wealth management services coincide, as well as the significant differences between them.
TechFinancial advisors spend a lot of time giving their clients advice on how to invest their money. But what they often forget to do is listen.
Financial AdvisorFinancial advisors must carefully consider a client's willingness and ability to take investment risks, including tax concerns and liquidity needs.
Financial AdvisorFive guidelines have been created to assist asset managers on the best practices for placing and managing trades in client accounts.