Put the Loyalty, Prudence, and Care standard, III(A), into practice
The idea
Members owe clients a duty of loyalty and must act with reasonable care and prudent judgement, placing clients' interests before their employer's and their own. Identifying the client is the first and often the hardest question: for a pension plan the client is the beneficiaries, not the company that sponsors it or the executives who selected the manager. Soft dollar arrangements must be used for research that benefits the client whose commissions paid for it. Proxy voting is part of the duty, and a policy of not voting requires a cost-benefit justification rather than mere convenience.
A practice question
For a corporate pension plan, who is the client under Standard III(A)?
- The beneficiaries of the plan — correct
- The company that sponsors the planWhy not: The sponsor appoints and pays the manager, and the assets are held for the beneficiaries, whose interests govern.
- The executive who hired the managerWhy not: The individual who made the appointment acts for the sponsor, and neither is the client for this purpose.
Standard III(A) Loyalty, Prudence and Care runs to the beneficiaries of a pension plan. The party who appoints and instructs the manager is not the party whose interests the duty protects.
A harder one
A manager stops voting proxies because the administration is burdensome. Is that acceptable?
- Yes, proxy voting is discretionaryWhy not: It is discretionary in the sense that it can be declined for good reason, and the reason must relate to the client's interest.
- Yes, provided clients are toldWhy not: Telling clients about a decision taken for the manager's convenience discloses the failing rather than curing it.
- No, convenience is not a cost-benefit case — correct
Standard III(A) allows a reasoned decision not to vote, supported by cost-benefit analysis. Administrative inconvenience to the manager is not such a reason.
The hardest tier
A pension sponsor's chief financial officer directs the manager toward an allocation that helps the company's accounting but is not in the beneficiaries' interest. What must the manager do?
- Comply, since the sponsor appointed the managerWhy not: Who appoints the manager does not determine whose interests they serve, which is the point of the Standard.
- Comply while documenting the instructionWhy not: A record shows the instruction came from elsewhere and does not make acting on it consistent with the duty.
- Decline, since the duty runs to the beneficiaries — correct
Standard III(A) places the client's interest first, and for a pension plan the client is the beneficiaries. An instruction from the sponsor does not displace that duty.
In the app: 9 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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