You are reading the 2026 curriculum (exams up to November 2026). Sitting in February 2027 or later? Go to the 2027 Ethical and Professional Standards guide.
Standard III(B): Fair Dealing
Deal fairly and objectively with all clients when disseminating recommendations and taking investment action. Fair is not equal: service levels may differ if disclosed and open to all who pay, but no client may be disadvantaged on a recommendation change or a trade allocation. Oversubscribed issues are allocated pro rata.
Before this: Standard III(A): Loyalty, Prudence, and Care
On the exam
- Demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity
- Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct
- Identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards
Demonstrate III(B), recommend procedures and identify compliant conduct. Expect recommendation-dissemination and trade or new-issue allocation items, and possibly one pro rata calculation. The usual wrong answers equate fair with identical, or favor the biggest clients.
How deeply to learn each part
- Know the idea
- Understand it in general. It frames other topics, but you will not calculate with it.
- Use it
- Understand it well enough to solve a question with it. Recognize when it applies.
- Memorize
- Learn it by heart. The exam will not give it to you.
You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.
You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.
What does Standard III(B) require?
Standard III(B), fair dealing , requires you to deal fairly and objectively with all clients when you provide analysis, make recommendations or take action. The Standard says “fairly”, not “equally”, because you cannot reach every client at the same instant, and because clients have different objectives, so not every opportunity suits every client.
Memorize
It covers two kinds of conduct, and the exam tests both.
- An investment recommendation is any opinion about buying, selling or holding an investment. It may be a full report, a short update, an addition to or deletion from a recommended list, or an oral comment. Every client must have a fair opportunity to act on it. Changes matter even more than first-time views, so tell the clients who acted on the old view, particularly before you accept an order that goes against the new one.
- Investment action means trades and allocations: general purchases, new issues and secondary offerings, and block trade s that serve several accounts.
- Investment recommendations Memorize opinions on buying, selling or holding
- Initial and changed recommendations a fair chance for all to act
- Reach clients who acted on the old view and warn anyone ordering against the new one
-
- Investment action Memorize trades and allocations
- Block trades same price, same commission, pro rata fills
- Oversubscribed new issues pro rata, round lots
-
- Levels of service Memorize allowed with conditions
- Disclosed to clients and prospects
- Open to all not offered selectively
-
How do you allocate an oversubscribed issue?
When demand exceeds supply, an oversubscribed issue must be allocated pro rata : each eligible order receives the same fill ratio, at the same price, on a round-lot basis to avoid odd lots.
Here is a client’s allocation, the client’s order, the shares available and the total ordered by all eligible clients. The fraction is the fill ratio.
A firm receives 12000 shares of an oversubscribed issue. Eligible clients ordered 20000 shares in total. The fill ratio under a pro rata allocation is closest to:
12000 ÷ 20000 = 60.00%
Fill ratio60.00%
- 12000÷20000=0.6, so 60.00%
- 12000ENTER20000÷0.6, so 60.00%
ENTER enter (on the HP, puts the number on the stack)
If the fill ratio gives odd lots, round to round lots, and use an agreed minimum lot size for securities such as bonds. Rounding is a detail, not a license to favor someone.
Two more rules sit on top of the arithmetic.
- If the issue is oversubscribed, forgo purchases for yourself and your immediate family to free up shares for clients. The exception is a family account that you manage like any other client account. Then it should not be excluded.
- A hot issue is one trading at a premium once secondary trading begins, because of strong demand. Make a bona fide public distribution. Never hold it back for your own benefit or use it as a reward to gain a benefit.
Can service levels differ?
Yes. You may give more personal or in-depth service to clients who pay higher fees or generate more brokerage. The conditions for levels of service are that they are disclosed to clients and prospects, are available to everyone willing to pay, and do not disadvantage or negatively affect other clients.
Disclosure has a limit. A duty of fairness and loyalty can never be overridden by client consent to a patently unfair allocation procedure.
Where do the lines fall?
| Situation | Verdict |
|---|---|
| An analyst phones the five biggest clients about a downgrade an hour before emailing everyone else | Violation |
| A premium tier gets a monthly call with the analyst, disclosed and open to all who pay | Acceptable |
| A manager allocates an oversubscribed issue only to accounts that pay performance fees | Violation |
| A manager fills a block trade and allocates it pro rata at the average price | Acceptable |
| A manager gives a family account that is managed like any client account a pro rata share on the same terms | Acceptable |
Try this 0 of 3
- Make the issue big enough that nobody is cut back
- Set every order to the same size
- Add a fourth client order
- Pro rata
- First come
- Largest first
| Client | Order | Pro rata | First come | Largest first |
|---|---|---|---|---|
| A09:12 | 10,000 | 6,000 | 2,000 | 10,000 |
| B09:03 | 6,000 | 3,600 | 6,000 | 2,000 |
| C09:07 | 4,000 | 2,400 | 4,000 | 0 |
First come and largest first are not fair dealing under III(B): some clients are filled in full while others get little or nothing. Pro rata gives every eligible account the same fill ratio at the same price.
Show working
Total orders = 10,000 + 6,000 + 4,000 = 20,000
Fill ratio = 12,000 ÷ 20,000 = 60.00%
Client A: 0.6 × 10,000 = 6000
Client B: 0.6 × 6,000 = 3600
Client C: 0.6 × 4,000 = 2400
- 12000÷(10000+6000+4000)=0.6, the fill ratio
- ×10000=6000, client A's shares
- 12000ENTER10000ENTER6000+4000+÷0.6, the fill ratio
- 10000×6000, client A's shares
ENTER enter (on the HP, puts the number on the stack)
What procedures help?
- Limit the number of people who know a recommendation is coming, and shorten the time between the decision and the release.
- Publish guidelines that stop staff who know of a pending recommendation from discussing or trading on it until it is out.
- Disseminate simultaneously, for example by email or a platform. After wide distribution you may follow up with individual clients.
- Keep a list of clients and their holdings, so you can notify the right people when a view changes.
- Write down allocation procedures: time-stamp orders and changes, process first in, first out, give every account in a block the same price and commission, and allocate partial fills pro rata on order size. For new issues, collect indications of interest and allocate by client, not by portfolio manager.
- Disclose the allocation procedures and the levels of service. Review accounts regularly to catch preferential treatment.
Go deeper Why simultaneous means as close as practical
Mail, phone, email and trading platforms reach people at different speeds, so literal simultaneity is impossible. What the Standard rules out is a deliberate head start, such as calling favored clients first. A firm that sends an alert to everyone at once, then lets analysts call individuals afterward, is in line with the Standard.
Go deeper Why different accounts may trade differently
Fair dealing does not force every account to do the same thing. A manager may buy a security in one account while selling it from another because their objectives differ. Document the reasons for both sides of the trade, and expect supervisors to review accounts to check that trading is not being used to benefit a favored client.
Memorize this
MemorizeStandard III(B): what to know cold
| Topic | The rule |
|---|---|
| Fair, not equal | No discrimination. Clients cannot all be reached at the same instant |
| Recommendations | Give all clients a fair opportunity to act. Changes matter more than first calls. Warn clients who have acted on the old view |
| Oversubscribed issue | Pro rata on order size, same price, round lots. Do not buy for yourself or relatives unless their accounts are managed like clients' |
| Hot issues | Bona fide public distribution. Never held back or used as a reward |
| Levels of service | Allowed if disclosed, open to all who pay, and not disadvantaging others |
| Client consent | Cannot excuse a patently unfair allocation method |
Memory hook Same chance, same price, not same size: fill ratio = shares received ÷ total ordered, applied to every order.
Know it cold Allocate pro rata, disseminate together, disclose the procedures.
- Investment recommendations Memorize opinions on buying, selling or holding
- Initial and changed recommendations a fair chance for all to act
- Reach clients who acted on the old view and warn anyone ordering against the new one
-
- Investment action Memorize trades and allocations
- Block trades same price, same commission, pro rata fills
- Oversubscribed new issues pro rata, round lots
-
- Levels of service Memorize allowed with conditions
- Disclosed to clients and prospects
- Open to all not offered selectively
-
Quick example
A firm receives 7,000 shares of an oversubscribed issue. Eligible clients ordered 10,000 shares in total, and one client ordered 5,000. Fill ratio 7,000 ÷ 10,000 = 70%, so that client receives 5,000 × 0.70 = 3,500 shares.
- 7000÷10000×5000= 3500
- 7000ENTER10000÷5000× 3500
ENTER enter (on the HP, puts the number on the stack)
How it is asked
-
Compute the allocation
9,000 shares, orders of 8,000, 5,000 and 2,000. How many to the 8,000 client?
9,000 ÷ 15,000 = 60%, so 4,800. Traps: equal split (3,000), first order filled in full (8,000).
-
Selective call before release
An analyst phones the three biggest clients about a downgrade before releasing it. Violation?
Yes, III(B). Trap: II(A), because the duty breached is fair dealing.
-
Premium service
A higher-fee tier gets more frequent reviews. It is disclosed to all. Violation?
No. Different service levels are allowed if disclosed and open to all. Trap: "all service must be identical".
Exam traps
- Reading "fairly" as "equally". Different service levels are fine if disclosed, open to all who pay, and not disadvantaging anyone.
- Allocating a scarce issue to the largest or most profitable relationships first, or only to accounts that pay performance fees. Allocation is pro rata.
- Believing client consent can cure an unfair allocation method. Consent to a patently unfair method never excuses it.
- Confusing III(B) with VI(B) Priority of Transactions. III(B) is about treating clients fairly against each other. VI(B) is about personal trading against clients.
Checkpoint
3 exam-style questions. About 90 seconds each.
1A firm receives 9,000 shares of an oversubscribed issue. Three eligible clients ordered 8,000, 5,000 and 2,000 shares. Under a pro rata allocation, the client who ordered 8,000 shares should receive:
2An analyst phones the firm's three largest institutional clients about a rating change before releasing it to all clients. Did the analyst violate the Standards?
3A wealth manager offers clients who pay a higher fee more frequent portfolio reviews, and discloses the tiers to all clients and prospects. Anyone willing to pay can join. Did the manager violate the Standards?
Key takeaways
- Treat clients fairly, not identically.
- Disseminate recommendations, especially changes, so that all interested clients have a fair chance to act.
- Allocate block trades and oversubscribed issues pro rata at the same price.
- Premium service is fine if disclosed and open to everyone willing to pay.
Quick example
A firm receives 7,000 shares of an oversubscribed issue. Eligible clients ordered 10,000 shares in total, and one client ordered 5,000. Fill ratio 7,000 ÷ 10,000 = 70%, so that client receives 5,000 × 0.70 = 3,500 shares.
- 7000÷10000×5000= 3500
- 7000ENTER10000÷5000× 3500
ENTER enter (on the HP, puts the number on the stack)
Questions about this lesson?
Where this comes back
- Standard III(C): Suitability Guidance for Standards I–VII
- Standard VI(B): Priority of Transactions Guidance for Standards I–VII
Questions candidates ask
Does fair dealing mean treating all clients equally?
No. The Standard says fairly, not equally. You may differentiate service by fee level if the levels are disclosed and available to all, but no client may be disadvantaged on recommendations or trade allocation.
How should initial public offering (IPO) shares be allocated among clients?
If an issue is oversubscribed, allocate pro rata to all eligible subscribers according to order size, at the same price and on a round-lot basis. Do not favor large, profitable or related accounts, and do not hold back a hot issue.
Can a firm offer different levels of service?
Yes. Premium service for higher fees is acceptable if the levels are disclosed to clients and prospects, are available to everyone willing to pay, and do not disadvantage other clients.
Spotted an error? Tell us and we will fix it.