The tier switches the conduct duties on and off.

The conduct rulebooks of the two centres are written as a schedule of duties, and each duty is switched on or off by the client's category. The category is settled at the start of the relationship, by an assessment the firm performs and records, and it decides for the life of the relationship what the firm across the table must do for the client and what it need not. A client who reads the rulebook from its own side of the table finds that the question of what it is owed was answered before any substance was discussed, by a test it may not have noticed being applied. The category is the switch, and it describes the client's duties rather than its wealth. A sovereign and a family office of the same size may sit in different categories, and two institutions of different sizes in the same one; the switch reads the criteria, and the criteria are about capacity to bear the loss of protection, not about the size of the cheque.

This note sets out the schedule of duties and how each switches with the category, the market counterparty category and what it turns off, the duties that do not switch, how a client reads the schedule from its side, why the schedule reaches a fund's structure and every party in its chain, the strictest-classification rule for documents, the differences between the centres, a comparison, a worked relationship as a type, cases, what each party holds, the sequence, questions, terms and what to read.

The schedule

Suitability. A firm that advises a retail client, or manages a portfolio for one, must assess whether the recommendation or the portfolio is suitable: the client's knowledge and experience, its financial situation, its objectives and its capacity for loss. For a professional client the duty is narrower: the firm may assume the knowledge and experience, and on execution-only business may agree with the client that it will not assess suitability at all. For a market counterparty there is no suitability duty.

Best execution. Owed in full to retail clients: the firm must take all sufficient steps to obtain the best possible result. Owed to professional clients on the terms the firm states in its execution policy, which the client is taken to have accepted. Not owed to a market counterparty.

Disclosure. The form and content of what the firm must tell the client about its services, its charges, the risks of the investments and its conflicts differ by category: a prescribed form and timing for retail; a lighter form for professional, which the firm's terms of business may carry; and for a market counterparty very little beyond what the contract says.

Holding the client's cash and assets. The rules on segregation, on the accounts in which cash is held, on reconciliation and on reporting apply in full to retail clients and in a form the professional client may vary by agreement; a market counterparty's arrangements are contractual.

Complaints and redress. The retail complaints machinery, with its prescribed timetable, its record-keeping and its route to the centre's dispute resolution, is for retail clients. A professional client's remedy is the contract and the court, and the firm's complaints process applies to it only as the firm's terms provide.

Financial promotions and communications. What may be sent to a retail client, and in what form, is restricted by the rulebook's promotion rules: balanced, with risk warnings, without certain content. A professional client may receive communications the rulebook would forbid to retail, and the private fund tiers' memoranda are such communications.

Reporting. The content and frequency of periodic statements differ by category, with retail receiving more, more often, in a prescribed form.

The market counterparty

Beside retail and professional sits the market counterparty: a regulated firm, a government, a central bank, a supranational, or a professional client that the firm has classified as a counterparty on the criteria the rulebook states and with the notice it requires, which in both centres includes the client's right to object. For a market counterparty most of the conduct duties are off entirely, and the relationship is governed by the contract between the parties and by the market's own rules. A fund manager dealing with an institutional investor that is itself regulated may classify it as a market counterparty, and the duties it owes that investor are then the contract's, which is why the contract matters more with a counterparty than with anybody else.

The duties that do not switch

Some duties are owed to every client whatever its category, and a firm that reads the switch as turning everything off has misread it. The duty to act honestly, fairly and professionally. The duty to communicate in a way that is clear, fair and not misleading, tested against the category. The duty to manage conflicts of interest and to disclose those that cannot be managed. The duty to keep records. The duty to comply with the rules on the firm's own systems, controls and financial resources. And the duties under the centre's law on market conduct and on the prevention of financial crime, which have nothing to do with classification. A professional client has given up the retail protections; it has not given up the firm's obligation to behave as the rulebook requires.

Reading the switch from the investor's side

An investor reads the same schedule from the other side. A professional client has given up the suitability assessment on execution-only business, the retail form of disclosure, the full cash and asset protections unless it negotiates them, the retail reporting, and access to the retail complaints machinery. It has gained access to the private tiers, to communications the rulebook restricts for retail, to faster execution on the firm's policy, and to a relationship the firm can run without the retail apparatus, which is cheaper and which the firm may pass on in its terms. An investor that wishes to be treated as retail may ask to be, and the firm must consider the request and may decline it; an investor that wishes to be treated as professional must satisfy the test. What a client is owed, then, is a matter of category rather than of negotiation, and the category is settled at the start by a test the firm applies and records. A client that wants more than its category carries negotiates it into the terms of business as a contractual term, and a firm that grants it owes it as a contract rather than as a rulebook duty.

Why it reaches the structure

Every party in a fund's chain has classified the same investor, possibly differently. The manager under the centre's rulebook, for the tier and for its own duties. The distributor in an onshore state under its own state's rules, for the placement. The administrator for its own purposes, where its agreement makes it the keeper of the record. The custodian for the rules on held assets. The lender, in its own way, for the borrowing base. A structure's documents have to be consistent with the strictest classification in the chain, because the duty that one party owes under the strictest classification is a duty the structure must let it discharge. A subscription agreement that assumes every holder is professional, with a distributor that has classified one of them as retail under its own rules, is a document that one party in the chain cannot sign, and the structure discovers it at the distributor's diligence.

The schedule also reaches the manager's own terms of business with each holder, which are drafted to the duties the category switches on. A manager whose terms of business were drafted for professional clients and who admits, through a distributor, a holder the distributor classified as retail, has terms of business that do not discharge the duties that holder is owed in the distributor's state.

The strictest classification

The rule for the documents is that they are drafted to the strictest classification in the chain for each holder, and the placement file records which classification that is. Where a holder is professional in the centre and retail in its own state for the placement, the distributor's duties in its state are discharged by the distributor under its own rules, and the manager's documents carry whatever the distributor's rules require them to carry. Where a holder is a market counterparty to the manager and professional to the administrator, the administrator's duties are discharged on its own classification. The manager's file holds the chain for each holder, and the structure paper names the strictest reading and the party who discharges each duty.

Suitability, read closely

Suitability is the duty that most often turns a dispute, and it is worth reading in its own terms. For a retail client, or for a professional client on advised or managed business where the duty has not been narrowed, the firm must obtain enough information about the client to assess whether a recommendation or a managed portfolio meets the client's objectives, is such that the client can bear the related risks, and is such that the client has the knowledge and experience to understand those risks. The information is recorded, the assessment is recorded, and the recommendation is recorded against the assessment. For a professional client the rulebooks permit the firm to assume knowledge and experience and, on execution-only business, to agree that no assessment is made; the agreement is in the terms of business and the client's acknowledgement.

The point for a fund manager is that placing a private fund's units is, in most readings, a promotion and a dealing rather than advice, and suitability is engaged only where the manager advises the holder or manages for it. A manager that finds itself advising a holder on whether to subscribe, in a meeting, in a letter, in a model it prepared for that holder, has engaged the duty whatever its terms of business say, and the category decides how much of it is owed. The placement team's discipline is to place and not to advise, and the file shows which it did.

Disclosure of conflicts, read closely

The conflicts duty is owed to every client, and the form of its discharge switches. A firm must identify conflicts between itself and its clients and between one client and another, manage them so that the client's interests are not damaged, and where management is not enough, disclose them in a form that lets the client take an informed decision. For a retail client the disclosure is prescribed; for a professional client it may be in the terms of business and the memorandum; for a market counterparty it is contractual. A fund manager's conflicts are structural: its other vehicles, its affiliated providers, its own balance sheet, the relationships through which assets reach it. The memorandum's conflicts section discharges the identification; the constitution's approval route discharges the management; the periodic report discharges the ongoing disclosure. Each is drafted to the category of the holders, and a memorandum drafted for professional clients placed to a holder classified as retail in its own state has a conflicts section the distributor's rules may read as insufficient.

The cash and asset rules in a fund's chain

A fund's cash sits in accounts the administrator operates, and its assets sit with a custodian or in its holding companies, and the conduct rulebook's rules on holding a client's cash and assets apply to the manager to the extent the manager holds either for the holders. In most private fund structures the manager does not: the fund holds its own assets through its own companies and its cash in its own accounts, and the holders' relationship to the fund is that of unitholders, not of clients whose assets the manager holds. The rules reach the manager where it holds subscription monies before issue, redemption proceeds before payment, or assets for a holder outside the fund, and a manager's terms of business say whether it does any of those and on what basis. A manager that holds subscription monies for a week before first close, in its own account, has held its subscribers' cash for a week, with the segregation the rules require for the category of each subscriber.

Where it surfaces

At the first dispute, when a holder asks which duties it was owed and the terms of business were drafted for a different category.

At the distributor's diligence, when the distributor's classification is stricter than the manager's and the manager's documents do not discharge the distributor's duties.

At the market counterparty election, when the notice was not given and the category the firm relied on does not exist.

At the rulebook's amendment, when the schedule changed and the terms did not.

At the regulator's review, when the terms of business for each category are requested and there is one set.

How the two centres differ

The categories and the duties are aligned in substance. The centres differ in the criteria for a market counterparty election and the notice required; in the form and timing of the retail disclosures; in the detail of the execution policy a professional client is taken to accept; in the variations a professional client may agree to the cash and asset rules; in the complaints timetable; and in the reporting content. A manager operating in both keeps two sets of terms of business, or one set drafted to the stricter of the two with the differences annotated, and its counsel in each centre confirms which duties each set discharges.

By duty · by category	Retail	Professional	Market counterparty
Suitability	In full on advised and managed business	Narrowed; may be waived on execution-only	None
Best execution	In full	On the firm's stated policy	None
Disclosure of charges, risks, conflicts	Prescribed form and timing	Lighter; in the terms of business	Contractual
Cash and assets	Full segregation regime	Variable by agreement	Contractual
Complaints	Prescribed process and route	Firm's process as the terms provide	Contractual
Promotions	Restricted content and form	Wider; private tier memoranda permitted	Wider
Reporting	Prescribed content and frequency	As the terms provide	As the contract provides
Honesty, fairness, clarity, conflicts, records	Owed	Owed	Owed

Communications and the memorandum

The promotion rules switch with the category in a way a placement team meets daily. A communication to a retail client must be balanced, must carry risk warnings in a prescribed form, must not present performance in certain ways, and must not be sent at all for certain products. A communication to a professional client may carry what the retail rules forbid, provided it is clear, fair and not misleading on the standard of a professional reader. A private fund's memorandum is a communication to professional clients and is drafted on that standard, which is why it may not be shown to a person who has not been classified: the moment it reaches a retail person it is a retail communication that breaches every retail rule it did not follow. The discipline of the classified list before the presentation is the discipline of the promotion rules, and the room that is not all professional is a retail promotion.

The terms of business as the instrument

The terms of business are the instrument by which the firm discharges the professional schedule, and they are drafted to it clause by clause. A clause stating the category and the notice. A clause on suitability: waived on execution-only, or the scope where advice is given. A clause incorporating the execution policy. A clause on disclosure of charges and conflicts, with the disclosures themselves or a reference to the memorandum. A clause on cash and assets, with any variation in the form the rulebook requires. A clause on complaints and the firm's process. A clause on reporting and its form. A clause on the firm's right to reclassify and the client's right to request retail treatment. A manager whose terms of business are a generic agreement has terms that discharge no duty in particular, and a dispute reads the rulebook instead.

A timeline, as a type

Year one: the rulebook is read, the terms of business drafted to the professional schedule, each holder classified and the terms signed. Year two: the rulebook is amended in one centre on the execution policy and the cash and asset variations; the manager's counsel reads the amendment and the terms are updated for the holders in that centre, with a notice. Year three: a holder asks to be treated as retail for a new service; the firm considers and declines, and the holder takes the service elsewhere. Year four: a dispute about a conflict; the terms, the memorandum and the periodic reports show the identification, management and disclosure; the dispute is decided on them. Year five: the regulator's review reads two sets of terms, one per centre, each current.

A relationship, as a type

An institutional investor approaches a manager about a qualified investor fund. The manager reads the rulebook's schedule with the investor's counsel before the terms of business are drafted, proposes professional classification on the deemed route with the notice, and proposes no market counterparty election because the investor's own policy requires the conflicts disclosures the professional category carries. The terms of business are drafted to the professional duties: an execution policy the investor accepts, disclosure of charges and conflicts in the terms, a complaints process the firm runs, reporting quarterly in an agreed form. The investor subscribes through a distributor in its own state, which classifies it under that state's test and discharges its own duties there. The manager's file holds both classifications, the terms of business, the notice and the acknowledgement. Neither party is surprised later by what was owed, and a dispute in year four is decided on the terms both read at the start.

The regulator's own reading

Both regulators publish guidance on classification and on the conduct schedule, and both examine firms against it. The examination reads the firm's classification records, its terms of business by category, its execution policy, its disclosures, its complaints log and its conflicts register, and compares each with the duties the category switches on. A firm with professional clients and no execution policy has not discharged best execution; one with retail clients and no suitability records has not discharged suitability; one with a market counterparty and no notice has a professional client. The findings are written in the schedule's own terms, and a firm that drafted its terms to the schedule answers them in the same terms.

Four cases, as types

A manager classifies a family office as professional and agrees execution-only terms with no suitability assessment. The family office's own adviser, in an onshore state, has classified it as retail under that state's rules and owes it a suitability assessment the manager's terms do not contemplate. The two firms' files disagree about the same client, and when the investment disappoints, the family office's counsel asks both firms which of them assessed suitability, and the answer is neither.

A manager classifies a regulated institution as a market counterparty without giving the notice the rulebook requires or recording the institution's right to object. The institution later disputes a conflicts matter, and the firm's defence, that it owed no conflicts disclosure to a counterparty, rests on a category it never properly established; the review reads the institution as professional and the disclosure as owed.

A manager drafts one set of terms of business for professional clients and uses it in both centres. The second centre's rulebook requires a variation to the cash and asset rules to be agreed in a particular form, which the terms do not carry; every professional client in that centre is owed the full regime the terms assumed had been varied.

A manager reads the schedule with each investor before the relationship begins, agrees the category, gives the notice, records the acknowledgement, drafts the terms of business to the duties that category switches on in the centre in question, and holds the chain of classifications for each holder placed through an intermediary. The duties owed are the duties discharged, and the file shows both.

What each party holds

The manager holds the classification, the notice, the terms of business drafted to the category, and the chain for every intermediated holder.

Counsel in each centre holds the schedule and the form of each notice and variation.

The distributor holds its own classification and its own duties in its own state.

The administrator and the custodian hold their own classifications for their own purposes.

The regulator holds the schedule, the review and the finding.

The client holds the notice, the terms and its right to ask for retail treatment.

The sequence

1. The rulebook's schedule of duties is read against each category before the terms of business are drafted.
2. The category is agreed with each client, the notice given and the acknowledgement kept.
3. The terms of business are drafted to the duties that category switches on in the centre in question.
4. The chain of classifications for each intermediated holder is recorded, with the strictest reading named.
5. The structure's documents are aligned to the strictest classification in the chain.
6. The schedule is re-read when the rulebook changes, which in both centres it has.

Questions a manager asks

Can a professional client waive everything. It can agree to waive what the rulebook permits to be waived for its category, in the form the rulebook requires; it cannot waive the duties the rulebook owes to every client.

Is a market counterparty election worth making. It turns off most of the schedule and leaves the contract, which is useful with a regulated institution that wants the contract to govern and a burden with one whose own policy requires the disclosures; the election is made with the client's counsel, not for convenience.

Does the category affect the manager's charges. The rulebook does not set charges; it sets how they are disclosed, and the disclosure differs by category.

What if the client asks to be retail. The firm considers the request and may decline it where it cannot service retail clients; a firm that accepts has a retail client and the full schedule.

Do the duties apply to the fund or to the manager. To the manager, as the regulated firm dealing with the client; the fund's constitution carries the manager's duties to holders in its own terms beside the rulebook's.

Does the schedule change. Both centres have amended their conduct rulebooks, and a manager's terms drafted to a superseded schedule discharge the duties of the wrong year.

Terms used

Schedule of duties: the conduct rulebook's list of obligations, each switched by the client's category.

Market counterparty: the category for regulated and sovereign clients, and for professional clients electing it, with most duties off.

Execution policy: the firm's stated approach to executing orders, which a professional client is taken to accept.

Terms of business: the agreement between the firm and the client setting out the services and the duties as varied for the category.

Strictest classification: the rule that documents are drafted to the most protective classification any party in the chain has applied to a holder.

Duties that do not switch: honesty, fairness, clear communication, conflicts, records and financial crime, owed to every client.

What to read

The conduct of business rulebook of each centre: the client categories and their criteria, the notices and elections, and the schedule of duties on suitability, execution, disclosure, cash and assets, complaints, promotions and reporting, with the provisions on variations by agreement. On this site, the conduct rooms for each centre under the restricted reading and the regulator rooms beside them.