Reading Reading 3: CFA Institute Soft Dollar Standards LOS a-Q 1～5

1、An investment advisor with fiduciary responsibilities over client assets is guided by some basic duties and principles concerning “soft dollars.” Which of the following is NOT one of these duties or principles?

A)   To act in the clients' best interest.

B)   The quality of the transaction comes first.

C)   All commissions paid to a broker are the property of the broker.

D)   To disclose to clients conflicts of interest.

The correct answer was C)    

All (client) commissions paid to a broker are the property of the client.

2、The statement “the quality of the transaction comes first” means:

A)   minimization of transactions costs in the context of the best execution.

B)   lowest price execution regardless of other transactions costs.

C)   minimization of transactions costs regardless of the other facts concerning execution.

D)   the ordering of the transactions must be properly prioritized.

The correct answer was A)    

The quality of the transaction refers to an optimization of the balance between transactions costs and execution. This does not necessarily imply that either the transactions costs or the price must be minimized, although minimization of the price is likely to be a higher order concern. It has nothing to do with the priority of transactions.

3、Which of the following correctly describes one of the two fundamental principles involved in evaluating any soft dollar arrangements?

A)   The investment manager must not enter into any agency relationships.

B)   Advisors must adhere to the prohibition against misrepresentation.

C)   The quality of the transaction comes first.

D)   The priority of the transactions comes first.

The correct answer was

The quality of the transaction (execution & cost) comes first.

4、Which of the following correctly describes one of the two fundamental principles involved in evaluating any soft dollar arrangements?

A)   The investment manager must not enter into any agency relationships.

B)   Duty to employer is of primary importance.

C)   All client commissions paid to a broker are the property of the client.

D)   The advisor must maintain independence and objectivity.

The correct answer was C)    

All client commissions paid to a broker are the property of the client.

5、Scott Burroughs is a portfolio manager for a firm that claims it is in compliance with CFA Institute Soft Dollar Standards. In purchasing bonds for the account of the pension fund of Sheets Company, no commissions were paid, but there was a spread charged by the broker between the purchase and sale price of the bonds. The trade is governed by the Investment Company Act of 1940 which requires that the trade must benefit only the client. Which of the following statements regarding client brokerage is TRUE? The specific brokerage from the trade:

A)   can be used to benefit another client only if Burroughs receives prior consent from Sheets.

B)   can be used to benefit another client as long as Burroughs receives consent from Sheets, either before or after the trade.

C)   can be used to benefit another client as long as Sheets benefits from the other client's brokerage in the future.

D)   cannot be used to benefit any other client.

The correct answer was D)

The Soft Dollar Standards do not supersede any law, and the law states that the brokerage must be used solely for the client's benefit. The client cannot wave these provisions by consent.