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标题: Ethical and Professional Standards 【Reading 3】Sample [打印本页]
作者: JonnyKay    时间: 2012-3-23 15:16     标题: [2012 L2] Ethical and Professional Standards 【Session 1 - Reading 3】Sample

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)
All commissions paid to a broker are the property of the broker.
B)
The quality of the transaction comes first.
C)
To act in the clients' best interest.


All (client) commissions paid to a broker are the property of the client.
作者: JonnyKay    时间: 2012-3-23 15:17

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 CORRECT? The specific brokerage from the trade:
A)
can be used to benefit another client only if Burroughs receives prior consent from Sheets.
B)
cannot be used to benefit any other client.
C)
can be used to benefit another client as long as Sheets benefits from the other client's brokerage in the future.


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.
作者: JonnyKay    时间: 2012-3-23 15:17

Which of the following best 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)
All client commissions paid to a broker are the property of the client.
C)
The advisor must maintain independence and objectivity.


All client commissions paid to a broker are the property of the client.
作者: JonnyKay    时间: 2012-3-23 15:17

Which of the following best describes one of the two fundamental principles involved in evaluating any soft dollar arrangements?
A)
The quality of the transaction comes first.
B)
The priority of the transactions comes first.
C)
The investment manager must not enter into any agency relationships.


The quality of the transaction (execution & cost) comes first.
作者: JonnyKay    时间: 2012-3-23 15:18

The statement “the quality of the transaction comes first” means:
A)
lowest price execution regardless of other transactions costs.
B)
minimization of transactions costs in the context of the best execution.
C)
the ordering of the transactions must be properly prioritized.


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.
作者: JonnyKay    时间: 2012-3-23 15:18

Sharon Fischer manages an equity mutual fund, and she uses soft dollars generated on this account to obtain municipal bond research for an associate whose fund is small and does not generate a sufficient level of soft dollars for his municipal bond research needs. With regard to this action, which of the following statements is most accurate? This action is:
A)
not permissible; Fischer is in violation of her fiduciary duties.
B)
not permissible; Fischer is not in violation of her fiduciary duties.
C)
permissible; Fischer is not in violation of her fiduciary duties.


Since the research purchased is not relevant to the client assets generating the soft dollars, the action is not permissible. By this action, she is effectively transferring assets belonging to the equity clients to the clients of the municipal fund. This is in violation of the Code and Standards
作者: JonnyKay    时间: 2012-3-23 15:19

Waldmann Brothers & Company offers Pyramid Investment Advisors the use of its proprietary investment allocation software. This package is purported to improve the risk-return trade-off for assets under management, and is also useful for the generation of various diagnostic reports that will benefit Pyramid. Goldman, Pyramid’s CEO estimates that about 70 percent of the value of the package is the improvement of the risk-return trade-off, and that this will be valuable to the holders of Pyramid’s Growth Fund. The remaining value of the package accrues to Pyramid in the form of increased management efficiency. If the value of the package is $50,000 per year, how much of this must be paid by Pyramid?
A)
$15,000.
B)
$35,000.
C)
$50,000.


Since approximately 30 percent of the value of the asset accrues to the management of the investment firm, 0.30 * 50,000 = $15,000 should be paid by Pyramid. The remainder can be funded with soft dollars, since the balance of the value will accrue to the clients who will directly benefit from the acquisition of the asset.
作者: JonnyKay    时间: 2012-3-23 15:19

Marc Schultz manages an equity mutual fund, and he uses soft dollars generated on this account to obtain equity research to assist him in managing the portfolio. With regard to this action, which of the following statements is CORRECT? This action is:
A)
permissible; Schultz is not in violation of his fiduciary duties.
B)
not permissible; Schultz is in violation of his fiduciary duties.
C)
not permissible; Schultz is not in violation of his fiduciary duties.


Since the research is relevant to the client assets and is used for the benefit of the client, the action is permissible, and there is no violation.
作者: JonnyKay    时间: 2012-3-23 15:19

Springfield Investment Advisors uses soft dollars generated with mutual fund transactions to get software that is used 50% of the time to assist in the management of client assets. Which of the following statements is CORRECT? This action is:
A)
not permissible since items purchased must provide 100% of their benefits to clients.
B)
permissible since items purchased with soft dollars must be tangible, and software is intangible.
C)
permissible only if the firm pays for 50% of the software cost with its own resources.


As long as the software is used for the benefit of clients 50% of the time it is permissible to pay for 50% of the software with soft dollars. The remainder must be paid for by the firm with its own resources.
作者: JonnyKay    时间: 2012-3-23 15:20

Springfield Investment Advisors uses soft dollars generated with mutual fund transactions to get software that is only useful for the management of the investment firm. Which of the following statements is CORRECT? This is:
A)
not permissible since items purchased with soft dollars must provide a benefit to the client.
B)
not permissible since items purchased with soft dollars must provide at least 50% of their benefits to the client.
C)
permissible since items purchased with soft dollars must provide a benefit to the firm.


This action is not permissible—items purchased must provide a benefit to the client. The firm is responsible for securing assets necessary for the operation of the firm from the firm’s resources
作者: JonnyKay    时间: 2012-3-23 15:20

Jason Wariner manages an equity mutual fund and directs trades to various brokers on the basis of their research coverage of the equity being traded. The commissions paid vary somewhat (i.e., he knows that he could occasionally save on the commission by dealing with a broker other than the one handling the transaction) but are believed to be reasonable in relation to the research and execution services provided. With regard to this practice, which of the following statements is CORRECT? This action is:
A)
not permissible; Wariner is in violation of his fiduciary duties.
B)
permissible; Wariner is not in violation of his fiduciary duties.
C)
not permissible; Wariner is not in violation of his fiduciary duties.


Since the research is relevant to the client assets and is used for the benefit of the client, the action is permissible, and there is no violation so long as the value of the research obtained is commensurate with the differential in cost paid.
作者: JonnyKay    时间: 2012-3-23 15:21

Rochelle Bell is the Chief Investment Officer at a money management company that claims it is in compliance with CFA Institute Soft Dollar Standards. Last year the company had $10 million of soft dollar funds accruing from commissions available but only spent $8 million on research services. This year Bell estimates that the company will have $11 million of soft dollar funds available. Bell analyzes the research services that the firm wishes to purchase and places them into four categories: fully available for soft dollars, mixed usage, not available for soft dollars, and cannot be determined. The total of soft dollars allocated to the first two groups is $7 million, and there are $500,000 of expenditures in the group for which she cannot determine whether they are suitable for soft dollar expenditures. Bell should:
A)
allocate $500,000 of this year's soft dollars to this last group.
B)
not allocate any of the soft dollars to this last group.
C)
use the 50-50 rule and allocate $250,000 of soft dollars to this last group.


In cases when the manager cannot determine whether the expenditure qualifies for soft dollars, soft dollars cannot be used.
作者: JonnyKay    时间: 2012-3-23 15:21

Springfield Investment Advisors uses soft dollars generated with mutual fund transactions to get software that is only useful for the management of client assets. Which of the following statements is CORRECT? This is:
A)
permissible, since items purchased with soft dollars must provide a benefit to the client.
B)
not permissible, since items purchased with soft dollars must provide a benefit to the firm.
C)
not permissible, since items purchased with soft dollars must be tangible, and software is intangible.


This action is permissible, since the software is relevant and provides a benefit to the client.
作者: JonnyKay    时间: 2012-3-23 15:22

Elaine Black, CFA has recently been hired as the Chief Investment Officer at a money management company that does not claim it is in compliance with CFA Institute Soft Dollar Standards. Her former company was in compliance. Which of the following statements concerning CFA Institute Soft Dollar Standards is CORRECT? Black:
A)
cannot use soft dollars to pay for research services except when the commissions originate from principle trades.
B)
must ignore all provisions set forth in the CFA Institute Soft Dollar Standards except when they are consistent with the Standards of Professional Conduct.
C)
must abide by the conditions set forth in the Standards of Professional Conduct concerning soft dollars and can chose to accept some of the CFA Institute Soft Dollar Standards.


Black must abide by the Standards of Professional Conduct, but can still follow any of the Soft Dollar Standards that she desires.
作者: JonnyKay    时间: 2012-3-23 15:22

Liz Davis 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 Richards Company, no commissions were paid but there was a spread charged by the broker between the purchase and sale price of the bonds. The brokerage on the trade is not governed by any securities regulation. The specific brokerage from the trade:
A)
cannot be used to benefit any other client.
B)
can be used to benefit another client as long as Davis receives prior consent from Richards.
C)
can be used to benefit another client as long as Richards benefits from other the client’s brokerage in the future.


Prior consent must be given in the case of a principal trade
作者: JonnyKay    时间: 2012-3-23 15:22

Steve Bishop is a portfolio manager with Bradshaw Asset Management. He has received a request from the Gail Foundation, one of his clients, to review Bradshaw's soft dollar policy, since Bradshaw claims to comply with the CFA Institute Soft Dollar Standards. Bishop must be prepared to present the client with all of the following EXCEPT:
A)
the total amount of brokerage paid by Bradshaw to each broker.
B)
the aggregate percentage on Bradshaw's brokerage derived through client-directed brokerage.
C)
the total amount of Gail's commissions generated through soft dollar arrangements.


The disclosure of the total amount of brokerage paid by Bradshaw is recommended but not required, and there is no mention of disclosure of brokerage paid to each broker.
作者: JonnyKay    时间: 2012-3-23 15:23

Which of the following is NOT one of the basic fiduciary duties? To:
A)
place their client’s interest before their own.
B)
maintain knowledge of and comply with all applicable laws.
C)
exercise prudent judgment.


CFA Institute members have a duty to maintain knowledge and to comply with all applicable laws, but this is Standard I(A), Knowledge of the Law, not a fiduciary duty.
作者: JonnyKay    时间: 2012-3-23 15:23

Which of the following statements about soft dollars is CORRECT?
A)
Fiduciaries must disclose actual, but not potential, conflicts of interest.
B)
Items purchased with soft dollars must provide a benefit to the firm.
C)
Items purchased with soft dollars must provide a benefit to the client.


Items purchased with soft dollars must provide a benefit to the client. If this benefit is less than 100 percent to the client, soft dollars can only be used to purchase the item in proportion to the benefit derived by the client.
作者: JonnyKay    时间: 2012-3-23 15:23

Carl Johnson, a large equity client of Madison Investment Advisors, directs Madison to pass along old copies of any research purchased with soft dollars generated by trades in his account to his friend Jacob Wisnewski. Madison receives about ten such reports per year, and, after these have been reviewed in the context of their relevance to Johnson’s account, they are forwarded on to Wisnewski. With regard to this procedure, which of the following statements is CORRECT? The research:
A)
provides a benefit to Johnson and may be released to Wisnewski with the permission of the source.
B)
does provide a benefit to Johnson but may not be released to Wisnewski with or without the permission of the source.
C)
does not provide a benefit to Johnson but may be released to Wisnewski with the permission of the source.


Since the research received is relevant to and is used for the benefit of Johnson, there is nothing inherently wrong with passing the reports to Wisnewski unless precluded from doing so by the provider of the research.
作者: JonnyKay    时间: 2012-3-23 15:24

Which of the following is one of the four requirements for meeting fiduciary obligations with regard to soft dollar arrangements? Investment managers must:
A)
avoid agency relationships.
B)
seek the best price and execution.
C)
minimize transactions costs.


Investment managers must seek the best price and execution.
作者: JonnyKay    时间: 2012-3-23 15:24

Which of the following is one of the four requirements for meeting fiduciary obligations with regard to soft dollar arrangements? Items purchased with soft dollars must:
A)
provide a benefit to the firm.
B)
provide a benefit to the client.
C)
provide at least 50% of their benefits to the client.


Items purchased with soft dollars must provide a benefit to the client.
作者: JonnyKay    时间: 2012-3-23 15:25

Which of the following is one of the four requirements for meeting fiduciary obligations with regard to soft dollar arrangements? Commissions:
A)
paid must be reasonable in relation to the research and execution services provided.
B)
paid must be held in escrow for the benefit of the client.
C)
paid must be minimized.


Commissions paid must be reasonable in relation to the research and execution services provided. This does not imply that trades are always directed to the lowest cost broker.
作者: JonnyKay    时间: 2012-3-23 15:27

William Nagle, CFA has his own money management firm. He has a wide range of clients. Some of his clients are entirely invested in the money market while others like to actively trade stocks including hot new issues and options.
Over the years Nagle has developed a good relationship with Presley Brothers Brokerage who executes his trades. One of the reasons Nagle initially chose and continues to use Presley Brothers is that Presley Brothers provides to Nagle a free high-speed Internet service plus the services of a top-rated research firm over the Internet. That service provides up-to-the minute recommendations. Although the fees Presley Brothers charges Nagle’s clients per trade are slightly higher than competing firms, Nagle feels their speed of execution is worth the cost. Nagle has found the recommendations from the Internet research firm have been useful for some of his more active clients.
Presley Brothers also underwrites stocks and gives Nagle the opportunity to buy shares in initial public offerings for his clients. The amount of IPO stock offered to Nagle is proportional to the amount of commissions that Nagle has generated. As a rule, Nagle allocates the IPO shares to the clients who generated the most commissions in the previous year. He discloses this practice to all his clients, and since Nagle started dealing with Presley Brothers Brokerage, all of the IPOs Presley Brothers has underwritten have made a profit for Nagle’s clients. Therefore, Nagle has a standing order with Presley Brothers to purchase as much of each IPO that Presley Brothers can give him. Once Nagle gets the IPO issue, he divides it into three allocations and begins calling his clients one at a time, beginning with the top commission-generating client, and offers to sell an allocation to each client until all three allocations are sold.
Presley Brothers also offers Nagle another perk for doing business with the firm. If Nagle generates a certain minimum in commissions, then Presley Brothers provides Nagle with the opportunity to offer discount commissions on option trades. In addition to that, exceeding the commission quota earns Nagle an all-paid weekend trip to a resort where Presley Brothers gives seminars to managers like Nagle who have exceeded the commission quota. The trip does include seminars that provide valuable information on the products like mutual funds that Presley Brothers offers and financial markets in general, but it also takes place at a posh resort with many free amenities. In recent years, Nagle has exceeded the commission quota and has been able to take the trip. His main focus on the trips has been to learn something at the seminars that he can offer to his larger clients who generate the most business. The trips have given Nagle sufficient information on Presley Brothers’ products so that Nagle has decided to satisfy all of his clients’ needs with Presley Brothers products. By choosing to use Presley Brothers Brokerage for the indicated reason, has Nagle broken the standard concerning soft dollars?
A)
No, because although his clients pay higher fees, the services are worth it.
B)
Yes, because his clients pay higher fees and he gets free Internet service and the services of a research firm.
C)
Yes, because his clients pay higher fees and he gets free Internet service only.


Nagle is receiving free Internet service, and does not pass the savings on to his clients. The research benefits some of the clients; therefore, there must be some clients paying a higher fee and not getting anything from Nagle or Presley Brothers for the extra expense. (Study Session 1, LOS 3.b)
The method that Nagle uses to allocate the IPO issues to his clients is:
A)
a violation of the standards on fair dealing.
B)
not a violation of the standards because Nagle discloses the practice to his clients.
C)
a violation of the standard on soft dollars.


Nagle needs to give all of his clients an opportunity to participate in profitable deals. In Nagle’s current system, it is possible for long-time clients who generate a consistent level of business per year to never be able to participate in a profitable IPO. (Study Session 2, LOS 8.a)
Nagle’s standing order to purchase as much as much as possible of each Presley Brothers’ IPOs is a violation of the standard because:
A)
Nagle should get advanced notice of his clients’ interest in the IPO.
B)
Nagle is, in effect, distributing soft dollars.
C)
of no reason, it is actually an acceptable practice because all the IPOs have been profitable.


The standard on Trade Allocation: Fair Dealing and Disclosure requires that Nagle get an advanced indication of client interest. (Study Session 2, LOS 8.a)
Nagle has violated the standards on research objectivity by:
A)
his standing order for IPOs but not by his using only Presley Brothers investment products.
B)
his standing order for IPOs and his using only Presley Brothers investment products.
C)
his only using Presley Brothers investment products but not by his standing order for IPOs.


Nagle is not doing any research on the IPOs before taking the allocations. Apparently, taking the trips has led to Nagle limiting his choices of possible products for his clients. Nagle needs to be more thorough in researching the needs of his clients. (Study Session 1, LOS 4.a)
With respect to the trip that Nagle has been taking each year Nagle:
A)
should disclose it to his clients because it provides him with information about stock market activities other than those of Presley Brothers.
B)
should disclose it to his clients because it could represent a conflict of interest and hinder his objectivity.
C)
does not need to disclose it to his clients because it provides him with valuable information.


Nagle’s objectivity has clearly been compromised since he has started only using Presley Brothers’ products. The clients need to be aware that a significant portion of Nagle’s information is coming from the one firm that executes his trades and provides all of his clients’ products. (Study Session 1, LOS 2.a,b)
Being able to offer his clients discount commissions on option trades after generating a certain amount of commissions is:
A)
a violation because it benefits those clients who are inclined to do option trading.
B)
not a violation because it is a benefit that all clients can share in if they so choose.
C)
a violation because commissions on option trades are the quintessential soft dollars.


Clearly some of Nagle’s clients will benefit from this arrangement more than others. (Study Session 1, LOS 2.a,b)
作者: JonnyKay    时间: 2012-3-23 15:28

Centurion Rivals (CR), an investment advisory firm, receives the following services in return for directing client brokerage to another firm:
CR wants to advertise that it is in compliance with CFA Institute’s soft dollar standards. CR should:
A)
advertise compliance until notified by CFA Institute of a violation.
B)
determine whether its policies are in compliance using CFA Institute’s 3-tiered analysis.
C)
advertise partial compliance based on the differing treatment between the research reports and the online marketing database.


CR should determine whether its policies are in compliance using CFA Institute’s 3-tiered analysis. CR will learn from this analysis that the online marketing database is a violation. No description of partial compliance is permissible.
作者: JonnyKay    时间: 2012-3-23 15:28

Centurion Rivals (CR), an investment advisory firm, receives the following services in return for directing client brokerage to another firm:
Which of the following standards has CR most likely violated?
A)
Standard V(A) Diligence and Reasonable Basis.
B)
CFA Institute Soft-dollar Standards.
C)
Both CFA Institute Soft-dollar Standards and Standard V(A) Diligence and Reasonable Basis.


The marketing database is a violation of CFA Insititute soft dollar standards because it does not directly assist the investment manager in the investment management process. Rather, it is a benefit to the firm which should not be paid with client brokerage.
作者: JonnyKay    时间: 2012-3-23 15:28

A brokerage firm has just purchased a new computer system that will facilitate trades for its customers and supply research to the brokers directly aiding in their investment recommendations. Which of the following statements regarding the application of the CFA Institute Soft Dollar Standards is CORRECT?
A)
Only the portion of the costs that will be attributed to research can be paid for with Client Brokerage.
B)
The full cost of the computer system can be paid for with Client Brokerage.
C)
Only the software applications and not the hardware can be paid for with Client Brokerage.


Soft Dollar Standards set forth a three-level analysis to assist the Investment Manager in determining whether or not a product or service is Research. In nearly all cases, if the criteria of all three levels are satisfied, the Investment Manager can use Client Brokerage to pay for the Research. The final step in the analysis is to determine what portion of the Research will be used in the Investment-Decision-Making Process and pay only for that portion with Client Brokerage.
作者: JonnyKay    时间: 2012-3-23 15:29

David Sanders is the Chief Investment Officer at a money management company that claims it is in compliance with CFA Institute Soft Dollar Standards. Last year he purchased a Bloomberg system for the portfolio managers to get information concerning investment decisions. He used soft dollars from brokers to pay for the system. Because the system has come up for renewal, he has an assistant audit the use of the terminal for a week. The assistant reports that the system is only used about 20 percent of the time for investment decision-making activities and 80 percent for other uses. Sanders:
A)
can use soft dollars to pay for 20 percent of the system for the next year and must reimburse clients for 80 percent of the cost of last year's system.
B)
cannot use soft dollars to pay for any part of the system for the next year, but need not take any action concerning last year's soft dollars.
C)
can use soft dollars to pay for 20 percent of the system for the next year and need not take any action concerning last year's soft dollars.


Sanders must make a good faith estimate for the proportion of the system that is used for investment decision-making and use that proportion to determine the amount of money that can be used for soft dollar purchases. He need not take any action with respect to last year's expenditures.



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