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Ethical and Professional Standards 【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.

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.

TOP

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.

TOP

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.

TOP

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.

TOP

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

TOP

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.

TOP

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.

TOP

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.

TOP

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

TOP

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