土豆妮

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.

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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.

土豆妮

Which of the following is NOT one of the basic fiduciary duties? To:

A) place their client’s interest before their own.

B) exercise prudent judgment.

C) maintain knowledge of and comply with all applicable laws.

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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.

土豆妮

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.

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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.

土豆妮

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) does provide a benefit to Johnson but may not be released to Wisnewski with or without the permission of the source.

B) does not provide a benefit to Johnson but may be released to Wisnewski with the permission of the source.

C) provides a benefit to Johnson and may be released to Wisnewski with the permission of the source.

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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.

土豆妮

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) minimize transactions costs.

C) seek the best price and execution.

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Investment managers must seek the best price and execution.

土豆妮

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.

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Items purchased with soft dollars must provide a benefit to the client.

土豆妮

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 held in escrow for the benefit of the client.

B) paid must be reasonable in relation to the research and execution services provided.

C) paid must be minimized.

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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.

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土豆妮

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.

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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)

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土豆妮

The method that Nagle uses to allocate the IPO issues to his clients is:

A) not a violation of the standards because Nagle discloses the practice to his clients.

B) a violation of the standard on soft dollars.

C) a violation of the standards on fair dealing.

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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)

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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.

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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)

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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.

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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)

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With respect to the trip that Nagle has been taking each year Nagle:

A) should disclose it to his clients because it could represent a conflict of interest and hinder his objectivity.

B) should disclose it to his clients because it provides him with information about stock market activities other than those of Presley Brothers.

C) does not need to disclose it to his clients because it provides him with valuable information.

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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)

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Being able to offer his clients discount commissions on option trades after generating a certain amount of commissions is:

A) not a violation because it is a benefit that all clients can share in if they so choose.

B) a violation because commissions on option trades are the quintessential soft dollars.

C) a violation because it benefits those clients who are inclined to do option trading.

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Clearly some of Nagle’s clients will benefit from this arrangement more than others. (Study Session 1, LOS 2.a,b)