Two ethics conundrums associates, supporting, referring, structure, industry

toocfatoo

1. Brian Lewis is an institutional bond sales associate for Kite Brothers. Kite Brothers has had an incentive program in place where sales associates are compensated for referring clients to other units fo the company. Lewis recommends to a client that the client transfer his personal accounts to the retail area of Kite Brothers. He gives the client supporting info that KB is the leader in the retail brokerage industry with a very competitive fee structure. The client moves the account. Has Lewis violated the CFAI SOPC?

a) No, Lewis was participating in a legitimate incentive program established by employer.
b) No, KB has a favorable track record and can provide excellent service to client.
C), Yes, because Lewis did not disclose the compensation he earned for the referral to another dept within Kite Brothers.


2. Ron Brenner manages portfolios of high net worth assets. One of his clients, offers Brenner a reward above those provided by his employer to motivate superior performance in managing his portfolio. The client offers Brenner use of his yacht for a week if Brenner exceeds the portfolio benchmark on his account. Immediately after receiving this proposal, Brenner notifies his manager via email about it, and his employer grants permission. Which of the following is correct regarding the additional compensation agreement?
a) Brenner must notify "all parties involved", which includes his other clients.
b) Brenner has complied with CFAI standards
c) This inducement is excessive and should be declined as it could cause partiality in the handling of other accounts.

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1: C. Why is it C though? I remember reading in the solution to another question that you do not have to disclose referral compensation from one part of your company to another, as the client can deduce that there would be such an arrangement.

2. B. I don't get why though, shouldn't you disclose this to the relevant clients so that they can judge your objectivity and fairness? Why is this nto disclosed to clients, while getting a referral fee from a third party has to be disclosed...aren't they both basically the same thing in that they could make you biased?

kamara5

i don't agree with 2 B...he has to receive written permission from employer, no? regarding the disclosure to clients, i'm not so sure...i am always lost w/ these ethics tricky shots

thisisbrianly

But it says that his employer gave him permission. Does the permission also have to be written because it doesn't say in what form permission was granted.

lc26mizzou

1. You don't have to tell your client about soft dollars if they benefit the client (i.e. better research, lower fees...)

2. B is correct - the employer gave his permission according to the problem - the permission does have to be written, as well as the request to use it, so that the employer can manage any potential conflicts of interest.

You have to let clients know about any potential conflicts of interest that would affect their account directly, such as referral fees, relationships with firms that would service the clients, etc.

soddy1979

1. regards to referal fees (part of conflict of interest) - you must disclose it to "everybody"

2. regards to additional compensation - it is part of duties to employer!, so only employer gives permission. there is nothing in duties to clients part about this. but it could be "conflict of interests theoretically - standard VI., you have to judge here if it can influence independence and objectivity or interfere with duties to clients and employer. here, I think it is OK, you will do best for this client, nothing said you will forget the others...

Benjiko

1. Think of the way financial companies are structured now that Glass Stegall act has been removed. Large "umbrella" companies own investment companies and banks. I work with an investment advisor and receive comp. from their subsidiary for referring clients to their division, technically another company. Retail banking and financial advisory arent held under the same company, but they may sit in desks across the hall. This is very common in banking, making cross referrals for management and holding assets.

2. I have seen several instances in Qs like this and it seems legit. Imagine having to inform all your clients your "comps" with different clients. It sounds too invasive. And who would be the judge of "excessive"?

JPSem

If number 2 was in the contexted of what would be the best thing to do in this situation. C would have been the best answer, but since one of the options are Ron is in compliance (true) B is correct. So tricky so tricky

RobertA

Brafique, refer to the ethics example on page 101 of book 1 of the LOS. It provides a pretty clear example that supports disclosing all referral fees even when it is generally understood that sales associates are compensated for bringing new assets under management.

dontknow1987

I remember doing a question where it specifically said you do not need to disclose referral fees when you are recommending an additional service for the company you work for. It said something about that clients should know that you have an incentive to refer work to your company blah blah blah...

farrukhsadiq

I have the same feeling with you. But are you sure the answers are right? where did you get the ethical questions and the answer?