Reading 3: CFA Institute Soft Dollar Standards-LOS b 习题精选 2011, generated, research, account

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Session 1: Ethical and Professional Standards
Reading 3: CFA Institute Soft Dollar Standards

LOS b: Critique company soft-dollar practices and policies.

 

 

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 not in violation of her fiduciary duties.

B) not permissible; Fischer is in violation of her fiduciary duties.

C) permissible; Fischer is not in violation of her fiduciary duties.

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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.

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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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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)

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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.

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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.

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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.

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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.

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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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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) not permissible, since items purchased with soft dollars must provide a benefit to the firm.

B) permissible, since items purchased with soft dollars must provide a benefit to the client.

C) not permissible, since items purchased with soft dollars must be tangible, and software is intangible.

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This action is permissible, since the software is relevant and provides a benefit to the client.

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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.

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Black must abide by the Standards of Professional Conduct, but can still follow any of the Soft Dollar Standards that she desires.