CFA Practice Question

There are 361 practice questions for this study session.

CFA Practice Question

One of the discretionary accounts managed by Bill Farnsworth, CFA, is the Jones Corporation employees' profit-sharing plan. Diane Jones, the company president, recently asked Farnsworth to vote the shares in the firm's profit-sharing plan in favor of the company-nominated slate of directors and against the directors sponsored by a dissident stockholder group. Farnsworth does not want to lose this client, because he directs all the client's trades to a brokerage firm that provides him with useful information about tax-free investments. Although this information is not of value in managing the Jones Corporation account, it does help in managing several other accounts. The brokerage firm providing this information also offers the lowest prices for trades. Farnsworth investigates the proxy-fight issue, concludes that management's slate of directors is better for the long-run performance of the firm than those recommended by the dissident group, and votes accordingly.
A. Farnsworth violated the Standards in voting the shares in the manner requested by Jones, but not in directing trades to the brokerage firm.
B. Farnsworth did not violate the Standards in voting the shares in the manner requested by Jones nor in directing trades to the brokerage firm.
C. Farnsworth violated the Standards in directing trades to the brokerage firm, but not in voting the shares as requested by Jones.

User Contributed Comments 17

User Comment
hz2125 why "nor in directing trades to the brokerage firm"
MadsI Because they also offered the lowest price
rhmd If the brokerage firm did not offer the best execution, he might be in violation by using it. Price alone is not the ethical determinant, but the combination of price and execution.
superjam I would have thought that Farnsworth get brokerage in the form of research which is not passed on to the client it should be. Shouldnt farnsworth determine a value of the information on tax-free investments and then pass this on to jones corporation? what i am saying is farnsworth is benefiting from directing trades to this broker, NOT his client.
HenryQ Even if you get lowest execution costs from a client direct brokerage, but you do not use the research reports from it solely to this client, is that in line with the standard? Coz here is says the research helps managing other accounts...
BryanKec I agree with Henry
Drzewes You can get the research from the broker, but if it does not affect client's account, but other clients, the company, or other clients should pay for it and the client from this question should get even lower brokerage costs. That is my interpretation, but I'm not sure.
bahamas It doesnt matter that the research is not used for the client's account because according to the information presented in the question, the prices for trades are the lowest. You have to omit the execution part of this standard because there was no mention of it in the question.
Bretton lowest price does not mean best execution which is the key tenant in the standard
Gooner7 agree with Bretton
Hishy By lowest prices it means stock prices it executes at, right? Or does it mean commissions charged? Because isn't low stock price obtained what best execution is all about?
Hishy And Drzewes sounds right
REITboy ^Agree.
ali7204 how is it not a voilation?
ascruggs92 I don't like that lowest cost is automatically assumed to be in the client's best interest. Right now I'm in a situation at work where we are switching brokers, and after giving our clients suggestions, some chose not to go to the firm with the lowest trading commissions because of the additional services provided by one of the other firms. According to the CFA institute I would be violating the Fair Dealing Standard by letting them choose another broker with higher prices? Ok then
rjdelong there is no indication that it wasn't the best execution, so we can't assume it wasn't. It is the best price, so Farnsworth is OBLIGATED to use the broker for Jones account because of this. The fact that he doesn't want to lose this added benefit of research is not a violation. Farnsworth doesn't set prices, so he can't pass along a different rate to his other clients and charge Jones less just because their account doesn't get all the benefits of all his other accounts from some piece of research.
akirchner1 This practice problem is taken verbatim from the Ethics portion of the CFA book. There is a detailed description of the answer in the solutions section.
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