CFA Practice Question

CFA Practice Question

Cornelius is a portfolio manager with Apex Investments, an investment advisory firm. Cornelius has, over the years, developed a special symbiotic relationship with Mike Milken, the owner of Milk 'em, Inc., a small brokerage firm. Cornelius puts subtle pressure on the trading desk at Apex to execute its trades through Milk 'em, thus generating brokerage revenue for Mike. In return, Mike recommends the services of Apex Investments to many of his clients.

This arrangement is not disclosed to either the senior management at Apex nor to any of the clients. It has been observed by many at Apex Investments that the commissions charged by Milk 'em are 10.5% higher than those of other brokers. However, Cornelius has justified the higher costs by pointing to the extra revenue flow from Milk 'em. Cornelius has ______

I. not violated any CFA Institute standards.
II. violated Standard VI (A) - Disclosure of Conflicts.
III. violated Standard VI (C) - Referral Fees.
IV. violated Standard III (A) - Loyalty, Prudence, and Care.
A. II, III and IV only
B. I only
C. II and III only
Explanation: Cornelius is clearly in a situation representing a conflict of interests. His arrangement and non-disclosure of the arrangement are unfair to the current clients of Apex and potential clients recommended by Milk 'em. They represent a violation of his fiduciary duties to the clients. By not informing senior management at Apex about the arrangement, he has also violated Standard VI (A) - Disclosure of Conflicts.

User Contributed Comments 6

User Comment
passerby Cornelius did not receive referral fees in this case. I do not believe III is a correct answer to the question.
quincy This is a softdollar referral in kind, he should disclose it to client.
danlan Is IV correct?
mtcfa IV is a violation in this case because Cornelius is not acting or putting the interests of the client first.
StanleyMo referral fee is all kind of benefits
AUAU loyalty to employers not clients ?
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