CFA Practice Question
Trust Fund is a reasonably successful investment management firm that has as its clients a few pension plans. Trust Fund executes all of its trades with Prime Brokerage, an average brokerage firm. Prime Brokerage charges higher commissions than comparable players in the market but in return, provides investment research on the stocks which are part of the pension plan assets under Trust Fund's management. Portfolio managers at Trust Fund know about the close relationship on the golf links between Prime Brokerage's chief broker, Ralph Fiennes, and Trust Fund's CEO, Armis Arvanitis. They also believe that the research provided by Prime Brokerage, while not superlative, is quite useful and justifies the excess expense in brokerage. This "soft dollars" practice is disclosed in Trust Fund's official documents and contracts but Sisko, a freshly minted CFA charterholder, thinks that Trust Fund managers are in violation of the CFA Institute code of Ethics.
Which of the following is true?
A. Trust Fund's managers are violating Standard III (A) - Loyalty, Prudence, and Care by not executing the trades at the lowest price available.
B. Sisko is not applying the CFA Institute code correctly. Trust Fund's managers are not violating any CFA Institute standards.
C. Trust Fund's managers are violating Standard VI (C) - Referral Fees by not revealing the arrangement to pension plan beneficiaries.
Explanation: The practice of using "soft dollars" (i.e., the usage of brokerage for purchase of research services) is not forbidden by the CFA Institute code or securities laws, as long as they are commensurate with the services received and the practice is disclosed to the clients. In this case, there is no evidence that Trust Fund is overpaying Prime Brokerage or that it is not seeking best price and execution. Hence, Sisko is mistaken and Trust Fund managers are not in violation of the CFA Institute code.
User Contributed Comments 9
| User | Comment |
|---|---|
| charje2000 | but has this arrangement been communicated to the client? |
| xjarl | it's disclosed in their official documents |
| chamad | Unfortunaltely we do not have the luxury of justifying our answers. You have sometimes to assume and hope that CFA did the same assumption. Sorry 11 days for june exam!!! |
| u0302638 | I was thinking...since the firm doesnt seek best price trade execution--> it is a violation . There other firms that will give good research and best price as well. |
| thammy | www.cfainstitute.org/centre/codes/softdollar/ |
| Merke | I think there is still an appearance of conflict of interest, because the case says "Portfolio managers at Trust Fund know about the close relationship on the golf links between Prime Brokerage's chief broker, Ralph Fiennes, and Trust Fund's CEO, Armis Arvanitis." The answer B says the Trust Fund managers are not violating ANY standards. And the Code says that mere disclosure of any conflicts or potential violations does not release the management from liability. I don't find answer B good enough. |
| 7Ricky | If they have higher commissions does that no factor into price? and thus not equal best price and execution? |
| mary11 | I can't believe Sisko passed the CFA exam if he thought there was a violation. haha There is hope for us! |
| Ifi2703 | Sisko clearly needs to be relieved of his charter status immediately! |