Soft Dollars - EOC Question

Hi folks,

I was wondering if anyone could help me with an end-of-chapter question from the Ethics material.

I’ve reproduced the question and answer below, but I am still puzzled how the answer is not (B). The CFA says (A).

My line of thinking is that if Carter is allowed to do this, he could just as easily churn the “soft dollar prohibited” accounts, generating commissions that the brokerage will use (albeit indirectly) to determine whether Carter will continue to receive research.

Isn’t this the exact definition of soft dollars – paying the brokerage commissions to receive (unpaid, but valuable) research in return?

— [question and answer removed by admin]


Previously posted here, but I don’t think it was satisfactorily covered.

http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91257660

  • Your company requires you to always take the cheapest flight within your schedule.
  • It also forbids you from choosing flights based on the points you’ll earn.
  • For your trip to Fargo, the cheapest/best flight happens to also be the one that’ll earn you the most points.

You would choose the flight that costs the least and best fits your schedule. Picking a worse or more expensive flight to avoid getting points wouldn’t make sense.

This is an excellent answer, biuku.

In essence, you’ve got an explicit first-order optimization: find the brokerage with the best execution with the lowest cost.

The restriction says you can’t use soft dollars as an input to that optimization problem.

In short, research/kickback value (an input) is forbidden from being considered in determining the output (broker choice).

Thank you very much for your help!

Is not soft dollars removed from the curriculum for the L2 2016 exam?