this question is in page 114 in the curriculum book and the answer is B. I thought the client brokerage must be used for the benefit of that client(here Jones Corporation). the reason it’s not violation of the standard, is because the question says that it’s a discretionary account, not client-directed brokerage account?? This question got me confused so I just wanted to clarify… Thanks! __________________________________________________________ One of the discretionary accounts managed by Farnsworth is the Jones Corporation employee profit-sharing plan. Jones, the company president, recently asked Farnsworth to vote the shares in the 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 account because he directs all the account’s trades to a brokerage firm that provides Farnsworth 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 commissions for trades and best execution. Farnsworth investigates the director issue, concludes that management’s slate is better for the long-run performance of the firm than the dissident group’s slate, and votes accordingly. Farnsworth: A. violated the Standards in voting the shares in the manner requested by Jones but not in directing trades to the brokerage firm B. did not violate the Standards in voting the shares in the manner requested by Jones or in directing trades to the brokerage firm C. violated the Standards in directing trades to the brokerage firm but not in voting the shares as requested by Jones. D. violated the Standards in voting the shares in the manner requested by Jones and in directing trades to the brokerage firm.
There are a few key sentences here: 1) The tax-free investment information is not meaningful to Jones Corp. 2) The brokerage in question provides the lowest commissions and best execution. Therefore, to take a common sense approach (not usually useful in ethics, I know), Farnsworth is booking trades for Jones with the broker with best execution, so it is not a violation in that sense. Because the information received is not relevant to Jones, he doesn’t need to use it for their account. If he received the information, it was relevant to Jones, and he didn’t use it for Jones’ account, then that would be a violation. Voting the way the client asked is fine of course, especially since it was the better option. If it wasn’t, Farnsworth would be obligated to share his opinion with Jones. If he still wanted to vote the same way, that’s fine, because Farnsworth gave his opinion. Sorry if I went off on a few tangents there…
I read it as not a violation, from the point of view that Farnsworth investigated the director issue and concluded the managements slate is better for the long run performance of the firm… He had the employees interests at heart with his vote,the fact that Jones told him to vote that way is a complication,if he concluded that the dissident group was better for shareholders and ignored this relying on Jones direction then this would be a different issue…the Jones comment on voting is the trick?
Actually, that’s an excellent point perdition, I forgot about the employee sharing part. It’s only a distractor in this case, as the president wants you to pick the better option anyway, but if he didn’t, you’d have a tough call to make, and probably would have to pick the other one.
so when choosing a brokerage firm in Soft Dollar Arrangements, the only consideration is if the broker has the best execution and lowest commission? Whether the information is useful to the client whose brokerage is paid for the information or service or not doesnt need to be considered when choosing a broker?
travor, whether the info is used for the client or not is a factor, but in this case, as farnsworth is going for the best execution it doesn’t make a difference. farnsworth wouldn’t be able to get a better price by forgoing the additional information.