Ethics - Kim - Topic Test - referral fee Q

Not sure if anybody has done this but wow is ethics not been kind to me.

An individual KIM, pays an investment management fee to Akagi of 10% for bringing in clients for the first 24 months in the fund. Kim tellls the clients verbally. Akagi also discloses to each client the fee he expects to earn from this arrangement ONCE an agrremenent is signed.

I get that the appropriate disclosure is PRIOR to signing the agreement and I also get that KIM needs WRITTEN disclosure and not verbal. Also says KIM has violated supervisory duties by not being aware that Akagi did not disclose the nature and value of the benefit.

What I dont understand is how this is even a REFERRAL fee. Kim has hired Akagi to bring clients to his company. Akagi is not recommending products outside of the firm. Akagi is only getting a 10% of the investment fee for bringing clients in but I don’t see this as being a referral.

I see a referral as being --> recommending a broker or something outside of the firm.

If anybody wants to look at the topic test, its’ Topic Test 1 on the CFA site – KIM

Much appreciated.

Example 2 (Disclosure of Interdepartmental Referral Arrangements):

James Handley works for the trust department of Central Trust Bank. He receives

compensation for each referral he makes to Central Trust’s brokerage department and

personal financial management department that results in a sale. He refers several of

his clients to the personal financial management department but does not disclose

the arrangement within Central Trust to his clients.

Comment: Handley has violated Standard VI© by not disclosing the

referral arrangement at Central Trust Bank to his clients. Standard VI©

does not distinguish between referral payments paid by a third party for

referring clients to the third party and internal payments paid within the

firm to attract new business to a subsidiary. Members and candidates must

disclose all such referral fees. Therefore, Handley is required to disclose,

at the time of referral, any referral fee agreement in place among Central

Trust Bank’s departments. The disclosure should include the nature and

the value of the benefit and should be made in writing.

Example 2 (Disclosure of Interdepartmental Referral Arrangements):

James Handley works for the trust department of Central Trust Bank. He receives

compensation for each referral he makes to Central Trust’s brokerage department and

personal financial management department that results in a sale. He refers several of

his clients to the personal financial management department but does not disclose

the arrangement within Central Trust to his clients.

Comment: Handley has violated Standard VI© by not disclosing the

referral arrangement at Central Trust Bank to his clients. Standard VI©

does not distinguish between referral payments paid by a third party for

referring clients to the third party and internal payments paid within the

firm to attract new business to a subsidiary. Members and candidates must

disclose all such referral fees. Therefore, Handley is required to disclose,

at the time of referral, any referral fee agreement in place among Central

Trust Bank’s departments. The disclosure should include the nature and

the value of the benefit and should be made in writing.

NOMI

Wow…thanks so much. That is tricky to know and in depth.

Much appreciated.