A brokerage firm has just purchased a new computer system that will facilitate trades for its customers and supply research to the brokers directly aiding in their investment recommendations. Which of the following statements regarding the application of the CFA Institute Soft Dollar Standards is CORRECT? (X) A) The full cost of the computer system can be paid for with Client Brokerage. ( ) B) Only the portion of the costs that will be attributed to research can be paid for with Client Brokerage. ( ) C) Only the software applications and not the hardware can be paid for with Client Brokerage. Your answer: A was incorrect. The correct answer was B) Only the portion of the costs that will be attributed to research can be paid for with Client Brokerage. Soft Dollar Standards set forth a three-level analysis to assist the Investment Manager in determining whether or not a product or service is Research. In nearly all cases, if the criteria of all three levels are satisfied, the Investment Manager can use Client Brokerage to pay for the Research. The final step in the analysis is to determine what portion of the Research will be used in the Investment-Decision-Making Process and pay only for that portion with Client Brokerage. If it facilitates trades, is that not for the benefit of the client? Or is it disallowed because its not part of the “investment decision making process”?
The question does not say that the computer is being used exclusively for the clients benefit. The traders at the brokerage could also be using the computer to check their facebook accounts etc. So only the portion of the costs attributed to research can be paid for with client brokerage (B)
but also remember that soft dollar client brokerage is about research not general trades per se