It asks which activities by an investment manager most likely violates standard III (A), The correct answer was using client brokerage to pay for the manager’s operating expenses.
I find “operating expenses” to be confusing. What does it mean by using client brokerage to pay for operating expenses? How does the firm pay for its normal expenses if I assume commisions are the only revenue the firm receives from the client?
Am I missing something simple here?
I chose “Using client brokerage to purchase goods and services that do not benefit the client” but the justification is that the firm would have to disclose it’s policies on soft dollar commisions to address the potential conflict. Confused!
If you look at EOC questions, reading 2, qn3, it says that that one is definitely wrong (i.e. the correct answer). Of course it also goes on to describe what you mentioned, “if the use is in the best interests of the client”,which it clearly is not (pages 145 and 155 if you want to find the exact explanation), or at least my interpretation of it.
My only thought, hope something like that doesn’t come out
soft dollars can be used to purchase research reports that help the client. soft dollars cannot be used to support operating expenses i.e. pay utilities or pay the receptionist at the firm. that’s all i remember from IIIA.
brokerage commissions are only to be used to support brokerage services, not investment firm’s expenses. to your point, investment firm’s expenses will be funded from regular client fees, not brokerage commissions.
That’s the part that confusing me a bit, how do you seperate supporting brokerage services from firm expenses? Is it implying the brokerage commision is a pass through to cover the cost on the trade? Seems vague to me :-/
(what is a pass through? should know this from mortgage pass through - but never got to know it )
I interpreted IIIA mainly as: IM firm different from brokerage firm and both trying to service clients. brokerage commission is the fee clients pay separatelly to brokerage firm unless it is a direct brokerage where IM firm is the middle man that pays that amount to the brokerage firm. And in this they can hike up the commission with soft dollars. Is this correct?
I thought brokerage commissions were like, payments from the brokerage for you directing clients there. It doesn’t have to come in cash form but also like say reports (which if you use to benefit the clients it’s fine, though might still have conflict of interest depending on the scenario).