Scott Burroughs is a portfolio manager for a firm that claims it is in compliance with CFA Institute Soft Dollar Standards. In purchasing bonds for the account of the pension fund of Sheets Company, no commissions were paid, but there was a spread charged by the broker between the purchase and sale price of the bonds. The trade is governed by the Investment Company Act of 1940 which requires that the trade must benefit only the client. Which of the following statements regarding client brokerage is TRUE? The specific brokerage from the trade: A) can be used to benefit another client only if Burroughs receives prior consent from Sheets. B) cannot be used to benefit any other client. C) can be used to benefit another client as long as Sheets benefits from the other client’s brokerage in the future. Your answer: C was incorrect. The correct answer was B) cannot be used to benefit any other client. The Soft Dollar Standards do not supersede any law, and the law states that the brokerage must be used solely for the client’s benefit. The client cannot wave these provisions by consent. while that makes sense, here is an excerpt from this LOS (note the last sentence): Recommended: It is permissible to use client brokerage from agency trades to obtain research which may not directly benefit the client. Over time, however, the client should receive a benefit from the research. As long as no fiduciary regulations apply, it is permissible to use client brokerage obtained from principal trades to benefit other client accounts, as long as this is disclosed to the client and prior consent is received.
ok nevermind…the excerpt above is for principal trades…does anyone know what those are and how theyre different? for example in this question, the answer is that consent must be given: Liz Davis is a portfolio manager for a firm that claims it is in compliance with CFA Institute Soft Dollar Standards. In purchasing bonds for the account of the pension fund of Richards Company, no commissions were paid but there was a spread charged by the broker between the purchase and sale price of the bonds. The brokerage on the trade is not governed by any securities regulation. The specific brokerage from the trade: A) cannot be used to benefit any other client. B) can be used to benefit another client as long as Richards benefits from other the client’s brokerage in the future. C) can be used to benefit another client as long as Davis receives prior consent from Richards. Your answer: B was incorrect. The correct answer was C) can be used to benefit another client as long as Davis receives prior consent from Richards. Prior consent must be given in the case of a principal trade.
top one is a principal trade also (the hint is gets charged a spread, not a commission… which would be agency). the big difference here is in the first one it says: The trade is governed by the Investment Company Act of 1940 which requires that the trade must benefit only the client. with that explicitly in there, i’d say schweser’s answer is ok. if that weren’t in there, then i would’ve answered it like the bottom one- principal trade, would’ve been ok with consent. soft $$ standards do suck- required vs recommended, ouch to try to memorize those.
so if i understand correctly, with principal trades, you can use one clients soft dollars for the benefit of another client, as long as consent is given. however, if there is a specific investment law like the 1940 act, then that supercedes soft dollars rules. 2 questions. 1. the notes say you need to disclose to the client and get prior consent, yet in this question the consent is taken from Richards (which is the fund that Davis works for). does this make sense? 2. what is a principal trade? what is the alternative?