After reading the text, i am still unclear on one small aspect of soft dollars. is it ok to use brokerage from one client to benefit another client in any way shape or form? If so, what is an example of using soft dollars from one client to benefit another or something besides that client being ok?
Let’s say you have only three clients, Client A, Client B, and Client C. Client C directs your brokerage to a certain broker. Under no circumstance, can Client A or Client B’s brokerage benefit Client C. Let’s say Client A only invests in domestic equities and Client B invests in emerging market equities. If you place a trade for Client A, and the broker says he will give you research on an emerging market fund, that won’t directly affect Client A (but it will help Client B). You can accept ONLY if over the long run, some of Client B’s brokerage will help Client A.
Another crucial nuance that you left out is that in AGENCY trades, the long run effect mentioned above applies (can benefit other clients if in long run benefits the client whose brokerage being used). However in PRINCIPAL trades there are often laws requiring the use of the client’s brokerage to be used only for their benefit, and even absent these laws, you still need written consent from the client in a PRINCIPAL trade if their brokerage will ever at any time be used for someone else benefit. For me the tricky part seems to be realizing when their is a “client directed” situation going in, it’s not always clear as in “client directs you to use xyz brokerage”, and I got creamed on the CFA sample I with this garbage.
Yeah, I got that question wrong. It really wasn’t obvious there was a client directed brokerage arrangement, but it’s probably buried in the vignette somewhere.
job71188 Wrote: ------------------------------------------------------- > Let’s say you have only three clients, Client A, > Client B, and Client C. > > Client C directs your brokerage to a certain > broker. Under no circumstance, can Client A or > Client B’s brokerage benefit Client C. > Can client C’s benefit A or B?
Look at this - it seems to indicate one cannot us brokerage from a to benefit b, regardless of whether or not b will one day benefit a - unless there is permission 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: A was incorrect. The correct answer was C) can be used to benefit another client as long as Davis receives prior consent from Richards.
rolo550 Wrote: ------------------------------------------------------- > Look at this - it seems to indicate one cannot us > brokerage from a to benefit b, regardless of > whether or not b will one day benefit a - unless > there is permission > > 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: A was incorrect. The correct answer > was C) can be used to benefit another client as > long as Davis receives prior consent from > Richards. I thought ERISA applies here, but I guess since it’s a principal trade it doesn’t apply. This is a pretty bizarre scenario, I’m gonna have to recheck the Ethics book.
No commissions are applied, its done a spread basis (discount) instead. This means it’s a principal trade, not agency. Under principal trades laws often require brokerage to only benefit the client who is generating it, and absent those laws, you still need written consent.