Sue Kim Case Scenario

In the solution of Sue Kim Case Scenario question 39, it says Disclosure that fully explains the referral fee arrangement has not been properly provided, in violation of Standard VI©–Referral Fees. Akagi is required to disclose in writing, and prior to the execution of any agreement, referral fee agreements, including the nature and the value of the benefit.

However, Standard VI©–Referral Fees does not required to disclose in writing.

Sounds as though they made a mistake.

Who says Standard VI© doesn’t need to be in writing? I see that no-where in the text. The text simply omits that part, but in their example it does say writing should be done.

According to the Standard VI©- Referral Fee examples, it says should be made in writing (page 162):

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.

Also, AnalystPrep says so too… They must be right:

Appropriate disclosure means communicating before an investment professional enters into a contract with a client or a prospective client. The reporting of referral fees include type (i.e. flat fee, percentage of business), as well as estimate value. This should be done in writing , with both parties signing a written agreement.

I do, for one.

The Standard itself, for another.

“Should be” is a recommendation; “must be” is a requirement.

The Standard does not require that the disclosure be in writing, so it is not a violation of the Standard to make the disclosure verbally. The recommended procedures for compliance do not mention disclosure in writing.

The example you cite makes a recommendation; it does not establish a requirement.

Contrast the language of Standard VI© with that of Standard IV(B), which states, “. . . unless they obtain _ written _ consent . . . .” (Emphasis added.) If the text omits that part (simply or otherwise), it isn’t a requirement.

They’re mentioning a recommendation (“should be”), not a requirement.

They should make that distinction between requirement and recommendation!!! (here, I am making a recommendation :slight_smile: )