Ethics

CFA Level III Ethics
#1

Hi Brave Ones,

I have a question for you guys…how can we infer that, as written in the solution on p182, this useful information is not being paid by the trade’s “embedded” commissions?

How can they say the client is not paying extra money for that information?

many thanks!

tigas

CFAI Book 1. Exercise 14, P154

Reading:

Farnsworth does not want to lose this account because he directs all the account’s trades to a brokerage firm that provides Farnsworth with useful information about tax- free investments. Although this information is not of value in managing the Jones Corporation account, it does help in managing several other accounts.

(Level III 2012 Volume 1 Ethical and Professional Standards, 5th Edition. Pearson Learning Solutions p. 154).

Solution:

It does not matter that the brokerage firm also provides research information that is not useful for the account generating the commission, because Farnsworth is not paying extra money of the client’s for that information.

(Level III 2012 Volume 1 Ethical and Professional Standards, 5th Edition. Pearson Learning Solutions p. 182).

#2

Just wondering, What is the client paying for here, only best execution and lowest commission? Isn’t there always a implicit soft dollars arrangement where you receive some useful research? thanks

#3

There is not always an implicit soft dollars paid. I don’t have the book in front of me but will look later.

#4

Many thanks Andrew. All the best for your CFA quest.

#5

I think it falls down to LOWEST COMMISSION so even with the extra research they are providing they still have the lowest commission and best execution! I got this one wrong when I first did it too.

#6

so a client can simply pay a commission for every trade and don’t get anything back from the broker other than the execution? I think I will stick to “There is not always an implicit soft dollars paid”. thank you also mohsen. yamani. tigas