Session 1 - Reading 3 CFA Institute Soft Dollar Standards - LOS c

CFA Level 2 – Ethical and Standards, Session 1 – Reading 3

CFA Institute Soft Dollar Standards – LOS c

(Practice Questions, Sample Questions)

1. Centurion Rivals (CR), an investment advisory firm, receives the following services in return for directing client brokerage to another firm:

Research reports supporting trades surrounding IPOs, mergers, and bankruptcy proceedings.

Access to an online database to track current, former, and prospective clients for marketing purposes.

CR wants to advertise that it is in compliance with CFA Institute’s soft dollar standards. CR should:

A) advertise compliance until notified by CFA Institute of a violation.

B) advertise partial compliance based on the differing treatment between the research reports and the online marketing database.

C) determine whether its policies are in compliance using CFA Institute’s 3-tiered analysis. (CR should determine whether its policies are in compliance using CFA Institute’s 3-tiered analysis. CR will learn from this analysis that the online marketing database is a violation. No description of partial compliance is permissible)

2. Centurion Rivals (CR), an investment advisory firm, receives the following services in return for directing client brokerage to another firm:

Research reports supporting trades surrounding IPOs, mergers, and bankruptcy proceedings.

Access to an online database to track current, former, and prospective clients for marketing purposes.

Which of the following standards has CR most likely violated?

A) Standard V(A) Diligence and Reasonable Basis.

B) Both CFA Institute Soft-dollar Standards and Standard V(A) Diligence and Reasonable Basis.

C) CFA Institute Soft-dollar Standards. (The marketing database is a violation of CFA Insititute soft dollar standards because it does not directly assist the investment manager in the investment management process.

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Rather, it is a benefit to the firm which should not be paid with client brokerage)

3. A brokerage firm has just purchased a new computer system that will facilitate trades for its customers and supply research to the brokers directly aiding in their investment recommendations. Which of the following statements regarding the application of the CFA Institute Soft Dollar Standards is CORRECT?

A) Only the portion of the costs that will be attributed to research can be paid for with Client Brokerage. (Soft Dollar Standards set forth a three-level analysis to assist the Investment Manager in determining whether or not a product or service is Research. In nearly all cases, if the criteria of all three levels are satisfied, the Investment Manager can use Client Brokerage to pay for the Research. The final step in the analysis is to determine what portion of the Research will be used in the Investment-Decision-Making Process and pay only for that portion with Client Brokerage)

B) The full cost of the computer system can be paid for with Client Brokerage.

C) Only the software applications and not the hardware can be paid for with Client Brokerage

4. David Sanders is the Chief Investment Officer at a money management company that claims it is in compliance with CFA Institute Soft Dollar Standards. Last year he purchased a Bloomberg system for the portfolio managers to get information concerning investment decisions. He used soft dollars from brokers to pay for the system. Because the system has come up for renewal, he has an assistant audit the use of the terminal for a week. The assistant reports that the system is only used about 20 percent of the time for investment decision-making activities and 80 percent for other uses. Sanders:

A) can use soft dollars to pay for 20 percent of the system for the next year and need not take any action concerning last year’s soft dollars. (Sanders must make a good faith estimate for the proportion of the system that is used for investment decision-making and use that proportion to determine the amount of money that can be used for soft dollar purchases. He need not take any action with respect to last year’s expenditures)

B) can use soft dollars to pay for 20 percent of the system for the next year and must reimburse clients for 80 percent of the cost of last year’s system.

C) cannot use soft dollars to pay for any part of the system for the next year, but need not take any action concerning last year’s soft dollars