Question #45
Reading: Reading 42.3 Standards of Professional Conduct Guidance for Standards III
PDF File: Reading 42.3 Standards of Professional Conduct Guidance for Standards III.pdf
Page: 19
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Perley & Sons is an investment advisor company that just signed a contract with full discretionary power for the management of assets for Bright Future, a charitable fund. Without consultation, portfolio manager Martin Brown, CFA, decides to trade the funds' assets through a brokerage firm that provides, as an additional benefit, research reports for companies in the microchip industry. These companies represent the main investment interest for most of the Perley & Sons clients. The Bright Future portfolio does not hold any equities in the microchip industry, and, because of its risk profile, is unlikely to ever do so. Which of the following activities represents a possible breach with the CFA Institute standards?
Answer Choices:
A. Lack of action in consulting with the client before choosing the brokerage firm
B. Accepting research reports from the brokerage firm that do not benefit client portfolios
C. Exercising a selection principle that does not comply with the idea of best trade price and execution
Explanation
The problem refers to the fiduciary duties of the analyst and brokerage contracts involving
soft money. Trades placed with a broker that provides the firm with research are implicitly
paying for the research. In a competitive marketplace, it is probable that the trades could
have been as effectively placed with a broker that was able to provide research that would
apply to the holdings of Bright Future. According to Standard III(A) Loyalty, Prudence, and
Care, it is permissible to direct trades of the client portfolio through a broker who provides
research that does not directly benefit the client portfolio, but the client should be
informed about the situation.