Cornelius is a portfolio manager with Apex Investments, an investment advisory firm. Cornelius has, over the years, developed a special symbiotic relationship with Mike Milken, the owner of Milk 'em, Inc., a small brokerage firm. Cornelius puts subtle pressure on the trading desk at Apex to execute its trades through Milk
'em, thus generating brokerage revenue for Mike. In return, Mike recommends the services of Apex Investments to many of its clients. This arrangement is not disclosed to either the senior management at Apex nor to any of the clients. It has been observed by many at Apex Investments that the commissions charged by
Milk 'em are 10-15% higher than those by other brokers. However, Cornelius has justified the higher costs by pointing to the extra revenue-flow from Milk 'em.
Cornelius has:
I. not violated any AIMR standards.
II. violated Standard III (C) - Disclosure of Conflicts to Employer.
III. violated Standard IV (B.8) - Disclosure of Referral Fees.
IV. violated Standard IV (B.1) - Fiduciary Duties.
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A. B. C. D.A
Cornelius is clearly in a situation representing a conflict of interests. His arrangement and non-disclosure of the arrangement are unfair to the current clients of
Apex and potential clients recommended by Milk 'em. They represent a violation of his fiduciary duties to the clients. By not informing senior management at Apex about the arrangement, he has also violated Standard III (B) - Disclosure of Conflicts to Employer.