Trust Fund is a reasonably successful investment management firm that has as its clients a few pension plans. Trust Fund executes all of its trades with Prime
Brokerage, an average brokerage firm. Prime Brokerage charges higher commissions than comparable players in the market but in return, provides investment research on the stocks which are part of the pension plan assets under Trust Fund's management. Portfolio managers at Trust Fund know about the close relationship on the golf links between Prime Brokerage's chief broker, Ralph Fiennes, and Trust Fund's CEO, Armis Arvanitis. They also believe that the research provided by Prime Brokerage, while not superlative, is quite useful and justifies the excess expense in brokerage. This "soft-dollars" practice is disclosed in Trust
Fund's official documents and contracts but Sisko, a freshly minted CFA charterholder, thinks that Trust Fund managers are in violation of the AIMR code of
Ethics. Which of the following is true?
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A. B. C. D.C
The practice of using "soft dollars" (i.e., the usage of brokerage for purchase of research services) is not forbidden by the AIMR code or securities laws, as long as they are commensurate with the services received and the practice is disclosed to the clients. In this case, there is no evidence that Trust Fund is overpaying
Prime Brokerage or that it is not seeking best price and execution. Hence, Sisko is mistaken and Trust Fund managers are not in violation of the AIMR code.
The scenario presented in the question involves Trust Fund, an investment management firm, and its relationship with Prime Brokerage, a brokerage firm. Trust Fund manages pension plans and executes trades through Prime Brokerage, which charges higher commissions compared to other brokerage firms. However, Prime Brokerage provides investment research on the stocks held in the pension plan assets managed by Trust Fund. Trust Fund's CEO, Armis Arvanitis, has a close relationship with Prime Brokerage's chief broker, Ralph Fiennes.
Sisko, a newly minted CFA charterholder, believes that Trust Fund's managers are in violation of the AIMR (Association for Investment Management and Research) code of Ethics. Let's analyze each answer choice to determine the accuracy of Sisko's claim:
A. Trust Fund's managers are violating Standard IV (B.8) - Disclosure of Referral Fees by not revealing the arrangement to pension plan beneficiaries.
Standard IV (B.8) of the AIMR code of Ethics relates to disclosure of referral fees. However, the scenario does not mention any referral fees being paid by Trust Fund to Prime Brokerage or the need for disclosure of such fees to pension plan beneficiaries. Therefore, this answer choice is not relevant to the situation described.
B. Trust Fund's managers are violating Standard IV (B.1) - Fiduciary Duties by not executing the trades at the lowest price available.
Standard IV (B.1) of the AIMR code of Ethics pertains to fiduciary duties. It requires investment professionals to act in the best interests of their clients and put client interests ahead of their own. While it is mentioned that Prime Brokerage charges higher commissions, it is not stated that Trust Fund is executing trades at prices that are not the lowest available. Therefore, this answer choice does not accurately reflect the violation, if any, in this scenario.
C. Sisko is not applying the AIMR code correctly. Trust Fund's managers are not violating any AIMR standards.
This answer choice suggests that Trust Fund's managers are not violating any AIMR standards. To evaluate its accuracy, we need to consider the information provided. The scenario describes a relationship where Trust Fund receives investment research from Prime Brokerage in exchange for paying higher commissions. This arrangement, commonly known as "soft dollars," allows Trust Fund to use the research to make investment decisions. However, soft dollars can be a controversial practice in the investment management industry.
To determine whether Trust Fund's managers are violating any AIMR standards, we need to assess if the practice of using soft dollars is permissible and disclosed appropriately. The scenario states that Trust Fund's soft-dollar arrangement with Prime Brokerage is disclosed in its official documents and contracts. If Trust Fund has disclosed the arrangement to its clients (pension plan beneficiaries) as required, and the beneficiaries are aware of the potential higher commissions paid for the research services, it may not be considered a violation of AIMR standards. However, without explicit information about the disclosure to pension plan beneficiaries, we cannot definitively conclude whether Trust Fund's managers are in compliance with AIMR standards.
D. Trust Fund's managers are violating Standard IV (B.3) - Fair Dealing by unfairly diverting funds from the plan assets to Prime Brokerage through higher fees.
Standard IV (B.3) of the AIMR code of Ethics relates to fair dealing. It emphasizes fair and equitable treatment of clients when allocating investment opportunities and charging fees. In this scenario, Trust Fund's managers are using Prime Brokerage's services, which come at a higher cost compared to other brokerage firms. If these higher fees result in an unfair diversion of funds from the plan assets to Prime Brokerage without providing commensurate value, it could be considered a violation of Standard IV (B.3).
However, the scenario states that