CFA Level IEthical and Professional StandardsHard
A portfolio manager routes client trades through Broker X, paying $0.05 per share in commissions instead of the $0.03 per share available through comparable brokers, in exchange for extensive client entertainment (sporting event tickets and dinners) provided to the manager personally, with no investment research or execution benefit to clients. On a 500,000-share annual trade volume, what is the excess cost borne by clients, and has a violation occurred?
- A$10,000 excess cost; yes, this violates Standard III(A) because client brokerage was used for the manager's personal benefit
- B$25,000 excess cost; no violation, since brokerage relationships are a normal cost of doing business
- C$10,000 excess cost; no violation, because commissions are always at the manager's discretion
- D$15,000 excess cost; yes, but only Standard VI(C) Referral Fees is violated, not III(A)
Show answer & explanationAnswer & explanation
Correct answer: A. $10,000 excess cost; yes, this violates Standard III(A) because client brokerage was used for the manager's personal benefit
Excess cost = (0.05 − 0.03) × 500,000 = $0.02 × 500,000 = $10,000. Since client brokerage was directed to benefit the manager personally rather than the client (no research or better execution received), this violates the duty of loyalty, prudence, and care under Standard III(A), as client assets (via commissions) were misused.
Why the other options are wrong
- B. $25,000 is an incorrect calculation, and personal benefit does not qualify as normal business cost.
- C. The math is right but discretion does not excuse using client commissions for personal gain.
- D. The correct dollar figure and the correct standard (III(A)) are both misidentified here.
Client Brokerage / Soft Dollars (III(A))
Members must use client brokerage commissions only to benefit clients (e.g., research or execution quality), not for personal gain, as part of the duty of loyalty, prudence, and care.
- Directing trades for personal perks at client expense is a violation
- Best execution and research benefits are legitimate uses of soft dollars
- Excess commission cost = (paid rate − market rate) × share volume
Memory trick: Client's commission, client's benefit only.