Which of the following is true?

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?
A . Trust Fund’s managers are violating Standard IV (
B . 8) – Disclosure of Referral Fees by not revealing the arrangement to pension plan beneficiaries.
C . Trust Fund’s managers are violating Standard IV (
D . 1) – Fiduciary Duties by not executing the trades at the lowest price available.
E . Sisko is not applying the AIMR code correctly. Trust Fund’s managers are not violating any AIMR standards.
F . Trust Fund’s managers are violating Standard IV (
G . 3) – Fair Dealing by unfairly diverting funds from the plan assets to Prime Brokerage through higher fees.

View Answer

Answer: C

Explanation:

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.