MCQ Quiz

Question 1 of 21

Vega manages accounts for Osborn Charitable Trust pursuant to a written direction requiring that all trades be routed exclusively through Forsythe Securities, with Osborn's trustees having acknowledged in writing that Vega is not to seek best price and execution and that they understand the consequences. Vega continues routing through Forsythe without supplementing with other venues, even though a competitor broker could obtain marginally better fills. Is Vega's conduct most likely consistent with Standard III(A)?

Consistent with Standard III(A), because brokerage commissions belong to the firm once a client has authorized a specific broker in writing.
Consistent with Standard III(A), because a written client direction that acknowledges the best-execution consequences displaces the default obligation for those trades.
Inconsistent with Standard III(A), because the duty to seek best price and best execution may not be waived by any form of client instruction.

Question 2 of 21

Sulejman is a broker who executes unsolicited, client-directed trades for several high-net-worth investors. He provides no investment advice. A client instructs him to buy a thinly traded micro-cap at a specified limit price. Sulejman privately doubts the wisdom of the investment but executes the trade at the client's limit on the best available terms. Sulejman's conduct is most likely:

Inconsistent with Standard III(A), because loyalty and care require a broker to substitute his own sound judgment for evidently weak client instructions.
Consistent with Standard III(A), because the duty for an execution-only professional centers on skill and diligence in executing trades on the most favorable terms within the client's parameters.
Consistent with Standard III(A), because Standard III(A) does not apply to professionals who act solely as trade execution providers.

Question 3 of 21

Lundqvist, a South American equities analyst, directs trade flow to a small sponsoring broker that arranges research briefing trips paid via soft dollars. After the legitimate three-day research briefing, Lundqvist extends the trip by five additional days of personal sightseeing and pays the hotel expenses for those five days from client commission dollars. Lundqvist's conduct is most likely:

Consistent with Standard III(A), because the aggregate soft-dollar outlay remains within an accepted two-to-one ratio to hard-dollar research fees.
Inconsistent with Standard III(A), because the five additional days do not assist investment decision making, and their expenses therefore must not be paid with client commission dollars.
Consistent with Standard III(A), because soft-dollar use is a matter governed by firm policy rather than by Standard III(A).

Question 4 of 21

Akerman manages a company's defined-benefit pension plan. The sponsor's CFO directs Akerman to move plan assets into an illiquid affiliated strategy that would principally benefit the sponsor's balance-sheet presentation rather than plan participants. Akerman refuses and documents the refusal. His conduct is most likely:

Inconsistent with Standard III(A), because the plan sponsor engaged Akerman and is entitled to direct the investment of plan assets absent a contrary written policy.
Consistent with Standard III(A), because the duty of loyalty in pension management is owed to the ultimate beneficiaries rather than to the plan sponsor.
Consistent with Standard III(A), because the refusal is permissible whenever an allocation would reduce reported plan returns in the current quarter.

Question 5 of 21

Asante has previously disclosed her firm's proxy voting policy, which applies a cost-benefit analysis. For a small position representing a minor portfolio weight, she concludes the administrative cost of voting a routine procedural proxy would exceed any reasonably expected economic benefit and therefore does not vote. Her conduct is most likely:

Inconsistent with Standard III(A), because proxy voting is an integral part of the management of investments and every proxy must be voted.
Consistent with Standard III(A), because voting is required only where the matter involves a non-routine governance question such as a change in capitalization.
Consistent with Standard III(A), because a cost-benefit analysis may show that voting all proxies does not benefit the client, and the voting policy was disclosed.

Question 6 of 21

Marchetti routes an existing client's trades exclusively to Armitage Securities. Armitage has promised to steer new prospective clients to Marchetti in exchange. Marchetti does not inform the existing client of this arrangement and has not verified whether Armitage's execution is competitive with other venues. Marchetti's conduct is most likely:

Consistent with Standard III(A), because brokerage commissions are client assets and any referral-related benefit ultimately flows through to the client base.
Consistent with Standard III(A), so long as Marchetti records the arrangement in the firm's internal compliance log.
Inconsistent with Standard III(A), because the arrangement uses the client's brokerage without disclosure and without assurance of best price and best execution.

Question 7 of 21

Saylor operates a blended advisory and execution practice that is limited by firm policy to recommending in-house products. The limitation is disclosed in writing at the start of each client engagement. Saylor recommends an in-house balanced fund to a client for whom it is suitable, even though non-proprietary alternatives exist in the market. Saylor's conduct is most likely:

Consistent with Standard III(A), because the advisory limitation was disclosed at the outset and the recommendation aligns with the client's objectives and risk tolerance.
Consistent with Standard III(A), because in-house products are presumed suitable for all clients of the firm unless the client specifically objects in writing.
Inconsistent with Standard III(A), because recommending a proprietary product whenever a comparable external product exists is a per se conflict of interest.

Question 8 of 21

Unser's brother is a standard fee-paying client of Unser's advisory practice, managed under the firm's normal fee schedule and investment policy process. An IPO is suitable for several of Unser's clients, including his brother. After pro-rata allocation across all suitable accounts, the brother receives his proportional share alongside unrelated clients. Unser's conduct is most likely:

Inconsistent with Standard III(A), because any allocation of scarce IPO shares to a family member creates an appearance of conflict that should be avoided.
Consistent with Standard III(A), because a related-party account may receive an allocation only after every unrelated client has been filled in full.
Consistent with Standard III(A), because a family member's account that is a regular fee-paying account comparable to other client accounts must receive its proportional share alongside other suitable accounts.

Question 9 of 21

Duarte is the investment manager for a sponsor's defined-benefit pension plan. The sponsor's senior executives ask him to accumulate a significant position in the sponsor's own stock to defeat a pending hostile takeover. Duarte evaluates the long-term prospects of the company against the premium offered and the opportunities available elsewhere, concludes the purchase is not in the plan participants' interest, and declines. Duarte's conduct is most likely:

Consistent with Standard III(A), because the investment decision is made on its merits in light of the beneficiaries' interests rather than the sponsor's management preferences.
Consistent with Standard III(A), because a pension plan manager owes no duty to plan beneficiaries absent a separately documented fiduciary appointment.
Inconsistent with Standard III(A), because declining to assist the sponsor during a hostile bid breaches the duty of loyalty owed to the retaining company.

Question 10 of 21

Pereira manages a global financial sector mutual fund run to a published mandate. Novak, an individual investor in the fund, tells Pereira that recent volatility makes the fund's exposures unsuitable for Novak's personal risk profile and demands that Pereira rebalance the portfolio accordingly. Pereira declines and continues managing the fund per its mandate. Pereira's conduct is most likely:

Consistent with Standard III(A), because Pereira's duty is to invest in a manner consistent with the fund's stated mandate rather than the individual needs of any fund investor.
Consistent with Standard III(A), because no duty of loyalty, prudence, or care arises between a fund manager and persons who hold units of the fund for any purpose.
Inconsistent with Standard III(A), because the duty of loyalty extends to each fund investor in proportion to their holding in the fund.

Question 11 of 21

Wileman is the investment manager for the Milestone Company's pension plan. Milestone is the target of a hostile takeover. After being persuaded by Milestone's executives that defeating the bid will bring further corporate business to Wileman's firm, he purchases significant Milestone stock in the open market for the plan to defeat the bid, even though he believes the stock is overvalued. Wileman's conduct is most likely:

Inconsistent with Standard III(A), because purchasing a sponsor's own stock for a pension plan is prohibited regardless of the investment's merits.
Consistent with Standard III(A), because defeating the bid preserved the sponsor's continued existence and therefore benefited plan participants as beneficiaries.
Inconsistent with Standard III(A), because Wileman elevated his firm's business interests and sponsor management's preferences above the interests of the plan beneficiaries.

Question 12 of 21

Coltrane operates a blended advisory and execution practice that is limited by firm policy to recommending only in-house products. He does not disclose this limitation to new clients, preferring to discuss it only if a client specifically asks. He recommends in-house products that are individually suitable for each client. Coltrane's conduct is most likely:

Consistent with Standard III(A), because Coltrane recommends only products that are suitable for each client.
Inconsistent with Standard III(A), because advisory services and execution services may not be offered by the same person under the standard.
Inconsistent with Standard III(A), because the extent and limitations of the advisory arrangement must be disclosed to clients at the outset so they can decide whether to engage under those restrictions.

Question 13 of 21

Galanis manages a client portfolio under a written mandate that directs heavy concentration in the client's sector of industry expertise. Galanis maintains that concentration over time despite its elevated idiosyncratic risk, because the concentration is consistent with the account objectives. His conduct is most likely:

Inconsistent with Standard III(A), because prudence requires diversification notwithstanding any mandate that directs concentration.
Consistent with Standard III(A), because diversification is not required where it is inconsistent with the plan guidelines or the account objectives.
Consistent with Standard III(A), because the prudence obligation is satisfied whenever an investment falls within the client's permitted asset classes.

Question 14 of 21

Nakashima practices in a jurisdiction that imposes by statute a fiduciary duty on investment advisers that is materially stricter than the duties articulated in Standard III(A). In client dealings she complies with the stricter statutory duty even where Standard III(A) alone would accept less. Her conduct is most likely:

Inconsistent with Standard III(A), because the Code and Standards establish a single benchmark that cannot be displaced by local statutory rules.
Consistent with Standard III(A), because compliance with any bona fide local statute is itself a complete defense under the Code.
Consistent with Standard III(A), because Standard III(A) is not a substitute for legal or regulatory obligations and members must abide by the strictest applicable requirements.

Question 15 of 21

Vance, a trust officer, routes almost all trust account trades to Greco Securities, a market maker. In return, Greco gives Vance personally a lower buy price and a higher sell price on her personal trades than Greco gives to the trust accounts and to other investors. The trust accounts receive Greco's ordinary quotes. Vance's conduct is most likely:

Inconsistent with Standard III(A), because Vance is selecting the broker for the trust accounts on the basis of personal benefit and therefore placing her own interests ahead of her clients.
Inconsistent with Standard III(A), because a trust officer may not trade for a personal account in any security also held by trust clients.
Consistent with Standard III(A), because the trust accounts themselves still receive standard market-maker quotes from Greco.

Question 16 of 21

Hensley is retained by Carstairs Law LLP as an expert witness in a commercial dispute. During her testimony, her analysis supports a conclusion that is unfavorable to Carstairs' position, and she says so on the record. Hensley's conduct is most likely:

Inconsistent with Standard III(A), because Carstairs is the retaining client and Hensley owes Carstairs a duty of loyalty, prudence, and care.
Consistent with Standard III(A), because as an expert witness Hensley is bound by the standards of independence and objectivity rather than advisory loyalty to the law firm.
Consistent with Standard III(A), because the duty of loyalty, prudence, and care never applies to an expert witness engagement.

Question 17 of 21

Before quarterly performance statements are released, Okafor, a performance analyst, discovers an omitted trade whose correction would flip a client's reported gain into a loss and likely trigger termination of the firm by that client, which has previously placed the firm on a watch list. Okafor forwards the corrected figures to the external-facing team so they can be sent to the client. Okafor's conduct is most likely:

Inconsistent with Standard III(A), because the corrected statement should first be reviewed by senior management to assess the business consequences.
Consistent with Standard III(A), because performance analysts are not treated as having custody of client assets and therefore have no direct duties under Standard III(A).
Consistent with Standard III(A), because withholding information about errors is not in the best interest of the client, even if the correction may result in the firm's termination by the client.

Question 18 of 21

Rivera has effective control of client assets. She sends itemized quarterly statements listing funds, securities, debits, credits, and transactions; discloses the custodian bank where the assets are maintained and notes any movements; and maintains client assets segregated from firm assets and from other parties' assets. Her procedures are most likely:

Consistent with the compliance practices recommended under Standard III(A) for members with control of client assets.
Inconsistent with Standard III(A), because itemized statements must be provided on a monthly basis where the member has effective control of client assets.
Consistent with Standard III(A), because the recordkeeping requirements for custody attach only when the member is also the legal custodian rather than a third-party custodian.

Question 19 of 21

Vogel manages discretionary high-net-worth accounts under a fee arrangement whose economics are driven largely by trading commissions. The securities she selects for each client are appropriate and fall within the client's permitted asset classes, but the volume of trading for each account substantially exceeds what is necessary to accomplish the client's investment objectives, and she pushes the trading to clear a firm-imposed minimum commission level. Vogel's conduct is most likely:

Inconsistent with Standard III(A), because she is using client assets to benefit her firm and herself through trading that exceeds what the client's objectives require.
Inconsistent with Standard III(A), because compensation tied to trading commissions is a per se breach of the duty of loyalty.
Consistent with Standard III(A), because all trades remain within each client's approved asset-class parameters.

Question 20 of 21

Ferraro's sister is a standard fee-paying client whose investment policy statement indicates that a new IPO is a suitable investment. To avoid any appearance of preferential treatment, Ferraro allocates IPO shares pro-rata to his unrelated clients for whom the issue is also suitable but allocates no shares to his sister. Ferraro's conduct is most likely:

Consistent with Standard III(A), because refusing to allocate shares to a family account eliminates the appearance of a conflict of interest.
Inconsistent with Standard III(A), because a standard fee-paying family account must be treated like any other comparable client account and not be disadvantaged in the allocation.
Consistent with Standard III(A), because allocations involving relatives may be declined at the member's discretion as a firm-level matter.

Question 21 of 21

Whitman routes most of his firm's client trades to Kingsford Brokerage, which charges commissions above prevailing market rates and reciprocates by paying Whitman's firm's office rent. Whitman privately views Kingsford's research and execution as merely average. His conduct is most likely:

Inconsistent with Standard III(A), because Whitman is using client commissions for services that do not benefit the clients and is not obtaining best price and best execution.
Inconsistent with Standard III(A), because a soft-dollar arrangement with a broker that provides only average research is categorically prohibited under the standard.
Consistent with Standard III(A), because Kingsford's rent payments reduce firm overhead and therefore indirectly benefit the firm's clients.

Standard III(A) Duties to Clients - Loyalty, Prudence and Care

First Principles Thinking: directed brokerage and the best-execution default

First Principles Thinking: execution-only obligations under Standard III(A)

First Principles Thinking: soft dollars versus personal benefit

First Principles Thinking: identifying the client as the beneficiaries

First Principles Thinking: proxy voting under a disclosed cost-benefit policy

First Principles Thinking: directed brokerage as a reward for referrals

First Principles Thinking: blended advisory with disclosed product-set limitations

First Principles Thinking: fair treatment of family accounts at standard fees

First Principles Thinking: pension manager's duty runs to beneficiaries

First Principles Thinking: fund manager's duty runs to the mandate

First Principles Thinking: conflicted purchases for a pension plan

First Principles Thinking: disclosure of advisory limitations

First Principles Thinking: diversification within the mandate

First Principles Thinking: Code as a floor, law as the ceiling

First Principles Thinking: broker selection motivated by personal benefit

First Principles Thinking: identifying the client in an expert witness role

First Principles Thinking: client best interest versus firm business risk

First Principles Thinking: custody and recommended compliance practices

First Principles Thinking: trading volume versus client objectives

First Principles Thinking: related-party clients paying normal fees

First Principles Thinking: soft dollars for firm overhead