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SS1 - Reading 3 Notes

SS1 - Reading 3 Notes

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Published by: cfalevel1 on Jan 19, 2010
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Soft Dollar Standards
LOS 3.a
Define “soft dollar” arrangements and state the general principles of the Soft Dollar Standards. 
Soft Dollar -
Research / benefits reimbursed to the client, or the client’s manager, by thebroker in exchange for directing trades to the broker.
Soft dollar practices
– use of brokerage by investment manager to obtain products /services to aid manager in investment decision making process
– compensation given to broker as payment for trade execution services
– includes
(generated by broker) and
third party 
Mixed use research
– research that can be used for both the investment managementprocess and general management
 Agency trade
– transaction that involves payment of a commission
Principal trade
– transaction that involves a discount or a spread Brokerage is always property of client - we're using clients money after all.Investment managers have duty to:
Obtain best execution
Minimize transaction costs
Use client brokerage to benefit clients LOS 3.b -
Critique company soft dollar practices and policies. 
Requirements and RecommendationsI. General – Required
Soft dollar practices must benefit client, whose interests always come first
Allocation of client brokerage – must not be based on amount of client referralsinvestment manager receives from broker 
Re: mutual funds, investment manager’s client is the fund. Fund’s board shouldset policies on broker selection 
II. Relationships with Clients – Required
§Disclose to client that manager may participate in soft dollar arrangements prior todoing so
II. Relationships with Clients Recommended
OK to use brokerage from agency trades to obtain research – client shouldreceive some benefit
OK to use client brokerage obtained from principal trades to benefit other clientaccounts, as long as disclosed 
III. Selection of Brokers – Required:
When evaluating / selecting brokers, consider trade execution capabilities
III. Selection of Brokers – Recommended:
When evaluating best execution, consider broker’s financial responsibility, rate or spread involved, range of services 
IV. Evaluation of Research – Required:
§Must meet definition – must assist manager in investment decision makingprocess, not in management of the firm§Must benefit client§Basis must be documented§Principal trades – research must benefit other client accounts, with disclosure &permissionIf this criteria is not met, investment manager must pay for the research§Mixed use research – make reasonable allocation of cost based on expectedusage. Evaluate annually 
V. Client – Directed Brokerage – Required:
Do not use brokerage from another client to pay for products / servicespurchased under any client directed brokerage agreement 
V. Client – Directed Brokerage – Recommended:
Manager: Disclose duty of best execution
Disclose to client that client’s selection may adversely affect execution andadequacy of research
Structure arrangements – no commitment of portion of brokerage to single broker  
VI. Disclosure – Required:
§Disclose policies in plain language§Disclose types of third-party research received§To comply with Soft Dollar Standards, send client statement of practices annually§Disclose availability of more info regarding arrangements upon request 
VI. Disclosure – Recommended:
§On client request, provide description of product / service obtained through clientbrokerage generated by client’s account

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