Chapter 5 Practice Question Answers

1. 1. Answer: A. A firm or professional may theoretically charge both to a client, but this fact needs to be disclosed to them in writing. Professionals are not required to choose the compensation arrangement that results in the lowest overall cost, as long as the compensation arrangement chosen is in the client’s best interest.
2. 2. Answer: B. While it is not the only measure that should be used to determine if a fee is fair, a client that is being charged substantially more than other similar clients is likely being charged an unreasonable fee. Since most clients would always prefer a lower fee, their opinion of their fee is not a great measure of its reasonableness. Likewise, the portion of a fee the IAR or agent keeps after his or her firm takes their cut and the length of a relationship are not good measures of whether or not a fee is ultimately fair and reasonable.
3. 3. Answer: A. Receiving compensation related to an account that wasn’t initially disclosed to a client requires a new disclosure of that fact in writing. Neither receiving broad-based bonuses that do not create conflicts of interest nor sharing compensation with another licensed professional would require a separate written disclosure. Splitting compensation with an unlicensed professional is prohibited in general, regardless of a disclosure being made.
4. 4. Answer: B. Anytime a professional receives services from a broker who also provides services to her clients, it is considered a soft-dollar arrangement and can result in a conflict of interest.
5. 5. Answer: C. Research services, software for analysis, and electronic data subscriptions are all acceptable for soft-dollar arrangements. Computer hardware, furniture, and clerical services are all prohibited in soft-dollar arrangements.
6. 6. Answer: D. Any compensation, commission, or fees charged by a firm or their professionals can create a conflict of interest. Even an account maintenance fee