CMFAS RES 2B Ethics, Codes & Standards for Derivatives Dealing question: even though the brokerage charges higher commissions than others

CMFAS RES 2BEthics, Codes & Standards for Derivatives Dealing

A hedge fund routes most of its commission-heavy trades through one brokerage because the senior executives of the two firms are close, even though the brokerage charges higher commissions than others. In return the brokerage absorbs some of the fund's overhead expenses. According to the guide this arrangement:

A A breach of the best-interests duty: execution was not the best, and the executives served themselves
B Is a legitimate soft-dollar arrangement, provided it is disclosed in the fund's annual report
C Is a breach only if the brokerage is a related corporation of the fund under the Companies Act
D Is acceptable, because the fund's clients are high net worth individuals who can monitor costs

Show the answer and explanation

Answer: A. A breach of the best-interests duty: execution was not the best, and the executives served themselves

Section 5.4.1.3(i)(a) example (DigiFund and Johnson Inc.): directing business to a higher-cost broker in exchange for benefits to the firm disregards fiduciary duties to clients; the executives colluded to generate business among themselves. Takeaway: brokerage selection must serve the client's execution, not the firm's relationships.

Common mistake

Client wealth does not dilute the duty of best interest.

Practise more RES 2B Ethics, Codes & Standards for Derivatives Dealing questions

Exam-style questions with worked answers, then full timed mocks. Free to start.

Start practising →

Study note: Ethics, Codes & Standards for Derivatives Dealing CMFAS RES 2Bpractice questions & mock exams

Related CMFAS RES 2B questions

A hedge fund's stop-loss on a commodity future is triggered at 2.15pm in a fast, thin market. The dealer fills the whole order immediately at an average price eight ticks worse than the best bid shown a moment earlier, rather than working it for a better price. The client complains that the firm breached its best execution duty. How should the compliance officer assess the complaint?A dealer quoting electronic FX prices applies 'last look' — a final check before accepting a client's trade request. Under the FX Global Code, last look An individual client meets the accredited-investor financial thresholds. Before the dealer can treat them as an AI, it must

Build a daily practice habit — a few exam-style questions a day, with worked answers. Free to start.

Start practising →

Original study material mapped to the public CMFAS RES 2B syllabus. Unofficial, not endorsed by MAS or IBF. Verify figures and rules against current guidance before relying on them.