IACCP Examination Study Guide |Questions And
Answers Verified 100% Correct.
Obtain 3 to 5 quotes (actual transactions and/or indicative), and consider the quality of
the broker, nature and basis of quote, relationship with quoting broker, spread
between/among quotes received (not tossing highest/lowest) - ANSWER-How could an
advisor obtain reasonably accurate securities valuation and what should be considered
in doing so?
Clearly defined and understandable - ANSWER-What is of the most importance for
written policies and procedures for securities valuation?
Consistency of disclosures is crucial and should include: 1) Transparency of valuation
process; 2) Risk disclosure (particularly if holdings include illiquid or difficult-to-price);
and 3) Firm's conflicts of interest and measures to mitigate those.
Types of investors and disclosure materials include:
Registered Investment Companies: Prospectus and Statement of Additional Information
(SAI)
Private Investment Funds: Private placement memorandum (PPM)
Advisory clients: Form ADV Part 2 (if adviser recommends or places accounts in
difficult-to-price investments - ANSWER-What should a securities valuation disclosure
include, and in what materials would the various investor types receive such disclosure?
Consistent and clear written procedures for:
Process for securities pricing or, when not available, process for determining fair and
accurate valuation which could include established committee to perform valuation,
identify methodologies and factors, establish procedures and regularly review and test
or third party valuation service
Written valuation policies should identify all parties involved in valuation process,
appropriate, reasonable and consistent valuation methodologies (including sources of
prices for different types of investments, priority of sources, and how sources are used)
for the various types of liquid illiquid investments; Procedures for use and oversight of
pricing service or other 3rd parties; Procedures to manage potential conflicts of interest;
Documentation requirements; Procedures to prevent, detect and correct violations;
Regular review and updating of process
Disclosures - ANSWER-What should a consistent securities valuation are some
procedures that should be consistent as related to securities valuation?
,Client must not be disadvantaged and must be made whole. Adviser should bear costs
of errors and cannot use soft dollars (brokerage commissions) to do so. -
ANSWERWhen correcting trade errors, what is required per Lerner No-Action letter?
1) Written procedures for correcting trade errors (which should name who to make
aware of potential errors)
2) Form ADV disclosure of what firm will not correct
3) Trade Error log
4) Document how losses are calculated
Other considerations: If possible, person who caused error should not be responsible
for resolving. Periodic reviews of trading practices to confirm procedures are being
followed. - ANSWER-Trade Error related documentation
Arrangements where products/services (other than execution of securities transactions)
obtained by adviser from/through BD in exchange for advisers directing trades to BD -
ANSWER-Define Soft Dollars
Allows use of client commissions to purchase eligible brokerage and research services -
ANSWER-Explain how the Safe Harbor Rule applies to Soft Dollars
Proprietary research, Third party research (investment adviser, broker, research
provider), Commission sharing arrangements (recapture programs) - ANSWER-Types
of Soft Dollar Arrangements
Soft Dollar Test
1) SAFE HARBOR ELIGIBLE: Does product/service meet eligibility criteria of Safe
Harbor Rule?
2) LAWFUL & APPROPRIATE INVESTMENT DECISION-MAKING
RESPONSIBILITIES ASSISTANCE: Does it provide lawful and appropriate assistance
in performance of adviser's investment decision-making?
3) GOOD FAITH DETERMINATION: Can adviser make good faith determination that
commissions paid reasonable in relation to value of products/services provided by
BD
(either in terms of particular transaction or advisers overall jop w/ respect to
discretionary accounts)? - ANSWER-What is the Three-Step Test?
SEC interpretations, Safe Harbor applicable to Soft Dollars when:
Products/Services provide lawful and appropriate assistance to money manager
in performance of investment decision-making responsibilities; Mixed-use:
Three-Step Test
Only when services obtained in relation to commissions paid to BD acting in agency
capacity, commissions on fixed-income securities effected on agency basis -
, ANSWER-What guidance has SEC released specific to Safe Harbor Rule and Soft
Dollars?
Product/service obtained with client commissions has both eligible and non-eligible
uses
Requirements: 1) reasonable allocation of cost according to use; 2) maintain allocation
B&R; and 3) clearly disclose soft dollar practices and provide details info to clients upon
request - ANSWER-Define Mixed-Use (soft dollars) and the applicable requirements
RESEARCH: Advice, Analysis, Reports, and Services provided by BD before
communication of transaction order.
(EXs: data services, market research products/services, securities portfolio analysis
software, seminars/conferences, discussions with research analysts, meetings with
corporate execs to obtain oral reports on co's performance, rating services)
BROKERAGE (newer 'Temporal' Standard): activities required to effect transaction
(beginning order transmittal to BD through conclusion of transaction clearance and
settlement); also functions incidental thereto ('Incidental'); and functions required by
SEC or SRO rules.
(Exs Temporal: communications services related to execution, clearing, settlement of
securities; dedicated lines between BD and adviser's/third-party vendor's order
management system; order transmittal services; trading software; software providing
algorithmic trading strategies
EXs Incidental: clearance, settlement & short-term custody services in connection w/
trades effected by broker; post-trade matching of trade info; electronic communication
of allocation instructions between institutions and BDs - ANSWER-Define "brokerage
and research services"
CLIENT-REQUESTED: adviser instructed to direct all or portion of brokerage
transactions to specified BD
ADVISER-REQUIRED Adviser does not take discretion to determine broker or
commission on trade-by-trade basis and requires all clients direct use of specific BD for
all trades
Requirements include: 1) reasonably disclose to client disadvantages of arrangement
and any conflicts of interest; 2) written policies and procedures; 3) - ANSWER-Define
Directed Brokerage and requirements
Inability to negotiate commissions, to obtain volume discount, and potential conflicts of
interest such as referral of clients from brokerage firm - ANSWER-What are the
disadvantages or limitations of Directed Brokerage arrangement?
SOFT DOLLARS: arrangement for product/service from or through BD in exchange for
adviser directing trades to BD
Answers Verified 100% Correct.
Obtain 3 to 5 quotes (actual transactions and/or indicative), and consider the quality of
the broker, nature and basis of quote, relationship with quoting broker, spread
between/among quotes received (not tossing highest/lowest) - ANSWER-How could an
advisor obtain reasonably accurate securities valuation and what should be considered
in doing so?
Clearly defined and understandable - ANSWER-What is of the most importance for
written policies and procedures for securities valuation?
Consistency of disclosures is crucial and should include: 1) Transparency of valuation
process; 2) Risk disclosure (particularly if holdings include illiquid or difficult-to-price);
and 3) Firm's conflicts of interest and measures to mitigate those.
Types of investors and disclosure materials include:
Registered Investment Companies: Prospectus and Statement of Additional Information
(SAI)
Private Investment Funds: Private placement memorandum (PPM)
Advisory clients: Form ADV Part 2 (if adviser recommends or places accounts in
difficult-to-price investments - ANSWER-What should a securities valuation disclosure
include, and in what materials would the various investor types receive such disclosure?
Consistent and clear written procedures for:
Process for securities pricing or, when not available, process for determining fair and
accurate valuation which could include established committee to perform valuation,
identify methodologies and factors, establish procedures and regularly review and test
or third party valuation service
Written valuation policies should identify all parties involved in valuation process,
appropriate, reasonable and consistent valuation methodologies (including sources of
prices for different types of investments, priority of sources, and how sources are used)
for the various types of liquid illiquid investments; Procedures for use and oversight of
pricing service or other 3rd parties; Procedures to manage potential conflicts of interest;
Documentation requirements; Procedures to prevent, detect and correct violations;
Regular review and updating of process
Disclosures - ANSWER-What should a consistent securities valuation are some
procedures that should be consistent as related to securities valuation?
,Client must not be disadvantaged and must be made whole. Adviser should bear costs
of errors and cannot use soft dollars (brokerage commissions) to do so. -
ANSWERWhen correcting trade errors, what is required per Lerner No-Action letter?
1) Written procedures for correcting trade errors (which should name who to make
aware of potential errors)
2) Form ADV disclosure of what firm will not correct
3) Trade Error log
4) Document how losses are calculated
Other considerations: If possible, person who caused error should not be responsible
for resolving. Periodic reviews of trading practices to confirm procedures are being
followed. - ANSWER-Trade Error related documentation
Arrangements where products/services (other than execution of securities transactions)
obtained by adviser from/through BD in exchange for advisers directing trades to BD -
ANSWER-Define Soft Dollars
Allows use of client commissions to purchase eligible brokerage and research services -
ANSWER-Explain how the Safe Harbor Rule applies to Soft Dollars
Proprietary research, Third party research (investment adviser, broker, research
provider), Commission sharing arrangements (recapture programs) - ANSWER-Types
of Soft Dollar Arrangements
Soft Dollar Test
1) SAFE HARBOR ELIGIBLE: Does product/service meet eligibility criteria of Safe
Harbor Rule?
2) LAWFUL & APPROPRIATE INVESTMENT DECISION-MAKING
RESPONSIBILITIES ASSISTANCE: Does it provide lawful and appropriate assistance
in performance of adviser's investment decision-making?
3) GOOD FAITH DETERMINATION: Can adviser make good faith determination that
commissions paid reasonable in relation to value of products/services provided by
BD
(either in terms of particular transaction or advisers overall jop w/ respect to
discretionary accounts)? - ANSWER-What is the Three-Step Test?
SEC interpretations, Safe Harbor applicable to Soft Dollars when:
Products/Services provide lawful and appropriate assistance to money manager
in performance of investment decision-making responsibilities; Mixed-use:
Three-Step Test
Only when services obtained in relation to commissions paid to BD acting in agency
capacity, commissions on fixed-income securities effected on agency basis -
, ANSWER-What guidance has SEC released specific to Safe Harbor Rule and Soft
Dollars?
Product/service obtained with client commissions has both eligible and non-eligible
uses
Requirements: 1) reasonable allocation of cost according to use; 2) maintain allocation
B&R; and 3) clearly disclose soft dollar practices and provide details info to clients upon
request - ANSWER-Define Mixed-Use (soft dollars) and the applicable requirements
RESEARCH: Advice, Analysis, Reports, and Services provided by BD before
communication of transaction order.
(EXs: data services, market research products/services, securities portfolio analysis
software, seminars/conferences, discussions with research analysts, meetings with
corporate execs to obtain oral reports on co's performance, rating services)
BROKERAGE (newer 'Temporal' Standard): activities required to effect transaction
(beginning order transmittal to BD through conclusion of transaction clearance and
settlement); also functions incidental thereto ('Incidental'); and functions required by
SEC or SRO rules.
(Exs Temporal: communications services related to execution, clearing, settlement of
securities; dedicated lines between BD and adviser's/third-party vendor's order
management system; order transmittal services; trading software; software providing
algorithmic trading strategies
EXs Incidental: clearance, settlement & short-term custody services in connection w/
trades effected by broker; post-trade matching of trade info; electronic communication
of allocation instructions between institutions and BDs - ANSWER-Define "brokerage
and research services"
CLIENT-REQUESTED: adviser instructed to direct all or portion of brokerage
transactions to specified BD
ADVISER-REQUIRED Adviser does not take discretion to determine broker or
commission on trade-by-trade basis and requires all clients direct use of specific BD for
all trades
Requirements include: 1) reasonably disclose to client disadvantages of arrangement
and any conflicts of interest; 2) written policies and procedures; 3) - ANSWER-Define
Directed Brokerage and requirements
Inability to negotiate commissions, to obtain volume discount, and potential conflicts of
interest such as referral of clients from brokerage firm - ANSWER-What are the
disadvantages or limitations of Directed Brokerage arrangement?
SOFT DOLLARS: arrangement for product/service from or through BD in exchange for
adviser directing trades to BD
