Discuss Finra Series-63 Exam Topic 5 Question 24

MoeMoney Investment Advisers uses the services of two broker-dealers exclusively when it executes trades for its clients' accounts. The larger of the two broker-dealers provides MoeMoney with research from its analyst department in return for the business and also serves as the custodian for some of MoeMoney's clients' accounts. The smaller of the two broker-dealers picks up the utility bill for MoeMoney. MoeMoney is careful to disclose this form of ''soft dollar'' compensation to its clients.

Is it in violation of any securities laws?

AYes. Investment advisers are prohibited from receiving any soft dollar compensation whatsoever.

BNo. Investment advisers are entitled to receive soft dollar compensation from broker-dealers with which it has a relationship as long as they disclose this to their clients.

CYes. Although investment advisers are permitted to receive some forms of soft dollar compensation from broker-dealers with which it has a relationship, such as research or custodial services, other forms of soft dollar compensation, including the payment of overhead expenses,are prohibited.

DYes. Investment advisers are required to use more than two broker-dealers when executing trades on its clients' accounts.

Suggested Answer: C

Yes. MoeMoney is in violation of securities laws in accepting payment of its utility bills for directing business to the smaller broker-dealer because this form of soft dollar compensation is prohibited. Some forms of soft dollar compensation are permitted, such as the research and custodial services MoeMoney receives from the larger broker-dealer, but the payment of any office overhead expense is not. Allowed soft dollar compensation is deemed to benefit both the investment adviser and its clients; soft dollars that seem to benefit only the adviser are not allowed.

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17 comments · newest first

Roslyn 2 months ago

But how can we trust them? Soft dollars can be tricky.

Coral 2 months ago

I agree with B. Disclosure protects clients.

Chana 2 months ago

D seems extreme. Two broker-dealers should be enough if managed well.

Dong 2 months ago

I lean towards C. Some soft dollar compensation is okay, but not for overhead.

Filiberto 2 months ago

But what about the utility bill? That feels off.

Craig 2 months ago

Option B makes sense. Transparency is key.

An 3 months ago

I disagree. As long as they disclose it, it's fine.

Krissy 3 months ago

I think it's a violation. Soft dollar compensation shouldn't happen at all.

Desmond 3 months ago

No way, they should be using more than two brokers!

Ariel 3 months ago

I think they can only use it for research and custodial services.

Samuel 3 months ago

Wait, can they really use soft dollars for utility bills? That seems sketchy.

Glory 3 months ago

Totally agree, as long as they’re transparent about it!

Jacquline 4 months ago

Soft dollar compensation is allowed if disclosed, right?

Deja 4 months ago

I recall that there are limits on how many broker-dealers you can use, but I don’t think it’s a strict rule about only using two. So, I doubt option D is right.

Novella 4 months ago

I practiced a question similar to this, and I think the key is whether the compensation is disclosed. I’m thinking B could be correct, but I’m a bit hesitant.

Reuben 4 months ago

I’m not entirely sure, but I feel like there are specific rules about what types of soft dollar compensation are allowed. Maybe option C is the right answer?

Ruthann 4 months ago

I remember discussing soft dollar arrangements in class, and I think they can be acceptable if disclosed properly. So, I’m leaning towards option B.

Finra Series-63 Exam - Topic 5 Question 24 Discussion