AIFA AIFA Ethics & Professional Standards 2 — Questions and Answers
Question 1: Which of the following actions violates the 'fair dealing' standard in investment management?
- Distributing research reports simultaneously to all clients
- Allocating IPO shares proportionally across eligible accounts
- Providing hot IPO shares preferentially to large-fee clients (Correct answer)
- Charging different fee structures to institutional vs. retail clients
Correct answer: Providing hot IPO shares preferentially to large-fee clients
Fair dealing prohibits selective allocation of investment opportunities based on client profitability or fee generation, requiring equitable treatment across all clients.
Question 2: A financial adviser receives a gift from a vendor that could influence their objectivity. Under US ethical standards, what is the most appropriate response?
- Accept the gift if its value is under $100
- Disclose the gift to the employer and follow the firm's gift policy (Correct answer)
- Return the gift only if the vendor is a publicly traded company
- Accept the gift because it is a normal business courtesy
Correct answer: Disclose the gift to the employer and follow the firm's gift policy
Gifts from vendors that could compromise objectivity must be disclosed to the employer, and the adviser must comply with the firm's established gift and entertainment policies.
Question 3: Under the Investment Advisers Act of 1940, registered investment advisers in the US owe clients which standard of care?
- Suitability standard
- Fiduciary standard (Correct answer)
- Best interest standard only for retirement accounts
- Reasonable basis standard
Correct answer: Fiduciary standard
SEC-registered investment advisers are held to a fiduciary standard, requiring them to act in the client's best interest at all times, which is stricter than the suitability standard.
Question 4: What is 'churning' in the context of investment management ethics?
- Rebalancing a portfolio too conservatively
- Excessive trading in a client account to generate commissions (Correct answer)
- Switching clients between similar mutual funds
- Overconcentrating a portfolio in one sector
Correct answer: Excessive trading in a client account to generate commissions
Churning refers to excessive trading in a client account primarily to generate commissions for the broker, violating fiduciary and suitability obligations.
Question 5: An analyst publishes a research report with a buy recommendation. Unknown to readers, the analyst owns shares in the company. Which ethical standard is violated?
- Prudent Investor Rule
- Disclosure of conflicts of interest (Correct answer)
- Fair Dealing Standard
- Material Nonpublic Information Standard
Correct answer: Disclosure of conflicts of interest
Investment professionals must disclose any ownership interests or conflicts of interest that could bias their research or recommendations.
Question 6: Which of the following best describes the 'prudent investor rule' as applied to US fiduciaries?
- Investing only in government bonds to avoid risk
- Managing a portfolio with the care and skill of a prudent person seeking reasonable return with appropriate risk (Correct answer)
- Maximizing returns regardless of portfolio risk
- Following client instructions even when clearly imprudent
Correct answer: Managing a portfolio with the care and skill of a prudent person seeking reasonable return with appropriate risk
The prudent investor rule requires fiduciaries to manage assets with the care, skill, and caution that a prudent person would exercise, balancing risk and return appropriately.
AIFA AIFA Ethics & Professional Standards 2
Which of the following actions violates the 'fair dealing' standard in investment management?