AIFA AIFA Ethics & Professional Standards 1 — Questions and Answers
Question 1: Under the CFA Institute Code of Ethics, which duty takes precedence when an investment professional's personal interests conflict with those of a client?
- Client interests always come first (Correct answer)
- Personal interests may be balanced with client interests
- Employer interests take precedence over client interests
- Regulatory compliance overrides client duties
Correct answer: Client interests always come first
The CFA Code of Ethics requires that client interests always take precedence over an investment professional's personal or employer interests.
Question 2: An AIFA candidate learns material nonpublic information about a company from a corporate insider. What is the correct course of action?
- Trade immediately to benefit clients
- Disclose the information broadly before trading
- Refrain from trading and consult compliance (Correct answer)
- Use the information only for discretionary accounts
Correct answer: Refrain from trading and consult compliance
Using material nonpublic information violates insider trading laws; the candidate must refrain from trading and report the situation to the compliance department.
Question 3: Which of the following best describes the duty of loyalty under professional ethics standards for investment professionals?
- Acting in the employer's best financial interest at all times
- Placing client interests above personal and employer interests (Correct answer)
- Maximizing portfolio returns regardless of risk tolerance
- Following all instructions from senior management without question
Correct answer: Placing client interests above personal and employer interests
Loyalty requires prioritizing client interests above both personal gain and employer directives, ensuring advice and actions serve the client's best interests.
Question 4: A portfolio manager discovers that a colleague has been front-running client orders. What is the ethical obligation of the manager?
- Ignore it if it does not affect their own clients
- Confront the colleague privately and take no further action
- Report the misconduct to supervisors or compliance (Correct answer)
- Wait to see if the behavior continues before reporting
Correct answer: Report the misconduct to supervisors or compliance
Front-running is a serious ethical violation, and investment professionals have a duty to report known misconduct to appropriate supervisors or compliance personnel.
Question 5: What does 'suitability' require of a US investment adviser when making recommendations?
- Recommending the highest-returning product available
- Ensuring the recommendation aligns with the client's financial situation, objectives, and risk tolerance (Correct answer)
- Offering only SEC-registered products
- Providing the lowest-cost option in every product category
Correct answer: Ensuring the recommendation aligns with the client's financial situation, objectives, and risk tolerance
Suitability requires that any recommendation be appropriate for the client's specific financial situation, investment objectives, time horizon, and risk tolerance.
Question 6: Which standard requires investment professionals to make 'reasonable and diligent efforts' to obtain client financial information before providing advice?
- Standard of Care
- Know Your Customer (KYC) (Correct answer)
- Prudent Investor Rule
- Best Execution Standard
Correct answer: Know Your Customer (KYC)
Know Your Customer (KYC) requirements obligate advisers to gather sufficient client information before making any investment recommendation.
AIFA AIFA Ethics & Professional Standards 1
Under the CFA Institute Code of Ethics, which duty takes precedence when an investment professional's personal interests conflict with those of a client?