CES Ethics & Legal Compliance 2 — Questions and Answers
Question 1: A CES professional learns that a colleague is recommending unsuitable estate planning products to elderly clients to earn higher commissions. What is the ethically required response?
- Ignore it as an internal firm matter
- Report the misconduct to the appropriate regulatory or firm compliance authority (Correct answer)
- Confront the colleague privately and take no further action
- Avoid working with that colleague in the future
Correct answer: Report the misconduct to the appropriate regulatory or firm compliance authority
Ethical standards require practitioners to report known misconduct that harms clients, not merely avoid it personally.
Question 2: Under UPIA (Uniform Prudent Investor Act), a trustee must balance which two primary considerations when managing trust investments?
- Tax minimization and income maximization
- Risk and return in the context of the trust's overall purpose (Correct answer)
- Liquidity and growth at all times
- Beneficiary preferences and market trends
Correct answer: Risk and return in the context of the trust's overall purpose
UPIA requires trustees to balance risk and return relative to the trust's purposes and beneficiaries' needs.
Question 3: A trustee who fails to diversify trust assets without a specific reason to do so may be held liable for which type of breach?
- Breach of the duty of impartiality
- Breach of the prudent investor standard (Correct answer)
- Breach of the duty to account
- Breach of the duty to inform
Correct answer: Breach of the prudent investor standard
The prudent investor standard includes a duty to diversify unless circumstances of the trust dictate otherwise.
Question 4: When a CES practitioner becomes aware of a client's diminished mental capacity, what is the primary ethical obligation?
- Immediately terminate the client relationship
- Continue normal service while documenting capacity concerns and consulting with appropriate parties (Correct answer)
- Transfer the account to a family member immediately
- Halt all account activity until a court determines capacity
Correct answer: Continue normal service while documenting capacity concerns and consulting with appropriate parties
Practitioners must document concerns, consider involving qualified parties (e.g., healthcare professionals or attorneys), and act in the client's best interest.
Question 5: Which ethical principle prohibits a CES professional from using confidential client information for personal financial gain?
- Duty of loyalty (Correct answer)
- Duty of competence
- Duty of diligence
- Duty of communication
Correct answer: Duty of loyalty
The duty of loyalty requires professionals to place client interests first, prohibiting self-dealing with confidential information.
Question 6: A trust document is silent on whether the trustee can hire a professional investment manager and pay management fees from trust assets. What governs this situation?
- The trustee must seek court approval each time
- The trustee cannot delegate investment functions under any circumstances
- State trust law and the prudent investor standard generally permit delegation to qualified agents (Correct answer)
- The beneficiaries must unanimously approve each delegation
Correct answer: State trust law and the prudent investor standard generally permit delegation to qualified agents
Modern trust law under UPIA and UTC permits trustees to delegate investment functions to qualified professionals under a prudent investor framework.
Question 7: Under the attorney-client privilege concept as applied to estate planning, which party generally holds the privilege in a trust after the grantor's death?
- The attorney who drafted the documents
- The successor trustee on behalf of the trust (Correct answer)
- The beneficiaries collectively
- The court overseeing probate
Correct answer: The successor trustee on behalf of the trust
After death, the successor trustee generally holds the privilege for communications related to trust administration.
CES Ethics & Legal Compliance 2
A CES professional learns that a colleague is recommending unsuitable estate planning products to elderly clients to earn higher commissions.
What is the ethically required response?