CFS Ethics & Professional Responsibility 5 — Questions and Answers
Question 1: An advisor rolls a client's low-cost 401(k) into a higher-cost IRA mainly to earn fees, without considering the plan's advantages. This is a concern because:
- Rollover recommendations must be in the client's best interest and compare costs and services (Correct answer)
- 401(k) plans have no fees
- IRAs cannot hold mutual funds
- Rollovers are always prohibited
Correct answer: Rollover recommendations must be in the client's best interest and compare costs and services
Regulators require advisors to compare fees, services, and investment options before recommending a rollover, and to put the client's interest first.
Question 2: Which practice best manages a conflict of interest when a firm pays higher commissions on its proprietary funds?
- Recommend proprietary funds by default
- Avoid all non-proprietary funds
- Hide the commission structure
- Disclose the incentive and recommend proprietary funds only when they are in the client's best interest (Correct answer)
Correct answer: Disclose the incentive and recommend proprietary funds only when they are in the client's best interest
Conflicts must be disclosed and either mitigated or eliminated so that compensation does not put the firm's interest ahead of the client's.
Question 3: Before recommending a fund, a representative must understand its risks and features well enough to know it is suitable for at least some investors. This is:
- Quantitative suitability
- Best execution
- Reasonable-basis suitability (Correct answer)
- Customer-specific suitability
Correct answer: Reasonable-basis suitability
Reasonable-basis suitability requires reasonable diligence to understand a product before recommending it to anyone.
Question 4: Under FINRA Rule 3220, the annual limit on gifts a representative may give to an employee of another firm in relation to that firm's business is:
- $500 per person per year
- $300 per person per year (Correct answer)
- $100 per person per year
- No limit if disclosed
Correct answer: $300 per person per year
FINRA amended Rule 3220 in 2025 to raise the gift limit from $100 to $300 per person per year.
Question 5: An advisor guarantees a client that a stock fund will not lose value over the next year. This is:
- Acceptable if the fund is diversified
- Allowed if put in writing
- A prohibited guarantee against loss (Correct answer)
- Acceptable for retirees
Correct answer: A prohibited guarantee against loss
Representatives may not guarantee a customer against loss in connection with securities transactions.
Question 6: Which action is required when an advisor finds an error in a client's order that caused a loss?
- Move the loss to another client's account
- Charge the client for the correction
- Leave it in place and hope the market recovers
- Correct it promptly at the firm's expense and document it (Correct answer)
Correct answer: Correct it promptly at the firm's expense and document it
Trade errors must be corrected promptly so the client is made whole, and the loss can never be moved to another client.
Question 7: A representative uses discretion to trade a client's account without written authorization. This violates:
- Regulation S-P
- Rule 22c-1 forward pricing
- Rules requiring prior written discretionary authority (Correct answer)
- Breakpoint disclosure rules
Correct answer: Rules requiring prior written discretionary authority
Discretionary trading needs the customer's prior written authorization and the firm's approval of the account.
CFS Ethics & Professional Responsibility 5
An advisor rolls a client's low-cost 401(k) into a higher-cost IRA mainly to earn fees, without considering the plan's advantages.
This is a concern because: