Ethical Business Practices Flashcards

A Certified Investment Counselor (CIC) learns of material nonpublic information about a company whose stock is held in many client portfolios. According to the CFA Institute Standards of Professional Conduct, which of the following actions is the most appropriate?

Answer: Maintain the current client positions and refrain from any trading based on the information.

Acting on material nonpublic information (insider trading) is a serious ethical and legal violation. The correct course of action is to not trade on the information or cause others to trade on it. The counselor must wait until the information becomes public before making any trading decisions.

Which of the following BEST describes the fiduciary duty of a Certified Investment Counselor (CIC)?

Answer: A legal and ethical obligation to act in the best interest of the client, placing the client's interests above their own.

The core of a CIC's ethical responsibility is the fiduciary duty, which legally and ethically obligates the counselor to prioritize the client's best interests above all others, including their own or their firm's. While suitability is a component, the fiduciary standard is a higher obligation.

A CIC is creating a new marketing brochure for their firm. According to the IAA Standards of Practice, all communications with clients and the public must be:

Answer: Accurate, balanced, and not misleading.

The Investment Adviser Association (IAA) Standards of Practice require that all oral and written statements to clients, prospects, or the media be accurate, balanced, and not misleading. This ensures fair and honest representation of the firm's services and capabilities.

An investment counselor is offered an all-expenses-paid luxury trip by a mutual fund company whose funds the counselor frequently recommends to clients. Accepting this offer could create a conflict of interest that compromises the counselor's:

Answer: Independence and objectivity.

Accepting significant gifts or lavish entertainment can impair, or appear to impair, a counselor's independence and objectivity. This could lead to recommendations based on the counselor's personal benefit rather than the client's best interests. The CFA Institute Standards of Professional Conduct strictly regulate the acceptance of gifts to prevent such conflicts.

A client with a very low risk tolerance insists on investing a significant portion of their retirement portfolio in a highly volatile technology startup. The Certified Investment Counselor has explained the risks extensively, but the client is adamant. What is the most ethical course of action for the CIC?

Answer: Execute the trade as instructed but document the client's insistence and the counselor's opposing recommendation.

While a CIC has a duty to act in the client's best interest, the client ultimately retains control over their assets. The most ethical action is to ensure the client is fully informed of the risks and that the recommendation against the trade is clear. Documenting this conversation and the client's directive protects both the client and the counselor and demonstrates the counselor fulfilled their duty to inform, even if the client chose to ignore the advice.

Under the Investment Advisers Act of 1940, registered investment advisers are required to adopt a Code of Ethics. Which of the following is a mandatory provision of this code?

Answer: Provisions requiring 'access persons' to report their personal securities holdings and transactions.

The SEC rule under the Investment Advisers Act of 1940 mandates that an adviser's Code of Ethics must address personal trading by advisory personnel to manage conflicts of interest. This includes requiring 'access persons' (employees with access to nonpublic information) to report their personal securities transactions and holdings.