IAA Standards of Practice Flashcards

According to the IAA Standards of Practice, which of the following is a core component of an investment adviser's fiduciary duty to a client?

Answer: Making full and fair disclosure of all material facts and conflicts of interest.

The IAA Standards of Practice emphasize that a core element of an investment adviser's fiduciary duty is the duty to make full and fair disclosure to clients of all material facts, including any potential conflicts of interest. This allows clients to make informed decisions. Guaranteeing returns is prohibited, placing the adviser's interests first is a breach of duty, and client information must be kept confidential.

A Certified Investment Counselor (CIC) at an IAA member firm is developing a new investment strategy for a high-net-worth client. The strategy involves significant investments in a technology fund managed by the CIC's brother-in-law. According to IAA Standards of Practice, what is the CIC's primary obligation in this scenario?

Answer: Disclose the familial relationship to the client and obtain their informed consent before proceeding.

The IAA Standards of Practice require advisers to avoid or disclose conflicts of interest. A familial relationship with a fund manager represents a material conflict of interest. The CIC must fully and fairly disclose this conflict to the client to allow the client to provide informed consent. Simply proceeding without disclosure or avoiding the investment without discussing it with the client would not meet the standard of care.

Which of the following is NOT explicitly listed as a general duty for an investment adviser under the IAA's Standards of Practice?

Answer: The duty to provide a written summary of all client meetings within 48 hours.

The IAA's Standards of Practice outline several key duties, including placing client interests first, having a reasonable basis for advice, and seeking best execution. While good practice, there is no specific IAA standard mandating a written summary of all client meetings within a 48-hour timeframe.

An investment advisory firm's marketing materials claim their proprietary trading algorithm has "never lost money." This statement is based on back-tested data over a limited period and does not reflect actual client returns. Which principle of the IAA Standards of Practice does this most directly violate?

Answer: Communications with Clients and the Public

The IAA Standards of Practice state that an investment adviser's oral and written statements to clients and the public must be accurate, balanced, and not misleading. Claiming the algorithm has "never lost money" based on limited back-testing is a misleading statement and a clear violation of the standards for communication.

A client informs their Certified Investment Counselor (CIC) about a confidential, unannounced merger that will significantly impact a publicly traded company's stock price. The CIC, recognizing this as material non-public information, should:

Answer: Refrain from trading in the security for any client and document the situation as per the firm's compliance policies.

The IAA Standards of Practice, in line with securities laws, prohibit the use of inside information. Acting on material non-public information is illegal and a severe ethical breach. The correct course of action is to refrain from trading and follow the firm's established policies and procedures for handling such information to prevent its misuse.

Under the IAA Standards of Practice, an investment adviser's duty of care encompasses which of the following responsibilities?

Answer: Providing investment advice that is suitable for the client based on their objectives and circumstances.

The duty of care, a component of the overall fiduciary duty, requires an adviser to have a reasonable basis for their investment advice and to ensure that advice is consistent with the client's objectives, strategies, and policies. This means providing suitable advice tailored to the individual client's situation.