Professional Qualifications and Integrity Flashcards

A Certified Investment Counselor's (CIC) firm enters into a written agreement to pay a cash fee to a local accounting firm for referring new advisory clients. To comply with the Investment Advisers Act of 1940, the CIC's firm must ensure all of the following conditions are met EXCEPT:

Answer: The accounting firm is also a registered investment adviser.

Under the SEC's Marketing Rule (which replaced the old Cash Solicitation Rule, Rule 206(4)-3), a solicitor, such as an accounting firm in this scenario, is not required to be a registered investment adviser. However, the other conditions are mandatory: there must be a written agreement, the client must receive proper disclosure about the solicitor's role and compensation, and the adviser must have a reasonable basis to believe the client received the disclosures.

Under the safe harbor of Section 28(e) of the Securities Exchange Act of 1934, an investment adviser is permitted to use client commissions, or 'soft dollars,' to pay for which of the following?

Answer: Third-party research reports analyzing economic trends.

Section 28(e) provides a safe harbor for using client commissions to pay for eligible 'brokerage and research services'. Third-party research providing advice, analyses, or reports is a permissible use. Overhead expenses such as rent, salaries, generic computer hardware, and membership dues do not qualify as research or brokerage services under the safe harbor and must be paid for by the adviser out of its own funds.

A core tenet of professional integrity for a Certified Investment Counselor is maintaining professional competence. Which of the following actions BEST demonstrates an ongoing commitment to this principle?

Answer: Regularly participating in continuing education programs covering market trends, ethics, and regulatory updates.

Maintaining professional competence is an ongoing responsibility that requires continuous learning to stay current with evolving regulations, markets, products, and ethical standards. Regularly participating in continuing education is the most direct and effective way to fulfill this duty. Passing an initial exam is a one-time event, while publishing newsletters and holding a senior position do not, in themselves, guarantee that a counselor's knowledge remains current.

An advisory firm's performance presentation to a prospective client highlights the returns of its top five performing accounts from the past year, describing them as 'examples of our strategic success.' The firm manages over 500 accounts in that same strategy. This practice directly violates the principles of fair representation and full disclosure emphasized by which of the following?

Answer: The Global Investment Performance Standards (GIPS).

The Global Investment Performance Standards (GIPS) are ethical standards for investment performance presentation. A key principle of GIPS is to prevent 'cherry-picking,' which is the practice of showing only the best-performing portfolios. GIPS requires that all actual, fee-paying, discretionary portfolios be included in at least one composite to ensure a fair and complete representation of a firm's performance for a given strategy.

According to the Investment Advisers Act of 1940's 'Books and Records' Rule (Rule 204-2), a registered investment adviser must make and keep true, accurate, and current records of all of the following EXCEPT:

Answer: Audio recordings of all telephone conversations with clients.

SEC Rule 204-2 specifies numerous records that must be maintained, including financial journals, order memoranda, and client agreements. However, it does not mandate the recording of all telephone conversations with clients. While firms must retain certain communications (like emails and texts relating to advice), a blanket requirement to record all calls is not part of the rule.

A Certified Investment Counselor has the authority to vote proxies for client accounts. In a contentious board of directors election for a company held in client portfolios, the counselor's firm has a significant business relationship with one of the candidates. To fulfill their fiduciary duty, the counselor's primary obligation is to:

Answer: Vote the proxies in a manner solely consistent with the best economic interest of the clients.

An investment adviser's fiduciary duty requires that they vote proxies in a manner consistent with the client's best interest. The adviser must not subrogate the client's interests to their own, which includes prioritizing firm business relationships. The duty of care requires the adviser to monitor corporate events and vote the proxies; simply abstaining may not be in the client's best interest. The primary duty is to make a determination based on the client's best economic interest.