Ethical Business Practices Flashcards

A CIC discovers that a colleague is front-running client orders by placing personal trades before executing client transactions. What is the most appropriate immediate action?

Answer: Report the behavior to compliance or a supervisor

Front-running is a serious ethical and legal violation that must be reported to compliance or a supervisor immediately.

Under the CFA Institute Code of Ethics, which of the following best describes 'material nonpublic information'?

Answer: Information that a reasonable investor would consider important and that has not been publicly disclosed

Material nonpublic information is information a reasonable investor would find important in an investment decision that has not been publicly released.

A client asks a CIC to recommend investments that are unsuitable for their risk profile but insists they want them. The counselor should:

Answer: Document the client's instructions and warn of the risks, then decide based on fiduciary duty

The counselor must document the client's wishes, communicate the risks clearly, and act in accordance with their fiduciary obligation.

Which practice violates the prohibition on market manipulation under investment ethics standards?

Answer: Coordinating with others to artificially inflate a security's trading volume

Coordinating trades to create artificial volume or price movements constitutes market manipulation, which is strictly prohibited.

A CIC's firm receives soft-dollar arrangements from a broker. Under ethical guidelines, these arrangements are permissible only if:

Answer: The research or services received benefit the clients whose commissions generated them

Soft-dollar arrangements are permissible when the goods or services received benefit the clients who generated the commissions.

When a CIC manages both discretionary and non-discretionary accounts, trade allocation must be:

Answer: Conducted in a fair and equitable manner across all client accounts

Ethical standards require that trade allocations be fair and equitable to all clients regardless of account type or size.

A CIC is asked to provide a performance record that cherry-picks only the best-performing time periods. This would violate which ethical principle?

Answer: Full and fair disclosure

Selectively presenting performance data that misrepresents overall results violates the principle of full and fair disclosure.