CIC Client Communication and Disclosure 2 — Questions and Answers
Question 1: Under SEC Regulation Best Interest (Reg BI), which disclosure document must broker-dealers provide to retail customers?
- Form ADV Part 2
- Form CRS (Customer Relationship Summary) (Correct answer)
- Form U4
- Form 13F
Correct answer: Form CRS (Customer Relationship Summary)
Reg BI requires broker-dealers to provide retail customers with a Form CRS summarizing the relationship and services offered.
Question 2: A client asks why their portfolio underperformed the benchmark. The investment counselor's most appropriate response is to:
- Blame market conditions without specifics
- Provide a written attribution analysis explaining factor-level performance drivers (Correct answer)
- Redirect the conversation to future opportunities
- Assure the client the benchmark is irrelevant
Correct answer: Provide a written attribution analysis explaining factor-level performance drivers
Transparent attribution analysis fulfills the counselor's duty to communicate clearly and honestly about portfolio performance.
Question 3: Which of the following best describes 'informed consent' in the context of investment advisory relationships?
- A client signing any document provided by the adviser
- A client agreeing to terms after receiving full, clear disclosure of material facts (Correct answer)
- Verbal acknowledgment of investment risks only
- Regulatory approval of an investment strategy
Correct answer: A client agreeing to terms after receiving full, clear disclosure of material facts
Informed consent requires the client to have received and understood all material information before agreeing to a course of action.
Question 4: An investment counselor discovers a conflict of interest after an advisory relationship has already begun. The counselor should:
- Disclose the conflict promptly and obtain the client's consent to continue (Correct answer)
- Wait until the annual review to mention it
- Resolve the conflict internally without telling the client
- Transfer the account to another adviser without explanation
Correct answer: Disclose the conflict promptly and obtain the client's consent to continue
Newly discovered conflicts must be disclosed promptly so the client can decide whether to continue the relationship.
Question 5: Which communication practice is specifically required when an adviser changes its fee schedule?
- Posting the new schedule on the company website only
- Notifying affected clients in writing with sufficient advance notice (Correct answer)
- Informing clients verbally at the next meeting
- Filing a report with the SEC with no client notification needed
Correct answer: Notifying affected clients in writing with sufficient advance notice
Material changes to fee schedules require advance written notice to clients so they can evaluate the impact.
Question 6: A client with low financial literacy asks about derivatives exposure in their portfolio. The counselor should:
- Use technical jargon to demonstrate expertise
- Explain the concept in plain language appropriate to the client's knowledge level (Correct answer)
- Decline to discuss complex instruments
- Refer the client to the prospectus without further explanation
Correct answer: Explain the concept in plain language appropriate to the client's knowledge level
Effective disclosure requires tailoring communication to the client's level of understanding to ensure genuine comprehension.
Question 7: Under FINRA rules, which statement about customer account statements is correct?
- Statements must be sent quarterly at minimum for accounts with activity (Correct answer)
- Statements are only required annually unless the client requests otherwise
- Monthly statements are mandatory regardless of account activity
- Statements must be delivered in paper format only
Correct answer: Statements must be sent quarterly at minimum for accounts with activity
FINRA requires account statements at least quarterly, and monthly for accounts with transaction activity.
CIC Client Communication and Disclosure 2
Under SEC Regulation Best Interest (Reg BI), which disclosure document must broker-dealers provide to retail customers?