CIC Client Communication and Disclosure 3 — Questions and Answers
Question 1: An investment counselor fails to disclose that they receive 12b-1 fees from a mutual fund they recommend. This most likely violates:
- The suitability standard only
- The fiduciary duty to disclose all material conflicts of interest (Correct answer)
- ERISA contribution limits
- FINRA margin requirements
Correct answer: The fiduciary duty to disclose all material conflicts of interest
12b-1 fees create a conflict of interest that must be disclosed to clients as a material fact under the fiduciary standard.
Question 2: Which element is NOT typically required in a written investment policy statement (IPS) delivered to a client?
- Investment objectives and time horizon
- Specific individual stock picks for the next quarter (Correct answer)
- Risk tolerance parameters
- Liquidity needs and constraints
Correct answer: Specific individual stock picks for the next quarter
An IPS establishes strategic guidelines and constraints, not specific tactical security selections.
Question 3: When is a 'tombstone' advertisement typically used in the securities industry?
- To announce the death of a registered investment adviser
- To provide limited factual information about a securities offering without soliciting buyers (Correct answer)
- To disclose the termination of a client relationship
- To advertise past performance results prominently
Correct answer: To provide limited factual information about a securities offering without soliciting buyers
A tombstone ad provides basic factual details of a completed or pending offering and is exempt from full prospectus delivery requirements.
Question 4: A client requests that all communications be sent to their spouse's email address. The counselor should:
- Comply immediately without documentation
- Obtain written authorization from the client before redirecting communications (Correct answer)
- Decline, as communications must always go directly to the account owner
- Report the request to the compliance department as suspicious
Correct answer: Obtain written authorization from the client before redirecting communications
Redirecting account communications requires documented client authorization to protect privacy and regulatory compliance.
Question 5: Which SEC rule governs the delivery of prospectuses in electronic format?
- Rule 482
- Rule 15c2-12
- Rule 172 and the SEC's e-delivery guidance (Correct answer)
- Rule 10b-5
Correct answer: Rule 172 and the SEC's e-delivery guidance
Rule 172 and the SEC's electronic delivery guidance allow prospectus delivery via electronic means when clients have consented.
Question 6: A client's investment counselor uses social media to post performance results. Under SEC advertising rules, the counselor must:
- Only post gross returns to simplify the message
- Include required disclosures and ensure results are presented fairly without cherry-picking (Correct answer)
- Obtain FINRA approval for each post before publishing
- Limit posts to educational content with no performance data
Correct answer: Include required disclosures and ensure results are presented fairly without cherry-picking
The SEC's Marketing Rule (Rule 206(4)-1) requires that performance results in advertisements include required disclosures and not be presented in a misleading manner.
Question 7: A counselor switches a client from a fee-based account to a commission-based account. What is the primary disclosure obligation?
- No disclosure is needed if the client's returns improve
- The counselor must disclose how the compensation structure change affects the client's costs and the adviser's incentives (Correct answer)
- Only the back-office operations team needs to be notified
- Disclosure is required only if the client is a qualified purchaser
Correct answer: The counselor must disclose how the compensation structure change affects the client's costs and the adviser's incentives
Changing compensation structures is a material change requiring full disclosure of how it affects costs and potential conflicts.
CIC Client Communication and Disclosure 3
An investment counselor fails to disclose that they receive 12b-1 fees from a mutual fund they recommend.
This most likely violates: