CIC Client Communication and Disclosure 4 — Questions and Answers
Question 1: Under NASAA model rules, how often must an investment adviser deliver or offer to deliver its brochure to existing clients?
- Only upon initial engagement
- Annually, with an offer to deliver the full brochure (Correct answer)
- Every three years unless material changes occur
- Only when the client requests it
Correct answer: Annually, with an offer to deliver the full brochure
NASAA rules require advisers to deliver or offer to deliver their Form ADV brochure to existing clients annually.
Question 2: An elderly client shows signs of cognitive decline during account review meetings. The investment counselor's best course of action is to:
- Continue as normal and document nothing to avoid liability
- Note the observations, consult compliance, and consider involving a trusted contact person (Correct answer)
- Immediately freeze the account without client consent
- Transfer the account to a family member without further investigation
Correct answer: Note the observations, consult compliance, and consider involving a trusted contact person
Suspected diminished capacity should be documented and escalated through compliance channels, with consideration given to contacting the designated trusted contact.
Question 3: Which statement about risk disclosure in investment advisory communications is accurate?
- Generic boilerplate risk language satisfies all disclosure requirements
- Risk disclosure must be specific to the actual risks of the recommended strategy or product (Correct answer)
- Risk factors need only be disclosed in annual reports
- Only catastrophic risks need to be disclosed to clients
Correct answer: Risk disclosure must be specific to the actual risks of the recommended strategy or product
Meaningful risk disclosure must be specific and relevant to the actual investment risks the client faces, not generic or vague.
Question 4: A client has a discretionary account. How does this affect the communication requirements for individual trades?
- Pre-trade approval from the client is required for each transaction
- Post-trade confirmations and periodic account statements must still be provided (Correct answer)
- No communication is required since the adviser has full discretion
- Only annual summaries are needed for discretionary accounts
Correct answer: Post-trade confirmations and periodic account statements must still be provided
Even in discretionary accounts, trade confirmations and periodic statements must be delivered to keep clients informed.
Question 5: Under the SEC Marketing Rule, which type of testimonial from a client is now permissible for investment advisers?
- Any testimonial without restrictions since all are now banned
- Client testimonials, subject to specific disclosure requirements and conditions (Correct answer)
- Only testimonials from institutional clients
- Testimonials are still completely prohibited under the updated rule
Correct answer: Client testimonials, subject to specific disclosure requirements and conditions
The 2021 Marketing Rule permits client testimonials provided advisers include required disclosures about the compensation arrangement and that it is a testimonial.
Question 6: When a client experiences a significant life event such as divorce, the investment counselor should:
- Wait for the next scheduled review to update the file
- Proactively reach out to reassess the client's financial situation and update disclosures as needed (Correct answer)
- Assume the investment policy statement remains valid without review
- Refer all life event discussions to an attorney only
Correct answer: Proactively reach out to reassess the client's financial situation and update disclosures as needed
Life events can materially change a client's risk tolerance, time horizon, and objectives, requiring proactive reassessment and updated disclosures.
Question 7: The 'know your customer' (KYC) obligation in investment advising primarily serves to:
- Satisfy anti-money laundering requirements only
- Ensure recommendations are suitable and communications are tailored to the client's actual situation (Correct answer)
- Limit the adviser's legal liability in case of losses
- Fulfill tax reporting requirements for the IRS
Correct answer: Ensure recommendations are suitable and communications are tailored to the client's actual situation
KYC enables advisers to make suitable recommendations and communicate effectively by understanding each client's unique financial profile.
CIC Client Communication and Disclosure 4
Under NASAA model rules, how often must an investment adviser deliver or offer to deliver its brochure to existing clients?