CIC Client Communication and Disclosure 5 — Questions and Answers
Question 1: A client disagrees with how the investment counselor described a phone conversation in the written follow-up memo. The best practice is to:
- Ignore the client's objection and retain the original memo
- Amend the memo to reflect an agreed-upon record and document the correction process (Correct answer)
- Delete the original memo to avoid disputes
- Refuse to alter any written record under any circumstances
Correct answer: Amend the memo to reflect an agreed-upon record and document the correction process
Written records should accurately reflect communications; corrections should be made transparently with documentation of the amendment process.
Question 2: Which standard governs how investment advisers must communicate when recommending a rollover from a 401(k) to an IRA?
- Only ERISA Section 404(c) safe harbor applies
- DOL's fiduciary standards require disclosure of costs, alternatives, and conflicts when recommending rollovers (Correct answer)
- No special disclosure is required as rollovers are not investment recommendations
- FINRA suitability rules exclusively govern rollover recommendations
Correct answer: DOL's fiduciary standards require disclosure of costs, alternatives, and conflicts when recommending rollovers
Under DOL guidance, rollover recommendations trigger fiduciary duties requiring disclosure of costs, alternatives, and any conflicts of interest.
Question 3: An investment counselor sends a client a report containing a material error. Upon discovering the error, the counselor must:
- Issue a corrected report promptly and notify the client of the error (Correct answer)
- Correct the error in the next scheduled report without special notification
- Only correct the error if the client identifies it first
- File an amended report with the SEC before notifying the client
Correct answer: Issue a corrected report promptly and notify the client of the error
Material errors require prompt correction and immediate client notification to ensure the client has accurate information for decision-making.
Question 4: Which best describes the purpose of a client's 'trusted contact person' designation under FINRA Rule 4512?
- To grant the contact person trading authority over the account
- To allow the firm to contact someone if there are concerns about the client's health or suspected financial exploitation (Correct answer)
- To designate a beneficiary for the account upon the client's death
- To provide a backup email address for account statements
Correct answer: To allow the firm to contact someone if there are concerns about the client's health or suspected financial exploitation
FINRA Rule 4512 requires firms to make reasonable efforts to obtain a trusted contact to reach if the firm has concerns about the client's well-being or potential exploitation.
Question 5: An investment counselor presents a hypothetical portfolio illustration to a prospect. Under SEC rules, this illustration must:
- Show only the best-case scenario to generate interest
- Include clear disclosure that results are hypothetical and not indicative of actual past or future performance (Correct answer)
- Be filed with the SEC before sharing with the prospect
- Omit any risk disclosures to keep the presentation concise
Correct answer: Include clear disclosure that results are hypothetical and not indicative of actual past or future performance
Hypothetical performance illustrations must be clearly labeled as such and include disclosures about limitations and the difference from actual results.
Question 6: A client requests all future communications exclusively via text message. The counselor should:
- Agree immediately as the client's communication preference controls
- Evaluate whether text messaging satisfies regulatory record-keeping requirements before agreeing (Correct answer)
- Refuse entirely, as text messaging is prohibited for client communications
- Use text messaging only for non-sensitive information without client consent
Correct answer: Evaluate whether text messaging satisfies regulatory record-keeping requirements before agreeing
Advisers must assess whether a communication channel allows for proper record retention before adopting it, as regulators require all client communications to be retained.
Question 7: The term 'wrap fee' in a client disclosure document refers to:
- A fee charged for physically wrapping investment certificates for safekeeping
- A bundled fee covering advisory, brokerage, and administrative services in a single charge (Correct answer)
- An additional charge applied when a portfolio exceeds performance benchmarks
- Fees paid to third-party research providers on behalf of the client
Correct answer: A bundled fee covering advisory, brokerage, and administrative services in a single charge
A wrap fee is an all-inclusive charge that bundles advisory, trading, and custody costs, which must be clearly disclosed so clients understand what is included.
CIC Client Communication and Disclosure 5
A client disagrees with how the investment counselor described a phone conversation in the written follow-up memo.
The best practice is to: