CIC Ethical Business Practices 3 — Questions and Answers
Question 1: A CIC receives a gift worth $250 from a vendor seeking to win the firm's brokerage business. Under typical ethics policies, the counselor should:
- Accept the gift since it is below the IRS reporting threshold
- Decline or report the gift per firm policy, as it may create a conflict of interest (Correct answer)
- Accept it and disclose only if the value exceeds $500
- Return it only if the vendor is awarded the business
Correct answer: Decline or report the gift per firm policy, as it may create a conflict of interest
Gifts from vendors seeking business create conflicts of interest and must be handled per firm gift policy, which typically requires declining or reporting.
Question 2: Which statement about the fiduciary standard is most accurate for a Certified Investment Counselor?
- It requires recommending only products the firm earns the highest fees on
- It obligates the counselor to act in the client's best interest above the counselor's own interests (Correct answer)
- It is equivalent to the suitability standard used by broker-dealers
- It applies only when managing pension funds
Correct answer: It obligates the counselor to act in the client's best interest above the counselor's own interests
The fiduciary standard requires that a CIC place the client's best interests ahead of their own or the firm's interests at all times.
Question 3: An investment counselor discovers a material error in a client's account statement that overstates portfolio value. The ethical response is to:
- Correct the error quietly without notifying the client
- Notify the client promptly and correct the error (Correct answer)
- Wait until the next statement cycle to make the correction
- Disclose the error only if the client specifically asks
Correct answer: Notify the client promptly and correct the error
Ethical standards require prompt disclosure and correction of errors that materially affect client account information.
Question 4: Under AIMR/CFA Institute performance presentation standards, composite performance results should include:
- Only accounts that outperformed the benchmark
- All fee-paying discretionary accounts that fit the composite definition, including terminated accounts (Correct answer)
- Only accounts with assets above a certain threshold
- Accounts selected at the discretion of the portfolio manager
Correct answer: All fee-paying discretionary accounts that fit the composite definition, including terminated accounts
Composites must include all actual, fee-paying discretionary portfolios meeting the composite definition, including those that have been terminated.
Question 5: A CIC who simultaneously serves as a trustee for a client's estate and as the investment counselor for that estate faces:
- A straightforward arrangement that simplifies decision-making
- A potential conflict of interest that must be disclosed and managed (Correct answer)
- A prohibited dual role under all circumstances
- No ethical issue as long as fees are reasonable
Correct answer: A potential conflict of interest that must be disclosed and managed
Serving in dual roles for the same client creates potential conflicts that must be disclosed and managed appropriately.
Question 6: Which of the following constitutes an appropriate use of client information obtained during the advisory relationship?
- Sharing client portfolio data with a third-party marketing firm to generate referrals
- Using aggregated, anonymized client data to improve portfolio modeling techniques (Correct answer)
- Disclosing individual client holdings to prospects as proof of the counselor's expertise
- Selling client contact information to affiliated businesses
Correct answer: Using aggregated, anonymized client data to improve portfolio modeling techniques
Using aggregated and anonymized client data to improve investment processes is appropriate; sharing identifiable client information without consent is not.
Question 7: A CIC learns through a mosaic of public information that a company's earnings will likely disappoint next quarter. Trading on this conclusion is:
- Prohibited because it is based on nonpublic analysis
- Permitted because the mosaic theory allows trading on conclusions from public information (Correct answer)
- Permitted only if the trade is placed through an outside broker
- Prohibited unless the information is also shared with all clients simultaneously
Correct answer: Permitted because the mosaic theory allows trading on conclusions from public information
The mosaic theory permits analysts to act on conclusions drawn from piecing together public information, as long as no material nonpublic information is used.
CIC Ethical Business Practices 3
A CIC receives a gift worth $250 from a vendor seeking to win the firm's brokerage business.
Under typical ethics policies, the counselor should: