CIC Ethical Business Practices 4 — Questions and Answers
Question 1: A CIC is offered a speaking engagement at a conference sponsored by a company whose securities the counselor actively recommends to clients. The most ethical course of action is to:
- Decline the engagement to avoid any appearance of conflict
- Accept and disclose the sponsorship relationship to the audience and to clients (Correct answer)
- Accept but make no mention of the sponsorship
- Accept only if compensated below market rates
Correct answer: Accept and disclose the sponsorship relationship to the audience and to clients
Accepting the engagement is permissible if the counselor discloses the sponsorship relationship to maintain transparency and manage conflicts.
Question 2: Which of the following is NOT considered a component of the duty of loyalty owed by a CIC to clients?
- Placing client interests before personal interests
- Avoiding actions that benefit the firm at the client's expense
- Guaranteeing a minimum rate of return on investments (Correct answer)
- Disclosing all material conflicts of interest
Correct answer: Guaranteeing a minimum rate of return on investments
Guaranteeing investment returns is not part of the duty of loyalty; it is also prohibited because no investment outcome can be guaranteed.
Question 3: Under the Investment Advisers Act of 1940, which action requires prior written client consent?
- Changing the investment strategy within the same risk category
- Assigning the advisory contract to another adviser (Correct answer)
- Adjusting the portfolio's asset allocation by 5%
- Replacing one large-cap fund with another large-cap fund
Correct answer: Assigning the advisory contract to another adviser
Assignment of an advisory contract to another adviser requires prior written client consent under the Investment Advisers Act of 1940.
Question 4: An investment counselor's written investment policy statement (IPS) for a client should primarily serve to:
- Limit the counselor's legal liability in case of poor performance
- Document the client's objectives, constraints, and guidelines to govern portfolio management (Correct answer)
- Describe the fee structure and billing procedures
- Outline the firm's investment philosophy and process
Correct answer: Document the client's objectives, constraints, and guidelines to govern portfolio management
The IPS documents the client's specific investment objectives, risk tolerance, time horizon, and constraints to guide all portfolio decisions.
Question 5: Which scenario best illustrates a violation of the standard of independence and objectivity?
- A CIC updates a price target after receiving new earnings guidance
- A CIC changes a sell recommendation to a buy after a company threatens to remove the firm from its approved broker list (Correct answer)
- A CIC disagrees with a consensus analyst rating and issues a contrarian recommendation
- A CIC declines to cover a company because it lacks sufficient information
Correct answer: A CIC changes a sell recommendation to a buy after a company threatens to remove the firm from its approved broker list
Changing a recommendation due to threats or pressure from a covered company violates independence and objectivity standards.
Question 6: A CIC who is also a director of a public company must handle trades in that company's securities by:
- Trading freely since board membership provides legitimate access to information
- Restricting trades to pre-approved windows and pre-clearing through compliance (Correct answer)
- Avoiding all personal investment in securities for the duration of the directorship
- Disclosing trades to clients but not to regulators
Correct answer: Restricting trades to pre-approved windows and pre-clearing through compliance
Board members must pre-clear trades and trade only during approved windows to avoid insider trading violations.
Question 7: When a CIC suspects that a client may be using their account for money laundering, the counselor's obligation under anti-money-laundering (AML) rules is to:
- Confront the client directly and demand an explanation
- File a Suspicious Activity Report (SAR) with FinCEN without tipping off the client (Correct answer)
- Close the account immediately and send a certified letter explaining why
- Consult a personal attorney before taking any action
Correct answer: File a Suspicious Activity Report (SAR) with FinCEN without tipping off the client
AML regulations require filing a SAR with FinCEN when suspicious activity is identified, and the counselor must not alert the client (tipping off is prohibited).
CIC Ethical Business Practices 4
A CIC is offered a speaking engagement at a conference sponsored by a company whose securities the counselor actively recommends to clients.
The most ethical course of action is to: