CIC Ethics & Professional Standards 2 — Questions and Answers
Question 1: A CIC is managing a client's retirement portfolio and discovers the client's son works at a company the CIC is considering purchasing shares in. What is the most appropriate action?
- Purchase the shares without disclosure since the relationship is indirect
- Disclose the potential conflict to the client and obtain consent before trading (Correct answer)
- Avoid the investment entirely to eliminate any appearance of conflict
- Consult only internal compliance without informing the client
Correct answer: Disclose the potential conflict to the client and obtain consent before trading
Full disclosure of potential conflicts of interest to the client and obtaining informed consent is required before proceeding.
Question 2: Under CIC ethical standards, which action best exemplifies the duty of loyalty?
- Recommending products that generate the highest commission
- Placing client interests ahead of personal financial gain (Correct answer)
- Prioritizing firm revenue goals when selecting investments
- Sharing client performance data with prospective clients as marketing
Correct answer: Placing client interests ahead of personal financial gain
Duty of loyalty requires placing client interests above the advisor's own financial interests at all times.
Question 3: A CIC learns through a personal friendship that a CEO plans to announce strong quarterly earnings next week. Trading on this information would violate which standard?
- Suitability standard
- Prohibition on insider trading (Correct answer)
- Recordkeeping requirements
- Fee disclosure rules
Correct answer: Prohibition on insider trading
Trading on material non-public information obtained through personal relationships constitutes insider trading, which is strictly prohibited.
Question 4: Which of the following is NOT considered a reasonable basis for an investment recommendation under CIC standards?
- Quantitative analysis of historical returns
- A client's specific risk tolerance and investment horizon
- A rumor heard at an industry conference (Correct answer)
- Fundamental analysis of a company's financial statements
Correct answer: A rumor heard at an industry conference
Recommendations must be based on diligent research and analysis, not unverified rumors or speculative information.
Question 5: A CIC who simultaneously serves as a director on a public company's board and manages accounts that trade that company's stock must:
- Resign from the board immediately
- Disclose the directorship to clients and implement information barriers (Correct answer)
- Limit trades in that company to only sell orders
- Report the conflict to regulators but not to clients
Correct answer: Disclose the directorship to clients and implement information barriers
Serving as a director creates a significant conflict requiring full disclosure to clients and implementation of information barriers to prevent misuse of material non-public information.
Question 6: When a CIC's firm requires the use of a preferred custodian that charges higher fees than alternatives, the CIC must:
- Accept the arrangement without disclosure since it is firm policy
- Disclose the arrangement and any additional costs to affected clients (Correct answer)
- Refuse the firm's directive to protect client interests
- Charge lower advisory fees to offset the higher custodian costs
Correct answer: Disclose the arrangement and any additional costs to affected clients
Clients must be informed of any arrangements that increase their costs, even when those arrangements are firm-mandated.
Question 7: A CIC receives a gift worth $400 from a broker-dealer who executes trades for the CIC's clients. According to ethical standards, the CIC should:
- Accept the gift as it is under $500 and does not require disclosure
- Decline or disclose the gift to the employer and document it (Correct answer)
- Return the gift only if it was received during an active transaction
- Accept the gift but donate it to charity to avoid any appearance of impropriety
Correct answer: Decline or disclose the gift to the employer and document it
Gifts from service providers must be disclosed to the employer and documented to avoid compromising objectivity, regardless of the dollar threshold.
CIC Ethics & Professional Standards 2
A CIC is managing a client's retirement portfolio and discovers the client's son works at a company the CIC is considering purchasing shares in.
What is the most appropriate action?