CIC Ethics & Professional Standards 4 — Questions and Answers
Question 1: A CIC is leaving a firm and wants to contact clients at the new firm. Which action is ethically permissible?
- Taking a copy of the client list before resigning
- Using publicly available information to reconnect with former clients (Correct answer)
- Sending solicitation letters to clients using information memorized from records
- Delaying resignation until downloading all client contact data
Correct answer: Using publicly available information to reconnect with former clients
Using publicly available information to contact former clients is permissible, but taking or using proprietary client records from a former employer is not.
Question 2: When must a CIC update a client's Investment Policy Statement (IPS)?
- Only when the client requests a change in writing
- Whenever there is a material change in the client's financial situation or objectives (Correct answer)
- At a fixed schedule of every five years
- Only after a major market correction affects the portfolio
Correct answer: Whenever there is a material change in the client's financial situation or objectives
The IPS should be updated whenever a material change occurs in the client's circumstances, goals, or risk tolerance to ensure ongoing suitability.
Question 3: A CIC firm's compliance manual prohibits acceptance of entertainment valued over $150 per event. A broker invites the CIC to a $300 sports event. The CIC should:
- Accept if the tickets are split between two events to stay under the limit
- Decline the invitation to comply with firm policy (Correct answer)
- Accept since sports events are exempt from entertainment limits
- Ask a colleague to attend instead to technically avoid violating the rule
Correct answer: Decline the invitation to comply with firm policy
Firm compliance policies must be followed, and circumventing them through technical workarounds still violates the spirit and intent of the rule.
Question 4: A CIC is hired to manage a pension fund. The plan sponsor instructs the CIC to invest solely in the sponsor's own company stock. The CIC should:
- Comply since the plan sponsor has ultimate authority over the portfolio
- Comply only if the allocation does not exceed 10% of the total portfolio
- Refuse if the concentration creates undue risk to plan beneficiaries (Correct answer)
- Accept the instruction but hedge the position through derivatives
Correct answer: Refuse if the concentration creates undue risk to plan beneficiaries
As a fiduciary to plan beneficiaries, the CIC must refuse instructions that create imprudent concentration risk, even when they come from the plan sponsor.
Question 5: What is the primary purpose of maintaining client confidentiality under CIC ethical standards?
- To comply with marketing regulations limiting data sharing
- To protect clients from unauthorized disclosure of their personal and financial information (Correct answer)
- To prevent competitors from learning about successful investment strategies
- To limit the CIC's liability in the event of a data breach
Correct answer: To protect clients from unauthorized disclosure of their personal and financial information
Client confidentiality protects the client's privacy and trust, which is fundamental to the advisor-client relationship.
Question 6: A CIC's personal investment in a startup is now being considered for inclusion in a client's portfolio. Which step is mandatory before proceeding?
- Obtain three independent valuations of the startup
- Disclose the personal investment to the client and obtain written consent (Correct answer)
- Sell the personal investment before recommending it to clients
- Have the firm's investment committee approve the recommendation
Correct answer: Disclose the personal investment to the client and obtain written consent
Personal investment in a recommended security creates a conflict of interest that must be disclosed to the client and consented to before proceeding.
Question 7: Under CIC standards, which of the following constitutes 'soft dollar' abuse?
- Using commission credits to purchase research directly benefiting client portfolios
- Using excess commissions to pay for the advisor's personal travel and entertainment (Correct answer)
- Directing a portion of commissions toward third-party research services
- Disclosing soft dollar arrangements annually in the ADV filing
Correct answer: Using excess commissions to pay for the advisor's personal travel and entertainment
Soft dollar arrangements are permissible only when the benefits directly serve clients; using them for personal expenses is a clear violation of fiduciary duty.
CIC Ethics & Professional Standards 4
A CIC is leaving a firm and wants to contact clients at the new firm.
Which action is ethically permissible?