CIC Fiduciary Duty and Responsibilities 3 — Questions and Answers
Question 1: What distinguishes a fiduciary standard from a suitability standard in investment advisory relationships?
- The fiduciary standard requires only that investments be appropriate for the client's profile
- The fiduciary standard requires the advisor to act in the client's best interest, not merely recommend suitable products (Correct answer)
- The suitability standard is stricter and applies only to registered investment advisors
- There is no meaningful legal difference between the two standards
Correct answer: The fiduciary standard requires the advisor to act in the client's best interest, not merely recommend suitable products
The fiduciary standard is higher, requiring the advisor to place the client's best interest above all else, while the suitability standard only requires recommendations be appropriate.
Question 2: A CIC managing a trust account engages in excessive trading that generates commissions but provides no benefit to the trust. This practice is known as:
- Scalping
- Churning (Correct answer)
- Front-running
- Window dressing
Correct answer: Churning
Churning refers to excessive trading in a client's account primarily to generate commissions, which is a breach of fiduciary duty.
Question 3: Under the Investment Advisers Act of 1940, registered investment advisors owe clients which standard of conduct?
- Suitability standard
- Fiduciary standard (Correct answer)
- Best execution standard only
- Reasonable care standard
Correct answer: Fiduciary standard
The SEC has long interpreted the Investment Advisers Act of 1940 to impose a fiduciary duty on registered investment advisors.
Question 4: A fiduciary who delegates investment management responsibilities to a sub-advisor is:
- Fully relieved of all fiduciary liability once delegation occurs
- Still responsible for the prudent selection and monitoring of the sub-advisor (Correct answer)
- Required to obtain written client consent before any delegation
- Prohibited from delegation under fiduciary law
Correct answer: Still responsible for the prudent selection and monitoring of the sub-advisor
Delegation does not eliminate fiduciary responsibility; the fiduciary must prudently select and continually monitor any delegated parties.
Question 5: Which of the following is an example of a breach of the duty of care by an investment counselor?
- Recommending a diversified equity portfolio to a young client with high risk tolerance
- Failing to conduct adequate due diligence before recommending a complex structured product (Correct answer)
- Charging a fee that is clearly disclosed in the advisory agreement
- Following client instructions to hold a concentrated position
Correct answer: Failing to conduct adequate due diligence before recommending a complex structured product
Failing to perform adequate due diligence before recommending investments violates the duty of care, which requires competent analysis.
Question 6: An investment counselor receives research reports from a broker in exchange for directing client trades to that broker. This arrangement is known as:
- Revenue sharing
- Soft dollar arrangement (Correct answer)
- Commission recapture
- Payment for order flow
Correct answer: Soft dollar arrangement
Soft dollar arrangements involve receiving research or other benefits in exchange for client brokerage, which must be disclosed as a conflict of interest.
Question 7: When must a fiduciary update a client's Investment Policy Statement (IPS)?
- Only when the client requests a change
- Whenever there is a material change in the client's financial situation, goals, or risk tolerance (Correct answer)
- Every five years regardless of circumstances
- Only when there is a regulatory requirement to do so
Correct answer: Whenever there is a material change in the client's financial situation, goals, or risk tolerance
Fiduciary duty requires that the IPS be updated whenever material changes occur in the client's circumstances to ensure the investment strategy remains aligned with their needs.
CIC Fiduciary Duty and Responsibilities 3
What distinguishes a fiduciary standard from a suitability standard in investment advisory relationships?