CIC Fiduciary Duty and Responsibilities 5 — Questions and Answers
Question 1: A CIC managing charitable endowment funds must balance current spending needs with preservation for future beneficiaries. This obligation is known as:
- Duty of impartiality (Correct answer)
- Duty of loyalty
- Duty of confidentiality
- Duty of prudence
Correct answer: Duty of impartiality
The duty of impartiality requires fiduciaries to balance the interests of current beneficiaries against those of future beneficiaries when managing trust or endowment assets.
Question 2: When a fiduciary receives a gift from a client, the most appropriate course of action is to:
- Accept gifts under $100 as they are considered nominal
- Refuse or disclose the gift per firm policy, as gifts can compromise fiduciary objectivity (Correct answer)
- Accept the gift if it is given voluntarily without conditions
- Report the gift only if it exceeds $500 in value
Correct answer: Refuse or disclose the gift per firm policy, as gifts can compromise fiduciary objectivity
Gifts can create conflicts of interest or the appearance of impropriety; fiduciaries should follow firm gift policies, which typically require refusal or disclosure.
Question 3: What does the 'no-further-inquiry' rule mean in fiduciary law?
- Once a conflict is disclosed, no additional analysis of the transaction is needed
- Transactions involving a fiduciary's self-interest are voidable without needing to prove actual harm (Correct answer)
- Clients may not question fiduciary decisions once they have been made
- Regulators cannot investigate disclosed conflicts of interest
Correct answer: Transactions involving a fiduciary's self-interest are voidable without needing to prove actual harm
The no-further-inquiry rule holds that transactions in which a fiduciary has a personal interest are presumptively voidable, regardless of whether actual harm occurred.
Question 4: A fiduciary investment counselor's client passes away. What is the advisor's immediate obligation regarding the client's account?
- Continue managing the account per the existing investment policy until new instructions arrive
- Freeze all trading activity and notify the executor or legal representative of the estate (Correct answer)
- Transfer all assets to the client's designated beneficiaries immediately
- Close all positions and hold proceeds in cash pending legal direction
Correct answer: Freeze all trading activity and notify the executor or legal representative of the estate
Upon a client's death, the advisor should cease trading and promptly notify the estate's executor or administrator to ensure proper legal transfer of assets.
Question 5: Which of the following best illustrates the concept of 'material non-public information' as it relates to fiduciary duty?
- Publicly available earnings reports used to make investment recommendations
- Non-disclosed merger information received from a corporate insider used to trade client accounts (Correct answer)
- Investment research published by a third-party firm
- Historical price data used in technical analysis
Correct answer: Non-disclosed merger information received from a corporate insider used to trade client accounts
Using material non-public information to trade violates insider trading laws and represents a severe breach of fiduciary duty and securities regulations.
Question 6: How does the Reg BI (Regulation Best Interest) standard differ from the traditional investment advisor fiduciary standard?
- Reg BI is a stricter standard that applies to all investment advisors
- Reg BI applies to broker-dealers and requires acting in the client's best interest at the time of a recommendation, while the fiduciary standard is an ongoing obligation (Correct answer)
- Reg BI eliminates the need for conflict of interest disclosure
- There is no difference; they impose identical obligations
Correct answer: Reg BI applies to broker-dealers and requires acting in the client's best interest at the time of a recommendation, while the fiduciary standard is an ongoing obligation
Reg BI applies to broker-dealers at the point of recommendation, while the fiduciary standard for investment advisors is a continuous obligation throughout the advisory relationship.
Question 7: A fiduciary investment counselor determines that a client's current allocation no longer matches their stated risk tolerance due to market drift. The advisor's duty requires:
- Waiting for the client to notice the drift and request rebalancing
- Proactively notifying the client and recommending rebalancing to realign with the IPS (Correct answer)
- Immediately rebalancing without client notification under discretionary authority
- Documenting the drift but taking no action until the next annual review
Correct answer: Proactively notifying the client and recommending rebalancing to realign with the IPS
Fiduciary duty includes proactive monitoring and communication; the advisor must notify the client and recommend corrective action when the portfolio drifts from objectives.
CIC Fiduciary Duty and Responsibilities 5
A CIC managing charitable endowment funds must balance current spending needs with preservation for future beneficiaries.
This obligation is known as: