CIC IAA Standards of Practice 3 — Questions and Answers
Question 1: An IAA member serves on the board of a public company while also managing portfolios that hold that company's stock. Which action best addresses this conflict?
- Resign from the board immediately, as dual roles are always prohibited
- Disclose the board membership to clients and recuse from investment decisions about that company (Correct answer)
- Continue in both roles since board service provides valuable insight benefiting clients
- Transfer affected accounts to a colleague who can manage them without disclosing the reason
Correct answer: Disclose the board membership to clients and recuse from investment decisions about that company
IAA Standards require full disclosure of the conflict and recusal from investment decisions involving the company where board service creates material nonpublic information risk.
Question 2: How do IAA Standards define a 'material' conflict of interest?
- Any conflict involving more than $10,000 in potential compensation
- A conflict that a reasonable client would consider important when evaluating the adviser's recommendation (Correct answer)
- Only conflicts that are illegal under securities law
- Conflicts involving publicly traded securities but not private investments
Correct answer: A conflict that a reasonable client would consider important when evaluating the adviser's recommendation
Materiality is judged by whether a reasonable client would find the conflict significant in evaluating the adviser's objectivity and recommendations.
Question 3: Under IAA Standards, what is required when an adviser switches a client from one investment product to another?
- The switch must improve expected return by at least 1% annually
- The adviser must document a reasonable basis that the new investment is suitable and beneficial for the client (Correct answer)
- Prior approval from the IAA ethics committee is required for all switches
- The client must sign a waiver acknowledging potential tax consequences before any switch
Correct answer: The adviser must document a reasonable basis that the new investment is suitable and beneficial for the client
IAA Standards require advisers to have and document a reasonable basis for believing that any recommended switch serves the client's interest rather than generating commissions.
Question 4: An adviser's firm offers a proprietary mutual fund that pays higher revenue sharing than third-party funds. IAA Standards require the adviser to:
- Recommend the proprietary fund whenever its performance is comparable to alternatives
- Disclose the revenue-sharing arrangement and recommend based on the client's best interest (Correct answer)
- Avoid proprietary products entirely to eliminate the conflict
- Only recommend proprietary products to clients who specifically request them
Correct answer: Disclose the revenue-sharing arrangement and recommend based on the client's best interest
Advisers must disclose conflicts created by revenue-sharing arrangements and base recommendations on the client's best interest, not compensation incentives.
Question 5: According to IAA Standards, client confidentiality obligations survive:
- Only during the active advisory relationship
- Until the client passes away
- Indefinitely, even after the advisory relationship ends (Correct answer)
- For seven years following account closure to match recordkeeping requirements
Correct answer: Indefinitely, even after the advisory relationship ends
IAA Standards impose indefinite confidentiality obligations; the duty to protect client information does not expire when the advisory relationship ends.
Question 6: When must an IAA member update a client's Form ADV disclosures?
- Only at annual renewal regardless of material changes during the year
- Promptly when material changes occur and at least annually (Correct answer)
- Within 90 days of any change, regardless of materiality
- Only when the client specifically requests updated disclosure documents
Correct answer: Promptly when material changes occur and at least annually
IAA Standards align with SEC rules requiring prompt updates to Form ADV when material changes occur, plus at least an annual update.
Question 7: A portfolio manager allocates shares from an oversubscribed IPO entirely to accounts that pay higher fees. Under IAA Standards, this is:
- Permissible since higher-fee clients receive better service as disclosed
- A violation because IPO allocations must be distributed equitably among eligible clients (Correct answer)
- Acceptable if the firm's written policies authorize preferential allocation
- Only a violation if the IPO subsequently rises in price significantly
Correct answer: A violation because IPO allocations must be distributed equitably among eligible clients
IAA Standards require equitable allocation of investment opportunities; favoring higher-fee accounts for scarce allocations like oversubscribed IPOs violates fair dealing obligations.
CIC IAA Standards of Practice 3
An IAA member serves on the board of a public company while also managing portfolios that hold that company's stock.
Which action best addresses this conflict?