CIC IAA Standards of Practice 4 — Questions and Answers
Question 1: Under IAA Standards, which best describes the 'know your client' obligation at the start of an advisory relationship?
- Collecting only the client's investment objectives and time horizon
- Gathering comprehensive information about financial situation, risk tolerance, objectives, and relevant personal circumstances (Correct answer)
- Verifying the client's identity for anti-money-laundering purposes only
- Obtaining the client's signature on a risk disclosure form
Correct answer: Gathering comprehensive information about financial situation, risk tolerance, objectives, and relevant personal circumstances
IAA Standards require comprehensive client fact-finding covering financial situation, goals, risk tolerance, time horizon, tax status, and other relevant personal circumstances.
Question 2: An adviser learns a long-standing client has developed cognitive decline. What does IAA Standards guidance suggest?
- Continue normal service since the client retains legal competency until adjudicated otherwise
- Contact a trusted contact person on file if available and potentially alert compliance (Correct answer)
- Immediately freeze the account to protect the client from self-harm
- Transfer the account to the client's next of kin without delay
Correct answer: Contact a trusted contact person on file if available and potentially alert compliance
IAA guidance recommends reaching out to a designated trusted contact and involving compliance when cognitive decline raises concerns about a client's vulnerability.
Question 3: IAA Standards state that an adviser's written compliance policies must be reviewed:
- Only when the adviser's registration status changes
- At least annually and updated when regulatory changes or business changes require it (Correct answer)
- Every five years unless a material compliance failure occurs
- Solely in response to SEC examination findings
Correct answer: At least annually and updated when regulatory changes or business changes require it
IAA Standards require at least annual review of compliance policies and prompt updates when regulatory or business changes necessitate revision.
Question 4: A client's investment policy statement (IPS) allows equity allocations between 50% and 70%. Markets surge and the equity portion rises to 78%. Under IAA Standards, the adviser should:
- Wait until the next scheduled review to avoid unnecessary trading costs
- Rebalance promptly to bring the portfolio within the agreed policy range (Correct answer)
- Notify the client but take no action without explicit new instructions
- Increase the IPS equity ceiling retroactively to match current allocation
Correct answer: Rebalance promptly to bring the portfolio within the agreed policy range
When a portfolio drifts outside the parameters agreed in the IPS, IAA Standards require the adviser to rebalance promptly to honor the agreed risk framework.
Question 5: Which scenario violates IAA Standards regarding gifts and entertainment from third parties?
- Accepting a $25 holiday gift basket from a custodian firm
- Accepting paid airfare and a week's lodging at a luxury resort from a fund company seeking allocation (Correct answer)
- Attending an industry conference where registration is sponsored by a fund company
- Receiving a modest business lunch from a research provider
Correct answer: Accepting paid airfare and a week's lodging at a luxury resort from a fund company seeking allocation
Accepting lavish travel and lodging from a vendor seeking business creates a conflict that impairs independence and violates IAA Standards on gifts and benefits.
Question 6: Under IAA Standards, an adviser who uses a third-party model portfolio must:
- Adopt the model without modification to maintain fidelity to the strategy
- Still apply independent judgment to determine suitability for each client before implementation (Correct answer)
- Disclose use of the model only if it underperforms the adviser's own strategies
- Obtain IAA approval before using any externally developed model
Correct answer: Still apply independent judgment to determine suitability for each client before implementation
Even when using third-party model portfolios, advisers retain responsibility for independently assessing suitability for each client's specific circumstances.
Question 7: An IAA member firm is acquired by a bank holding company. What disclosure obligation is triggered under IAA Standards?
- No disclosure is needed since the adviser's ownership by a bank is immaterial to most clients
- Clients must be notified of the change in ownership as a material change in the adviser's business (Correct answer)
- Disclosure is only required for clients who also bank with the acquiring institution
- The acquiring bank assumes all disclosure obligations, releasing the adviser from further duty
Correct answer: Clients must be notified of the change in ownership as a material change in the adviser's business
A change in control of an advisory firm is a material business change that must be disclosed to clients under IAA Standards and SEC Form ADV requirements.
CIC IAA Standards of Practice 4
Under IAA Standards, which best describes the 'know your client' obligation at the start of an advisory relationship?