CIC IAA Standards of Practice 5 — Questions and Answers
Question 1: Under IAA Standards, what distinguishes a 'recommendation' that triggers suitability analysis from general investment education?
- Any mention of a specific security triggers full suitability analysis
- A recommendation is reasonably viewed as suggesting a specific action tailored to the client (Correct answer)
- Only written communications constitute recommendations requiring suitability review
- Suitability analysis is required only for recommendations involving securities over $50,000
Correct answer: A recommendation is reasonably viewed as suggesting a specific action tailored to the client
A communication rises to a recommendation—triggering suitability obligations—when it could reasonably be understood as advice to take a specific action suited to that client.
Question 2: An adviser has discretionary authority over a client's account. IAA Standards require the adviser to:
- Obtain prior client approval for each trade, negating the purpose of discretion
- Exercise discretion within the scope of the client's investment policy and best interest (Correct answer)
- Report every trade to the client within 24 hours as a condition of maintaining discretion
- Limit discretion to trades under $10,000 to reduce fiduciary risk
Correct answer: Exercise discretion within the scope of the client's investment policy and best interest
Discretionary authority must be exercised within the boundaries of the client's IPS and consistently with their best interest, not used to exceed the agreed mandate.
Question 3: When IAA Standards address 'independence and objectivity,' what specific pressure must advisers resist?
- Client pressure to reduce fees below the adviser's standard schedule
- Compensation arrangements, relationships, or other pressures that compromise unbiased advice (Correct answer)
- Regulatory pressure to adopt specific compliance frameworks
- Peer pressure to adopt the same investment philosophy as competing advisers
Correct answer: Compensation arrangements, relationships, or other pressures that compromise unbiased advice
IAA Standards on independence and objectivity focus on resisting financial incentives, relationships, and external pressures that could bias investment recommendations.
Question 4: A client's tax situation changes significantly mid-year. Under IAA Standards, the adviser's obligation is to:
- Wait until the annual review to reassess the portfolio in light of tax changes
- Proactively consider the tax change's impact on the investment strategy and communicate with the client (Correct answer)
- Refer all tax matters exclusively to the client's CPA without taking any portfolio action
- Notify the client in writing but take no action without a signed amendment to the IPS
Correct answer: Proactively consider the tax change's impact on the investment strategy and communicate with the client
IAA Standards require advisers to respond proactively to material changes in a client's circumstances, including tax changes that affect portfolio strategy.
Question 5: Under IAA Standards, soft-dollar arrangements are permissible only if:
- They are kept completely confidential to avoid market impact
- The research or services obtained benefit the clients whose commissions generated the soft dollars (Correct answer)
- They are limited to proprietary research produced by the executing broker
- Soft-dollar use is prohibited entirely under current IAA Standards
Correct answer: The research or services obtained benefit the clients whose commissions generated the soft dollars
Soft-dollar arrangements are acceptable under IAA Standards when the research and brokerage services obtained directly benefit the clients whose trades generate the commissions.
Question 6: An adviser recommends a bond fund that later defaults, causing client losses. Under IAA Standards, the adviser faces liability if:
- Any investment recommended ever results in a loss for the client
- The recommendation lacked a reasonable basis or the risks were not adequately disclosed at the time (Correct answer)
- The adviser did not personally own the same bond fund
- The client had not previously invested in fixed income products
Correct answer: The recommendation lacked a reasonable basis or the risks were not adequately disclosed at the time
Advisers are not guarantors of performance; liability under IAA Standards arises when a recommendation lacked reasonable basis or material risks were not disclosed.
Question 7: IAA Standards require that an adviser's Code of Ethics must be provided to:
- Regulators only, as clients lack the expertise to evaluate it
- All supervised persons and, upon request, to clients and prospective clients (Correct answer)
- Clients with accounts over $1 million as part of enhanced due diligence
- The IAA for annual certification but not to clients directly
Correct answer: All supervised persons and, upon request, to clients and prospective clients
IAA Standards require that the Code of Ethics be distributed to all supervised persons and made available to clients and prospective clients upon request.
CIC IAA Standards of Practice 5
Under IAA Standards, what distinguishes a 'recommendation' that triggers suitability analysis from general investment education?