CIM Ethics & Regulatory Standards 2

Question 1

Under the Investment Advisers Act of 1940, which duty requires an adviser to place client interests ahead of its own at all times?

Accepted Answer

Fiduciary duty of loyalty

Answer

The SEC interprets the Advisers Act as imposing a fiduciary duty of care and loyalty, requiring advisers to put client interests first.

Question 2

A portfolio manager receives material nonpublic information about a pending merger from a friend at the target firm. What should the manager do?

Accepted Answer

Refrain from trading and communicate the issue to compliance

Answer

Acting on material nonpublic information violates insider trading laws, so the manager must not trade and should escalate to compliance.

Question 3

Section 28(e) of the Securities Exchange Act provides a safe harbor for which practice?

Accepted Answer

Paying higher commissions for eligible research and brokerage services

Answer

Section 28(e) protects managers who pay more than the lowest commission in good faith for eligible research and brokerage services.

Question 4

Which SEC form must a registered investment adviser deliver to clients describing its services, fees, and conflicts of interest?

Accepted Answer

Form ADV Part 2A brochure

Answer

Form ADV Part 2A is the plain-English brochure disclosing an adviser's business practices, fees, and conflicts.

Question 5

When a hot IPO is oversubscribed, how should a manager allocate shares among eligible client accounts to satisfy fair dealing?

Accepted Answer

Allocate pro rata according to a predetermined policy

Answer

Fair dealing requires a consistent, documented allocation method such as pro rata distribution among eligible accounts.

CIM - Chartered Investment Manager Practice Test