CIMA Ethics and Professional Responsibility 3 — Questions and Answers
Question 1: A CIMA professional manages both a charitable foundation and private client accounts with similar investment mandates. Shares of an undersubscribed IPO become available. What is the ethical approach to allocation?
- Allocate all shares to the private clients since they pay higher fees
- Allocate shares proportionally based on each account's investment guidelines (Correct answer)
- Allocate shares to the foundation first to maximize its tax benefit
- Avoid allocating IPO shares to either account to prevent conflicts
Correct answer: Allocate shares proportionally based on each account's investment guidelines
Fair dealing requires that investment opportunities be allocated equitably across accounts with similar mandates, typically on a pro-rata basis.
Question 2: Under CIMA's Standards of Professional Conduct, which statement about material nonpublic information is correct?
- Information becomes public once it is shared with any institutional investor
- Trading on material nonpublic information is prohibited regardless of how it was obtained (Correct answer)
- Research analysts may trade on their own unpublished research before client distribution
- Information shared by a corporate insider in a social setting is not considered material
Correct answer: Trading on material nonpublic information is prohibited regardless of how it was obtained
CIMA ethics prohibit trading on material nonpublic information regardless of its source, including accidental disclosures or seemingly informal settings.
Question 3: A wealth manager learns that a client is laundering money through their investment account. After internal reporting is ignored, what must the professional do?
- Continue managing the account to protect the client relationship
- Report the activity to appropriate regulatory or law enforcement authorities (Correct answer)
- Quietly resign without documenting the issue
- Alert other clients in the firm about the risk
Correct answer: Report the activity to appropriate regulatory or law enforcement authorities
When internal reporting fails to address illegal activity such as money laundering, the professional has an obligation to escalate to external authorities.
Question 4: Which scenario most clearly illustrates a violation of the 'objectivity' principle in the CIMA Code?
- Recommending a bond fund after conducting independent research
- Increasing a stock's target price after receiving a free all-expenses-paid conference trip from the issuer (Correct answer)
- Declining to cover a sector outside the analyst's area of expertise
- Disclosing a personal investment in a recommended stock
Correct answer: Increasing a stock's target price after receiving a free all-expenses-paid conference trip from the issuer
Accepting material benefits from a covered company and then changing recommendations favorably is a direct violation of objectivity and creates a conflict of interest.
Question 5: Which element is NOT a component of a fully compliant performance presentation under CIMA ethical standards?
- Reporting composite performance including all discretionary accounts
- Disclosing the benchmark used for comparison
- Showing only top-performing accounts to attract new clients (Correct answer)
- Including a disclosure of fees and their impact on returns
Correct answer: Showing only top-performing accounts to attract new clients
Selectively presenting only top-performing accounts is cherry-picking and constitutes a misleading performance presentation under CIMA ethics.
Question 6: A CIMA certificant is offered a consulting fee by a corporation to present their stock favorably to institutional clients. This arrangement must be:
- Accepted only if the stock is genuinely undervalued
- Disclosed prominently to clients before any recommendation is made (Correct answer)
- Declined outright as all compensation from issuers is prohibited
- Reported only if the fee exceeds $1,000
Correct answer: Disclosed prominently to clients before any recommendation is made
Compensation from issuers for favorable coverage must be fully and prominently disclosed to clients so they can assess the potential bias.
Question 7: Under CIMA standards, which best describes 'independence' in the context of investment research?
- The analyst works without supervision from senior management
- Research conclusions are based on objective analysis, free from undue pressure or conflicts (Correct answer)
- The research department is physically separated from the trading floor
- The analyst is licensed independently of their employing firm
Correct answer: Research conclusions are based on objective analysis, free from undue pressure or conflicts
Independence in investment research means that analytical conclusions are reached through objective, unbiased analysis without influence from internal or external conflicts.
CIMA Ethics and Professional Responsibility 3
A CIMA professional manages both a charitable foundation and private client accounts with similar investment mandates.
Shares of an undersubscribed IPO become available.
What is the ethical approach to allocation?