Financial Advisor Financial Advisor Ethics and Compliance 1 — Questions and Answers
Question 1: Under the Investment Advisers Act of 1940, what is the primary fiduciary duty of a registered investment adviser?
- Maximize commissions earned
- Act in the best interest of the client (Correct answer)
- Follow employer guidelines above client needs
- Recommend only proprietary products
Correct answer: Act in the best interest of the client
Registered investment advisers have a fiduciary duty to act in the best interest of their clients, placing client interests above their own.
Question 2: Which of the following must a financial advisor disclose to clients under Form ADV Part 2?
- Personal social media accounts
- Material conflicts of interest (Correct answer)
- Names of all other clients
- Internal firm salary structures
Correct answer: Material conflicts of interest
Form ADV Part 2 requires advisors to disclose material conflicts of interest so clients can make informed decisions.
Question 3: A financial advisor who receives compensation for recommending a specific mutual fund without disclosing this to the client has most likely violated which rule?
- Regulation T
- SEC Rule 206(4)-7
- The anti-churning rule
- The disclosure and conflict-of-interest rule (Correct answer)
Correct answer: The disclosure and conflict-of-interest rule
Failing to disclose compensation arrangements violates the adviser's duty of disclosure regarding conflicts of interest.
Question 4: What is 'churning' in the context of financial advisory compliance?
- Excessive trading in a client account to generate commissions (Correct answer)
- Rotating between growth and value stocks quarterly
- Moving assets between taxable and tax-deferred accounts
- Reinvesting dividends automatically
Correct answer: Excessive trading in a client account to generate commissions
Churning refers to excessive trading activity in a client's account primarily to generate commissions for the advisor, which is prohibited.
Question 5: Under FINRA rules, what standard must broker-dealers meet when recommending securities to retail customers?
- Fiduciary standard
- Best Interest (Reg BI) standard (Correct answer)
- Suitability standard only
- Reasonable basis standard only
Correct answer: Best Interest (Reg BI) standard
Regulation Best Interest (Reg BI) requires broker-dealers to act in the best interest of retail customers when making recommendations.
Question 6: Which document must an investment adviser deliver to a prospective client before or at the time of entering an advisory contract?
- Form 4
- Form ADV Part 2 (brochure) (Correct answer)
- Form U4
- Form 13F
Correct answer: Form ADV Part 2 (brochure)
Investment advisers must deliver Form ADV Part 2 (the brochure) to prospective clients before or at contract inception.
Financial Advisor Financial Advisor Ethics and Compliance 1
Under the Investment Advisers Act of 1940, what is the primary fiduciary duty of a registered investment adviser?