Ethics & Professional Conduct Flashcards
9 cards from real IAR practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 9 Ethics & Professional Conduct flashcards as text
Under the fiduciary standard, what must an IAR prioritize above all else?
Answer: The client's best interest
Under the fiduciary standard, Investment Adviser Representatives (IARs) are legally and ethically obligated to act solely in the best interest of their clients. This means prioritizing the client's needs, goals, and financial well-being above their own or their firm's interests, including avoiding conflicts of interest or disclosing them transparently.
What is the first step an IAR should take if they identify a conflict of interest?
Answer: Disclose it to the client in writing
Under the fiduciary standard, if an IAR identifies a conflict of interest, their primary obligation is to disclose it fully and clearly to the client in writing. This transparency allows the client to make an informed decision about whether to proceed with the recommendation or service, knowing all relevant information about the potential conflict.
Which action violates the CFA Institute's Code of Ethics?
Answer: Plagiarizing investment research reports
The CFA Institute's Code of Ethics and Standards of Professional Conduct strictly prohibits plagiarism. Plagiarizing investment research reports violates the standard of "Reference to Research, Quotations, and Outside Information" by presenting others' work as one's own, undermining the integrity and ethical conduct expected of investment professionals.
An IAR learns a client is engaged in illegal activity. What should they do?
Answer: Report it to authorities if legally obligated
If an IAR learns a client is engaged in illegal activity, they have a legal and ethical obligation to report it to the appropriate authorities, especially if it involves financial crimes like money laundering or fraud. This is mandated by regulations such as the Bank Secrecy Act and anti-money laundering (AML) laws. Continuing to manage such investments without reporting could implicate the IAR.
What is 'soft dollar' abuse under SEC rules?
Answer: Using client commissions to cover office rent or entertainment
"Soft dollar" arrangements allow investment advisors to use client commissions to pay for research and brokerage services that directly benefit the client. However, soft dollar abuse occurs when advisors use client commissions to pay for services that are not research-related and primarily benefit the advisor or firm, such as office rent, administrative expenses, or entertainment. This is a violation of SEC rules as it constitutes a breach of fiduciary duty.
An IAR's family member works at a company the IAR recommends to clients. This creates:
Answer: A conflict of interest requiring disclosure
An IAR recommending a company where a family member works creates a potential conflict of interest. Even if the recommendation is suitable, the personal relationship could influence the advisor's judgment or appear to do so. Under the fiduciary standard, this conflict must be clearly disclosed to the client in writing, allowing them to make an informed decision.
When is it permissible to share confidential client information?
Answer: When required by law or with client authorization
Investment Advisory Representatives (IARs) have a strict fiduciary duty to protect client confidentiality. Sharing client information is only permissible under specific circumstances to ensure client privacy and maintain trust. These exceptions include when disclosure is legally mandated, such as by a court order or regulatory request, or when the client has provided explicit written authorization for their information to be shared.
What does 'suitability' require when recommending investments?
Answer: Matching investments to the client's profile and needs
Suitability in investment recommendations requires an Investment Advisory Representative (IAR) to ensure that any investment product or strategy aligns with a client's specific financial situation, investment objectives, risk tolerance, and time horizon. This ethical and regulatory obligation ensures that recommendations are appropriate and in the client's best interest, rather than simply pursuing the highest returns or ignoring individual client factors.
An IAR receives a gift from a client. How should they respond?
Answer: Report it to compliance per firm policy
Investment Advisory Representatives (IARs) must adhere to strict ethical guidelines regarding gifts from clients to prevent conflicts of interest or the appearance of impropriety. Firm policies typically require IARs to report any gifts received to their compliance department. This ensures transparency, allows for proper oversight, and helps maintain the integrity of the advisor-client relationship.
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