CIC Ethical Business Practices 2 — Questions and Answers
Question 1: A CIC discovers that a colleague is front-running client orders by placing personal trades before executing client transactions. What is the most appropriate immediate action?
- Ignore it if the gains are small
- Report the behavior to compliance or a supervisor (Correct answer)
- Confront the colleague directly and demand they stop
- Wait to see if the pattern continues before acting
Correct answer: Report the behavior to compliance or a supervisor
Front-running is a serious ethical and legal violation that must be reported to compliance or a supervisor immediately.
Question 2: Under the CFA Institute Code of Ethics, which of the following best describes 'material nonpublic information'?
- Any information not yet published in a major newspaper
- Information that a reasonable investor would consider important and that has not been publicly disclosed (Correct answer)
- Proprietary research generated internally by the firm
- Any data obtained from a company's annual report
Correct answer: Information that a reasonable investor would consider important and that has not been publicly disclosed
Material nonpublic information is information a reasonable investor would find important in an investment decision that has not been publicly released.
Question 3: A client asks a CIC to recommend investments that are unsuitable for their risk profile but insists they want them. The counselor should:
- Execute the trade as directed since the client has final authority
- Refuse to execute any trade the client requests
- Document the client's instructions and warn of the risks, then decide based on fiduciary duty (Correct answer)
- Immediately terminate the client relationship
Correct answer: Document the client's instructions and warn of the risks, then decide based on fiduciary duty
The counselor must document the client's wishes, communicate the risks clearly, and act in accordance with their fiduciary obligation.
Question 4: Which practice violates the prohibition on market manipulation under investment ethics standards?
- Publishing a research report with a buy recommendation
- Coordinating with others to artificially inflate a security's trading volume (Correct answer)
- Updating a valuation model with new earnings data
- Recommending a security after conducting thorough due diligence
Correct answer: Coordinating with others to artificially inflate a security's trading volume
Coordinating trades to create artificial volume or price movements constitutes market manipulation, which is strictly prohibited.
Question 5: A CIC's firm receives soft-dollar arrangements from a broker. Under ethical guidelines, these arrangements are permissible only if:
- The soft dollars benefit the investment counselor personally
- The research or services received benefit the clients whose commissions generated them (Correct answer)
- The arrangement is disclosed only to firm management
- The broker provides the lowest possible commission rate
Correct answer: The research or services received benefit the clients whose commissions generated them
Soft-dollar arrangements are permissible when the goods or services received benefit the clients who generated the commissions.
Question 6: When a CIC manages both discretionary and non-discretionary accounts, trade allocation must be:
- Prioritized to discretionary accounts since the counselor has full control
- Conducted in a fair and equitable manner across all client accounts (Correct answer)
- Based on the size of the account balance
- Allocated first to clients who have been with the firm longest
Correct answer: Conducted in a fair and equitable manner across all client accounts
Ethical standards require that trade allocations be fair and equitable to all clients regardless of account type or size.
Question 7: A CIC is asked to provide a performance record that cherry-picks only the best-performing time periods. This would violate which ethical principle?
- Loyalty
- Fair dealing
- Full and fair disclosure (Correct answer)
- Independence
Correct answer: Full and fair disclosure
Selectively presenting performance data that misrepresents overall results violates the principle of full and fair disclosure.
CIC Ethical Business Practices 2
A CIC discovers that a colleague is front-running client orders by placing personal trades before executing client transactions.
What is the most appropriate immediate action?