CIC IAA Standards of Practice 2 — Questions and Answers
Question 1: Under IAA Standards, which duty takes precedence when a client's short-term interests conflict with their long-term financial wellbeing?
- Short-term interests always prevail to satisfy the client
- Long-term wellbeing, as the adviser must act in the client's best interest overall (Correct answer)
- Neither; the adviser must present both options and let the client decide without guidance
- The adviser's firm policy determines which takes precedence
Correct answer: Long-term wellbeing, as the adviser must act in the client's best interest overall
IAA Standards require advisers to act in clients' overall best interests, which typically means prioritizing long-term financial wellbeing over short-term preferences.
Question 2: An IAA member discovers that a colleague is front-running client orders. What is the member's obligation?
- Report the conduct to appropriate supervisory or compliance personnel (Correct answer)
- Warn the clients being harmed directly without involving compliance
- Document it privately and take no further action to avoid workplace conflict
- Front-running is only prohibited for the member personally, not a reportable offense by others
Correct answer: Report the conduct to appropriate supervisory or compliance personnel
IAA Standards require members to report known violations by colleagues to appropriate supervisory or compliance personnel.
Question 3: A client requests that their adviser execute a strategy the adviser believes is unsuitable. After fully explaining the risks, the client insists. What should the adviser do?
- Execute the trade immediately since the client gave informed consent
- Refuse entirely and terminate the relationship
- Document the client's informed decision and may execute while noting the suitability concern (Correct answer)
- Execute only if the firm's compliance department approves each trade
Correct answer: Document the client's informed decision and may execute while noting the suitability concern
After documenting the client's informed decision to override the adviser's recommendation, the adviser may proceed while maintaining a clear record of the suitability concern.
Question 4: According to IAA Standards, how must an investment adviser handle material nonpublic information received accidentally?
- Use it to protect clients from potential losses
- Immediately trade on it before reporting to avoid client harm
- Refrain from trading or tipping and establish information barriers (Correct answer)
- Disclose it to all clients simultaneously so no one gains an advantage
Correct answer: Refrain from trading or tipping and establish information barriers
Upon receiving material nonpublic information, advisers must refrain from trading or tipping and implement information barriers to prevent misuse.
Question 5: When the IAA Standards require 'fair dealing' with clients, this means:
- All clients receive identical investment recommendations regardless of their profiles
- Advisers treat all clients equitably, though services may differ based on agreements (Correct answer)
- Fees must be the same for all clients with similar account sizes
- Investment opportunities must be offered simultaneously to every client
Correct answer: Advisers treat all clients equitably, though services may differ based on agreements
Fair dealing requires equitable treatment of all clients, though the scope of services may legitimately vary based on contractual agreements and client needs.
Question 6: Under IAA Standards, which scenario best illustrates a violation of the prohibition on excessive trading?
- Rebalancing a portfolio annually to maintain target allocations
- Executing 12 trades per day in a small account primarily to generate commissions (Correct answer)
- Making three tactical adjustments in a month following a market correction
- Switching a client from one mutual fund to a lower-cost equivalent
Correct answer: Executing 12 trades per day in a small account primarily to generate commissions
Executing frequent trades primarily to generate commissions rather than to benefit the client constitutes churning, which violates IAA Standards.
Question 7: IAA Standards require that performance information presented to prospects must be:
- Limited to the adviser's five best-performing accounts to demonstrate capability
- Presented net of all fees to show real returns earned by clients
- Shown only for periods of at least ten years to ensure statistical significance
- Based on composite results that are fair, accurate, and not misleading (Correct answer)
Correct answer: Based on composite results that are fair, accurate, and not misleading
Performance presentations must use composites that fairly represent the adviser's track record and must not be misleading through selective inclusion of results.
CIC IAA Standards of Practice 2
Under IAA Standards, which duty takes precedence when a client's short-term interests conflict with their long-term financial wellbeing?