CSI CSI-IFC Online Practice Questions and Exam Preparation

CSI CSI-IFC Online Questions & Answers

• Question 501:

  Barend is a Dealing Representative with Planvest Group Inc., a mutual fund dealer and member of the Mutual Fund Dealers Association of Canada (MFDA).

  Which of the following CORRECTLY describes Barend's obligation for conflicts of interest?

  A. Barend must identify material conflicts of interest and implement controls on behalf of the firm.
  B. Barend must disclose material conflicts of interest that cannot be addressed in the best interest of the client.
  C. Barend must avoid material conflicts of interest that cannot be addressed in the best interest of the client.
  D. Barend must identify material conflicts of interest and promptly report the conflicts of interest to clients.
  B. Barend must disclose material conflicts of interest that cannot be addressed in the best interest of the client.

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  Explanation

  A conflict of interest is a situation where an individual or a firm has competing or incompatible interests that may affect their ability to act fairly, honestly, and in the best interest of their clients. A material conflict of interest is a conflict of interest that a reasonable person would expect to know about and that may influence the client's decision to enter into or maintain a business relationship with the individual or the firm. According to the MFDA rules, Barend has an obligation to identify and address material conflicts of interest in a manner that prioritizes the client's interest over his own or the firm's interest 1. If a material conflict of interest cannot be addressed in the best interest of the client, Barend must disclose it to the client before opening an account, providing advice, or executing a transaction. The disclosure must be clear, meaningful, and timely, and it must explain the nature and extent of the conflict of interest and how it could affect the client's interests 2. Barend must also obtain the client's written consent to proceed with the account opening, advice, or transaction despite the conflict of interest. Barend must avoid material conflicts of interest that are prohibited by law or that would result in a breach of his fiduciary duty to the client. Barend must also report any material conflicts of interest to his firm and comply with the firm's policies and procedures for managing conflicts of interest 3.

  References:

  MFDA Rule 2.1.4 - Conflicts of Interest1 MFDA Policy No. 2 - Minimum Standards for Account Supervision2 MFDA Policy No. 9 - Disclosure of Conflicts of Interest (Outside Business Activities)3

• Question 502:

  While assessing the suitability of an investment recommendation as a Dealing Representative, which statement applies to the "Client's Interest First" standard?

  A. Presenting a fund's historical investment performance to anticipate a mutual fund's future rate of return.
  B. Clarifying for clients the costs and fees associated with mutual funds and how they impact investment performance.
  C. The use of a risk-based approach when determining which mutual fund to recommend to the client.
  D. Accurately document Know Your Client information (KYC) so there is evidence to support a recommendation.
  B. Clarifying for clients the costs and fees associated with mutual funds and how they impact investment performance.

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  Explanation

  The "Client's Interest First" standard requires that Dealing Representatives act in the best interest of their clients and place their clients' interests before their own or their employer's interests. This means that they must provide clear, accurate, and complete information to their clients about the mutual funds they recommend, including the costs and fees associated with them and how they affect the investment performance. Presenting a fund's historical performance to anticipate its future return is misleading and does not serve the client's interest. Using a risk-based approach to select a mutual fund is part of the suitability assessment, but it does not necessarily put the client's interest first. Accurately documenting the KYC information is important for compliance purposes, but it does not ensure that the recommendation is in the client's best interest. Canadian Investment Funds Course, Chapter 8: Suitability and Know Your Client1

• Question 503:

  Raybert has a very short-term investment objective and has decided to purchase money market instruments. There are plenty of 90-day money market securities available for him to choose from. Although Raybert is aware that all the respective issuers have a similar need for his capital, no matter what he decides, he can only afford to purchase one.

  In terms of financial markets and their relationship to the principles of supply and demand, which characteristic of investment capital are the issuers being exposed to?

  A. Mobility
  B. Risk
  C. Scarcity
  D. Sensitivity
  C. Scarcity

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  Explanation

  Scarcity is a characteristic of investment capital that refers to the limited availability of capital relative to the demand for it. Scarcity affects the price and return of capital, as well as the allocation of capital among different issuers and sectors.

  When capital is scarce, issuers have to compete for it by offering higher returns or lower prices, or by adjusting their financing strategies. When capital is abundant, issuers have more access to it at lower costs or higher prices, or by diversifying their sources of capital. In this case, Raybert has a very short-term investment objective and has decided to purchase money market instruments. There are plenty of 90-day money market securities available for him to choose from, but he can only afford to purchase one. This means that the issuers of these securities are exposed to the scarcity of capital, as they have to attract Raybert and other investors with similar objectives by offering competitive rates or discounts.

• Question 504:

  Josephine is a Dealing Representative with Sunshine Mutual Funds Inc. for over 10 years. Her brother Jonathan has an account with Sunshine Mutual Funds Inc., too. Jonathan wants Josephine to manage his portfolio and make investment decisions on his behalf. Jonathan trusts his sister to make better investment choices than he can. He also wants to give Power of Attorney (POA) to Josephine so she can have full authority over his account.

  How can Josephine respond to her brother's request?

  A. Josephine can accept a limited POA.
  B. Josephine cannot accept the POA as she is not the immediate family.
  C. Josephine can accept the POA as it is an exception that is permitted under the MFDA rules.
  D. Josephine should accept the POA after making a full disclosure to her dealer about the POA.
  A. Josephine can accept a limited POA.

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  Explanation

  According to the MFDA rules, a Member or an Approved Person cannot accept or act upon a general power of attorney or other similar authorization from a client in favour of the Member or Approved Person, unless the client is a spouse, parent, or child of the Approved Person and certain conditions are met. However, a Member or an Approved Person can accept a limited trading authorization from a client, which allows the Member or Approved Person to execute trades on behalf of the client, but not to engage in any discretionary trading. Therefore, Josephine can accept a limited POA from her brother, as long as she does not make any investment decisions without his consent.

  References:

  Canadian Investment Funds Course (CIFC) - Module 1: The Financial Services Industry -Section 1.3: Know Your Client (KYC)1 and web search results from search_web(query="power of attorney and mutual fund dealers association rules") 23 1: (https://www.ifse.ca/wp-content/uploads/2021/08/CIFC-Module-1.pdf)

• Question 505:

  Khuyen is a Dealing Representative for Stark Contrast Investments. Her dealer has relationships with 20 different mutual fund families. This gave her the flexibility to sell two different types of funds from two different fund families to her client, Bao. $5,000 was invested in the Blue Moon Global Balanced fund and an additional $5,000 was invested in the Orange Sun Asset Allocation fund. Khuyen has been reviewing the performance of both funds and has determined that Bao would be better off being fully invested in the Blue Moon Global Balance fund. Bao had previously signed a Limited Authorization Form (LAF) for Khuyen, so she goes ahead and does not worry about consulting with Bao before making the change.

  What type of activity has Khuyen performed?

  A. Top-down management
  B. Churning
  C. Discretionary trading
  D. Value investing
  C. Discretionary trading

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  Explanation

  Discretionary trading is a type of trading activity where the advisor makes investment decisions on behalf of the client without obtaining the client's prior consent for each transaction. Discretionary trading is only allowed if the client has signed a discretionary management agreement with the advisor and the advisor is registered as a portfolio manager. A limited authorization form (LAF) does not grant the advisor the authority to engage in discretionary trading. A LAF only allows the advisor to execute trades that are initiated by the client, such as pre-authorized contributions or withdrawals. Therefore, Khuyen has performed discretionary trading by switching Bao's funds without consulting him, which is a violation of her registrant responsibilities and ethical standards.

  References:

  Canadian Investment Funds Course (CIFC) Study Guide, Chapter 2: The Sales Process, Section 2.4: Ethics and Compliance, page 2-161

  Discretionary Trading Definition - Investopedia2

• Question 506:

  What bias results in investors valuing an asset that they own over an asset that another individual owns?

  A. Representativeness
  B. Endowment
  C. Risk aversion
  D. Status Quo
  B. Endowment

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  Explanation

  Endowment bias leads investors to overvalue assets they own compared to similar assets they do not own.

  The feedback from the document states: "People who are subject to endowment bias place more value on an asset they hold property rights to than on an asset they do not hold property rights to."

  References:

  Chapter 5 - Behavioural FinanceLearning Domain: The Know Your Client Communication Process