PMT (2026): Regulation and Ethics

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How to use this topic drill

Use this page to isolate Regulation and Ethics for PMT (2026). Work through the 10 questions first, then review the explanations and return to mixed practice in Securities Prep.

Pass	What to do	What to record
First attempt	Answer without checking the explanation first.	The fact, rule, calculation, or judgment point that controlled your answer.
Review	Read the explanation even when you were correct.	Why the best answer is stronger than the closest distractor.
Repair	Repeat only missed or uncertain items after a short break.	The pattern behind misses, not the answer letter.
Transfer	Return to mixed practice once the topic feels stable.	Whether the same skill holds up when the topic is no longer obvious.

Blueprint context: 10% of the practice outline. A focused topic score can overstate readiness if you recognize the pattern too quickly, so use it as repair work before timed mixed sets.

Sample questions

These questions are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.

Question 1

Topic: Regulation and Ethics

A Canadian investment management firm routes most equity trades for discretionary accounts through an affiliated CIRO-regulated investment dealer. Compliance is reviewing the practice.

Artifact: Trade-routing review (excerpt)

• 92% of equity orders routed to the affiliate
• Reason recorded: operational convenience
• Best-execution review: overdue
• Affiliate relationship: disclosed at account opening
• Ongoing price-quality monitoring: not documented

Which conclusion is best supported by the review?

• A. Routing through an affiliate is prohibited for discretionary accounts.
• B. Operational convenience is enough if trades settle on time.
• C. The missing review is a material gap because conflict oversight and best execution protect clients and market integrity.
• D. Account-opening disclosure removes the need for ongoing routing oversight.

Best answer: C

What this tests: Regulation and Ethics

Explanation: The review shows a conflict risk and missing execution oversight, not just an administrative delay. Regulation is meant to protect clients from biased trade routing and to preserve confidence that markets operate fairly.

Investment-industry regulation is not designed to ban every potential conflict; it is designed to make sure firms control conflicts, treat clients fairly, and maintain confidence in market fairness. In this case, routing most discretionary-account trades to an affiliate creates an obvious conflict risk. Because the best-execution review is overdue and price-quality monitoring is not documented, the firm cannot demonstrate that the routing practice continues to serve clients rather than the firm’s convenience or economics. Disclosure at account opening helps, but it does not replace ongoing supervision and evidence that execution quality is being monitored. The key point is that regulation requires processes that protect client outcomes and support market integrity, not just disclosure or operational efficiency.

• Disclosure only fails because initial disclosure does not replace ongoing conflict management and execution monitoring.
• Automatic ban goes too far because affiliate routing can be permitted if properly supervised and justified.
• Convenience standard misses that timely settlement and easier operations do not prove fair execution for clients.

An affiliated routing arrangement requires ongoing conflict and execution oversight; disclosure alone does not show clients are being treated fairly.

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Question 2

Topic: Regulation and Ethics

A portfolio manager has full discretion over a retired client’s managed account. The mandate is capital preservation with monthly withdrawals, and the client will need $400,000 for a home purchase in six months. The firm’s affiliate is offering a five-year note that pays the firm a higher fee than a liquid short-term government securities strategy. Which action best reflects the meaning of trust and fiduciary duty in this client relationship?

• A. Hold cash until the client approves each trade personally.
• B. Buy the five-year note after disclosing the higher firm fee.
• C. Use liquid short-term government securities and document the client-first rationale.
• D. Split the funds between the note and short-term securities.

Best answer: C

What this tests: Regulation and Ethics

Explanation: Trust and fiduciary duty mean the client relies on the portfolio manager to exercise discretionary authority loyally and prudently in the client’s best interest. Here, the six-month liquidity need and capital-preservation mandate outweigh the firm’s incentive to use the higher-fee affiliated product.

In a client portfolio relationship, trust means the client places confidence in the portfolio manager’s honesty, competence, and judgment. Fiduciary duty means the manager must act with loyalty, care, and good faith, putting the client’s interests ahead of the firm’s or the manager’s own interests. In this scenario, the decisive facts are the capital-preservation mandate, the monthly withdrawals, the known six-month cash need, and the higher fee on the affiliated five-year note. A liquid short-term government securities strategy fits those constraints, while the note does not. Disclosure of a conflict is important, but it does not make an unsuitable or client-disadvantaging choice acceptable.

The key takeaway is that fiduciary duty is not just disclosure; it is client-first decision-making under discretionary authority.

• Disclosure alone fails because a disclosed conflict still cannot justify choosing an illiquid product over the client’s known six-month need.
• Partial compromise fails because putting any meaningful portion into the five-year note still weakens the required liquidity profile.
• Trade-by-trade approval fails because the account is discretionary, and avoiding action does not better serve the mandate.

Fiduciary duty requires the portfolio manager to put the client’s liquidity and preservation needs ahead of the firm’s higher compensation.

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Question 3

Topic: Regulation and Ethics

A portfolio manager at a Canadian investment management firm manages a retiree’s discretionary account. The client calls and says she is now willing to add a small high-yield allocation to increase income. The file contains this IPS excerpt:

• Objective: capital preservation and income
• Risk profile: low
• Fixed-income guideline: all holdings must be rated at least BBB
• Mandate changes: any change to objectives or constraints requires written client approval before implementation

What is the best next action?

• A. Use a high-yield ETF because the BBB limit applies only to direct bond purchases.
• B. Record the call and buy a small BB-rated position under existing discretion.
• C. Obtain written approval and amend the IPS before buying any below-BBB exposure.
• D. Wait for the next scheduled review before considering any change.

Best answer: C

What this tests: Regulation and Ethics

Explanation: A discretionary mandate allows the portfolio manager to act within the client’s documented instructions, not to change them based on a phone call alone. Because the IPS requires written approval for mandate changes and sets a BBB minimum, below-BBB exposure cannot be added until the mandate is formally updated.

The core obligation in discretionary management is to manage the account according to the client’s current documented mandate and suitability profile. Here, the IPS sets a low-risk profile and a minimum credit quality of BBB for all fixed-income holdings, so a high-yield allocation would conflict with the existing mandate. The client’s call is important because it may indicate a change in objectives or risk tolerance, but it does not by itself authorize trading outside the written constraints.

The proper process is to:

• discuss the proposed change and its risks
• confirm whether suitability information should be updated
• obtain written client approval for the revised mandate
• amend the IPS before implementation

A call note supports the file, but it does not replace the required written mandate change.

• Verbal consent only fails because discretion applies within the existing written mandate, not outside it.
• ETF workaround fails because a high-yield ETF still creates exposure inconsistent with the BBB minimum.
• Delay to annual review is unnecessary; the issue is missing written authorization, which can be addressed now.

Discretionary authority permits security selection within the mandate, not an undocumented change to a BBB minimum credit rule.

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Question 4

Topic: Regulation and Ethics

A portfolio manager at a Canadian investment management firm reviews a new client file.

Artifact: Account-opening excerpt

• Service selected: advice and trade recommendations
• IPS note: portfolio manager may rebalance without prior client contact
• Separate discretionary management agreement: not on file
• Client objective: balanced growth

What is the best supported next action?

• A. Clarify the service and obtain written discretionary authority before any trade without prior approval
• B. Use a one-time verbal client consent as standing authority for future trades
• C. Treat rebalancing as an administrative function that does not require trade approval
• D. Begin model rebalancing because the IPS already grants limited discretion

Best answer: A

What this tests: Regulation and Ethics

Explanation: The file is internally inconsistent. Selecting advice and trade recommendations indicates an advisory-only relationship, while the IPS note suggests discretionary authority. Until the intended service is clarified and proper discretionary authority is formally documented, trades cannot be made without prior approval.

Discretionary portfolio management requires clear authority for the portfolio manager to decide and implement trades without getting client instructions each time. In this file, the selected service points to an advisory-only relationship, where the client receives recommendations but must approve transactions. The IPS note permitting rebalancing without prior contact conflicts with that selection, and the absence of a discretionary management agreement means the documentation does not support a managed-account relationship.

• Confirm which service the client actually intended.
• If advisory-only is intended, remove the discretionary wording.
• If discretionary management is intended, complete the firm’s discretionary documentation before trading without prior approval.

The key takeaway is that rebalancing is still a trade decision, not a carve-out from the need for proper authority.

• IPS wording alone overreaches because a note cannot override an advisory-only service selection when no discretionary agreement is on file.
• Rebalancing exception fails because changing holdings is an investment decision, not a purely administrative task.
• Standing verbal consent is not enough to convert an advisory relationship into ongoing discretionary authority.

The file mixes advisory-only and discretionary terms, so the firm cannot trade without prior client approval until proper discretionary authority is documented.

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Question 5

Topic: Regulation and Ethics

A Canadian investment management firm registered under NI 31-103 is onboarding a new portfolio manager to a discretionary balanced mandate. Before granting order-entry access, the chief compliance officer notes that the new hire will handle confidential client information, may receive issuer hospitality, and has a personal trading account. What is the best next step?

• A. Require review and written attestation to the code of ethics before access.
• B. Complete mandate guideline training first and address ethics at the first review.
• C. Wait for a personal-trading request before reviewing ethical standards.
• D. Grant supervised order-entry access and collect the ethics attestation at year-end.

Best answer: A

What this tests: Regulation and Ethics

Explanation: The code of ethics is a preventive control that tells employees how to act when handling client assets, confidential information, and conflicts. Because this hire will soon have discretionary trading access, the firm should communicate and document those standards before any trading or personal-account activity begins.

A code of ethics in an investment management firm is designed to protect clients by translating fiduciary and professional standards into day-to-day rules of conduct. It typically covers conflicts of interest, personal trading, gifts and entertainment, confidential information, and fair dealing. In an onboarding workflow, the proper sequence is to have the new portfolio manager review and attest to the code before granting order-entry access. That establishes the expected standard in advance, creates evidence that the individual understands it, and supports monitoring from day one. Strategy or mandate training may also be important, but those steps do not serve the code’s main purpose: setting and documenting client-first behaviour before a risk event occurs.

• Year-end attestation is too late because ethics controls should be in place before discretionary access begins.
• Mandate training first focuses on portfolio rules, not the firm-wide conduct standards for conflicts and confidentiality.
• Wait for a request is reactive and defeats the code’s role as a preventive control.

The code of ethics should be acknowledged before discretionary activity so client-first conduct and conflict rules are established before any trading occurs.

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Question 6

Topic: Regulation and Ethics

A portfolio manager at a CIRO-regulated investment dealer manages Ms. Roy’s discretionary account under a growth mandate. At the annual review, Ms. Roy says she retired last month, now needs $90,000 a year from the portfolio, and wants lower volatility. The managed account agreement is still in force, but no KYC update or revised mandate has been completed. What should the portfolio manager do first?

• A. Raise one year of withdrawals in cash, then review the mandate.
• B. Continue rebalancing under the existing growth mandate until quarter-end.
• C. Promptly update KYC and reassess suitability before continuing discretionary trading.
• D. Switch to lower-volatility ETFs under the current mandate.

Best answer: C

What this tests: Regulation and Ethics

Explanation: A signed managed account agreement does not remove the portfolio manager’s ongoing KYC and suitability obligations. Once the PM learns of a material change in retirement status, cash-flow needs, and risk tolerance, the mandate must be reassessed before normal discretionary trading continues.

In a discretionary account, the portfolio manager can choose and execute trades without client pre-approval for each order, but only within a mandate that remains suitable. Here, the client’s retirement changes time horizon and dependence on portfolio assets, the $90,000 annual withdrawal need changes liquidity requirements, and the request for lower volatility changes the risk profile. Those are material client changes.

The proper control response is to promptly update KYC, review whether the existing growth mandate and any IPS still fit the client, and document any needed revisions before continuing normal discretionary management. Portfolio changes such as holding more cash or using lower-volatility ETFs may be appropriate later, but they are implementation choices, not the first regulatory step.

• Continuing normal rebalancing fails because discretionary authority does not permit trading on stale client information.
• Raising cash first may become part of the revised strategy, but it does not replace the required KYC and suitability review.
• Switching to lower-volatility ETFs addresses implementation, not the primary mandate-control issue.

Retirement, new cash-flow needs, and a lower-risk objective are material changes that require a KYC and suitability review before the PM keeps using discretion.

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Question 7

Topic: Regulation and Ethics

A portfolio manager places one block buy for three discretionary accounts at a Canadian investment management firm. The firm’s compliance policy requires any partial fill to be allocated on the same percentage basis across eligible accounts, and employee-related accounts cannot receive preferential treatment.

Exhibit: Partial-fill allocation

Based on the exhibit, what is the best supported conclusion about the purpose of regulation?

• A. The exhibit shows employee-related accounts may be filled first.
• B. The exhibit shows the allocation was fair because client fill rates matched.
• C. The exhibit shows why regulation favours smaller accounts to boost returns.
• D. The exhibit shows why regulation targets preferential allocation and conflicts.

Best answer: D

What this tests: Regulation and Ethics

Explanation: The two client accounts each received only 50% of their requested shares, while the employee-related account received 100%. That uneven treatment illustrates why regulation requires fair allocation and conflict controls: to protect clients from being disadvantaged and to support confidence in the integrity of portfolio management and trading.

The core concept is that investment-industry regulation is not designed to maximize returns; it is designed to protect clients and preserve trust in fair, orderly markets. In a discretionary setting, the manager controls trade entry and allocation, so regulation and firm controls must limit conflicts and prevent favoritism.

\[ \begin{aligned} \text{Pension fill rate} &= 20{,}000 / 40{,}000 = 50\% \\ \text{Foundation fill rate} &= 10{,}000 / 20{,}000 = 50\% \\ \text{Employee-related fill rate} &= 10{,}000 / 10{,}000 = 100\% \end{aligned} \]

Because the employee-related account received a better allocation than the client accounts, the exhibit shows the need for regulation around fair dealing, supervision, and conflicts of interest. Matching client fill rates alone is not enough when another eligible account is clearly favoured.

• Smaller-account priority fails because allocation rules are about fairness, not boosting returns by filling small accounts first.
• Client-only match fails because fairness must apply across all eligible accounts, and the employee-related account received a better fill.
• Employee priority fails because regulation is meant to prevent preferential treatment, not authorize it.

Client accounts received 50% fills while the employee-related account received 100%, showing why regulation addresses preferential treatment and conflicts.

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Question 8

Topic: Regulation and Ethics

A portfolio manager at a Canadian investment management firm is onboarding a new discretionary account for a high-net-worth client. The client has funded the account and approved a draft IPS, but the managed-account agreement still says discretionary trading authority is “to be confirmed,” and no signed restriction schedule is on file. Markets have moved and the portfolio manager wants to invest the cash today. What is the best next step?

• A. Obtain signed discretionary authority and documented restrictions before entering any trade.
• B. Rely on the client’s verbal approval and ask compliance to update the file afterward.
• C. Enter the initial trades now and complete the authority wording before settlement.
• D. Invest the cash temporarily in money market instruments until the agreement is finalized.

Best answer: A

What this tests: Regulation and Ethics

Explanation: In a discretionary account, trading must not begin until the firm has clear written authority and any client restrictions documented. Funding the account, verbal consent, or a draft IPS shows intent, but none of those replaces executed managed-account documentation.

The core control is that discretionary trading authority must be clearly documented before the first order is placed. In this scenario, the agreement does not yet confirm discretion and the restriction schedule is missing, so the portfolio manager cannot know with certainty what authority exists or what limits apply. Trading first and fixing paperwork later would create unauthorized-trading risk and possible mandate breaches. The proper sequence is to complete and retain the signed managed-account documents, confirm any restrictions, and only then begin implementing the mandate. The closest distractor is temporarily investing cash, but that is still a discretionary investment decision and still requires documented authority.

• Entering trades first skips a required control and treats documentation as an after-the-fact cleanup step.
• Verbal approval is not enough because discretionary authority and restrictions must be evidenced in the client file.
• Parking cash in money market instruments still involves a trade, so it does not avoid the authority problem.

Clear written discretionary authority and restrictions must be on file before any trade so the portfolio manager does not act without documented mandate authority.

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Question 9

Topic: Regulation and Ethics

At a Canadian investment management firm registered under NI 31-103, a portfolio manager submits this memo for a block purchase in a thinly traded stock for discretionary accounts with identical Canadian equity mandates.

Artifact: Investment-committee memo excerpt

• Order size: $6 million; expected same-day fill about 35%
• Eligible accounts: 12 discretionary accounts with identical guidelines
• Proposed first-fill allocation: 100% to the 4 accounts in the firm’s new consultant-reporting composite
• Reason: “A stronger short-term composite track record will support business development; the other accounts can be filled later if liquidity improves.”

What is the best next action?

• A. Allow the proposal because the mandates and guidelines are identical.
• B. Allow the proposal after quarterly conflict disclosure to affected clients.
• C. Apply the firm’s pre-set fair-allocation policy across all 12 eligible accounts.
• D. Allow the proposal if later fills use the same average cost.

Best answer: C

What this tests: Regulation and Ethics

Explanation: The memo reveals a clear conflict: scarce liquidity is being directed to selected accounts to improve the firm’s marketability, not to serve each eligible client’s best interest. In a discretionary setting, similarly situated clients should be treated fairly through a documented allocation process.

This scenario tests fiduciary duty and conflict management in discretionary portfolio management. When multiple eligible accounts share the same mandate and a block order is unlikely to be fully filled, the portfolio manager cannot favour certain accounts because doing so helps the firm’s sales effort or consultant narrative. That is the firm’s interest, not the clients’ interest.

A proper response is to use the firm’s pre-established fair-allocation process for partial fills, such as a pro rata or other consistently applied method across eligible accounts, unless a documented client-specific constraint justifies a difference. Disclosure by itself does not cure an allocation that is unfair at the time it is made. Likewise, offering other clients access later or at an average cost does not recreate the same liquidity, timing, or execution opportunity.

The key takeaway is that discretionary authority must be exercised with loyalty, fairness, and conflict control.

• Disclosure only fails because telling clients later does not make an inequitable allocation fair.
• Same mandate fails because identical guidelines do not permit favouring some clients for the firm’s marketing benefit.
• Average-cost matching fails because later fills may not provide the same liquidity or execution opportunity.

Favouring selected accounts for marketing reasons puts the firm’s interest ahead of similarly situated clients, so the partial fill should follow a documented fair-allocation method.

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Question 10

Topic: Regulation and Ethics

A portfolio manager runs a CAD discretionary balanced account for a retired client whose mandate emphasizes income and capital preservation. The manager wants to add Bank ABC common stock and will not make an offsetting sale first. Based on the exhibit, what is the largest additional purchase that still complies with the mandate?

Exhibit: Mandate excerpt and current portfolio

• A. CAD 20,000
• B. CAD 100,000
• C. CAD 40,000
• D. CAD 120,000

Best answer: A

What this tests: Regulation and Ethics

Explanation: A discretionary trade must satisfy every relevant mandate control at the time of execution. The account has room for CAD 40,000 more in equities, but Bank ABC can rise by only 1% of portfolio value before hitting the 6% single-issuer cap, so the largest compliant purchase is CAD 20,000.

In a discretionary account, day-to-day trades must be checked against all mandate restrictions, not just the portfolio manager’s investment view. Here, the proposed purchase must fit both the overall equity range and the issuer concentration limit.

• Equity headroom: 50% minus 48% = 2% of CAD 2,000,000 = CAD 40,000.
• Bank ABC headroom: 6% minus 5% = 1% of CAD 2,000,000 = CAD 20,000.

The smaller amount governs because both rules apply at the same time. A purchase larger than CAD 20,000 would still fit the equity band but would breach the single-issuer guideline.

• CAD 40,000 uses only the equity ceiling and ignores the tighter issuer cap.
• CAD 100,000 treats the current 5% Bank ABC weight as available room instead of existing exposure.
• CAD 120,000 applies the full 6% issuer maximum to portfolio value without subtracting the current 5% holding.

The binding constraint is the remaining 1% single-issuer room, which equals CAD 20,000 on a CAD 2,000,000 portfolio.

Continue with full practice

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Related focused pages

• Free PMT (2026) Full-Length Practice Exam
• PMT (2026): The Institutional Portfolio Management Process
• PMT (2026): Portfolio Management Organization and Operations
• PMT (2026): Managing Equity Portfolios
• PMT (2026): Managing Fixed Income Portfolios
• PMT (2026): Permitted Use of Derivatives in Mutual Funds
• PMT (2026): Creating New Portfolio Management Mandates
• PMT (2026): Alternative Investment Management
• PMT (2026): Client Portfolio Reporting and Performance Attribution

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