American Institute of Certified Public Accountants (AICPA) Practice Exam

Are investments made by covered members in an investment club that acquires securities of a client considered a financial interest?

1. No, they are not considered a financial interest

2. Yes, they are considered direct financial interest

3. Yes, they are considered indirect financial interest

4. Only if the investment club is for profit

The correct answer is: Yes, they are considered indirect financial interest

Investments made by covered members in an investment club that acquires securities of a client are considered an indirect financial interest. This classification arises because a covered member does not have direct control over the investment decisions made by the club, yet they still hold a stake in the outcome of the investment. The reasoning for determining it as an indirect financial interest lies in how the investment club functions. Even though the covered member is part of the club and may benefit from profits, they do not directly invest in the client’s securities themselves; rather, their investment is pooled with that of others in the club. However, since the club is trading in the securities of a client entity, this creates a potential conflict of interest that the covered member must consider under professional and ethical standards. In this case, characterizing it as a direct financial interest would imply that the member has oversight or unilateral decision-making power over the investments, which isn't the case here. Therefore, viewing it as an indirect financial interest reflects the nature of the covered member's involvement and complies with established guidelines regarding conflicts of interest in the profession.