NASAA Series 63Ethical Practices and ObligationsMedium
An agent has established a personal relationship with a client over several years. The client, a busy executive, asks the agent to act as a co-trustee on a newly established trust for the client's minor children, offering a substantial annual fee for this service. The agent accepts without disclosing this arrangement to their broker-dealer or obtaining the firm's written approval. This action is a violation of the Uniform Securities Act regarding:
- AUndisclosed outside business activities.
- BCommingling of funds.
- CSelling away.
- DFront-running.
Show answer & explanationAnswer & explanation
Correct answer: A. Undisclosed outside business activities.
Serving as a co-trustee for a client, especially for a fee, constitutes an outside business activity. Agents are required to disclose such activities to their firm and often obtain written approval to ensure no conflicts of interest or other violations occur.
Why the other options are wrong
- B. Commingling involves mixing personal and client funds, which is not described.
- C. Selling away refers to executing securities transactions outside the firm's supervision, not acting as a trustee.
- D. Front-running involves trading on non-public information ahead of client orders, which is not relevant here.
Undisclosed Outside Business Activities
Agents and IARs must disclose any outside business activities, especially those involving clients or compensation, to their employing firm and often require written approval to prevent conflicts of interest or other ethical breaches.
- Includes any activity for compensation outside the firm.
- Must be disclosed to the broker-dealer/investment adviser.
- Firm approval is typically required.
- Protects against conflicts of interest and reputational risk.
Memory trick: Outside the firm, inside the rules.