NASAA Series 63Ethical Practices and ObligationsMedium
An investment adviser representative (IAR) is managing a discretionary account for a client. The IAR decides to purchase shares of a newly public biotechnology company for the client's portfolio. The IAR also owns a substantial amount of stock in the same biotechnology company, which they acquired as an early investor, and stands to benefit significantly if the stock price increases due to new buying interest. The IAR did not disclose their personal holdings or potential conflict of interest to the client before making the purchase. This scenario best describes:
- AUndisclosed Conflict of Interest
- BUnsuitable Recommendation
- CMarket Manipulation
- DSelling Away
Show answer & explanationAnswer & explanation
Correct answer: A. Undisclosed Conflict of Interest
The IAR has a personal financial interest that could influence their professional recommendation, creating a conflict of interest. Failing to disclose this conflict to the client before executing the trade is an ethical violation, as it compromises the IAR's fiduciary duty.
Why the other options are wrong
- B. While it could also be unsuitable, the core issue is the undisclosed personal stake.
- C. Market manipulation involves artificial price influence, which isn't directly described here.
- D. Selling away involves executing transactions outside the firm.
Undisclosed Conflict of Interest
A situation where an investment professional has a personal interest (financial or otherwise) that could influence their advice or actions for a client, and this interest is not revealed to the client.
- Fiduciary duty requires acting in client's best interest.
- Conflicts must be disclosed to clients.
- Disclosure allows clients to make informed decisions.
Memory trick: Reveal the hidden bias, maintain client trust.