NASAA Series 63Ethical Practices and ObligationsHard
A client calls their agent and states, 'I need to sell all my shares of XYZ Corp. immediately, as I'm worried about the news article I just read.' The agent responds, 'I understand your concern, but based on my analysis, the article is misleading, and the stock is likely to rebound. I recommend you hold.' The client insists on selling. If the agent refuses to place the sell order, citing their professional judgment that holding is in the client's best interest, the agent has committed:
- AA suitability violation
- BFailure to follow client instructions
- CUnauthorized trading
- DChurning
Show answer & explanationAnswer & explanation
Correct answer: B. Failure to follow client instructions
While agents have a suitability obligation for recommendations, they must also follow explicit, lawful client instructions for non-discretionary accounts. The client gave a clear, immediate sell order. Refusing to execute a client's direct order, even if the agent believes it's unwise, constitutes a failure to follow client instructions, which is a serious ethical and regulatory violation unless the order itself is illegal or impossible to execute.
Why the other options are wrong
- A. A suitability violation relates to recommending or executing unsuitable trades. Here, the agent is refusing to execute a client-directed trade, not recommending one.
- C. Unauthorized trading is executing trades without permission; here, the agent is refusing to execute a trade WITH permission (a direct order).
- D. Churning involves excessive trading, which is the opposite of refusing to trade.
Following Client Instructions
Agents must promptly and accurately execute all lawful and reasonable client instructions for non-discretionary accounts.
- Client's explicit order takes precedence over agent's judgment in non-discretionary accounts.
- Failure to follow instructions can lead to significant liability.
- Exceptions are rare (e.g., illegal order, insufficient funds).
Memory trick: Client's word is law, unless it breaks the law.