NASAA Series 63Ethical Practices and ObligationsHard
An investment adviser representative (IAR) manages several client accounts. To facilitate easier management and potential cost savings on trading, the IAR combines all client orders for a particular security into one large block trade. After executing the block trade, the IAR allocates the shares to the various client accounts, but consistently allocates the most profitable trades (e.g., shares purchased at a lower price that quickly appreciated) to their own personal account or to favored clients, while less profitable or losing trades are allocated to other clients. This practice is known as:
- ACherry-picking
- BMarket Manipulation
- CInterpositioning
- DFront-running
Show answer & explanationAnswer & explanation
Correct answer: A. Cherry-picking
Cherry-picking, or 'late trading,' is the unethical practice of allocating profitable trades from a block order to favored accounts (including the IAR's own) and less profitable or losing trades to other accounts. This violates the IAR's fiduciary duty to treat all clients fairly.
Why the other options are wrong
- B. Market manipulation involves artificially influencing security prices.
- C. Interpositioning involves inserting an unnecessary third party between a client and the best available market price.
- D. Front-running involves trading on advance knowledge of a client's large order.
Cherry-picking (Late Trading)
An unethical practice where an investment adviser allocates profitable trades from a block order to their own or favored accounts, while allocating less profitable or losing trades to other clients.
- Violates fiduciary duty of fair dealing.
- Exploits information asymmetry and discretion.
- Prohibited by securities regulations.
Memory trick: Picking the best cherries for yourself, leaving the bruised ones for others.