NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesEasy
A client, Mr. Henderson, informs his investment adviser representative (IAR) that he plans to purchase a new primary residence in 6 months and will need to liquidate a significant portion of his investment portfolio to fund the down payment. The IAR, without Mr. Henderson's explicit consent, shares this information with a mortgage broker who is a close business associate, anticipating that the mortgage broker might offer Mr. Henderson a favorable rate. Which ethical obligation has the IAR most likely violated?
- AThe duty of due diligence.
- BThe duty to supervise.
- CThe duty of confidentiality.
- DThe duty of reasonable basis.
Show answer & explanationAnswer & explanation
Correct answer: C. The duty of confidentiality.
Investment adviser representatives owe their clients a duty of confidentiality, meaning they must not disclose non-public personal information about clients to third parties without explicit client consent. Sharing Mr. Henderson's financial plans with a mortgage broker, even with good intentions, violates this duty.
Why the other options are wrong
- A. The duty of due diligence relates to thorough research and investigation before making recommendations, which is not the primary issue here.
- B. The duty to supervise applies to supervising other employees, not to the IAR's direct interaction with a client's confidential information.
- D. The duty of reasonable basis concerns ensuring recommendations are suitable and have a sound rationale, which is not the core violation in this scenario.
Duty of Confidentiality
Investment advisers and their representatives must protect the non-public personal information of their clients and not disclose it to third parties without explicit client consent, unless required by law.
- Applies to all non-public personal information.
- Requires explicit client consent for disclosure.
- Exceptions exist for legal or regulatory requirements.
Memory trick: IARs must act like trustworthy confidantes, keeping secrets and advising wisely.