NASAA Series 65, Uniform Investment Adviser Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesMedium
A client of an investment adviser representative (IAR) asks the IAR to provide a personal loan to cover an unexpected medical expense. The IAR, feeling sympathetic, agrees to lend the client $5,000, promising to formalize the agreement with a promissory note. Under the Uniform Securities Act, how should the IAR proceed?
- AThe IAR can make the loan if the client is an immediate family member, as this falls under an exception.
- BThe IAR can make the loan if it is approved in writing by the IAR's broker-dealer or investment adviser firm.
- CThe IAR should decline the loan request as it is generally a prohibited practice for IARs to lend money to clients.
- DThe IAR may proceed with the loan if the loan terms are fair and reasonable and disclosed to the client.
Show answer & explanationAnswer & explanation
Correct answer: C. The IAR should decline the loan request as it is generally a prohibited practice for IARs to lend money to clients.
Investment adviser representatives are generally prohibited from borrowing money from or lending money to clients. This rule is in place to prevent conflicts of interest, exploitation, and the blurring of professional boundaries that could compromise the IAR's fiduciary duty.
Why the other options are wrong
- A. While some exceptions exist for registered representatives of broker-dealers lending to or borrowing from immediate family, IARs generally face a stricter prohibition across the board. The question does not state the client is an immediate family member.
- B. Firm approval does not generally make an otherwise prohibited lending arrangement permissible; the prohibition is usually statutory.
- D. Fairness and disclosure do not override the outright prohibition on lending to clients for IARs.
Prohibited Lending/Borrowing (IAR)
The general prohibition for Investment Adviser Representatives from lending money to or borrowing money from clients.
- Prevents conflicts of interest.
- Maintains professional boundaries.
- Protects clients from potential exploitation.
- A core aspect of fiduciary duty.
Memory trick: Fiduciary's financial lines must never be crossed with clients.