NASAA Series 63Communication with Customers and ProspectsMedium
A client receives an email from their investment adviser representative (IAR) recommending the purchase of a specific exchange-traded fund (ETF). The IAR fails to disclose that the IAR's firm receives a higher commission or compensation for sales of this particular ETF compared to other similar ETFs. Under the Uniform Securities Act, this omission would most likely be considered a violation related to:
- AConflict of interest disclosure.
- BTimely execution of trades.
- CPerformance guarantee.
- DUnregistered security offering.
Show answer & explanationAnswer & explanation
Correct answer: A. Conflict of interest disclosure.
An IAR recommending a security from which their firm (and by extension, the IAR) receives higher compensation creates a conflict of interest. The Uniform Securities Act requires full and fair disclosure of all material conflicts of interest to clients, enabling them to make informed decisions.
Why the other options are wrong
- B. The scenario concerns a recommendation, not the execution of a trade.
- C. No guarantee of performance is mentioned in the scenario.
- D. The question implies a registered security, focusing on the omission, not the registration status.
Conflict of Interest Disclosure
Investment advisers and agents must disclose all material conflicts of interest to clients. This includes situations where the adviser or firm stands to benefit financially from a client's investment decision beyond standard advisory fees.
- Must disclose material conflicts.
- Higher compensation for certain products is a conflict.
- Enables clients to make informed decisions.
- Required under USA.
Memory trick: Ethical IA conduct means clear paths, no hidden turns.