NASAA Series 63Ethical Practices and ObligationsMedium
An investment adviser representative (IAR) manages a client's portfolio and frequently receives research reports from a brokerage firm in exchange for directing client trades through that firm. The IAR uses these reports to inform their investment decisions for the client accounts. The IAR has not explicitly disclosed this arrangement, known as a 'soft dollar arrangement,' to the client. Which ethical principle is primarily being violated by the IAR?
- AChurning.
- BUnauthorized trading.
- CUndisclosed soft dollar arrangement.
- DMarket manipulation.
Show answer & explanationAnswer & explanation
Correct answer: C. Undisclosed soft dollar arrangement.
A soft dollar arrangement, where an IAR receives benefits (like research) from a broker in exchange for client trades, must be fully disclosed to clients. Failing to disclose this arrangement represents a violation of the IAR's fiduciary duty to be transparent about potential conflicts of interest.
Why the other options are wrong
- A. Churning involves excessive trading for commissions, not the receipt of research benefits.
- B. Unauthorized trading involves executing trades without client permission, which is not the issue here.
- D. Market manipulation involves artificially influencing security prices, which is unrelated.
Soft Dollar Disclosure
The requirement for investment advisers to disclose to clients any 'soft dollar' arrangements, where the adviser receives products or services (like research) from a broker-dealer in exchange for directing client brokerage transactions to that firm.
- Must be disclosed to clients.
- Must benefit the client.
- Can create potential conflicts of interest.
Memory trick: Soft dollars need hard disclosures, always.