NASAA Series 63Ethical Practices and ObligationsMedium
An investment adviser representative (IAR) maintains several client accounts. To manage these accounts efficiently, the IAR combines all client funds into a single master account at a brokerage firm. From this master account, the IAR makes trades and allocates profits and losses proportionally to each client's individual sub-account. Which unethical practice is the IAR committing?
- ACommingling
- BChurning
- CSelling Away
- DFront-running
Show answer & explanationAnswer & explanation
Correct answer: A. Commingling
Commingling is the unethical practice of mixing client funds with the funds of the investment adviser or other clients. This practice is prohibited because it can obscure ownership, create conflicts of interest, and make it difficult to properly account for client assets.
Why the other options are wrong
- B. Churning involves excessive trading in a client's account to generate commissions, which is not described here.
- C. Selling away refers to an agent selling securities not offered by their broker-dealer, which is not the scenario.
- D. Front-running is trading on inside information before a client's large order, which is not depicted.
Commingling
Commingling is the unethical and illegal practice of mixing client funds or securities with those of the adviser or other clients.
- Prohibited practice under securities regulations.
- Can lead to loss of client identity and improper accounting.
- Creates potential conflicts of interest and makes auditing difficult.
Memory trick: Don't mix client cash, keep it clean and separate.