NASAA Series 63Ethical Practices and ObligationsMedium
An investment adviser representative (IAR) is also a licensed real estate agent. The IAR recommends to a client that they invest a significant portion of their portfolio into a real estate development project in which the IAR has an undisclosed ownership interest. The IAR stands to gain a substantial commission and a share of the profits from this project. Which unethical practice is most clearly being committed?
- AChurning.
- BUnauthorized trading.
- CUndisclosed conflict of interest.
- DMarket manipulation.
Show answer & explanationAnswer & explanation
Correct answer: C. Undisclosed conflict of interest.
The IAR is recommending an investment in which they have a personal financial stake without disclosing this to the client. This creates a clear conflict of interest where the IAR's personal gain could influence their advice, and failing to disclose it is unethical.
Why the other options are wrong
- A. Churning involves excessive trading to generate commissions, which is not described.
- B. Unauthorized trading involves executing trades without client permission, which is not the primary issue here.
- D. Market manipulation involves artificially influencing security prices, which is not occurring.
Undisclosed Conflict of Interest
A situation where a financial professional has a personal interest that could potentially influence their advice or actions regarding a client's account, and this interest is not revealed to the client.
- Personal interest conflicts with client's best interest.
- Must be disclosed to clients.
- Can lead to biased recommendations.
Memory trick: Always weigh your own gains against the client's, and tell them about it.