NASAA Series 63Ethical Practices and ObligationsHard
An investment adviser representative (IAR) is managing a discretionary account for a high-net-worth client. The IAR has identified an attractive investment opportunity that requires a minimum investment of $500,000. To meet this minimum, the IAR combines funds from three different client accounts, including the discretionary account, without obtaining explicit consent from the other two clients whose accounts are non-discretionary. Which unethical practice is the IAR committing?
- AMarket timing.
- BFront-running.
- CCherry-picking.
- DCommingling.
Show answer & explanationAnswer & explanation
Correct answer: D. Commingling.
Commingling is the practice of mixing client funds with funds from other clients or with the firm's own funds. While pooling funds for a block trade can be acceptable with proper disclosure and consent, doing so from non-discretionary accounts without explicit consent is a violation of the prohibition against commingling.
Why the other options are wrong
- A. Market timing involves short-term trading to profit from price fluctuations, which is not the issue presented.
- B. Front-running involves trading on advance knowledge of a client's large order, which is not described here.
- C. Cherry-picking involves allocating favorable trades to preferred accounts, not combining funds to meet a minimum.
Commingling
The unethical and illegal practice of mixing client funds with an agent's or firm's own funds, or mixing funds from different clients without specific authorization, making it difficult to determine ownership.
- Mixing client funds with personal/firm funds.
- Mixing funds from different clients without consent/proper procedure.
- Prohibited to protect client assets and prevent fraud.
Memory trick: Keep client jars separate; don't mix the cookies!