NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesMedium
An Investment Adviser Representative (IAR) has been approached by a client who expresses interest in purchasing a security that the IAR knows is highly illiquid and unsuitable for the client's stated financial goals and risk tolerance. The client insists on making the purchase despite the IAR's initial warnings. What is the IAR's most appropriate course of action under the Uniform Securities Act?
- ARefuse to execute the trade, explaining that it violates the IAR's fiduciary duty to recommend suitable investments.
- BExecute the trade as requested by the client, documenting the client's insistence and the IAR's warnings.
- CSuggest an alternative, less risky investment that still meets some of the client's expressed desires.
- DRefer the client to another IAR who may be willing to execute the requested trade.
Show answer & explanationAnswer & explanation
Correct answer: A. Refuse to execute the trade, explaining that it violates the IAR's fiduciary duty to recommend suitable investments.
An IAR has a fiduciary duty to always act in the best interest of their client. If a client insists on an investment that is clearly unsuitable for their profile, the IAR must refuse to execute the trade, as doing so would violate their fiduciary obligation, even with documentation.
Why the other options are wrong
- B. Executing an unsuitable trade, even with documentation, does not absolve the IAR of their fiduciary duty.
- C. While suggesting alternatives is good practice, if the client still insists on the unsuitable option, the IAR must ultimately refuse.
- D. Referring a client to another IAR to execute an unsuitable trade is unethical and does not resolve the fiduciary duty issue.
IAR Fiduciary Duty (Unsuitable Trade Refusal)
An IAR must refuse to execute a trade if it is deemed unsuitable for the client, even if the client insists, due to their fiduciary obligation.
- IARs have a fiduciary duty to clients.
- Suitability is paramount.
- Client insistence does not override fiduciary duty.
Memory trick: Always serve the client's best interest, like a loyal guardian.