NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesMedium
An investment adviser representative (IAR) for a state-registered investment adviser (IA) has been granted discretion by a client to manage their portfolio. The client has specifically requested that the IAR avoid investing in any companies involved in tobacco production. The IAR, believing that tobacco stocks offer significant growth potential, purchases shares in a major tobacco conglomerate for the client's portfolio. Which of the following ethical obligations has the IAR most likely violated?
- AThe duty of loyalty.
- BThe duty of care.
- CThe duty of best execution.
- DThe duty to disclose conflicts of interest.
Show answer & explanationAnswer & explanation
Correct answer: A. The duty of loyalty.
The IAR violated the duty of loyalty by acting against the client's explicit instructions and placing their own judgment above the client's stated preferences, even with discretionary authority.
Why the other options are wrong
- B. The duty of care involves exercising diligence and prudence, but the more direct violation here is going against a client's specific request.
- C. Best execution relates to obtaining the most favorable terms for a client's transactions, not following specific investment mandates.
- D. While conflicts should be disclosed, the primary violation is the action taken contrary to client instruction, not merely a failure to disclose a potential conflict.
Duty of Loyalty (IAR)
An IAR's fundamental obligation to act solely in the best interest of their clients, placing client interests above their own.
- Requires IARs to avoid conflicts of interest.
- Mandates following client's specific instructions.
- Includes seeking the best execution for client trades.
Memory trick: Always serve your client's heart, not just your smarts.