NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesHard
An Investment Adviser Representative (IAR) for a state-registered IA has been granted discretionary authority over a client's account. The client has instructed the IAR not to invest in any companies involved in tobacco production. The IAR later identifies a highly profitable investment opportunity in a tobacco company that perfectly aligns with the client's financial goals and risk tolerance, ignoring the specific restriction. The IAR executes the trade for the client's account. Which of the following best describes the IAR's violation?
- AFailure to maintain adequate records.
- BBreach of fiduciary duty by violating client instructions.
- CEngaging in unauthorized trading.
- DFailure to obtain best execution.
Show answer & explanationAnswer & explanation
Correct answer: B. Breach of fiduciary duty by violating client instructions.
An IAR, even with discretionary authority, must always adhere to specific client instructions and restrictions. By investing in a tobacco company despite the client's explicit prohibition, the IAR has breached their fiduciary duty of loyalty and acted contrary to the client's best interest as defined by the client themselves.
Why the other options are wrong
- A. While record-keeping is important, the primary violation here is the disregard for client instructions, not a record-keeping issue.
- C. This is not unauthorized trading because the IAR has discretionary authority; the violation is ignoring the specific restriction within that authority.
- D. While important, best execution is about price and speed, not adherence to client-specific investment prohibitions.
IAR Fiduciary Duty & Client Instructions
An IAR, even with discretionary authority, must always adhere to explicit client instructions and restrictions, as violating them constitutes a breach of fiduciary duty.
- Fiduciary duty includes loyalty and obedience.
- Discretionary authority does not override specific client prohibitions.
- Violating instructions is a breach of trust and duty.
Memory trick: Discretion gives power, but client's words are the ultimate law.