Series 65

AAA

Conflicts of Interest - Conflicts of Interest

Churning
As we discussed in previous sections, churning or excessive trading is an unethical business practice and is subject to the penalties.

  • By definition, excessive trading is also a conflict of interest, since in most cases an IA who engages in this behavior receives commissions from such trades.

  • This is a clear case of conflict of interest, since an IA must always put their client's interests first.

Client Loans
It is almost always considered unethical to borrow money from or loan money to a client.

  • Since the advisory relationship allows the IA to know confidential information about the client's income and assets, it is a breach of confidentiality (see page 42) to borrow money from the client.

  • Furthermore, loaning money in either direction is likely to influence the advice given, thus making it almost impossible for the IA to give objective advice.

  • Exceptions: The allowable exceptions to borrowing money from a client would be if the client:
    • is in the business of lending money, such as a bank or mortgage company
    • is an affiliate of an investment adviser
    • is a broker-dealer

The allowable exceptions to lending money to a client would be if the IA is:

    • a financial institution that normally engages in lending money
    • affiliated with the IA, such as an employee of the IA.


Look Out!
Remember that it is OK to borrow from or lend to someone who is an affiliate of the IA. In the test, this is often simply referred to as "an affiliate." This can be confusing, but both answers ("an affiliate" and "an affiliate of the IA") are considered correct.

Investment Adviser Duties
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