Conflicts of Interest - Other Prohibited Behaviors
Actions that are considered either unethical behavior or conflicts of interest include the following:
- Misrepresentations - IA cannot misrepresent his/her qualifications, services or fees to clients or potential clients
- Third-party research - IA cannot use or rely on third-party research for investment recommendations or reports without disclosing this fact to the client
- Advertisements - IA cannot use an advertisement that does not comply with the guidelines of the Investment Advisers Act of 1940
- Failure to state important facts - for example, failing to state the tax implication of a transaction
- Failure to follow a client's instructions
- Making misleading or untrue statements, including the following:
- Stating or implying that either the state Administrator or the SEC approves or endorses the IA
- Making exaggerated claims about investment performance
- Stating or implying that either the Administrator or the SEC approves of a specific investment
- Making inaccurate statement regarding commissions or markups
- Giving inaccurate market quotations
- Misrepresenting the client's account status
Exam Tips and Tricks
The exam is likely to contain a number of questions on prohibited behaviors such as misleading statements and misrepresentations. Consider this sample question:
- All of the following are unethical behaviors prohibited under the Uniform Securities Act EXCEPT:
- deliberately failing to follow a client's instructions.
- executing a trade the IA believes to be unsuitable at the client's orders.
- telling a client that the IA is a Registered Investment Advisor and has therefore been approved by the state Administrator.
- failing to tell a client that making trades recommended by the IA will subject the client to a large tax liability.
The correct answer is "b": the IA must follow client orders. It would be unethical only if the IA recommended the inappropriate trade.