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:

  1. All of the following are unethical behaviors prohibited under the Uniform Securities Act EXCEPT:
    1. deliberately failing to follow a client's instructions.
    2. executing a trade the IA believes to be unsuitable at the client's orders.
    3. telling a client that the IA is a Registered Investment Advisor and has therefore been approved by the state Administrator.
    4. 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.

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