When a broker solicits you to purchase securities not held or offered by the brokerage firm. As a rule, such activities are a violation of securities regulations. Typically, when a broker is selling away, the investments are in the form of private placements or other non-public investments.
The basic idea here is that if you are selling away, as a broker, you are attempting to sell something that you do not have rights to, or have not been authorized to sell. Such activity is considered fraudulent.
It is usually 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 below) 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.
Exceptional circumstances in which it would be allowable for an IA to borrow money from a client are these:
- if the client is in the business of lending money
- if the client is an affiliate of the investment advisor
- if the client is a broker-dealer.
Exceptional circumstances in which it would be allowable for an IA to lend money to a client are these:
- if the IA is a financial institution that normally engages in lending money
- if the client is affiliated with the IA, such as an employee of the IA.
Remember, it is OK to borrow from or lend to someone who is an affiliate of the investment advisor or broker-dealer. On the exam, this is usually referred to simply as "an affiliate". his can be confusing, but these answers are considered correct.
Confidentiality is required for all aspects of client information, unless the client specifically authorizes disclosure of information in writing. Confidentiality rules cover information on the client's:
- trust arrangements;
- legal affairs;
- tax information.
However, disclosure that may be required by governmental authorities (e.g. SEC, IRS, FINRA) is permitted, since the disclosure is required under law.
Exam Tips and Tricks
You are sure to be tested on the topic of "arm\'s length" transactions such as borrowing money from or loaning money to a client. Consider this sample question:
- An investment advisor cannot borrow money from:
- an affiliated investment advisor.
- an affiliated broker-dealer.
- an accredited investor.
- an unaffiliated bank.
The correct answer is "c": an IA cannot borrow money from an advisory client.
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