NISM-Series-X-A: Investment Adviser (Level 1) · Ethical Issues

Unethical Practices and Prohibited Conduct for Investment Advisers

Updated 11 October 2026 · Fact-checked

Unethical practices are acts that put the adviser's gain ahead of the client's interest or break market rules. Key ones are front running, insider trading, mis-selling, guaranteeing returns and misrepresentation. To solve a question, identify who is harmed, what information or promise was used, and match it to the right term.

Understand Unethical Practices and Prohibited Conduct

An investment adviser is paid to give advice in the client's interest. Unethical practices are acts that betray that duty. Prohibited conduct is the part that SEBI rules or securities laws forbid, and breaking it can lead to penalties.

Start with the information-based practices. Front running means trading ahead of a client's large order, using knowledge of that order, to profit from the price move it will cause. The information used is the client's pending trade. Insider trading means trading, or tipping others to trade, on unpublished price sensitive information (UPSI) about a listed company, such as unannounced results or a merger. The information used is about the company. Front running uses client order information. Insider trading uses company information.

Next, the selling-based practices. Mis-selling means selling a product that does not suit the client's needs, risk profile or understanding, or selling it by hiding or twisting its features. It can happen even when the product is good, because the product is wrong for that client. Misrepresentation means giving false or misleading statements, or leaving out material facts, about a product, past performance, fees or the adviser's own qualifications.

Guaranteeing returns is also prohibited. Market-linked products carry risk, so an adviser cannot promise assured or fixed returns on them. Past performance can be shown only fairly, with no promise about the future. Other conduct to avoid includes churning (excessive trading to earn more fees), undisclosed conflicts of interest, and misusing client money or confidential data.

The common thread is simple. Honest disclosure, suitability and putting the client first are the rule. Anything that hides risk, hides a conflict, or uses an informational edge against the client is unethical.

Key formulas to remember

Front running: Front running = trading ahead of a client's order, using knowledge of that order; Information used is the client's or employer's pending order. Adviser or insider benefits at the client's cost.
Insider trading: Insider trading = dealing or tipping on UPSI about a listed company; Information used is company-related and not public. Applies to securities of the company concerned.
Mis-selling: Mis-selling = unsuitable product or misleading sale, regardless of whether the product is itself good; Test: does it match the client's needs, risk profile and understanding, and were risks disclosed?
Misrepresentation: Misrepresentation = false or misleading statement, or omission of a material fact; Covers returns, risks, fees, past performance and the adviser's credentials.
Guaranteed returns: Assured or guaranteed returns on market-linked products = prohibited promise; Risk cannot be removed by a promise. Do not confuse with the stated coupon on a debt instrument, which is contractual and depends on the issuer's credit.
Churning: Churning = excessive trading mainly to generate fees or commission; Judged by purpose and client interest, not just the number of trades.

How to solve Unethical Practices and Prohibited Conduct questions

Most questions give a short scenario or a definition and ask you to name the practice, or to say whether conduct is permitted. Use this order.

1Read the last line first so you know whether you must name the practice, judge the conduct, or find the exception.
2Underline the action in the scenario: trading ahead, using company news, selling, promising, or stating facts.
3Ask what information was used. Client order points to front running. Unpublished company news points to insider trading.
4Ask whether the issue is the sale. An unsuitable product or hidden risk points to mis-selling. A false or omitted fact points to misrepresentation.
5Check for any promise of assured returns on a market-linked product. That is a prohibited guarantee.
6Check who benefited and who was harmed. Unethical conduct puts the adviser's gain above the client's interest.
7Eliminate options that are partly right, such as a correct term attached to the wrong information source.
8Pick the option that matches the exact definition, not the one that merely sounds serious.

Quickest way: Information source and promise test

When to use it: Use when you have under a minute and the options are similar terms.

Client's pending order used: front running.
Unpublished company information used: insider trading.
Product does not suit the client: mis-selling.
False statement or hidden material fact: misrepresentation.
Promise of fixed or assured returns on a market-linked product: prohibited guarantee.
Many trades for fees: churning.

Common mistakes in Unethical Practices and Prohibited Conduct

Treating front running and insider trading as the same thing.
Both involve trading on non-public information, so they feel identical.
Fix: Ask whose information it is. Client or employer order means front running. Company UPSI means insider trading.
Calling a sale mis-selling only when the product is bad.
Students link mis-selling to poor products.
Fix: Mis-selling is about fit and disclosure. A good product sold to the wrong client, or sold with hidden risks, is still mis-selling.
Thinking a verbal assurance of returns is fine if the client signs a disclaimer.
Students believe consent removes the issue.
Fix: Guaranteeing returns on market-linked products is prohibited regardless of any disclaimer or client consent.
Confusing misrepresentation with mis-selling.
Both occur during a sale.
Fix: Misrepresentation is a false or incomplete statement. Mis-selling is an unsuitable or improperly sold product. One sale can involve both.
Assuming insider trading applies only to company directors.
The word insider suggests senior staff.
Fix: Anyone who trades or tips on UPSI can be caught, including advisers, relatives and friends who received the information.

Worked examples

Example 1

An adviser at a firm learns that a client plans to buy a very large block of shares in a mid-cap company tomorrow. Today the adviser buys the same shares in his own account and sells them after the client's purchase lifts the price. Which practice is this?
A. Insider trading
B. Front running
C. Mis-selling
D. Churning

Show the solution

Find the action: the adviser traded his own account before the client's order.
Find the information used: the client's pending order, not unpublished news about the company.
The adviser profited from the price impact of the client's trade.
This matches the definition of front running.
Insider trading needs UPSI about the company. Mis-selling needs an unsuitable sale. Churning needs excessive trading for fees. None fit.

Answer: B. Front running

Example 2

An adviser tells a retired client with low risk tolerance that a small-cap equity fund will give an assured 18% a year, so she should move her entire savings into it. Which statement is correct?
A. Only a guarantee of returns is breached
B. Only unsuitability is involved
C. Guaranteeing returns, mis-selling and misrepresentation are all involved
D. No breach, because the fund is SEBI-regulated

Show the solution

Check the promise: an assured 18% on a market-linked fund is a prohibited guarantee of returns.
Check the statement: the assurance is false, because returns are not assured. That is misrepresentation.
Check the fit: a low-risk retiree moving all savings into a small-cap fund is unsuitable. That is mis-selling.
So options A and B are each incomplete.
Regulation of the fund does not make the adviser's conduct acceptable, so D is wrong.

Answer: C. Guaranteeing returns, mis-selling and misrepresentation are all involved

Exam tips

Learn each term as a one-line definition with its information source. Most wrong options swap these.
Watch for scenarios that fit more than one practice. Pick the option that covers all the breaches if one is offered.
Words like assured, guaranteed or risk-free on a market-linked product signal a prohibited promise.
On X-A, wrong answers cost 25% of the question's marks, and caselet questions can carry 2 marks. Skip only if you cannot narrow to two options.
Ethical questions often reward the client-first answer. If two options seem right, choose the one that protects the client and discloses more.

Practice questions from Ethical Issues

Unethical Practices and Prohibited Conduct: frequently asked questions

What is the difference between front running and insider trading?

Front running uses knowledge of a client's or employer's pending order to trade ahead of it. Insider trading uses unpublished price sensitive information about a listed company. The source of the information is the key difference.

What counts as mis-selling in India?

Mis-selling is selling a product that does not suit the client's needs, risk profile or understanding, or selling it with hidden or distorted information. The product may be perfectly legitimate. The problem is the fit and the disclosure.

Can an investment adviser guarantee returns?

No. An adviser must not promise or guarantee returns on market-linked products, because returns depend on markets and cannot be assured. Any such promise is misleading and prohibited.

Are unethical practices only a problem for the adviser?

No. Clients can lose money, and the adviser can face SEBI action and penalties. Unethical practices also damage trust in the whole advisory profession.