NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Ethical Issues
Adviser Nisha manages advice for two clients. Before issuing a written recommendation to clients to buy a mid-cap stock, she buys the stock in her own account expecting the price to rise after the recommendation. Which description is the most accurate?
This is front-running style personal trading that breaches the adviser's duty to put clients first. Buying ahead of her own recommendation exploits advance knowledge for personal gain, and neither the stock's size nor a later sale cures the conflict, so personal trades must be restricted and disclosed.
- AAcceptable, since she has paid for the shares herself
- BAcceptable if she sells within a year
- CFront running style personal trading that breaches the duty to put clients first and requires prior disclosure and restrictionCorrect
- DAcceptable if the stock is a mid-cap stock
Explanation
Trading ahead of clients on the basis of an impending recommendation exploits client-related information for personal gain and gives the adviser priority over clients. Market cap and holding period do not remove the conflict. Ethical rules require clients' interests to come first and personal trades to be disclosed and controlled.
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