NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Ethical Issues
An investment adviser registered with SEBI learns that a close friend plans to buy shares of a listed company on the basis of the adviser's recommendation to a client that has not yet been made public. Which action is most consistent with ethical standards?
The adviser should keep the unpublished recommendation confidential and ensure neither they nor anyone else trades ahead of the client. Client interests come first, and passing the information on risks front-running and breaches the duty of confidentiality, regardless of any promises by the friend.
- AShare the recommendation with the friend only after the client has placed the order
- BTell the friend informally but ask them not to forward it
- CKeep the recommendation confidential and not allow personal or third-party trades to benefit from it before the client actsCorrect
- DShare it with the friend if the friend promises not to trade for a week
Explanation
Client interests take priority, and client information or pending recommendations are confidential. Passing them on, even informally, risks front-running and breaches the duty of confidentiality. Delaying or asking for promises does not remove the conflict.
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