NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Ethical Issues
Caselet: Ms. Meera Iyer, an investment adviser, manages advice for 40 clients. She has researched a small-cap stock with limited liquidity and wants to buy it for her own account. She also plans to recommend it to several clients over the coming week. Which sequence best satisfies ethical and fair-dealing requirements?
Ms. Iyer should recommend the stock to clients first, allow reasonable time for them to act, disclose her own interest and trade only afterwards under her firm's personal trading policy. Clients' interests have priority, so buying ahead of them is front-running, particularly in an illiquid small-cap stock.
- ABuy for herself first, then recommend it to clients, since personal research justifies priority
- BRecommend to clients first, give them reasonable time to act, disclose her own holding and trade afterwards under her firm's personal trading policyCorrect
- CBuy for herself and recommend to clients on the same day to be fair
- DRecommend to the largest clients first, then smaller clients, then herself
Explanation
Client interests take priority over the adviser's personal trades, so personal trading must not precede client action and must follow the firm's policy and disclosure norms. Buying first risks front-running, and same-day trading in an illiquid stock can still disadvantage clients. Prioritising by client size breaks fair treatment.
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