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

Under the ethical framework for investment advisers, which practice best describes 'front running' by an adviser's employee?

Front running is trading for one's own account ahead of a client's known large order to profit from the expected price movement. It exploits confidential client information and violates the duty to place client interests first, so it is unethical and prohibited.

  1. ATrading personally ahead of a client's known large order to profit from the expected price moveCorrect
  2. BRecommending a product after completing a risk profile of the client
  3. CDisclosing fees to the client before signing the agreement
  4. DRebalancing a client's portfolio at the agreed review date

Explanation

Front running means using advance knowledge of a client's pending order to trade for one's own benefit before the client's order executes. It breaches the duty to put client interest first. The other options are normal, permitted advisory activities.

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