Investment advisers and their representatives must avoid conflicts of interest when dealing with loans involving their clients. This includes not borrowing from or lending to clients except under specific circumstances.
Which of the following is a conflict of interest related to loans?
Correct!
Not Correct
Select an option above to see an explanation here.
A) Borrowing money from a client creates a conflict of interest, which may compromise the adviser's professional judgment. B) Receiving a gift from a client may create a conflict of interest, but it is not related to loans. C) Trading securities based on non-public information is insider trading, which is illegal but unrelated to loans. D) Excessive trading in a client's account is churning, which is unethical but unrelated to loans.
What is the primary obligation of an investment adviser when dealing with loans involving clients?
A) Maximizing profits for the adviser may create conflicts of interest and is not the primary obligation. B) The primary obligation of an investment adviser is to act in the client's best interest, which includes avoiding conflicts of interest related to loans. C) Ensuring the loan is repaid on time is important but not the primary obligation. D) Disclosing the loan to regulators may be required, but the primary obligation is to act in the client's best interest.
In the past, there have been cases where investment advisers have borrowed money from their clients without disclosing the potential conflicts of interest. This has led to regulatory actions and fines against the advisers for violating their fiduciary duties.
Under which circumstance may an investment adviser representative be allowed to borrow money from a client?
A) Borrowing money from a close friend who is also a client is generally prohibited due to conflicts of interest. B) The loan amount does not change the potential conflict of interest. C) Disclosure alone does not make the loan permissible. D) An exception may be made if the client is a financial institution, as this is part of their normal business activities.
An investment adviser representative may have a client who is also a close friend. The representative needs a loan for personal reasons and is considering borrowing from a friend. However, this would create a conflict of interest and is generally prohibited, so the representative must seek alternative funding sources.
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Example Series 65 Example Practice Question
- Borrowing from clients: When an investment adviser or broker-dealer borrows money from a client, which is generally prohibited unless specific conditions are met. - Lending to clients: When an investment adviser or broker-dealer lends money to a client, which is also generally prohibited unless specific conditions are met.
- Borrowing from clients allowed: An investment adviser may borrow from a client if the client is a financial institution in the business of lending money, and the loan is made on terms generally available to the public. - Borrowing from clients disallowed: An investment adviser borrowing money from a client who is not a financial institution or borrowing on terms that are not generally available to the public. - Lending to clients allowed: An investment adviser may lend money to a client if the adviser is a financial institution in the business of lending money, and the loan is made on terms generally available to the public. - Lending to clients disallowed: An investment adviser lending money to a client when the adviser is not a financial institution or lending on terms that are not generally available to the public.