Personal Securities Transactions

Lesson

Personal securities transactions refer to the trading activities of investment adviser representatives (IARs) and other associated persons. These transactions can create conflicts of interest and ethical concerns, as IARs may prioritize their interests over their clients.

Practice Question #1

Which of the following is an example of front running?

A) An IAR buys shares of a stock for their personal account before executing a large client order for the same stock.

B) An IAR recommends a security to clients and then immediately sells it for a profit.

C) An IAR trades excessively in a client's account to generate commissions.

D) An IAR uses non-public information to trade securities for their personal account.

Select an option above to see an explanation here.

A) Front running occurs when an IAR trades securities for their account before executing client orders, potentially benefiting from the price movement caused by the client's trade. B) This is an example of scalping, not front running. C) This is an example of churning, not front-running. D) This is an example of insider trading, not front-running.

Terms

Personal Securities Transactions:: Trading activities of investment adviser representatives (IARs) and other associated persons.
Front Running:: The unethical practice of IAR trading securities for their account before executing client orders.
Scalping:: The unethical practice of an IAR recommending a security to clients and then immediately selling it for a profit.
Pre-Clearance:: IARs must obtain approval from their firm before executing personal securities transactions.
Restricted List:: A list of securities that IARs are prohibited from trading due to potential conflicts of interest.
Duplicate statements:: Copies of account statements sent to a financial professional's employer to monitor outside securities account activity.
Prior written consent:: Permission obtained in writing from a financial professional's employer before engaging in certain activities, such as opening an outside securities account.
Initial holdings:: The securities owned by an investment adviser at the beginning of an advisory relationship.
Quarterly reports:: Reports provided by investment advisers to clients every three months, detailing the performance and holdings of the client's account.

Practice Question #2

What is the purpose of a restricted list?

A) To prevent IARs from trading securities that may create conflicts of interest.

B) To require IARs to obtain pre-clearance for all personal securities transactions.

C) To outline the ethical responsibilities and standards of conduct for IARs and their firms.

D) To create an information barrier within a firm to prevent the sharing of non-public information.

Select an option above to see an explanation here.

A) A restricted list prohibits IARs from trading certain securities that may create conflicts of interest. B) Pre-clearance is a separate requirement for IARs to obtain approval before executing personal securities transactions. C) This describes a code of ethics, not a restricted list. D) This describes a Chinese wall, not a restricted list.

Real-World Example

An investment adviser representative (IAR) learns about an upcoming merger between two companies through a friend who works at one of the firms. The IAR purchases shares of the target company for their account before the news becomes public, resulting in a significant profit. This is an example of insider trading and violating the IAR's fiduciary duty to their clients.

Practice Question #3

What is the primary purpose of personal securities transaction rules for investment advisers?

A) To prevent insider trading

B) To ensure investment advisers prioritize client interests

C) To limit the number of transactions an adviser can make

D) To require advisers to disclose all personal transactions to clients

Select an option above to see an explanation here.

A) While preventing insider trading is important, it is not the primary purpose of personal securities transaction rules. B) The primary purpose of these rules is to ensure that investment advisers prioritize their clients' interests over their own. C) Limiting the number of transactions is not the main goal of these rules. D) Disclosure of personal transactions is important, but it is not the primary purpose of the rules.