Chapter 10 Answers and Explanations

1. D – Someone who is placed in a position of trust and expected to act in the best interest of someone else. At its core, a fiduciary is a trusted professional expected to give advice and act in a way that is in the best interest of his or her client. Simply working for someone else or getting paid to give advice does not make someone a fiduciary. Rather it is a unique expectation that is placed on financial professionals, defined by the fact that trust is placed in a person, regardless of how or if they are compensated. Lastly, fiduciaries are not expected to make as much profit as possible for each client, but rather, do what is most in line with each client’s objectives and risk tolerance.

2. A – Recommending a security for purchase that is owned by the adviser’s other clients. Simply recommending a good thing to multiple clients is not a conflict of interest, but more likely an expectation of a good investment adviser. However, recommending securities that the professional owns does create a conflict of interest, as does receiving a Wall Street Journal subscription paid for by a mutual fund vendor or recommending securities issued by a spouse’s employer. It’s important to note, however, that conflicts of interest do not by themselves prohibit a professional from acting, but rather require proper disclosure to the client or prospect.

3. D – II, III, and IV. Generally, the price of stock has no bearing on whether or not a trade is considered excessive. However, the number of shares transacted by the client, the client’s investment objectives, and the amount of commission generated will all be considered when trying to decide if trading in a client’s account is excessive.

4. C – The client is in the formal business of lending money and the loan is an official loan. The only time an agent can borrow money from a non–family member client is when the client is actually in the business of lending mo