Practice Quiz

FINRA Series 63 (NASAA)

Category - Series 63

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Joe Treader is the owner of a small, state-registered investment advisory firm that is on the verge of becoming insolvent. One of his clients who has become like a mother to him is aware of his financial difficulties and has offered to sell off some of the assets that he manages for her and loan him the money to get him through this period of economic
uncertainty until he is able to get on his feet again. Can Joe take her up on her offer?
  1. Yes. Based on the facts presented, it is an unsolicited offer and, as such, Joe can (and should) accept it.
  2. Yes, but only if Joe draws up a formal loan agreement with a fair interest rate, based on the going market rates, stated in the agreement as well as a firm date for principal repayment.
  3. No. As the client’s investment adviser, he has a fiduciary relationship with the client. Entering a loan agreement with this client could lead to conflicts of interest.
  4. Both A and B are true.
Explanation
Answer: C - No, Joe cannot take his client’s offer of a loan because it could lead to a conflict of interest--if not today, perhaps in the future--and as a fiduciary Joe will be expected to put this client’s welfare ahead of his own. If it takes him a lot longer than expected to get on his feet again, he may be tempted to act in his own best interest.
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