Question

ADAP Advisers is offered a large block of ACME stock (a NYSE-listed issue) by an institutional investor at a 20% discount to the current market price, if ADAP Advisers is willing to buy the block that day. Which statement is TRUE if ADAP purchases the block for its own account rather than for its customers

Answer 1

Options :

A. This action is prohibited without exception, since ADAP Advisers is benefiting at the expense of its customers

B. This action is permitted if ADAP Advisers rebates any profit that it earns to its customers when it sells the block

C. This action is permitted if the purchased stock is not a suitable investment for ADAP's customers

D. This action is permitted if the block is purchased in the Third Market during the hours that the NYSE is closed

Answer: C.) This action is permitted if the purchased stock is not a suitable investment for ADAP's customers

Explanation: ADAP being a professional in the aspect of advisory investment, have a legal and ethical responsibility or obligation called fiduciary duties to their clients, both buyers and sellers. Therefore it is always very important to keep this at the forefront of their dealings in other to avoid soiling their reputation and integrity. Therefore, even though the stock offered to ADAP advisers is at substantial discount, ADAP advisers must ensure that the stock is a suitable investment for it's customers before offering it to them.

The fact that ADAP purchased the stick on it's own account may reasonably infer that the stick is not a suitable investment for it's customers.