Question

An investment adviser places large block trades for securities positions that are being purchased for its customers' accounts in order to lower its commission costs. The trades are often executed piecemeal, at different prices. The adviser, after being confirmed that the entire block has been filled, allocates the shares to its accounts. As a favor to its most valuable employees, the adviser allocates the shares purchased at the lowest prices to its employees' accounts; and then allocates the remaining shares to its customer accounts pro-rata. The adviser has disclosed its allocation method only to its employees. Which statement is TRUE

Answer 1

Answer: The investment adviser has breached its fiduciary duty because it has not disclosed its method of allocating shares to its customers

Step-by-step explanation:

The options to the question are:

a. The investment adviser has breached its fiduciary duty to its customers because the block order must be executed at one price, not in pieces at differing prices

b. The investment adviser has breached its fiduciary duty because it has not disclosed its method of allocating shares to its customers

c. The investment adviser has not breached its fiduciary duty because it has disclosed its method of allocating shares to its employees

d. The investment adviser has not breached its fiduciary duty to customers because it has obtained trade executions for customers at lower commission costs.

Based on the scenario in the question, it should be noted that the investment adviser has breached its fiduciary duty because it has not disclosed its method of allocating shares to its customers.

Fiduciary duty is a legal obligation whereby a party has to work in the best interest of the other party and should also be trustworthy but in this situation, this isn't thw case.