A Registered Representative (RR) is managing a client’s portfolio and learns about a high-risk investment...

The Representative has failed to uphold the duty to disclose. Material information is not limited to the investment’s potential return. The client must also receive a balanced explanation of the product’s risks, disadvantages, costs, liquidity limitations and possible adverse outcomes. By withholding the potential downsides and proceeding with the transaction, the RR prevents the client from making an informed decision.

The duty of care is broader and requires reasonable competence, diligence and prudence. Although the conduct may also indicate poor care, the specific failure described is the omission of material risk disclosure. The duty of loyalty concerns acting without allowing personal or conflicting interests to displace the client’s interests. No personal conflict is identified. The duty of confidentiality concerns protecting client information and is unrelated to the omission in the scenario.

A recommendation cannot be justified solely by the possibility of substantial returns. Higher expected returns ordinarily involve higher uncertainty or loss exposure, and the recommendation process must address both sides of the risk-return relationship.

The official Retail Securities syllabus requires the investment-action recommendation process to address each product’s advantages, disadvantages and risks and explain what the proposed action can accomplish for the client.

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