NISM Series X-A Chapter 19: Ethical Issues Practice Questions

Question 1

One of the main investor grievance areas in the advisory business, described as 'frequent switching from one product to another to increase earnings from commissions,' is known as:

Accepted Answer

Churning.. The text explicitly states, 'Adopting wrong practices like frequent switching from one product to another to increase earnings from commissions i.e. churning.'

Question 2

According to the provided text, which of the following best defines 'ethics'?

Accepted Answer

Moral principles that decide and influence a person’s behaviour, dealing with what is good for society and individuals.. The text states, 'Ethics can be defined as several moral principles that decide and influence a person’s behaviour. It is thus an area that deals with what is good for society and individuals.' It also mentions 'a set of moral principles or rules of conduct that provide guidance for our behaviour when it affects others.'

Question 3

The text distinguishes between doing things within the ambit of the law and ethics. What is the key difference highlighted?

Accepted Answer

Legality ensures things are not illegal, while ethics brings into play what is right or wrong behaviour.. The text states, 'Doing things that are within the ambit of the law is one thing as this ensures that there is nothing illegal being done. But ethics goes one step beyond that as it brings into play what is right or wrong behaviour.'

Question 4

According to the text, what practice is described as 'frequent switching from one product to another to increase earnings from commissions'?

Accepted Answer

Churning. Under the section 'The main problems/investor grievance areas in the advisory business', point 4 states: 'Adopting wrong practices like frequent switching from one product to another to increase earnings from commissions i.e. churning.'

Question 5

According to the provided text, which of the following actions was found to be a prima facie violation of Regulation 13(a) of IA Regulations by SEBI, leading to the cancellation of registration?

Accepted Answer

Submitting a forged experience certificate at the time of registration.. The text on page 366 explicitly states: "SEBI found that the documents viz. the experience certificate submitted by the proprietor of the Investment Advisory firm at the time of registration was not genuine/forged/fabricated. The Noticee, by submitting false documents has obtained registration from SEBI as an IA and has prima facie violated his conditions of certificate and the ensuing provisions of Regulation 13 (a) of IA Regulations."

Question 6

As per the text, which of the following actions by an Investment Adviser led SEBI to restrain them from the securities market and cancel their registration?

Accepted Answer

Submitting forged experience certificates at the time of registration.. The text mentions: 'On investigation, SEBI found that the documents viz. the experience certificate submitted by the proprietor of the Investment Advisory firm at the time of registration was not genuine/forged/fabricated. ... SEBI has restrained the Noticee from the securities market as well as cancelled his certificate of registration.'

Question 7

According to the provided text, which of the following best defines ethics?

Accepted Answer

Moral principles that decide and influence a person’s behaviour, dealing with what is good for society and individuals.. The text states in section 19.1, 'Ethics can be defined as several moral principles that decide and influence a person’s behaviour. It is thus an area that deals with what is good for society and individuals.'

Question 8

Which of the following is identified in the text as an investor grievance area related to an Investment Adviser's practices?

Accepted Answer

Frequent switching from one product to another to increase earnings from commissions, also known as churning.. The text lists "Adopting wrong practices like frequent switching from one product to another to increase earnings from commissions i.e. churning" as one of the main problems/investor grievance areas. Options A, B, and D describe good or required practices

Question 9

According to the chapter, what is a key role of a financial intermediary in the Indian financial market, especially concerning complex products?

Accepted Answer

To channelize domestic savings into various investment vehicles and take the most suitable product to the retail investor.. The text states: 'The main role of a financial intermediary is channelizing the domestic savings into various investment vehicles available.' and 'It is the financial intermediary who should take the most suitable product to the retail investor that would serve the needs of the investor best and help in fulfilling his financial goals.'

Question 10

When faced with an ethical dilemma, which of the following is NOT suggested as a way to tackle or resolve it?

Accepted Answer

Immediately choosing the alternative that generates the most revenue for the adviser.. The text suggests deeper analysis, specific principles (highest good/least damage), and reconsidering the problem. Immediately choosing the most revenue-generating option is presented as the unethical choice in a dilemma example, not a resolution strategy

Question 11

As per the text, what action did SEBI take against a Noticee who submitted forged documents for registration as an Investment Adviser and promised exorbitant returns?

Accepted Answer

Restrained the Noticee from the securities market and cancelled their certificate of registration.. The text clearly states: 'SEBI has restrained the Noticee from the securities market as well as cancelled his certificate of registration.' This was in response to submitting false documents and promising exorbitant returns

Question 12

Which of the following is NOT listed as a widely acknowledged fundamental ethical principle in the chapter?

Accepted Answer

Profit maximization. The text lists: 'Widely acknowledged fundamental ethical principles include honesty, fairness, diligence, care and respect for others.' Profit maximization is not listed

Question 13

What is the primary definition of ethics as described in the chapter?

Accepted Answer

Moral principles that decide and influence a person’s behaviour.. The text states: 'Ethics can be defined as several moral principles that decide and influence a person’s behaviour.'

Question 14

Based on the provided text, what is the primary definition of ethics?

Accepted Answer

Moral principles that decide and influence a person’s behaviour.. The text states, 'Ethics can be defined as several moral principles that decide and influence a person’s behaviour.'

Question 15

An Investment Adviser faces a situation where a client approaches them for a service they don't actually need. The adviser can either provide the service to earn revenue or inform the client that it's unnecessary, foregoing the income. This scenario is an example of what?

Accepted Answer

An ethical dilemma.. The text describes an ethical dilemma as 'a situation where there is a problem and a person has to take a decision between two alternatives, neither of which is superior.' It provides this exact example: 'It could be that the client does not require a particular service, but does not know about it. In such a situation, the options before the investment adviser are (a) make the client go through the process and earn some money or (b) tell the client that they need not do all the things suggested because it is not necessary for them. This is a type of ethical dilemma, because option (a) will give the investment advisor revenue, but option (b) is ethically correct.' (Page 370)

Question 16

According to the text, which of the following is often cited as one of the best ways to resolve an ethical dilemma?

Accepted Answer

Conducting a deeper analysis of the entire matter, which often clarifies the correct course of action.. The text states, 'Deeper analysis of the entire matter is often one of the best ways to resolve the dilemma. On a detailed analysis it often becomes clear that what seems to be a dilemma is actually a clear case, where a specific course of action is the correct way to go ahead.'

Question 17

The 'Client First principle' in the investment advisory business primarily implies that an investment adviser should:

Accepted Answer

Conduct business in a manner that puts the interest of the client above everything else, demonstrating trustworthiness.. Section 19.2 states, 'The Investment adviser deals with the issue of giving advice on matters related to money and hence if they are conducting business in a manner that puts the interest of the client above everything else (Client First principle) they are on the correct ethical path.'

Question 18

An adviser recommends Small Cap Funds to senior citizens without assessing their risk tolerance. Which investor grievance area does this most closely represent?

Accepted Answer

Advisor’s lack of focus on understanding client specific situations or needs.. The text states: 'Advisor’s lack of focus on understanding client specific situations or needs so as to provide appropriate advice. Sometimes, client’s wishes and needs may differ. Risk profiling is a must in such cases. As an example, Small Cap Funds for senior citizens may not be appropriate.'

Question 19

Which of the following best defines 'ethics' according to the provided text?

Accepted Answer

Moral principles that decide and influence a person’s behaviour.. The text states, 'Ethics can be defined as several moral principles that decide and influence a person’s behaviour.' (Page 367)

Question 20

According to the chapter text, which of the following practices is specifically identified as 'churning' within the context of investor grievance areas?

Accepted Answer

Frequent switching from one product to another to increase earnings from commissions.. Under the 'main problems/investor grievance areas', point 4 is 'Adopting wrong practices like frequent switching from one product to another to increase earnings from commissions i.e. churning.'

Question 21

According to the text, what action did SEBI take against the Noticee who submitted forged documents and promised lucrative returns, violating Regulation 13(a)?

Accepted Answer

Restrained them from the securities market and cancelled their certificate of registration.. The text states, 'SEBI has restrained the Noticee from the securities market as well as cancelled his certificate of registration.'

Question 22

Based on the provided text, what is the core definition of ethics?

Accepted Answer

Moral principles that decide and influence a person’s behaviour, dealing with what is good for society and individuals.. The text states: 'Ethics can be defined as several moral principles that decide and influence a person’s behaviour. It is thus an area that deals with what is good for society and individuals.'

Question 23

What is highlighted as a 'most crucial factor' for an investment adviser to gain and maintain the confidence of clients, as per the chapter?

Accepted Answer

Ensuring their ethical standards put the interest of the client above their self-interest.. The text emphasizes: 'Investment advisers have to ensure that their ethical standards put the interest of the client above their self-interest i.e. there is no conflict of interest. If there is a feeling that the investment adviser is looking out only for their own specific needs and interest then it would be very difficult for them to gain the confidence of the people. This is one of the most crucial factors in an advisory business.'

Question 24

According to the famous quotation by Zig Ziglar mentioned in the text, what should an intermediary focus on to achieve success?

Accepted Answer

Helping other people get what they want.. The text quotes Zig Ziglar: 'You can have everything in life you want; if you will just help other people get what they want'

Question 25

What is considered the 'Client First' principle in the context of an Investment Adviser's ethical conduct?

Accepted Answer

Putting the client's interest above everything else.. The text states: 'if they are conducting business in a manner that puts the interest of the client above everything else (Client First principle) they are on the correct ethical path.'

Question 26

Based on the initial case study in the text, what was SEBI's response to an Investment Adviser (Noticee) found to have submitted forged experience certificates and promised lucrative returns to clients for a large fee?

Accepted Answer

SEBI restrained the Noticee from the securities market and cancelled their certificate of registration.. The text states: 'SEBI has restrained the Noticee from the securities market as well as cancelled his certificate of registration.'

Question 27

What practice is described as 'frequent switching from one product to another to increase earnings from commissions,' which SEBI has addressed by mandating that advisors cannot distribute?

Accepted Answer

Churning.. On page 370, under 'main problems/investor grievance areas,' point 4 explicitly describes 'Adopting wrong practices like frequent switching from one product to another to increase earnings from commissions i.e. churning.'

Question 28

An Investment Adviser recommends Small Cap Funds to a senior citizen client without conducting a proper risk profiling. According to the text, which investor grievance area does this action primarily fall under?

Accepted Answer

Advisor's lack of focus on understanding client specific situations or needs.. Page 369, under 'main problems/investor grievance areas,' point 1 states: 'Advisor’s lack of focus on understanding client specific situations or needs so as to provide appropriate advice. Sometimes, client’s wishes and needs may differ. Risk profiling is a must in such cases. As an example, Small Cap Funds for senior citizens may not be appropriate.'

Question 29

An investment adviser holds a personal belief that term insurance policies are exclusively the best option for clients' life cover needs. However, their organization requires them to actively promote Unit Linked Insurance Plans (ULIPs) or whole life policies because these generate higher commissions. This scenario is a clear example of which type of ethical dilemma?

Accepted Answer

A clash between an individual's personal values and their professional values within an organization.. Section 19.4 details this exact situation: 'Another situation of an ethical dilemma arising would be when there is a clash between personal values and professional values.' It then uses the example of an adviser believing in term insurance but being required to promote higher-commission policies like ULIPs

Question 30

Which of the following is NOT listed as a widely acknowledged fundamental ethical principle in the provided text?

Accepted Answer

Profitability. The text lists 'honesty, fairness, diligence, care and respect for others' as fundamental ethical principles. Profitability is not mentioned in this list

Question 31

According to the text, which of the following is highlighted as a main problem or investor grievance area in the advisory business?

Accepted Answer

Frequent switching from one product to another to increase earnings from commissions, also known as churning.. The text lists "Adopting wrong practices like frequent switching from one product to another to increase earnings from commissions i.e. churning" as one of the main problems/investor grievance areas

Question 32

Why is ethical conduct of the highest standard considered essential for investment advisers, according to the chapter text?

Accepted Answer

To build necessary trust and confidence for the investment adviser and the entire advisory and financial services industry.. The text emphasizes that 'In matters related to money it is vital that there is ethical behaviour of the highest standard. This is essential to build the necessary trust and confidence not only for the investment adviser but also for the entire advisory and financial services industry.'

Question 33

According to the text, 'churning' in the advisory business refers to which of the following practices?

Accepted Answer

Frequent switching from one product to another to increase earnings from commissions.. The text defines churning as: 'Adopting wrong practices like frequent switching from one product to another to increase earnings from commissions i.e. churning.'

Question 34

Why is trust considered central to an investment adviser's activities, according to the text?

Accepted Answer

It takes years to build but just a few moments to lose.. The text states, 'This trust is at the center of all the activities of an investment adviser because it can take years to build trust but just a few moments to lose it all.'

Question 35

What defines an 'ethical dilemma' as presented in the chapter?

Accepted Answer

A problem where a person has to decide between two alternatives, neither of which is superior.. The text states: 'An ethical dilemma is a situation where there is a problem and a person has to take a decision between two alternatives, neither of which is superior.'

Question 36

An Investment Adviser personally believes only in term insurance policies for clients' life cover needs due to low premiums and payout on death. However, their employer encourages promoting Unit Linked Insurance Plans (ULIPs) or whole life policies which have higher premiums and commissions. What kind of ethical dilemma does this situation illustrate?

Accepted Answer

A conflict between the adviser's personal values and professional values.. The text provides this exact example: 'Another situation of an ethical dilemma arising would be when there is a clash between personal values and professional values.' and then describes the term insurance vs. ULIPs/whole life scenario

Question 37

Which of the following actions best embodies the 'Client First principle' for an Investment Adviser, as described in the text?

Accepted Answer

Conducting business in a manner that puts the interest of the client above everything else.. Page 368 states, 'The Investment adviser deals with the issue of giving advice on matters related to money and hence if they are conducting business in a manner that puts the interest of the client above everything else (Client First principle) they are on the correct ethical path.'

Question 38

An Investment Adviser's personal value is to recommend only term insurance for life cover needs. However, their employer requires them to promote Unit Linked Insurance Plans (ULIPs) which offer higher commissions. This situation, as described in the text, represents a clash between which two types of values?

Accepted Answer

Personal values and professional values. The text describes this as a situation 'when there is a clash between personal values and professional values.'

Question 39

An investment adviser believes strongly in recommending only term insurance policies for life cover due to their low premiums and pure protection nature. However, their employer requires them to promote Unit Linked Insurance Plans (ULIPs) or whole life policies, which offer higher commissions to the organization. This situation represents an example of:

Accepted Answer

A conflict between personal values and professional values.. The text describes this exact scenario as an example of a situation 'when there is a clash between personal values and professional values.'

Question 40

Which of the following is NOT listed as a widely acknowledged fundamental ethical principle in the provided text?

Accepted Answer

Profitability. The text lists 'honesty, fairness, diligence, care and respect for others' as fundamental ethical principles. Profitability is not mentioned in this context

Question 41

An investment adviser personally believes in recommending only term insurance policies for life cover, but their employer requires them to promote Unit Linked Insurance Plans (ULIPs) or whole life policies which yield higher commissions for the organization. What type of ethical dilemma does this situation primarily represent?

Accepted Answer

A clash between personal values and professional values.. The text explicitly describes this scenario as 'Another situation of an ethical dilemma arising would be when there is a clash between personal values and professional values.' It gives the example of an individual's personal value for term insurance versus an employer's push for higher-commission policies like ULIPs

Question 42

According to the text, one effective way to resolve an ethical dilemma is by:

Accepted Answer

Conducting a deeper analysis of the entire matter to clarify the correct course of action.. The text states, 'Deeper analysis of the entire matter is often one of the best ways to resolve the dilemma. On a detailed analysis it often becomes clear that what seems to be a dilemma is actually a clear case, where a specific course of action is the correct way to go ahead.'

Question 43

The text describes an ethical dilemma as a situation where:

Accepted Answer

A person needs to make a decision between two alternatives, neither of which is superior.. The text defines an ethical dilemma as 'a situation where there is a problem and a person has to take a decision between two alternatives, neither of which is superior.'

Question 44

An Investment Adviser believes strongly in term insurance policies for clients' life cover needs due to their low premiums and payout only on death. However, their employer encourages promoting Unit Linked Insurance Plans (ULIPs) or whole life policies because they yield higher commissions for the organization. This situation, as described in the text, is an example of:

Accepted Answer

A clash between personal values and professional values.. The text explicitly describes this scenario under "Another situation of an ethical dilemma arising would be when there is a clash between personal values and professional values." It then uses the example of term insurance vs. ULIPs/whole life policies for higher commission

Question 45

The text states, 'Doing things that are within the ambit of the law is one thing as this ensures that there is nothing illegal being done. But ethics goes one step beyond that...'. What additional aspect does ethics bring into play beyond legal compliance?

Accepted Answer

What is right or wrong behaviour, arising out of basic values and character.. The text explicitly states, 'But ethics goes one step beyond that as it brings into play what is right or wrong behaviour. It arises out of the basic values and character that a person has.'

Question 46

An Investment Adviser personally believes that only term insurance policies are suitable for clients' life cover needs due to their pure protection nature and low premiums. However, the organization they work for pushes for the sale of Unit Linked Insurance Plans (ULIPs) or whole life policies, which yield higher commissions. This situation, as described in the text, exemplifies which type of ethical dilemma?

Accepted Answer

A clash between personal values and professional values.. The text explicitly states: 'Another situation of an ethical dilemma arising would be when there is a clash between personal values and professional values. This can be a very difficult situation... For example, there might be a personal value of an individual that they believe in only term insurance policies for clients... They might be in employment where the need would be to promote other types of insurance policies because they earn more income for the organization.'

Question 47

Which of the following is NOT listed as a common investor grievance area in the advisory business, according to the text?

Accepted Answer

Proactively suggesting useful financial strategies that benefit the client in the long run.. Pages 369-370 list several grievance areas, including lack of focus on client needs, churning, and not informing about risks. However, page 368 states, 'if the Investment adviser proactively suggests things that the client needs to do then this becomes a big positive factor,' indicating it is a beneficial action, not a grievance

Question 48

As per the text, what was a primary reason for SEBI restraining a Noticee from the securities market and cancelling their registration certificate?

Accepted Answer

The Noticee submitted forged or fabricated documents, such as an experience certificate, at the time of registration.. The text states, "On investigation, SEBI found that the documents viz. the experience certificate submitted by the proprietor of the Investment Advisory firm at the time of registration was not genuine/forged/fabricated. The Noticee, by submitting false documents has obtained registration from SEBI as an IA and has prima facie violated his conditions of certificate and the ensuing provisions of Regulation 13 (a) of IA Regulations."

Question 49

An Investment Advisory firm's proprietor submitted a forged experience certificate during registration and promised exorbitant returns to clients over a short period for a large fee. Which of the following actions did SEBI take based on its investigation, as per the text?

Accepted Answer

Restrained the Noticee from the securities market and cancelled their certificate of registration.. The text states, 'On investigation, SEBI found that the documents viz. the experience certificate submitted by the proprietor of the Investment Advisory firm at the time of registration was not genuine/forged/fabricated... SEBI has restrained the Noticee from the securities market as well as cancelled his certificate of registration.' It also mentions 'Promise of exorbitant return on a meagre investment will be viewed as violation'. (Page 366)

Question 50

According to the provided text, which of the following best defines 'ethics'?

Accepted Answer

Moral principles that decide and influence a person's behaviour, dealing with what is good for society and individuals.. The text states, "Ethics can be defined as several moral principles that decide and influence a person’s behaviour. It is thus an area that deals with what is good for society and individuals."

Ch.19: Ethical Issues

What You Will Learn in This Chapter

Multiple Choice Questions (125)

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