NISM Series X-A · Chapter 19: Ethical Issues
नैतिक मुद्दे · NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination
~3 of 150 marks
90 MCQs + 9 case studies · 150 marks · 3 hours · 60% to pass · −25% of a question's marks per wrong answer
14 practice questions in our bank
What this chapter covers
Why ethics matters in advice: ethics beyond legality, the "client first" principle, common grievance areas (unsuitable advice, product ignorance, churning, hiding risks, poor service), ethical dilemmas and how to resolve them, fiduciary duty, SEBI's do's and don'ts for investors, the annual audit and global practice (SEC, Australia).
नैतिक मुद्दे — क्लाइंट-फर्स्ट, नैतिक दुविधा, फिड्यूशियरी ज़िम्मेदारी, SEBI के करें/न करें और वैश्विक मानक।
What to master before the exam
- Ethics (from the Greek "ethos") goes beyond the law; trust takes years to build and moments to lose; the adviser's interest must never come before the client's.
- Grievance areas: not understanding client needs (small-cap funds for senior citizens), not understanding products (arbitrage funds sold as liquid-fund substitutes), churning for commission, hiding risks and poor after-sales service.
- An ethical dilemma is a choice between two alternatives, neither clearly superior; resolve it through deeper analysis, a guiding principle (most good or least harm) or reframing the problem.
- Fiduciary duty and utmost good faith (uberrimae fidei): full disclosure including perceived conflicts, suitable advice and a reasonable, objective basis for every recommendation.
- SEBI's do's (registered advisers only, fees through banking channels, risk profiling first) and don'ts (no money to the adviser, no assured returns); a yearly compliance audit by a practising CA; SEC and Australian "best interests" standards.
Exam tip: A short chapter in Module 6 (30 marks), often tested through caselets: "which action is the ethical one?" Choose the option that puts the client's interest first and discloses conflicts — even when it costs the adviser revenue.
Sample questions from this chapter
Five of the 14 questions in our free bank. Open the answer to see the explanation — every question in the mock test has one, in English and Hindi.
Question 1
The term ‘ethics’ is derived from the Greek word ‘ethos’, which means:
‘Ethics’ शब्द ग्रीक शब्द ‘ethos’ से बना है, जिसका अर्थ है:
- Law, rule or regulationकानून, नियम या विनियम
- Profit, wealth or gainलाभ, धन या प्राप्ति
- Trust, faith or beliefभरोसा, आस्था या विश्वास
- Custom, habit or characterप्रथा, आदत या चरित्र
Show answer & explanation
Answer: D — Custom, habit or character
Ethics, a set of moral principles that influence behaviour, is derived from the Greek word ‘ethos’, meaning custom, habit or character.
Ethics, व्यवहार को प्रभावित करने वाले नैतिक सिद्धांतों का समूह, ग्रीक शब्द ‘ethos’ से बना है जिसका अर्थ प्रथा, आदत या चरित्र है।
Question 2
Some say ethics involves just following the legal requirements of business. In this context, which statement is correct?
कुछ लोग कहते हैं कि नैतिकता (ethics) केवल व्यवसाय की कानूनी आवश्यकताओं का पालन है। इस संदर्भ में कौन-सा कथन सही है?
- Legal requirements are the final benchmark for what is ethicalक्या नैतिक है, इसका अंतिम मानदंड कानूनी आवश्यकताएँ हैं
- Legal requirements are complex and hence should not be missedकानूनी आवश्यकताएँ जटिल हैं, इसलिए इन्हें छोड़ना नहीं चाहिए
- Ethics is more than just legal requirements and deals with morals and values tooनैतिकता केवल कानूनी आवश्यकताओं से अधिक है और इसमें नैतिक मूल्य और मान्यताएँ भी शामिल हैं
- Business has several laws, so each of them needs to be followedव्यवसाय पर कई कानून लागू हैं, इसलिए हर एक का पालन आवश्यक है
Show answer & explanation
Answer: C — Ethics is more than just legal requirements and deals with morals and values too
Doing things within the law ensures nothing illegal is done, but ethics goes one step beyond — it brings in what is right or wrong behaviour, arising from a person’s values and character.
कानून के दायरे में काम करने से कुछ भी अवैध नहीं होता, परंतु नैतिकता एक कदम आगे जाती है — इसमें सही या गलत व्यवहार का प्रश्न आता है, जो व्यक्ति के मूल्यों और चरित्र से उत्पन्न होता है।
Question 3
The investment adviser has to put whose interest at the forefront while giving advice?
सलाह देते समय investment adviser को किसके हित को सबसे आगे रखना चाहिए?
- His own interestअपना स्वयं का हित
- His teamअपनी टीम
- The clientक्लाइंट
- The product providerउत्पाद प्रदाता
Show answer & explanation
Answer: C — The client
Conducting business so that the client’s interest is above everything else (the Client First principle) keeps the adviser on the correct ethical path; the fiduciary duty also requires the client to be at the forefront.
क्लाइंट के हित को सबसे ऊपर रखकर व्यवसाय करना (Client First सिद्धांत) सलाहकार को सही नैतिक मार्ग पर रखता है; fiduciary दायित्व भी यही माँगता है कि क्लाइंट सबसे आगे रहे।
Question 4
Frequently switching a client from one product to another to increase earnings from commissions is called:
कमीशन से कमाई बढ़ाने के लिए क्लाइंट को बार-बार एक उत्पाद से दूसरे उत्पाद में बदलवाना क्या कहलाता है?
- RebalancingRebalancing (पुनर्संतुलन)
- Diversificationविविधीकरण (Diversification)
- HedgingHedging (जोखिम-बचाव)
- ChurningChurning (बार-बार अदला-बदली)
Show answer & explanation
Answer: D — Churning
Frequent switching to increase commission earnings is churning — a wrong practice; it is for this reason that SEBI has mandated that advisers can’t distribute.
कमीशन बढ़ाने के लिए बार-बार बदलाव churning है — एक गलत प्रथा; इसी कारण SEBI ने अनिवार्य किया है कि सलाहकार वितरण (distribution) नहीं कर सकते।
Question 5
The workbook gives the example that Distress Debt Funds (AIF) carry a relatively higher default risk which must be communicated to the investor. This illustrates which problem area in the advisory business?
वर्कबुक उदाहरण देती है कि Distress Debt Funds (AIF) में अपेक्षाकृत अधिक default जोखिम होता है जो निवेशक को बताना आवश्यक है। यह सलाह व्यवसाय की किस समस्या को दर्शाता है?
- Poor after-sales serviceबिक्री के बाद की खराब सेवा
- Not informing the investor about risks while highlighting only the good features of a productउत्पाद की केवल अच्छी विशेषताएँ बताते हुए निवेशक को जोखिमों की जानकारी न देना
- Charging fees through banking channelsबैंकिंग चैनल से फ़ीस लेना
- Excessive diversification of the client’s portfolioक्लाइंट के पोर्टफोलियो का अत्यधिक विविधीकरण
Show answer & explanation
Answer: B — Not informing the investor about risks while highlighting only the good features of a product
Not educating or informing investors about risks and uncertainties while highlighting only the good features is largely misrepresentation; the Distress Debt Fund example shows a higher default risk that must be communicated.
केवल अच्छी विशेषताएँ बताकर जोखिमों और अनिश्चितताओं की जानकारी न देना मुख्यतः गलत प्रस्तुति (misrepresentation) है; Distress Debt Fund का उदाहरण अधिक default जोखिम दिखाता है जिसे बताना आवश्यक है।
See the NISM Study Hub for X-B (Investment Adviser Level 2) and the mutual fund distributor exams (V-A, V-D) too.
Aumsetu
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