Conflicts of Interest & Capacity

Overview

🔑 These are four general disclosures that both broker-dealers and investment advisers must make (and that also apply to agents and IARs by extension):

#	General disclosure
1	Conflicts of interest
2	Internet-related disclosures
3	Disclosure of capacity
4	Third-party research

Conflicts of interest

Here’s a helpful definition from the Merriam-Webster dictionary:

Definitions

Term	Definition	Example
Conflict of interest	A conflict between the private interests and the official responsibilities of a person in a position of trust	An investment adviser is compensated by an issuer for recommending that issuer’s security to clients
Proprietary investment or service	A security, product, or service developed by a company that is generally only available through that company	Fidelity’s Portfolio Advisory Service, a model portfolio offered by Fidelity and created for investors based on their needs, risk tolerance, and time horizon. This proprietary service is only offered to Fidelity clients.
Fiduciary duty	The requirement for a person (typically a professional) to hold another person’s interest above its own in all matters	Investment advisers must always act in a fiduciary capacity with their clients

A conflict of interest exists when a financial professional could personally benefit from something connected to a client interaction. If your adviser has a financial interest in recommending a specific security, product, or service, that’s something you’d want disclosed.

Conflicts of interest aren’t automatically illegal or improper. The problem arises when a conflict exists and isn’t disclosed. That’s why disclosure is the key requirement.

🔑 Common conflicts to recognize

Recommending a security that financially benefits a registered person (beyond normal transaction or advisory fees)
Recommending a security directly tied to an officer, director, or partner of the firm
Recommending securities issued by their own firm or an affiliated firm
Recommending a more expensive product or service resulting in higher compensation for the financial professional
Recommending a security that will be sold out of the firm’s inventory
Offering a product or service at a discounted rate only to a specific type of client
Recommending a proprietary investment or service

Broker-dealers vs. investment advisers

	Broker-dealers	Investment advisers
Core business	Executing transactions (they can recommend securities, but many trades are unsolicited — the customer initiated the trade without influence from a financial professional)	Providing advice
Fiduciary duty	In unsolicited situations, broker-dealers are not subject to a fiduciary duty, and conflicts of interest are less likely to arise	Must always act in a fiduciary capacity with their clients
Handling conflicts	—	Must remove and/or mitigate conflicts of interest as much as possible; if a conflict still exists, it must be disclosed

Notice that most of the conflicts listed above involve recommendations.

🔑 When conflicts must be disclosed

Type of conflict	When/where disclosed
Ongoing (permanent) conflicts	Typically disclosed in the brochure
Conflict arising in connection with a specific recommendation	Must be disclosed during the recommendation or before trade execution

When financial professionals communicate with investors online, they must follow certain protocols to stay compliant with regulatory requirements. In 1997, NASAA released an order relating to internet communications. As the internet became a common way to communicate in the late 1990s, regulators needed a consistent approach — especially around registration.

A key question is whether online activity counts as “doing business” in every state where readers happen to live. For example, suppose an IAR is registered and operating in only one state, but discusses securities in an online comment thread (Facebook, Reddit, etc.). Users from all 50 states join the conversation. Does the IAR need to be registered in all 50 states?

It depends on what the communication looks like.

🔑 Under the 1997 NASAA order, registered persons are NOT considered to be “transacting business” if:

The registered person discloses they may only perform securities-related services if properly registered in a client’s state
Any individualized responses must comply with relevant rules and regulations
The firm maintains a system that ensures these communications comply with applicable rules and regulations
Communications are general and non-specific if engaging investors in states the person isn’t registered in

🔑 The same NASAA order requires agents and IARs to:

Prominently disclose the firm they’re affiliated with
Ensure their communications are properly supervised
Ensure their firm authorizes these communications
Ensure their communications remain within the scope of their abilities

Keep in mind these rules apply only to online communications an agent or IAR makes while acting in a professional capacity. They generally don’t apply when the person isn’t discussing securities or is clearly speaking personally. For example, an agent posting a general comment about the stock market on Facebook in their free time would generally not be subject to the rules above. If the comment is made in a personal capacity and doesn’t reference professional affiliations, it typically falls outside the administrator’s jurisdiction.

Disclosure of capacity

To comprehend the concepts discussed in this section, you must be knowledgeable in regards to agency and principal capacities (the page links to a refresher on the topic).

The capacity in which a securities transaction occurs must be disclosed to investors.
In most cases, broker-dealers disclose capacity on the trade confirmation after the transaction is executed.
Trade confirmations must be sent to investors by settlement, which is typically the first business day after a trade occurs (depending on the security; the details are not important for this material).

⚠️ Pre-trade vs. post-trade disclosure

Situation	When capacity must be disclosed
Most broker-dealer transactions	After the trade, on the trade confirmation (sent by settlement)
An investment adviser’s recommendation that will result in a principal transaction	Before the trade — during the recommendation
Agency cross transactions	Certain pre-disclosures required (written disclosure and written approval must be in place before execution)

Example (principal transaction): an adviser recommends ABC Company common stock, and if the client agrees, the stock will be sold out of the adviser’s inventory. Because the adviser is on the other side of the trade, this creates a conflict of interest that must be disclosed during the recommendation.

Agency cross transactions

An agency cross transaction occurs when an investment adviser “crosses” two of their own clients on the same trade.

Example from the text: assume an adviser has two clients — Parsa and Ebony. On a quick phone call with their assigned IAR, Parsa expresses interest in buying Tesla stock. Later that day, the IAR reviews Ebony’s account and determines her current Tesla position is unsuitable. The IAR recommends that Ebony liquidate the position, and she agrees. The IAR then contacts Parsa, matches the two clients on the trade, and earns an advisory fee from Ebony.

🔑 That example would not be considered unethical if the following conditions were met (according to NASAA rules):

Condition
Written disclosure provided to clients documenting the details of an agency cross transaction
Written approval from each client to perform this type of transaction
A confirmation with trade details is provided by the settlement of the trade
An annual disclosure is provided to all clients detailing: total number of agency cross transactions performed; total compensation received in connection to these transactions; that the client’s written approval may be rescinded at any time
A recommendation was made only to one of the two clients

In the example above, the recommendation was made only to Ebony, which satisfies the last condition. In addition, the written disclosures and written approvals must be in place before executing the agency cross transaction. Finally, don’t overlook the annual disclosure requirement that applies to all clients.

Third-party research

Financial firms and their representatives may provide access to third-party research reports as an ongoing service. Many of these reports offer investment insights on specific securities from the perspective of professional analysts. With more data and analysis available, clients can make more informed decisions.
🔑 NASAA rules emphasize one major requirement: disclose the source. The registered person must not imply that the research is their own.

Key points

Conflicts of interest

Can exist as long as disclosed
Must be mitigated and removed if possible
Advisers disclose in the brochure (Form ADV Part 2A)

Internet-related disclosures

Will not be considered doing business in a state if:
- Individualized responses comply with relevant rules and regulations
- The firm maintains a system that ensures communications comply with rules and regulations
- Communications are general and non-specific

Disclosure of trading capacity

Broker-dealers disclose capacity on the trade confirmation
Investment advisers must disclose if performing a principal transaction

Agency cross transactions

Connecting two internal clients on a single trade
Requirements to perform:
- Written disclosure provided to the client documenting the details of the transaction
- Written approval from the client to perform this type of transaction
- Confirmation with trade details provided by settlement
- Annual disclosure provided to all clients regarding these transactions
- Recommendation may not be made to both clients

Third-party research

Must disclose the source of the research

Sources

Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.

#	Source	Publisher
1	Investment Advisers Act rules (206(4)-x, custody, brochure)	eCFR (17 CFR Part 275)
2	Model Rule 102(a)(4)-1 — unethical practices of IAs and IARs	NASAA
3	Reg BI — the four obligations, Form CRS	FINRA
4	Achievable Series 65 — chapter 4.5.2	Achievable (course text)

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