Chapter 16 Prohibited Activities
A person spreads a rumor in an effort to drive the price of a stock higher. This practice is: A) A violation that's referred to as pump-and-dump B) Acceptable if the stock is traded on an exchange C) A violation that's referred to as front-running D) Acceptable if the person notifies the firm's compliance department
A) A violation that's referred to as pump-and-dump When the purpose of spreading a rumor is to drive the price of a stock up, the SEC refers to this practice as pump-and-dump. This type of manipulation occurs when a large investor, or group of investors, owns stock and spreads false positive news about the company to create a buying frenzy (pump). Before the news can be confirmed, the investor(s) sells the shares at a profit (dump). Notifying the firm's compliance department doesn't make this practice acceptable. Front-running is also a violation, but it occurs when a person trades in advance of non-public information concerning a block or large order.
Which of the following statements is NOT TRUE regarding SEC insider trading rules? A) Being in possession of material, non-public information is a violation of insider trading rules. B) Any persons who profits from insider trading violations can be fined up to three times the profit in an SEC civil proceeding. C) If a person with inside information passes that information to another person who executes trades based on the information, then both persons have violated insider trading rules. D) It is not only a violation to earn a profit from trading on inside information, it is also a violation to avoid a loss by trading on material, non-public information.
A) Being in possession of material, non-public information is a violation of insider trading rules. Simply being in possession of inside information is not a violation of SEC insider trading rules. Instead, it's the trading while in possession of such information that's the violation. In addition, if a person (the tipper) passes along inside information to another person (the tippee) who then trades on the information, both the tipper and the tippee have committed insider trading violations.
If a firm places a temporary hold on a customer's account: A) It applies to either the entire account or specific disbursements B) It applies to the entire account C) It only applies to specific disbursements D) It is required to obtain the prior approval of FINRA
A) It applies to either the entire account or specific disbursements If a firm places a temporary hold on a customer's account, it can apply to either the entire account or specific disbursements. If the firm places the temporary hold, it must permit disbursements from the account if there is no reasonable belief that financial exploitation is occurring (e.g., paying normal bills).
If a broker-dealer decides to change the method that it uses to maintain its records to electronic storage media, what is the firm's obligation? A) It must notify its primary regulator at least 90 days prior to using the new method B) It must notify its primary regulator within 30 days after beginning the new method C) It must notify its primary regulator prior to the beginning the new method D) It must receive prior written approval from its primary regulator
A) It must notify its primary regulator at least 90 days prior to using the new method The SEC allows for the maintenance of records in forms other than paper. For example, firms may maintain their files on micrographic media or electronic storage media. Micrographic media includes microfilm, microfiche, or similar methods, while electronic storage media includes methods of digital storage (e.g., CD-ROM). If a firm decides to use electronic storage media, it must notify its primary regulator prior to the beginning of its use. Also, if a firm changes the form of electronic storage media that it's currently using, it must notify its regulator at least 90 days prior to using the new method.
In order for a person registered at a broker-dealer to lend money to a customer of the broker-dealer with whom he has an outside business relationship, the loan: A) Must be disclosed in advance and preapproved by the firm B) Must be disclosed in advance C) May be made without notice D) Is not permitted
A) Must be disclosed in advance and preapproved by the firm Lending to or borrowing from customers is permitted if it's based on an existing business relationship outside of the broker-dealer relationship. In these situations, the loans must be disclosed in advance and preapproved by the firm.
If a temporary hold has been placed on a customer's account, the firm: A) Must provide notice to the account owner and the trusted contact person B) Must provide notice only to the account owner C) Must provide notice only to the trusted contact person D) Must provide notice to FINRA
A) Must provide notice to the account owner and the trusted contact person If a temporary hold is placed on a customer's account (i.e., for a specified adult), the firm is required to notify both the account owner and the trusted contact person by no later than two business days after the hold has been placed.
If an employee of a broker-dealer wants to open a brokerage account at another member firm, the employee's obligation is to: A) Obtain her employing firm's prior written consent and provide written notification to the executing firm B) Obtain her employing firm's prior written consent and provide verbal notification to the executing firm C) Obtain her employing firm's written consent and its prior written consent for each order D) Obtain her employing firm's prior written consent and provide written notification to the executing firm by no later than 30 days after the account is opened
A) Obtain her employing firm's prior written consent and provide written notification to the executing firm Employees of broker-dealers who intend to open outside accounts for the purpose of executing securities transactions are required to obtain the prior written consent of their firm. In addition, before an outside account is opened, the employees are required to provide written notification to the executing firm of their association with another member firm. However, there is no requirement to obtain their employing firm's approval for each order. If a newly hired employee wants to maintain an account that he had opened prior becoming associated with a broker-dealer, he is required to obtain his employing firm's written consent within 30 days of the beginning of his employment.
The spouse of a brokerage firm employee wants to open a brokerage account so that he can trade individual stocks. If the account is opened at a firm that does not employ her spouse, the employee of the firm is required to: A) Obtain the prior written consent of her employing firm in order to open the account B) Obtain the prior written consent of her employing firm if the account is a joint account C) Obtain the written consent of the employing firm within a reasonable period after the account is opened D) Obtain the prior written consent of the employing firm for each order that's entered
A) Obtain the prior written consent of her employing firm in order to open the account Employees of broker-dealers (as well as the spouse of dependent children of these employees) who intend to open outside accounts for the purpose of executing securities transactions are required to obtain the prior written consent of the employing broker-dealer.
If a customer purchases securities and fails to pay for them by the payment date, the brokerage firm will: A) Sell out the securities and freeze the account B) Notify the Federal Reserve Board C) Notify the SEC D) Close the customer's account for a specified period
A) Sell out the securities and freeze the account When a customer purchases securities and fails to pay by the Reg T payment date (within two business days following settlement), the brokerage firm will sell out the securities and freeze the account for 90 days.
A registered representative's broker-dealer is an underwriter of an initial public offering of stock. The RR's father-in-law may purchase: A) The IPO from a different broker-dealer B) The IPO from the RR's broker-dealer C) Only a limited quantity of the IPO from any broker-dealer D) The IPO but only from a member of the selling group
A) The IPO from a different broker-dealer A restricted person is not permitted to purchase any shares of a new issue unless an exemption applies. There is no exemption for restricted persons to purchase limited quantities of an IPO. An immediate family member of an employee (an RR) of a member firm may be a restricted person. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. An exception exists if a nonsupported, immediate family member buys the IPO from a different broker-dealer. There is no requirement to purchase the shares only from a selling group member.
A registered representative has just received an institutional order to buy 500,000 shares of ABC stock. If the RR enters an order to buy 1,000 shares of ABC stock for his personal account before the institution's order is executed, which of the following is TRUE? A) The RR is guilty of front running the institutional order. B) The RR has violated the insider trading rules. C) The RR has most likely churned the institutional order. D) The RR has interpositioned the institutional order.
A) The RR is guilty of front running the institutional order. The institutional order is large enough to impact the market price of the stock. The RR's entering of an order for his personal account is a violation that's referred to as front running. The RR should have entered the institutional order first, then waited until it was executed, before entering the order for his account.
An employee of a broker-dealer has just received a report created by her firm's research department, but the report has not yet been released publicly. If the employee buys or sells shares based on the research report, which statement is TRUE? A) The employee has traded ahead of the report. B) This is a churning violation. C) The employees has traded on material, non-public information under the insider trading rules. D) Since the report is created by the employee's firm, she's permitted to trade on its contents before the public.
A) The employee has traded ahead of the report. The employee has traded ahead of the research and violated industry rules. Firms and employees are not allowed to place orders in advance of the release of a research report. (17573)
An employee of a broker-dealer has a personal brokerage account at her firm. From which of the following persons who also have accounts at her firm, may she borrow funds? A) The employee's sister B) The employee's friend C) A customer who has granted the employee with discretionary authority D) An officer of an institution that is one of the firm's clients
A) The employee's sister Registered personnel of a member firm are generally prohibited from borrowing money from, or lending money to, any customer. However, if the firm has written rules and procedures that meet the following conditions, then borrowing and lending between registered personnel and their customers is permissible: The customer is an immediate family member of the registered person. The customer is a financial institution or other entity that engages in the business of providing credit, financing, or loans in the course of its business. The customer and registered person are both registered with the same member firm. The customer has a personal relationship with the registered person wherein the loan would not have been solicited, offered, or given if the relationship did not exist. The loan is based on a business relationship other than that of a broker-customer.
Which of the following factors would be LEAST important in an analysis of whether an RR had churned a client's account? A) The type of securities the client traded B) The amount of commissions the client paid C) The amount of portfolio turnover D) The client's investment objectives
A) The type of securities the client traded Churning is a prohibited practice and occurs when an RR excessively buys and sells in a client's account to generate high sales commissions. The amount of commissions the client paid, portfolio turnover, and the client's investment objectives are all important factors to analyze in determining whether an RR churned a client's account. The specific type of securities that were purchased are not as important as the other three factors listed. For example, it is still a violation if an RR excessively buys and sells low-risk securities such as government debt.
One of an RR's friends is the CEO of a publicly traded company. She tells the RR that the next quarter's profits are going to be lower than expected. If the RR sells his shares of the company based on this conversation, which of the following is TRUE? A) This is an insider trading violation. B) This is an example of trading ahead. C) This is considered pegging and is a form of market manipulation. D) The RR has churned the market.
A) This is an insider trading violation. The CEO has provided the RR with material, non-public information and this is a violation of the insider trading rules. In general, a person is prohibited from trading a security based on material, non-public information until it's been widely disseminated.
Regulation M restricts which of the following activities? A) Underwriters bidding or purchasing a stock in the secondary market that's currently being offered B) Underwriters using other brokerage firms to assist in the sale of a new issue C) Underwriters from making a market in a security after it begins trading in the secondary market D) Underwriters from participating in a follow-on offering
A) Underwriters bidding or purchasing a stock in the secondary market that's currently being offered Regulation M is an SEC rule which restricts distribution participants (e.g., underwriters and issuers) from aggressively bidding for or making purchases in the secondary market for stock that's currently being offered in a distribution. However, underwriters are permitted to use other brokerage firm to assist in a distribution, make a market in a security once it begins trading in the secondary market, and participate in follow-on offerings.
Regulation M prohibits which of the following activities? A) Underwriters stabilizing an offering at a price that exceeds the public offering price B) Restricting distribution participants (underwriters and the issuer) from bidding for or purchasing the securities being offered C) Underwriters also acting as passive market makers D) Underwriters stabilizing an offering at or below the public offering price
A) Underwriters stabilizing an offering at a price that exceeds the public offering price Regulation M restricts distribution participants (e.g., underwriters and issuers) from aggressively bidding for or making purchases in the secondary market for a stock that's currently being offered in a distribution. However, many of these participants are allowed to make passive markets, but cannot conduct regular market making (i.e., not driving up the price). This restriction is in effect for a limited period that revolves around the effective date. Regulation M also attempts to prevent upward price manipulation before the pricing of the offering since this practice generally results in the issuer receiving greater proceeds for the offering and the underwriters receiving more in fees. However, certain exceptions are permitted if the SEC believes that the chances of manipulation are low. Under certain conditions, the SEC also makes exceptions for market makers and syndicate members that are seeking to support (stabilize) the price of the new issue. Stabilization is permitted at or below the public offering price (POP) since this activity is designed to protect the new issue's price from dropping substantially. However, stabilization cannot be done at a price that exceeds the POP.
The sale of which of the following dollar amount of mutual fund shares is most likely considered a breakpoint sale? A$5,000 B$99,000 C$25,000 D$1,000,000
B$99,000 The sale of mutual fund shares at $99,000 is likely just below a breakpoint of $100,000. If this is the case, the investor will be assessed a higher sales charge than if she had invested $100,000 in the fund. The investor may have been able to use a letter of intent to take advantage without having deposited the full $100,000.
If a temporary hold has been placed on an account, it will expire: A) After two business days B) After 15 business days C) After 30 days D) After the firm completes its investigation of the account
B) After 15 business days If a temporary hold is placed on the account of a specified adult, it will expire by no later than 15 business days after the date that it was first placed on the account, unless it was otherwise terminated or extended by another authorized regulatory entity. The temporary hold may be extended by the firm for no longer than 10 business days following the date, unless it was otherwise terminated or extended by another authorized regulatory entity.
Which of the following persons can a registered representative either make a loan to or borrow money from without providing notification to her employer? A) Another employee of an affiliated broker-dealer B) An institution that's in the business of borrowing or lending funds C) An individual with whom the RR maintains a personal relationship D) A company with which the RR has a business relationship
B) An institution that's in the business of borrowing or lending funds Registered representatives can borrow money from or loan money to a customer that regularly provides loans (e.g., a bank) without permission. However, for an RR to borrow from other employees, friends, and business partners, she's required to obtain permission from her employer. (17576)
An employee of a broker-dealer is NOT permitted to purchase a(n): A) New debt offering at its public offering price B) Equity IPO C) New mutual fund offering at its public offering price D) A new issue on the second day of trading
B) Equity IPO Any employees of a member firm, not just registered persons, are prohibited from purchasing equity IPOs. Although the debt and mutual fund are primary offerings, they are not subject to FINRA's IPO Rule. Employees of member firms are permitted to make purchases of securities in the secondary market.
If a registered representative (RR) of a member firm intends to open an account with another member firm, the RR: A) Must only provide written notice to the firm with which she opens the account B) Must provide written notice of her affiliation with another member firm to the firm with which she intends to opens the account and must obtain the written approval from her employing firm C) May open the account without providing notice or obtaining the written approval of either firm D) Is prohibited from opening outside accounts
B) Must provide written notice of her affiliation with another member firm to the firm with which she intends to opens the account and must obtain the written approval from her employing firm When seeking to open an account with another member firm, the employee must provide written notice to the firm with which she intends to open the account. Additionally, she must obtain the written approval from her employing broker-dealer. If the employer provides approval, the firm may request duplicate confirmations of trades and account statements. These provisions extend to the spouse and/or minor children of the employee. In reality, firms could institute internal house rules that prohibit outside accounts.
The guidelines regarding brokerage employees opening personal accounts with other brokerage firms do not apply if the transactions in the account involve which of the following securities? A) Municipal debt B) Mutual funds C) Exchange-traded funds D) Treasury debt
B) Mutual funds Employees of broker-dealers who intend to open outside accounts for the purpose of executing securities transactions are required to obtain the prior written consent of their firm. However, the requirements of this rule do not apply to accounts that are limited to transactions involving redeemable investment company securities (mutual fund shares), unit investment trusts, variable contracts, or 529 plans.
Information barriers are required between which of the following departments of a broker-dealer? A) Retail sales and institutional sales B) Research and trading C) Operations and trading D) Retail sales and operations
B) Research and trading Information barriers are required to prevent a trading department from learning of a pending research report regarding a security in which it has a position. The other departments don't require the establishment of information barriers.
Which of the following statements is TRUE concerning time of trade disclosures regarding municipal securities? A) The disclosures are only required if the execution occurred in the primary market. B) The disclosure is required for an unsolicited transaction. C) The disclosure is not required if the transaction was recommended. D) The disclosure would apply only for a trade executed in a principal transaction.
B) The disclosure is required for an unsolicited transaction. In addition to the best execution rule for municipal securities, a municipal securities dealer is required to disclose to a client all material information that's either known or reasonably accessible to the market. These time of trade disclosures are required to be made at or prior to the time of the trade and can be made either verbally or in writing. The main purpose of this rule is to require dealers to disclose to clients all of the relevant information concerning the securities that they're considering purchasing or selling. Many municipal securities have unique features and characteristics that should be disclosed to a client.
A registered representative is employed by a broker-dealer and her husband is seeking to open an individual account at another full-service firm. Which of the following statements is TRUE concerning this situation? A) The account may be opened without restriction since it's not in the name of the registered representative. B) The registered representative must ensure that the firm opening the account is aware of her status as a registered representative. C) The registered representative only needs to notify her employing firm of the fact that her husband is opening an outside account. D) This action is prohibited since registered representatives and immediate family members are prohibited from having external accounts.
B) The registered representative must ensure that the firm opening the account is aware of her status as a registered representative.Any RR who is seeking to open an external (outside) account must inform the firm at which the account is being opened of her status as an employee of a member firm. This provision applies even if the account is being opened by or for the spouse or a dependent child of the registered representative. Additionally, an RR must obtain her firm's prior written permission if she or her spouse or dependent children are seeking to open an outside account. In other words, simply notifying her employer is insufficient. If the account is opened, the firm that's carrying the account may be required to send duplicate confirmations and account statements to the employing firm (upon request). (15636)
Why do regulators require broker-dealers to establish information barriers? A) To require communications between departments to be made on recorded lines. B) To prevent confidential information from spreading from one department to another. C) To ensure that compliance is a part of all communications. D) To ensure that certain information is distributed between departments.
B) To prevent confidential information from spreading from one department to another. Information barriers are designed to prevent confidential information from spreading from one department to another. (17581)
A registered representative may NOT establish a joint account with a customer: A) Unless the customer is a relative of the RR B) Unless the RR's employer provides written approval C) Unless the customer signs a waiver of liability D) Under any circumstances
B) Unless the RR's employer provides written approval Under FINRA rules, an RR must adhere to the following three guidelines in order to participate in a joint account with a customer: (1) he must obtain written permission from his employer, (2) the customer's prior written consent is given, and 3) the sharing in the account's gains and losses are proportionate to each person's contribution to the account. However, these restrictions do not apply to accounts that RRs establish with immediate family members.
A personal friend of a registered representative, who is also a customer of the firm that employs the RR, lends funds to the RR. Is the loan required to be reported to the broker-dealer? A) No, since the person is not an immediately family member of the RR. B) Yes, since the person is not an immediately family member of the RR. C) No, since the transaction doesn't involve securities. D) Yes, since this type of arrangement is prohibited.
B) Yes, since the person is not an immediately family member of the RR. Registered representatives are generally prohibited from borrowing money from, or lending money to, a customer. However, the practice is permitted if a member firm implements written procedures and any one of the following five provisions is satisfied: The customer and the registered person are immediate family members. The customer is a financial institution that's regularly involved in the business of extending credit or providing loans. Both persons are registered with the same firm. The loan is based on a personal relationship that exists between the customer and registered person. The loan is based on a business relationship that's independent of the customer-broker relationship. If any one of the conditions indicated in provisions 3, 4, or 5 is satisfied, the registered person is required to notify the firm prior to the entering of the arrangement. For this question, since this situation equates to provision 4, it must be reported to the broker-dealer and the firm must provide written preapproval of the arrangement. If the arrangement is entered into with an immediate family member (provision 1) or with an institution that's in the business of extending credit or providing loans (provision 2), notification to the employing firm and written preapproval is not required.
The maximum criminal penalty for individuals who are convicted of insider trading violations is: A) Three times the amount gained or loss avoided B) $5,000 fine and/or three years in prison C) $5,000,000 fine and/or 20 years in prison D) Censure and/or $2,500 fine
C) $5,000,000 fine and/or 20 years in prison Maximum criminal penalties under the Securities Exchange Act of 1934, including violations of insider trading rules, are a $5,000,000 fine and/or 20 years in prison for each violation. The maximum civil penalty that can be assessed is three times the amount gained or loss avoided.
Which of the following accounts at a broker-dealer requires prior written approval? A) An joint account between a brother and sister B) A joint account between two unrelated persons C) A joint account between an employee of the broker-dealer and an unrelated person D) A joint account between a parent and adult child
C) A joint account between an employee of the broker-dealer and an unrelated person Most joint accounts don't require a broker-dealer's prior written approval, but employees of FINRA and MSRB member firms are generally prohibited from sharing in profits or losses in their customers' accounts unless approval has been obtained. However, an exception is made if the following conditions are met: 1) the employee has made a financial contribution to her customer's account and shares in the profits or losses in direct proportion to her financial contribution (this condition does not apply to situations in which the employee has an account with an immediate family member, such as a spouse or a parent, 2) the customer's prior consent is given, and 3) the employing broker-dealer's prior written consent is given.
All of the following persons are permitted to be named as a trusted contact person for a senior investor, EXCEPT: A) A family member B) A business associate C) A law firm D) A friend
C) A law firm To be a trusted contact person for a senior investor, the only requirements are that the person must be a natural person (not a law firm) and be at least 18 years old.
When a brokerage firm executes trades for customers in municipal securities, all material information should be disclosed: A) At the end of the day that the trade was executed B) On the business day after the trade was executed C) At or prior to the time of the trade D) On the business day prior to the trade
C) At or prior to the time of the trade In addition to the best execution rule for municipal securities, a municipal securities dealer is required to disclose to a client all material information that's either known or reasonably accessible to the market. These time of trade disclosures are required to be made at or prior to the time of the trade and can be made either verbally or in writing.
Broker-dealers are prohibited from which of the following activities? A) Advertising on television B) Advertising on social media C) Paying a media outlet to influence the price of a security D) Paying a media outlet to list the names of their new financial advisers
C) Paying a media outlet to influence the price of a security Broker-dealers are prohibited from paying any party to influence the market price of a security. Although firms are allowed to advertise, they cannot pay any electronic or public media outlet that has the ability to influence the price of a security.
Which of the following is a prohibited practice? A) Buying a company's shares after hearing a positive rumor concerning the company. B) Selling a company's shares after hearing a negative rumor concerning the company. C) Spreading a rumor about a company on social media and then buying the company's shares. D) Overhearing a rumor at an internal meeting about a pending merger.
C) Spreading a rumor about a company on social media and then buying the company's shares. Some investors have spread false or misleading information about companies to influence the price of stocks and bonds. The development of the internet and the overwhelming popularity of social media has increased the ability to fraudulently impact the price of securities using unsubstantiated rumors. The spreading of rumors can impact the price of a security in either a positive or negative manner. For example, in an effort to drive down the price of a company's stock, a person may use social media to spread either positive or negative news concerning a company. Although buying or selling a company's stock after hearing a rumor is not recommended, it's not a violation. The key to this question is recognizing that spreading a rumor to influence the price of a security is prohibited.
A broker-dealer receives an order from a client to purchase 1,000 shares of ABC stock. Before executing the order, the broker-dealer purchases the same security for its own account at a price that would have satisfied the client's order. The broker-dealer's transaction is considered: A) Unethical B) Fraudulent C) Trading ahead D) A conflict of interest
C) Trading ahead This question presents an example of trading ahead of a client's order, which is a prohibited practice. This violation occurs when a broker-dealer accepts an equity security order from a client and, rather than immediately executing the order, the broker-dealer trades the security on the same side of the market for its own account at a price that would have satisfied the client's order.
If a broker-dealer's trading desks purchases a large block of stock during the last minutes of trading in an effort to drive up the price, it is: A) An acceptable practice that's referred to as a block trade B) An acceptable practice that's referred to as trading ahead C) A prohibited practice that's referred to as backing away D) A prohibited practice that's referred to as marking-the-close
D) A prohibited practice that's referred to as marking-the-close The execution of a series of trades at or near the opening or closing of trading in an effort to influence the price of a security is a form of manipulation that's referred to as marking-the-opening or marking-the-close. Traders can execute customer orders or change the amount of securities they own to have securities available for customers; however, buying or selling the security to influence its price is considered manipulative.
A person spreads a rumor in an effort to drive the price of a stock higher. This practice is: A) Acceptable if the person is employed by the company B) Acceptable if the stock is not publicly traded C) A violation that's referred to as front-running D) A violation that's referred to as pump-and-dump
D) A violation that's referred to as pump-and-dump When the purpose of spreading a rumor is to drive the price of a stock up, the SEC refers to this practice as pump-and-dump. This type of manipulation occurs when a large investor, or group of investors, owns stock and spreads false positive news about the company to create a buying frenzy (pump). Before the news can be confirmed, the investor(s) sells the shares at a profit (dump). Front-running is also a violation, but it occurs when a person trades in advance of non-public information concerning a block or large order.
A firm may place a temporary hold on funds that are being sent out of which of the following customers? A) Any customer who is over the age of 60 B) Any customer who is under the age of 18 C) Any customer who is over the age of 18 and has no financial experience D) Any customer who is over the age of 18 and has a mental or physical impairment
D) Any customer who is over the age of 18 and has a mental or physical impairment A firm may place a temporary hold on the disbursements or transfers of funds and securities from any account related to a specified adult. The term specified adult is defined as any person who is age 65 or older as well as a person who is age 18 or older and who the firm reasonably believes has a mental or physical impairment that renders him unable to protect his own interests. This determination should be based on the facts and circumstances that are observed in the firm's business relationship with the person.
Under FINRA's New Issue Rule relating to the sale of equity IPOS, which of the following person(s), who is not materially supported by an associated person, is considered immediate family and restricted? A) Aunts or uncles B) Grandparents C) Mother-in-law and/or father-in-law D) Cousins
D) Cousins Under the New Issue Rule, FINRA considers in-laws of an employee to be restricted. According to the rule, aunts, uncles, cousins and grandparents of associated persons are not considered immediate family members.
A registered person of a broker-dealer has an existing account at another firm and has followed the proper procedures to open the account. The current responsibility of the registered person is to: A) Obtain her employing firm's prior written consent in order to purchase any securities in the account B) Obtain her employing firm's prior verbal consent in order to purchase any securities in the account C) Notify her clients that she has an existing account at another member firm to trade securities D) Ensure that her employing firm's guidelines are being followed when trading securities
D) Ensure that her employing firm's guidelines are being followed when trading securities Employees of broker-dealers who intend to open outside brokerage accounts for the purpose of executing securities transactions are required to obtain the prior written consent of their firm. Once the employees obtain the written consent of their employers, they must ensure that their firms' guidelines are being followed when trading securities.
Churning is BEST defined as: A) Selling shares of an investment company just below the amount at which a customer would receive a quantity discount B) Charging a customer a higher-than-normal markup on a transaction C) Failing to honor a firm quote D) Excessive trading activity in a customer's account
D) Excessive trading activity in a customer's account Churning is defined as excessive trading in a customer's account. Although the word excessive is not specifically defined, it's generally judged based on the customer's investment objectives and financial situation. Selling shares of an investment company just below the amount at which a customer would receive a quantity discount is referred to as a breakpoint sale. Charging a customer a higher-than-normal markup on a transaction is an example of excessive markups. Failing to honor a firm quote is an example of backing away. All four of these activities are prohibited practices.
A brokerage firm buys stock for its own account at $30 per share. The firm is able to take which of the following actions? A) Execute any limit orders that the firm is holding for its customers B) Execute any limit order to buy at a price below $30 per share C) Execute any limit order to sell at a price above $30 per share D) Execute any limit order to buy at $30 per share
D) Execute any limit order to buy at $30 per share A broker-dealer is in violation of FINRA rules if it accepts and holds a customer order (either market or limit) for an equity security and executes a trade involving that security for its own account at the same price and on the same side of the market (buy or sell). If the firm buys stock at $30 per share for its own account, it has an obligation (within 60 seconds) to fill a customer's buy order at $30 or better. The firm can execute a customers order below $30, but it's not required to do so.
A registered person overhears that a trader will be executing a block order for an exchange-traded fund (ETF). If the registered person immediately executes his own order for the same position as the ETF, this practice is considered: A) Insider trading B) Interpositioning C) Pegging D) Front-running
D) Front-running Although information regarding the order may not have been made public, the execution of an order ahead of a customer order in an effort to make a profit or protect against a loss is referred to as front running, not insider trading. Insider trading is based on the possession of material, non-public information concerning an issuer or an offering of securities. Interpositioning is the placement of another broker-dealer between the customer and the best market, which generally results in an increase in execution costs and a detriment to the customer. Pegging is setting a floor on how low a security's price can decline and, unless it involves stabilization, this practice is considered manipulative.
A registered representative is aware of a large order sitting on the firm's institutional trading desk. He decides to execute an order for his own account before the institutional order is entered. This practice is known as: A) Insider trading B) Interpositioning C) Pegging D) Frontrunning
D) Frontrunning Each of these practices are considered prohibited. Although knowledge of this order may not be public, the execution of an order ahead of a customer order in an effort to make a profit or protect against a loss is known as frontrunning—not insider trading. Insider trading is based on material non-public information concerning an issue of securities. Interpositioning is placing another broker-dealer between yourself and the customer, which generally results in an increase in execution costs and a detriment to the customer. Pegging is setting a floor on how low a security can go and unless it involves stabilization, this practice is considered manipulative.
A registered person wants to borrow funds from a neighbor who is also a customer of his firm. Which of the following statements is TRUE? A) He is only required to notify his firm. B) He is not required to notify or receive approval from his firm. C) He is required to notify FINRA. D) He is required to notify and receive approval from his firm.
D) He is required to notify and receive approval from his firm. Registered individuals may not borrow money from, or lend money to, a customer unless certain conditions are met. These conditions include implementing written procedures permitting such activity and satisfying one of the following provisions: The customer and the registered person are immediate family members. The customer is a financial institution that's regularly involved in the business of extending credit or providing loans. Both parties are registered with the same firm. The loan is based on a personal relationship between the customer and the registered person. The loan is based on a business relationship that's independent of the customer-broker-dealer relationship. If the loan is based on provisions 1 or 2 (borrowing from family members or from a financial institution whose business is loaning money), firm notification or firm approval is not required. However, if the conditions indicated in provisions 3, 4, or 5 apply (e.g., borrowing from a neighbor), the firm must approve the lending activity prior to the execution of the loan.
A person hears sensitive news regarding a publicly traded company before it's disseminated to the public. If this person sold his stock, the prohibited practice that he has engaged in is referred to as: A) Front-running B) Freeriding C) Wash sale D) Insider trading
D) Insider trading Any person, not just employees of brokerage firms, who uses material, non-public information to make a profit or avoid a loss is subject to insider trading sanctions. This also includes any person who acquires and passes the information along (tippers), as well as any person who receives and uses the information (tippees).
A broker-dealer must establish information barriers between which two departments? A) Research and compliance B) Retail and institutional sales C) Human resources and retail sales D) Investment banking and trading
D) Investment banking and trading Information barriers must be maintained at firms to prevent the flow of certain information between different departments at the firm. Much of the focus is on preventing the free flow of information between investment banking and other departments. In fact, most of the communication between investment banking and other departments is made through compliance.
A customer purchases 1,000 shares of stock at $55 in a cash account. On the payment date, the stock is selling at $65 per share but the customer has not paid for the transaction. Which of the following actions would be considered freeriding? A) Depositing $55,000 to pay for the purchase B) Depositing $55,000 cash into the account and then liquidating the shares at $65 C) Depositing $65,000 into the account and then liquidating the shares at $65 D) Liquidating the stock at $65 and using the sale proceeds to pay for the original purchase
D) Liquidating the stock at $65 and using the sale proceeds to pay for the original purchase The customer would not be permitted to liquidate the stock and use the sale proceeds to pay for the original transaction. This prohibited practice is known as freeriding. To satisfy the $55,000 requirement in the cash account, the customer may deposit the full amount in cash. There is no violation if the customer deposits more than the amount required
A registered representative persuades a customer to purchase a security by assuring her that, should it fall in value, the representative will make up the difference in the account. This practice is: A) Permitted if the arrangement is in writing and preapproved by the firm B) Permitted if the customer maintains an outside business relationship with the representative C) Permitted if the customer is an immediate family member D) Not permitted
D) Not permitted Guaranteeing a customer against a loss is prohibited regardless of the relationship.
n order to convince a customer to purchase mutual fund shares, a registered representative pledges to reimburse the client for a predetermined amount if the shares perform poorly. This activity is: A) Acceptable. B) Acceptable if it's in writing. C) Acceptable if it's in writing and approved by a principal. D) Prohibited.
D) Prohibited. The RR's pledge to reimburse the client for losses represents a guarantee against a loss. This type of activity is a prohibited practice.
If a customer fails to deposit the required amount within the prescribed time, Regulation T: A) Requires the broker-dealer to close the customer's account B) Allows the brokerage firm to grant a two-day automatic extension C) Allows the brokerage firm to lend funds to the customer to pay for the transaction D) Requires the brokerage firm to freeze the account for a specified period
D) Requires the brokerage firm to freeze the account for a specified period According to Regulation T, any purchases that are made in either cash or margin accounts must be paid for promptly. If they are not paid for within two business days of the regular-way settlement date, the broker-dealer may cancel the transaction by selling out the securities. After selling out the customer's securities, the broker-dealer is required to freeze the account for 90 days. For the 90-day period, all purchases must be paid for in advance; however, once the 90 days have elapsed, the customer is considered to have reestablished credit and may once again be extended normal credit terms.
When opening an account for a person who is age 65 or older, which of the following is TRUE? A) The account owner must provide information on a qualified guardian. B) The account owner must provide information on a trusted contact person. C) The RR is required to request information concerning the executor of the person's estate. D) The RR must request the trusted contact person's name and contact information.
D) The RR must request the trusted contact person's name and contact information. Although not required, a member firm should make a reasonable effort to obtain the name and contact information (e.g., mailing address, phone number, and email address) for the account owner's trusted contact person. Ideally, this information is obtained when the account is opened or updated. Acquiring this information should be included with all of the other customer-related information being obtained.
Obtaining best execution includes all the following factors, EXCEPT: A) Price and volatility B) The general character of the market C) The size and type of transaction D) The number of market makers for the security
D) The number of market makers for the security For purposes of obtaining best execution. the factors considered include price and volatility of the security, general character of the market, size and type of transaction, and the locations and accessibility of the member organization to primary markets. However, the number of market makers for the security is not a factor.
A registered representative has been named as the beneficiary in a trust account that's established at another brokerage firm. Is the RR required to notify her employing firm of the account? A) No, since the registered representative didn't set up the account. B) No, since the registered representative cannot make investment decisions in the account. C) No, trust accounts don't need to be disclosed to brokerage firms by their employees. D) Yes, since the registered representative has a beneficial interest in the account.
D) Yes, since the registered representative has a beneficial interest in the account. When a registered representative has a beneficial interest in an account at another financial firm, the RR must provide written notification to her employing broker-dealer. This is require regardless of whether the individual opened the account or is given trading authority. (17577)
Persons who violate federal insider trading regulations are subject to all of the following penalties, EXCEPT: A) Treble damages B) Prison terms C) Return any profits made D) FINRA fines
Insider traders face SEC civil penalties of up to three times the amount gained or loss avoided (treble damages). Criminal penalties for individuals can be as much as a $5,000,000 fine and 20 years in prison. In addition, private individuals who believe their investments were harmed by the actions of an insider trader may file a civil lawsuit to recover damages. However, FINRA fines may be assessed only against FINRA members and their associated persons. FINRA has jurisdiction only over members while anyone can be held civilly or criminally liable for insider trading. FINRA may not take action against someone who is not a FINRA member.
