Flashcards in 4 - Ethical Practices Deck (63)
What is a material fact?
Information used by a prospective purchaser to make an informed investment decision.
What are the three criteria the Uniform Securities Act uses to define fraudulent and other prohibited practices?
(1) Employing any device, scheme or artifice to defraud; (2) making any untrue statement of a material fact or omitting to state a material fact necessary to make a statement not misleading; or (3) engaging in any act, practice, or course of business that operates as a fraud or deceit on a person.
What are the criteria the Uniform Securities Act uses to define fraudulent and other prohibited practices for investment advisers or investment adviser representatives?
(1) Employing any device, scheme or artifice to defraud the other person; or (2) engaging in any act, practice or course of business which operates or would operate as a fraud or deceit upon the other person.
Describe the breadth of the antifraud provisions of state securities laws.
These provisions are very broad. They cover any person or transaction involving a security, regardless of whether the person, security or transaction is registered, exempt or federal covered.
May registered agents share fees or split commissions?
Yes, but only if they are registered as agents for the same broker-dealer or two broker-dealers under common ownership or control. Clients need not be told of such arrangement so long as it does not increase the amount of commission charged.
May an individual register as an agent for more than one broker-dealer?
An agent may only registered with multiple broker-dealers if the firms are affiliated by direct or indirect common control. For example, an agent may register with two broker-dealers that are owned by the same parent company. An agent cannot register with two unrelated firms.
What are some examples of material facts that would constitute fraud if misstated by agents or broker-dealers knowingly and willfully?
(1) inaccurate market quotations; (2) misstatements of an issuer's earnings, projected earnings or dividends; (3) inaccurate statements regarding the amount of commissions, markups or markdowns; (4) stating or implying that the agent has inside information when he does not; (5) telling a customer that a security will be listed on an exchange without reliable information; (6) informing a client that registration of a security means approval by the SEC or Administrator of such security, or that the Administrator or SEC approves of the agent or broker dealer; (7) misrepresenting the status of customer accounts; (8) promising a client services without the intent or ability to perform them.
Can brokerage commissions or markups ever be higher than normal?
Yes, provided it is disclosed to the client.
What are a broker's disclosure obligations with respect to his or her commissions?
Unless a commission is higher than normal, a broker-dealer is not required to disclose the amount of the commission on an offer to sell before the transaction. The amount of the commission is always required to be disclosed on the trade confirmation.
An agent or adviser tells a client that he has inside information when he does not. Is this fraud?
Yes. An agent that states or implies that he has inside information when he does not has acted fraudulently.
What is the difference between telling a client that a security is registered with a state Administrator and telling a client that a security is approved by a state Administrator?
Saying that a security is "registered" is permissible; saying that a security is "approved" constitutes fraud.
What is SIPC?
SIPC (Securities Investor Protection Corporation) protects clients of broker-dealers in the event of a broker-dealer bankruptcy by appointing a trustee to return client assets.
What information must be included in an order ticket?
The account ID, a description of the security (including the number of shares or par value), the terms and conditions of the order, the time of order entry and execution, the execution price and the identity of the agent. The client's name and address need not be included on the order ticket.
What is the definition of material inside information?
Any information about a company that has not been released to the public and that would likely affect the value of a security.
Are there any exemptions from the anti-fraud provisions of the Uniform Securities act?
No. There are no exemptions from the Uniform Securities Act's anti-fraud provisions.
What should an agent or investment adviser representative do if he comes into possession of material inside information?
Immediately report the possession of the information to a supervisor or compliance officer. The agent or investment adviser representative may not make recommendations based on the inside information, even if acquired accidentally.
Can an agent or investment adviser representative use information from a broker-dealer or investment adviser's research report if the report has not been made public?
Yes, this is not considered inside information.
When does an insider information violation occur?
Only when the information is used for trading. Possession alone or even giving someone the information, if it is not used, is not in itself a violation.
What are the repercussions for engaging in practices that are considered dishonest and unethical business practices under the Uniform Securities Act?
Engaging in such prohibited actions can result in denial, suspension or revocation of registration, a fine, or in the case of fraudulent practices, imprisonment.
What is churning?
Inducing trading in a customer's account which is excessive in size or frequency in view of the financial resources, objectives and character of the account. It is prohibited under the Uniform Securities Act.
What constitutes unethical delivery delays by a broker-dealer?
A pattern of unreasonable and unjustifiable delays in the delivery of securities and/or in the payment upon request of free credit balances to its customers.
What kinds of recommendations by an agent or broker-dealer are considered unethical?
Recommendations about a security transaction without reasonable grounds to believe that such recommendation is suitable for the customer, based on reasonable inquiry concerning the customer's investment objectives, financial situation and needs, and any other relevant information known by the broker-dealer or agent.
What kinds of recommendations may an agent or broker-dealer make to a client who refuses to discuss investment objectives?
The agent may not make any recommendations without reasonable grounds to believe that such recommendation is suitable, but may accept unsolicited orders from the client.
Who can imply that securities are approved by a state securities administrator?
No one can ever imply that securities are approved by the Administration, to do so is fraud. The Administrator does not approve or disapprove of securities. State securities administrators clear securities for public distribution.
What are blanket recommendations? Are they ever ethical?
An agent makes a blanket recommendation when he recommends the same security or transaction to a majority of his clients. It is unethical behavior because it does not take into account each client's unique financial needs.
When is it permissible for agent to accept instructions from a party other than his client?
The agent must have a written third-party trading authorization on file.
When may an agent exercise discretion in effecting a transaction for his customer's account?
An agent must have written authority to use his own discretion in making investment decisions for the client regarding selection of securities, whether to buy or sell and the number of shares. Decisions relating solely to time and price are not considered discretion. Discretionary trades must be suitable for the customer. The agent must obtain the written authorization prior to the first discretionary trade.
When must an agent obtain a written margin agreement from a client?
The agent must obtain a properly executed written margin agreement from his client promptly after the initial transaction in the margin account.
What are the rules regarding commingling of customer and firm assets?
Securities held in a client's name must not be commingled - held in the same account - with securities of the firm.