Chapter 10.9 Flashcards Preview

Chapter 10 > Chapter 10.9 > Flashcards

Flashcards in Chapter 10.9 Deck (17):

Recommending Speculative Low-Priced Securities

Many low-priced securities are by nature very volatile and very risky. Recommending speculative low-priced securities to customers without knowledge of their financial situation and other necessary data is a violation


Excessive trading activity

Excessive activity in a customer's account is referred to as "churning". Some common considerations would be whether the RR has control over the customer's account, the account turnover, and the broker's motivation for the trades. The quality of the securities traded is generally not a consideration.


Trading in Mutual fund shares

Trading in mutual fund shares, particularly on a short-term basis, would likely be a violation. It is clear that these securities are not proper short-term trading vehicles. Generally, mutual funds are long-term investments.


Fraudulent activities - Fictitious accounts

Establishment of fictitious accounts in order to execute transactions which otherwise would be prohibited, such as the purchase of hot issues, or to disguise transactions which are against firm policy


Fraudulent activities - Discretionary accounts

Transactions in discretionary accounts in excess of or without actual authority from customers


Fraudulent activities - Unauthorized transactions

Causing the execution of transactions which are unauthorized by customers or the sending of confirmations in order to cause customers to accept transactions not actually agreed upon


Fraudulent activities - Misuse of customers' funds or securities

Unauthorized use or borrowing of customers funds or securities


Recommending purchases beyond customer capability

Recommending the purchase of securities or the continuing purchase of securities in amounts which are inconsistent with the reasonable expectation that the customer has the financial ability to meet such a commitment.

**Customers should not trade options unless they can understand and evaluate the risks involved.


Fair dealing with customers with regard to derivative products or new financial products

as new products are introduced it is important that members make every effort to familiarize themselves with each customer's financial situation, trading experience, and ability to meet the risks involved with such products and to make customers aware of the pertinent information regarding the products. Members must follow specific guidelines for qualifying the accounts to trade the products and for supervising the accounts thereafter


Circulation of Rumors

No member or member organization shall circulate in any manner rumors of a sensational character which might reasonably be expected to affect market conditions on the exchange. A report shall be promptly made to FINRA of any circumstance which gives reason to believe that any rumor or unsubstantiated information might have been originated or circulated for the purpose of influencing prices ini listed securities.


Cash Alternatives

Represents an investment recommendation as an alternative to holding cash and includes:
-Treasury Bills
-MM funds
-Bank CD's
-Auction Rate securities
-bankers acceptances
-commercial paper
-federal agency short-term securiites
-fixed rate callable corporate securities
-muni notes
-Repos and swaps
-Variable rate demand notes

**Cash alternatives generally offer lower rates of return than longer-term equity or fixed income securities
**Some cash alternatives offer high levels of stability and liquidity while others carry significant risk
**Statements such as "safe as cash" or "carries no risk" should not be used when describing these investments
**Sales materials and oral presentations must present a fair and balanced presentation regarding the risks and benefits of investing in these products


Member firm obligations when relating to seniors

FINRA has published guidance on what they believe is the proper handling by members of senior customers. The following are some of the considerations when handling accounts of senior customers:
-Designate a specific individual or department to serve as central advisory contact for questions about senior issues
-Provide employees with written guidance on senior related issues
-Offer training to help RRs understand and meet the needs of older investors
-Determine at the opening of the account whether the customer has an executed durable power of attorney. If an elderly customer develops dementia, the RR or a relative of the client would have to acquire a court approved Guardianship - not a POA. A POA can only be signed by a person of "sound mind".
-Ask the client to designate a secondary or emergency contact for the account
-Ask the client if he or she would like to invite a friend or family member to accompany the customer to appointments
-Members must inform the customer that unsolicited trades places by the customer with the member firm may be unsuitable - if that is the case
-High pressure sales seminars and tactics are prohibited especially when they are aimed at seniors such as "limited time offer" or "you have to sign up today"
-Generally when making recommendations to senior investors, a RR should take into consideration the client's status(already retired or planning to retire) and the possible inflation risk of any investment product.
-RR's may use a "senior designation" such as "retirement specialist" if the RR is currently an accredited member of a national accreditation organization(CFP, etc.). The use of such designation requires the firm's approval.


What are inappropriate investment recommendations when dealing with senior investors?

-Recommending products which include withdrawal penalties or lack liquidity such as deferred variable annuities, equity indexed annuities, and limited partnerships.
-Variable life products or settlements
-Complex structured products such as collateralized debt obligations
-Home equity loans to be used for other investments
-Taking early withdrawals from retirement plans to invest in high risk investments


Verification of Customer's email instructions

Firms which accept email instructions from customers for the transmittal of funds and/or securities should have policies and procedures which:
-Include a method for verifying that the email was sent by the customer
-Identify and "red flag" transfer request which are out of the ordinary or cannot be verified



No person shall cause to be executed an order to buy or sell a security or related financial instrument when the person causing the order to be executed has material non-public market information in that security prior to the time information concerning the block transaction has been made public.


Front running rule applies to orders caused to be executed for:

-Any account in which the member or person associated with the member has an interest
-Any account with respect to which the member of person associated with the member exercises investment discretion, and
-Any account of customers or affiliates of the member when the customer or affiliate has been provided such material, non-public market information by the member or any person associated with the member


Permitted transactions

-Transactions that a firm can demonstrate are unrelated to the customer block order
-Transactions that are undertaken to fulfill or facilitate the execution of the customer block order, and
-Transactions that are executed, in whole or in part, on a national securities exchange and comply with the marketplace rules of that exchange