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SIE Test > CHAPTER 19 - BUSINESS ETHICS > Flashcards

CHAPTER 19 - BUSINESS ETHICS Flashcards

(50 cards)

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1
Q

Market Manipulation

A

changing price of stock through artificial means

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2
Q

Market manipulation of actively traded stock

A

hard to do because you need a lot of cash

smaller companies are where it happens more

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3
Q

Market Rumors

A

Someone trying to manipulate a market sends out misleading info to move a stock up or down and capitalizes on that

Industry personnel are prohibited from spreading false info

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4
Q

Pump and Dump

A

Inflating the price of an already owned stock by spreading false news to then sell at the higher price while others get stuck as it falls

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5
Q

Front Running

A

BD or RR placing orders in their own accounts before placing orders of customer to take advantage of price movements

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6
Q

Excessive Trading (Churning)

A

Excessive number of trades to generate commissions

Principal needs to review member firm accounts especially those with discretion

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7
Q

Marking the Open

A

Entering trades before the opening for a stock or falsely reporting trades that never occurred to influence opening price of a stock

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8
Q

Marking the Close

A

Entering trades at or near the close of trading day or falsely reporting trades that never occurred to influence closing price of stock

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9
Q

Backing Away

A

When market maker enters a quote, they commit to buying or selling the size but if they refuse to honor their quote that is a serious violation

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10
Q

Freeriding

A

Buying then selling securities before payment is made

If this is done then account will be frozen for 90 days unless cash is in the account before the purchase

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11
Q

Rule 5130 during IPOs

A

To prevent financial industry insiders from having advantages during IPOs, this rule states:
- Members make a true public offering at POP or bona fide offering
- Members don’t withhold securities in a public offering for their own benefit or use those to reward people in a position to do future business with
- Insiders don’t take advantage of status to gain access to new issues for their own benefit at expense of customers

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12
Q

What do the 5130 rules say?

A

Prohibit member firms from selling shares of new issued to any account where restricted persons are beneficial owners

Reps are required to get a letter from the account owner that the account is eligible to buy new common stock at POP

Restricted persons are not allowed to buy shares at POP

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13
Q

Restricted Persons

A

Members firms or their employees

Finders and fiduciaries acting on behalf of underwriting including attorneys and lawyers

Portfolio managers and any person who has authority to buy or sell securities for a bank, savings and loan association, insurance company, or investment company

Any person owning 10% or more of a member firm

Any immediate family members are also restricted, uncles and grandparents are NOT considered immediate family unless they live in same household

Exemption for small amounts, if ownership of restricted person does not exceed 10% of the member firm then account may purchase new equity issues (Jim has 5% of investment company, he can then buy the IPO but if his brother buys in at 6%, their total is now 11% and neither can buy the IPO anymore)

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14
Q

What stopped insider trading?

A

Securities act of 1934

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15
Q

Insider

A

Any person who has access to material nonpublic info about a company

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16
Q

Inside Information

A

Any material nonpublic info

This is info that has not been given to or is not readily available to the general public

This is material info

Possession of this info is NOT illegal

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17
Q

Insider Trading

A

Using inside info to make a gain or avoid a loss

Anyone who uses inside info to make a trade

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18
Q

Insider Trading Act Rules

A

Stops insiders from trading on inside information

Both the tipper and tippee are liable and everyone who trades on that info whether knowing or should know that it is non public

Yes to any of these questions made it insider trading:
- Is it material and nonpublic?
- Tipper owe a duty to company? Did they breach that duty?
- Does tipper stand to gain?
- Does tippee know or should know that this is confidential?

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19
Q

Penalties for Insider Trading

A

SEC determines if violation occurred

Civil Penalties - 3 x profits made or loss avoided (called treble)
- Also, controlling person like a RR could be fined $1M or three times profit made or loss avoided, whichever is greater

Criminal Penalties - $5M and up to 20 years in jail
- If violator is employee of BD, the firm could be fined up to 3 x the damages or $25M, whichever is greater

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20
Q

Contemporaneous Traders

A

People who enter trades near or at the same time as someone making insider trades

These traders may sue the insider traders and can be initiated up to 5 years after the violation occurred

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21
Q

Bounties

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A

Insider Trading Act gives payments to informers

Information can range from 10% to 30% of amounts recovered

22
Q

Treble

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A

3 x civil or criminal penalties

23
Q

FINRA rules over financial exploitation categories

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A

Age 65 or older
Age 18 or older whom the member believes has a mental or physical impairment that renders the person unable to protect their own interests

24
Q

Financial exploitation definition

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A

Wrongful taking, withholding, use of funds

OR

Act of omission of an act taken by person to obtain control over money assets or property

25
Rules to prevent potential exploitation
1 - Require member firms and associated persons to make reasonable effort to obtain name and contact info of trusted contact 2 - Permit but not require member firms to place temporary holds on disbursements from customer accounts when there is a reasonable belief of financial exploitation
26
Reasonable Effort to obtain name and contract info for trusted contact must be made:
1- When opening a customers account 2- Updating account info for existing account Member firm not prohibited from opening an account when customer fails or refuses to provide info, as long as member firm takes reasonable effort to get info, asking is reasonable When customer has provided name, firm must disclose in writing that member firm or associated person is authorized to contact trusted person and disclose certain info about accounts FINRA notes that trusted person is used as a resource to protect assets and help against financial exploitation
27
When does a firm reach out to trusted contact?
Unable to reach client Suspect customer is suffering from diminished capacity Member believes exploitation could happen
28
Temporary holds on disbursements of funds with financial exploitation
Member firm can place disbursement on hold if financial exploitation has: - occurred - is occurring - has been attempted - will be attempted
29
How long can this hold be?
15 days State regulator can terminate hold or extend it longer member firm must immediately start an internal review if placing on hold Member needs to provide notification and reason of hold to trusted contact no later than 2 business days after hold begins Member firm does not have to let trusted contact person know if: - they are unavailable - member believes that trusted person if exploiting them
30
Red flags of improper customer fund use
Conflicting info in new account applications Suspicious transfers between unrelated accounts Funds sent to third parties Activity in deceased persons accounts Excessive complaints * BD required to have systems in place to check this stuff, those are called exception reports to check red flags
31
Borrowing and lending to customers
Lending customers securities if they did not sign loan consent agreement Firms that permit borrowing/lending need written procedures Conduct rules of when you CAN lend: - Immediate family relationship (DOES NOT REQUIRE BD APPROVAL) - Customer is in business of lending money (bank) (DOES NOT REQUIRE BD APPROVAL) - Customer and rep are registered persons in same firm (REQUIRES BD APPROVAL) - Customer and rep have personal relationship outside of BD relationship (REQUIRES BD APPROVAL) - Customer and rep have business relationship (REQUIRES BD APPROVAL) If BD does not allow lending (or does not say anything on it), then it is not allowed under any circumstances
32
Guarantees
BDs, investment advisers, RRs may NOT guarantee any customer against loss or gain
33
Sharing
Members firms, investment advisers and their reps are prohibited from sharing in profits or losses in customers accounts except when: - rep and customer open JT account - sharing has received member firms prior written approval - rep shares in profit in losses in proportion to their financial contribution - contribution cannot be measured in knowledge, only dollars (except when with family members, then that does not require proportionate sharing between any family that they provide financial support)
34
Can firms have JT accounts with customers?
NOOO No sharing with their investment advisers or their reps either
35
Non-registered Persons limitations
responding to general non investment questions providing literature upon request setting appointments inviting prospects to seminar CANNOT engage in banking or securities business but may handle customer money and securities, if they do that they must be fingerprinted
36
What is considered registered?
Need to pass SIE and then need to pass 6 or 7
37
Outside Business Activities
An associated person can't work for any business other than member firm without employing BDs knowledge If registered person wants to be employed by someone other than member firm, they need to give prior written notice to member Firm does have the right to reject or restrict the outside activity Passive actives do NOT count No need to notify IF there is no compensation is involved
38
Private securities transactions
Conduct Rules define private transaction as any sale outside associated persons regular business and employing member This is known as SELLING AWAY If they want to then they must: - provide prior written notice to employer - describe the proposed transaction - describe their proposed role - disclose whether they receive compensation
39
With Compensation
Employing member may approve or disapprove If they approve, BD must treat the transaction as if it is being done in house and on its books If the member disapproves, associated person cannot do it
40
Without Compensation
Employing member must acknowledge that is has received written notification Member may require associated person to follow conditions Transaction that associated person does on behalf of immediate family members are excluded Employer BD may place whatever restrictions they want
41
Gifts and Gratuities
BDs may not give business related compensation to employees of other firms except when: - comp is not conditional on sales - employing member has approval - compensation does not exceed $100 per year Only gifts to employers of OTHER firms
42
Other gift rules
BDs can exceed $100 gift under these exceptions: - occasional non-cash expenditures like dinner - reminder advertising like pens - items given for life events All events must be reasonable
43
Why was MSRB created
to create rules around underwriting, trading, and advising on muni securities and also prevent pay to play: using political contributions to get business from municipalities Rules are enforced by FINRA, MSRB has no enforcement capability
44
MSRB pay to play rules
Negotiated underwritings where muni issuers selects an underwriter and negotiates a deal and how a financial advisory work where muni issuer selects firm to help it structure a new issue Rule G-37 stops firms that handle muni securities from engaging in muni securities business with an issuer for 2 years after contribution is made to an official of that issuer by: - muni firm - muni finance professional (MFP) associated with firm - any political action committee controlled by the firm MFP is associated person of FINRA member firm engaged in muni securities underwriting, trading, sales, and other activity that involve communication with public MFPs are allowed to make contributions up to $250 per election to officials for whom they can vote for and does not apply to muni firms
45
Pay to play rules example
If muni firm donates to a municipality as a political contribution but then separately bids on a security underwriting from that municipality, then they would be allowed to bid because this is not negotiated underwriting If they did try to negotiate the underwriting for a political contribution then they cannot do business for 2 years
46
If a RR is taking a second job with small pay what must they do with their member firm first?
Give them written notice first
47
If political contribution is made for elected official, then an adviser may
not provide advisory services to any government they represent for a fee for 2 years
48
Penalties for trading on insider info
Civil penalties for treble damages Up to $1M for RRs or BDs Criminal penalties up to $25M for BDs 20 years of prison $5M for criminal
49
When is non-cash compensation exceeding $100 limit to another member firms employee allowed?
Only if occasional
50

SIE Test (19 decks)

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