UNIT 29 QBANK Flashcards
What dollar limit is placed on damages if a suit is filed based on allegations of manipulative practices?
A) $250,000
B) No dollar limit
C) 300% of the damages suffered
D) $500,000
B) No dollar limit
Explanation
No dollar limit is placed on damages collectible from a lawsuit based on allegations of fraudulent or manipulative practices.
You have a client, Henry, who does much of his business overseas, and his assistant, sister Avery, often drops off checks at the branch for deposits in his individual account. Today Avery stopped by the office and said Henry forgot to sign some papers before he left and will be gone for three weeks. Because these are time critical documents Henry told her to have you sign them for him. Is this permissible? If so, under what circumstances would this action be allowed?
A) This would be permitted if Henry called you and said to go ahead and sign them for him.
B) This would be permitted because you know Avery is his sister.
C) This would not be permitted. Henry will have to sign them when he gets back.
D) This would be permitted because it is call a signature of convenience.
C) This would not be permitted. Henry will have to sign them when he gets back.
Explanation
You can never sign someone else’s name; that is forgery. Forgery is a crime. Don’t commit forgery.
The penalties for trading on insider information include
I. civil penalties up to treble damages.
II. up to $1 million for registered representatives or broker-dealers.
III. criminal penalties up to $25 million for broker-dealers.
IV. jail time up to 30 years.
A) III and IV
B) I and IV
C) I and II
D) I, II, and III
D) I, II, and III
I. civil penalties up to treble damages.
II. up to $1 million for registered representatives or broker-dealers.
III. criminal penalties up to $25 million for broker-dealers.
Explanation
The penalties are stiff. Regulators really don’t want people trading on inside information. However, the maximum prison sentence is 20 years, not 30.
An exception report would be most likely generated by which of the following observations?
I. Seeing activity in the account of a deceased person
II. Noting that a customer’s telephone area code matches the ZIP code provided
III. Receiving an execution for 300 shares when the order was for only 100
IV. Receiving a written complaint from a customer
A) II and III
B) I and II
C) I and III
D) II and IV
C) I and III
I. Seeing activity in the account of a deceased person
III. Receiving an execution for 300 shares when the order was for only 100
Explanation
There are a number of red flags that might generate an exception report. Among them are a trade in the account of a deceased person and a trade for an amount in excess of the customer’s order. Address numbers or area codes matching what we know or is expected is not a red flag nor is a single complaint, but excessive complaints could be.
A free lunch seminar is advertised among senior citizens who may be looking to improve the results of their investment portfolio. Which of the following activities by the registered hosts of the seminar would be deemed a potential violation?
I. Use of a designation such as Chartered Senior Advisor, a largely unknown designation
II. The representative is introduced as someone approved by Financial Industry Regulatory Authority (FINRA) to answer questions from senior investors
III. Use of degrees and registration licenses
IV. Promoting technology stocks
A) I and IV
B) III and IV
C) I and II
D) II and III
C) I and II
I. Use of a designation such as Chartered Senior Advisor, a largely unknown designation
II. The representative is introduced as someone approved by Financial Industry
Explanation
Use of degrees or designations may never be used in a misleading fashion nor can any reference to nonexistent or largely unknown designations be made. The use of designations is permissible so long as the compliance department of the firm has performed due diligence and is satisfied the credentials are bona fide and would be reasonably recognized as true tokens of expertise. Using educational degrees or securities registration licenses is permissible. To say that the representative is approved by FINRA to offer advice to seniors would likely bring heavy sanctions. The promotion of any stock is permissible so long as it is a balanced presentation with disclosure of the potential risks.
All of the following would require that updated account information be sent to the customer for confirmation within 30 days except
A) the customer informs the firm of a change in investment objectives.
B) the account records system has been changed to a new format.
C) the account is a newly opened one.
D) 36 months have passed since the account was opened.
B) the account records system has been changed to a new format.
Explanation
Updated account information must be sent to the customer with 30 days for confirmation upon the opening of the account, at least once every 36 months thereafter, and in the event of the customer notifying the firm of changes in any information shown or listed on the account form.
Which of the following are elements of insider trading?
I. The information is material, nonpublic information.
II. The information is nonmaterial, nonpublic information.
III. It is illegal to trade on insider information.
IV. It is illegal to possess insider information.
A) I and III
B) I and IV
C) II and III
D) II and IV
A) I and III
I. The information is material, nonpublic information.
III. It is illegal to trade on insider information.
Explanation
The information must be of a material nature. In other words, it would affect the price of the security if it was known, and a trade must occur for there to be a violation.
A customer of a broker-dealer purchases 100 shares of XYZ stock at $50 per share on Monday. Later that week, a confirmation arrives electronically indicating that the total cost of the transaction was $5,000. The client is puzzled that there is no additional charge for commission. The most likely reason for that is
A) there is a mistake on the confirmation.
B) XYZ stock probably dropped significantly between the trade date and the sending of the confirmation so the broker/dealer waived the commission.
C) the broker-dealer acted as a principal in the trade.
D) the broker-dealer acted as an agent in the trade.
C) the broker-dealer acted as a principal in the trade.
Explanation
Broker-dealers must always indicate their capacity on the confirmation. If the client had looked, there would have been a statement something to the effect of “we acted as principals in this trade.” When the firm does that, there is no commission; there is a markup (in the case of a buy) or a markdown (in the case of a sell). In this instance, the actual price of the stock would have been lower than $50 per share and the broker-dealer marked it up to $50. (e.g., price of $49.50 with a 0.50 markup = $50) When the firm is acting as an agent however, commissions are always disclosed.
A customer of a broker-dealer purchases 100 shares of XYZ stock at $50 per share on Monday. Later that week, a confirmation arrives electronically indicating that the total cost of the transaction was $5,000. The client is puzzled that there is no additional charge for commission. The most likely reason for that is
A) there is a mistake on the confirmation.
B) XYZ stock probably dropped significantly between the trade date and the sending of the confirmation so the broker/dealer waived the commission.
C) the broker-dealer acted as a principal in the trade.
D) the broker-dealer acted as an agent in the trade.
C) the broker-dealer acted as a principal in the trade.
Explanation
Broker-dealers must always indicate their capacity on the confirmation. If the client had looked, there would have been a statement something to the effect of “we acted as principals in this trade.” When the firm does that, there is no commission; there is a markup (in the case of a buy) or a markdown (in the case of a sell). In this instance, the actual price of the stock would have been lower than $50 per share and the broker-dealer marked it up to $50. (e.g., price of $49.50 with a 0.50 markup = $50) When the firm is acting as an agent however, commissions are always disclosed.
A form of market manipulation that attempts to keep the price of the stock from falling is called
A) capping.
B) supporting.
C) front running.
D) backing away.
B) supporting.
Explanation
Supporting is a form of market manipulation to keep the price of a security from falling. It is illegal if used to manipulate the market.
A member firm believes that financial exploitation of a senior customer is being attempted. While not required to, but allowed to, they put a temporary hold on disbursements of cash and securities from the account. The temporary hold should be
A) for as long as is required for a complete and thorough investigation to be concluded.
B) no longer than 3 business days unless a state regulator or agency of jurisdiction extends it longer.
C) no longer than 15 business days with no extensions possible.
D) no longer than 15 business days unless a state regulator or agency of jurisdiction extends it longer.
D) no longer than 15 business days unless a state regulator or agency of jurisdiction extends it longer.
Explanation
The rule specifies that the temporary hold on disbursements if one is placed should be for no longer than 15 business days. A state regulator or agency of jurisdiction can terminate it sooner or extend it longer if they deem it warranted.
A customer has just notified the brokerage firm of a change of address. How long does the broker-dealer have to provide the customer with an amended account record for confirmation?
A) 60 calendar days
B) 30 calendar days
C) 5 business days
D) 3 business days
B) 30 calendar days
Explanation
If a customer notifies a member firm of a change in account information, such as a change in address, marital status, or investment objective, the firm must amend the account information and send it to the customer for confirmation within 30 calendar days.
Brokers placing orders for their own account ahead of notably large customer orders that are known to be entering the market in an attempt to gain from the price movement that is likely to occur is an example of what prohibited activity?
A) Marking the close
B) Front running
C) Breakpoint sale
D) Insider trading
B) Front running
Explanation
Although each of these choices is a violation of Financial Industry Regulatory Authority (FINRA) rules and securities laws, when an investment professional places an order for his own account or one that he controls ahead of other orders that are so large that they will likely move the market in an attempt to gain from the price movement is an illegal activity known as front running. Those caught front running would be subject to severe sanctions by market regulators.
A customer has purchased a stock and then sold it before paying for the purchase. This is generally known as
A) pegging.
B) a wash sale.
C) backing away.
D) freeriding.
D) freeriding.
Explanation
Freeriding is a term used when securities are purchased and then sold before making payment for the purchase. Freeriding is generally prohibited in both cash and margin accounts.
Each of the following are likely to be found on a trade confirmation except
A) CUSIP.
B) bond credit rating.
C) description.
D) commission.
B) bond credit rating.
Explanation
Trade confirmations are required to include many details about the trade and the securities including, but not limited to, the trade date, description of the security, CUSIP number, commissions (not markups or markdowns) and more. There is no obligation for the firm to print the bond credit rating on the trade confirmation.
Which two of the following criteria, taken together, would cause a particular fact to be considered insider information under the Insider Information and Securities Fraud Enforcement Act of 1988?
I. It is personally embarrassing to the CEO of the corporation.
II. It is not known to the general public.
III. It could have a strong effect on the welfare of the corporation.
IV. It has only been reported in the industry’s technical journals.
A) II and III
B) I and IV
C) II and IV
D) I and III
A) II and III
II. It is not known to the general public.
III. It could have a strong effect on the welfare of the corporation.
Explanation
To be considered insider information, a fact must not be known to the general public and must be material, meaning that if it were public, the company could be strongly affected (either positively or negatively). Personal embarrassment to the CEO by itself is not sufficient, and any publication, even in an obscure technical journal, constitutes disclosure to the public.
To ensure that the information obtained from each new customer is accurate, firms must furnish to each customer a copy of the account record within how many days of opening the account?
A) 20
B) 45
C) 10
D) 30
D) 30
Explanation
A copy of the account record must be furnished to each customer within 30 days of opening the account.
All of the following are true of prohibited activities except
A) the improper use of customer assets is on FINRA’s list of prohibited activities.
B) the use of fraudulent devices is on FINRA’s list of prohibited activities.
C) FINRA has published a list of all the prohibited activities.
D) the use of manipulative devices is on FINRA’s list of prohibited activities.
C) FINRA has published a list of all the prohibited activities.
Explanation
There can never be a complete list of all the ways to cheat people. If it looks like lying, cheating, or stealing, don’t do it.
If a registered representative is sharing in profits and losses with a customer, all of the following statements apply except
A) The representative may share in gains and losses, but only in proportion to the representative’s share of the investment money.
B) The representative’s expertise must be considered part of the contributions to the account.
C) The representative must receive prior written permission from the principal before the arrangement may be made.
D) If the customer is an immediate family member of the representative, sharing in gains and losses need not be proportional.
B) The representative’s expertise must be considered part of the contributions to the account.
Explanation
A registered representative may share in gains and losses with a customer, provided written permission is first obtained from the representative’s principal, the investments take place in a joint account, and the representative’s share of the gains and losses is proportional to the representative’s share of the investment funds. The representative’s knowledge and expertise may not be considered part of the representative’s contribution, only what proportion of the investment funds the representative has contributed.
Which of the following might be considered a red flag in a customer’s account activities?
A) Several typos of little consequence are noted on the customer’s new account and margin forms.
B) The customer is constantly late for appointments with his registered representative.
C) Funds and securities are moved from one account to another for no apparent reason.
D) The customer repeatedly makes mistakes in simple arithmetic during investment discussions.
C) Funds and securities are moved from one account to another for no apparent reason.
Explanation
Moving assets about for no apparent good reason could constitute layering, one of the steps in money laundering. In addition, the movement of assets may not have been at the customer’s request, which might also need to be investigated because it might constitute improper use of customer funds and assets. The other activities may be unpleasant or distracting but would not amount to red flags.
Electronic delivery of documents requires all of the following except
A) procedures to show that delivery took place as intended.
B) assurance of confidentiality of the documents and personal information.
C) a recording of the customer verbally agreeing to such receipt.
D) procedures to deliver the information in paper form upon request.
C) a recording of the customer verbally agreeing to such receipt.
Explanation
Consent to receive documents such as confirmations and account statements by electronic means must be in writing.
An investor has a friend who mentions that an officer of the firm he works for reported to the CEO, in a confidential meeting, that a product had great test results. If this information were public, it would have a positive effect on the corporation’s stock price. If the investor now makes a large purchase of the corporation’s stock, who beside the investor might be liable under the Insider Trading and Securities Fraud Enforcement Act of 1988?
A) The officer in the meeting
B) The investor’s friend
C) The firms board of directors (BOD)
D) The CEO of the corporation
B) The investor’s friend
Explanation
In this scenario, the friend is the tipper, and the investor is the tippee. Both are liable under the act. The officer and the CEO of the corporation were exchanging information in a confidential meeting and are not liable. Note: The registered representative who does the trade and the representative’s broker-dealer firm could be liable if they should have known that the information was nonpublic and material information.
A registered representative with discretionary authority has been doing two or three trades per week in her customer’s discretionary account. The volume of transactions is not in keeping with the historic activity in the account and the trades don’t all align very well with the account objectives. A principal noted that other than generating commissions, the trades seem to have little profit potential. This is likely a red flag for
A) market manipulation.
B) churning.
C) freeriding.
D) front running.
B) churning.
Explanation
Excessive trading in a customer’s account to generate commissions rather than to help achieve the customer’s stated investment objectives is an abuse known as churning. This can occur in both discretionary and nondiscretionary accounts
A brokerage firm has accumulated a large holding in a little known company by purchasing several hundred thousand shares of the company’s stock. The firm instructs its registered representatives to begin touting the stock to every one of its customers and to make cold calls to new potential customers as well. This is most likely a scheme known as
A) marking the open.
B) pegging.
C) capping.
D) pump and dump.
D) pump and dump.
Explanation
A form of securities fraud commonly known as pump and dump is the act of inflating (pump) the price of an owned stock by perpetrating false and misleading positive rumors, in order to sell the stock at a higher price later. Generally the shares owned are first accumulated at lower prices before the misleading information is doled out to the investing public.
