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SIE > Ch. 16 > Flashcards

Ch. 16 Flashcards

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SIE Exam flashcards
1
Q

Give some examples of BD practices that are prohibited according to the Department of Justice.

A

Sharing client order information, selectively backing away from quotes, coordinating prices with other market makers

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2
Q

While waiting for her train, an RR overhears a rumor of an impending corporate takeover. What should she do?

A

Tips and unverified rumors must be reported to the firm’s legal/compliance department.

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3
Q

True or False: BDs and their employees may buy shares of equity IPOs from the syndicate.

A

False. They are considered restricted.

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4
Q

Explain the issuer-directed sale exemption under the Equity IPO Rule.

A

A BD employee may buy an equity IPO if an immediate family member is employed by the issuer who authorizes the sale.

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5
Q

True or False: When determining if churning has occurred in an account, profit or loss is a key consideration.

A

False. Profit or loss is never a consideration when examining the excessiveness of trading.

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6
Q

True or False: BD records may only be maintained in physical form.

A

False. Documents may be maintained in any format, but if an electronic media is used, the SRO must be notified.

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7
Q

What are treble damages?

A

The civil penalty for insider trading, which is three times the profit made or loss avoided

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8
Q

Are registered representatives permitted to have outside brokerage accounts?

A

Yes, provided they have the prior written consent of their employer.

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9
Q

True or False: Market makers are permitted to pay other parties to influence a stock’s price.

A

False, this is prohibited.

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10
Q

True or False: When determining a person’s eligibility to purchase an equity IPO, oral verification is acceptable.

A

False. Firms must obtain written or electronic verification of eligibility.

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11
Q

Can a registered broker-dealer state that the SEC has given its approval of the firm?

A

No, this is a prohibited practice. It is acceptable for the firm to simply state that it’s a registered broker-dealer.

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12
Q

True or False: Immediate family members of employees of the issuer are restricted from buying the IPO.

A

False. Immediate family members of employees of BDs (not the issuer) may be restricted.

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13
Q

Under what two circumstances can an RR borrow or lend money to a customer without approval?

A

1) Family relationships, or 2) the customer is a financial institution

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14
Q

Excessive trading in a client’s discretionary account without regard to her objectives is known as __________.

A

Churning

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15
Q

True or False: According to the Equity IPO Rule, all associated persons connected to a BD are restricted.

A

True. The associated persons of a BD include owners, officers, directors, and other employees.

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16
Q

May an RR personally lend to, or borrow from, a client?

A

Generally, no, unless it’s a family relationship or the customer is a financial institution

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17
Q

True or False: For an IPO, the brother of an RR is considered a restricted person.

A

True

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18
Q

Are immediate family members of member firm employees always restricted from purchasing equity IPOs?

A

Not if the individual receives no material support and is not purchasing from the firm employing their family member

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19
Q

True or False: Municipal dealers must disclose all material information to a customer at or prior to a trade.

A

True

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20
Q

Define the term restricted person as set by FINRA Rule 5130.

A

Member firms and their associated persons (including their immediate family members) and any other industry insiders

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21
Q

True or False: Market makers are obligated to honor their quotes for both size and price (i.e., they are firm quotes).

A

True

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22
Q

True or False: A broker-dealer that buys stock at $30 has traded ahead of a client who placed a buy limit order at $35.

A

True. Since the broker-dealer is buying at a better (lower) price, it has violated the trading ahead rule.

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23
Q

True or False: For an IPO, the sister-in-law of an RR is considered a restricted person.

A

True

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24
Q

May a retired RR continue to collect commissions?

A

Yes, on existing assets if a written contract with her former employer exists.

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25
Q

What is the criminal penalty for insider trading by corporations?

A

$25 million per violation

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26
Q

____________________ is the insertion of a third party between a customer and the best market price.

A

Interpositioning

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27
Q

May a market maker acting as an underwriter for the issuer continue to make a market in the issuer’s securities?

A

Yes

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28
Q

True or False: Electronic records must be searchable.

A

True

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29
Q

A BD receives a large buy order from a client. When may the BD execute a trade for the same stock in its own account?

A

After the client’s trade is reported on the Tape

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30
Q

Define trading ahead.

A

Buying or selling securities just before the release of a research report by the firm’s research department

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31
Q

If an insider trading violation occurs within a brokerage firm, what parties may be held liable?

A

The tipper, tippee, supervisor, and BD may be liable.

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32
Q

Define front running.

A

A firm/individual executing trades for its own account with knowledge of an impending large block customer order.

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33
Q

True or False: Registered representatives are prohibited from guaranteeing profits or reimbursing customers for losses.

A

True

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34
Q

True or False: If churning in a client’s account generates large profits, it is not considered a violation.

A

False

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35
Q

A BD is ready to issue a favorable research report. What must exist for the BD to continue regular trading operations?

A

Effective information barriers must be in place.

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36
Q

Define churning.

A

Excessive trading in a customer’s account for the primary purpose of generating commissions and other fees

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37
Q

To comply with the Best Execution Rule, is a BD always required to obtain the best market price available for clients?

A

No. However, BDs are required to use reasonable diligence to obtain the best price possible.

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38
Q

Is it a violation for a BD to buy ABC calls for itself before executing a buy order it is holding from an institution?

A

Yes. The violation is referred to as front-running.

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39
Q

True or False: Executing firms must send confirms to employing broker-dealers for every trade their employees execute.

A

False. Duplicate trade confirms are only required to be sent if requested.

40
Q

True or False: A broker-dealer that buys stock at $40 has traded ahead of a client who placed a buy limit order at $35.

A

False. Since the broker-dealer is buying at a higher (worse) price, no violation has occurred.

41
Q

True or False: Retired representatives can continue to receive commissions after they leave their broker-dealer.

A

True. However, they can only receive commissions based on investments that were made while they were working.

42
Q

According to the Equity IPO Rule, firms must update the eligibility of purchasers ___________ .

A

Annually

43
Q

The SEC can grant bounties of up to __% of the penalty for information in connection with insider trading violations.

A

30%

44
Q

Trading on material, non-public information is considered ________ ________.

A

Insider trading

45
Q

“For insider trading violations, the SEC can sue for treble damages.” What does that statement mean?

A

The SEC can sue for three times the damage (profit made or loss avoided).

46
Q

Besides BDs and their employees, who else is restricted from purchasing equity IPOs?

A

An employee’s immediate family if materially supported by, or sharing household with, the employee

47
Q

A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?

A

Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.

48
Q

Can a market maker have a quote displayed on different exchanges for the same stock?

A

Yes; however, the broker-dealer must have the same price on both markets.

49
Q

May an RR and a client share in an account?

A

Yes, with firm approval and provided the sharing in gains and losses is proportionate to their investment.

50
Q

Under what circumstances can a RR borrow or lend money to a customer with approval?

A

1) Both people are registered at the same firm, 2) a personal relationship exists, or 3) a business relationship exists

51
Q

What should a broker-dealer do if it believes that a client’s account has been financially exploited?

A

Place a hold on withdrawals. An important note is that it cannot halt securities transactions.

52
Q

What is the purpose of an information barrier between trading and research departments?

A

To prevent the trading department from learning of an impending report about a stock in which the firm has a position

53
Q

True or False: According to the Insider Trading Act, both the tipper and tippee may be held liable for a violation.

A

True

54
Q

True or False: A broker-dealer may pay a commission to an unregistered individual.

A

False

55
Q

A BD is ready to issue a favorable research report. Information barriers must exist between what two departments?

A

Trading and research

56
Q

What does the Best Execution Rule require a member firm to do?

A

Use reasonable diligence to obtain the best price possible for a client

57
Q

True or False: Employees of FINRA member firms must obtain employer permission to open accounts for buying mutual funds.

A

False. If an account is limited to mutual funds, 529 plans, or variable annuities, permission is not required.

58
Q

Define free-riding.

A

Buying shares without a cash deposit, then selling the shares before the payment date (i.e., before T + 4).

59
Q

True or False: A restricted person may buy an equity IPO from the issuer if he’s related to an employee of the issuer.

A

True; however, the purchase must be from the issuer directly, not the underwriters.

60
Q

At what price can underwriters stabilize a new offering?

A

At or below the public offering price

61
Q

If a client fails to pay for a security, his account may be frozen for ____ days.

A

90 days

62
Q

Churning is described as _____________________ designed to _____________________.

A

Excessive trading designed to generate commissions

63
Q

What is a broker-dealer required to do if it trades ahead of a retail customer’s limit order?

A

Immediately (within 60 seconds) fill the customer’s buy order at the limit price or better

64
Q

Under the Equity IPO Rule, who is considered to be part of an associated person’s immediate family?

A

Parents, siblings, spouse, children, or in-laws

65
Q

Executing a series of trades at the end of the day to manipulate the price of a security is called ________________.

A

Marking-the-close

66
Q

During the Regulation M Restricted Period, underwriters may not_______________________________________.

A

During the Regulation M Restricted Period, underwriters cannot purchase (bid) for the securities for their own account.

67
Q

The criminal penalty for insider trading by an individual is a maximum of $_________ and/or ___ years in prison.

A

$5 million and/or 20 years in prison

68
Q

The New Issue Rule covers what new issues?

A

All equity IPOs

69
Q

To keep outside brokerage accounts, new employees are required to obtain their employers written consent within __ days.

A

30 days

70
Q

Jim is an associated person. When is someone in his immediate family prohibited from buying an equity IPO?

A

Material support/household sharing exists, or purchase is made through his firm, or he controls IPO share allocation

71
Q

An RR’s mother plans to buy equity IPO shares from a BD that does not employ the RR. Is she restricted from purchasing?

A

No. If she is not supported by her child and purchases from a BD that does not employ her child, she is NOT restricted.

72
Q

An investor’s eligibility to purchase an equity new issue must be confirmed _______________.

A

Annually (called the pre-condition of sale)

73
Q

A BD executes a proprietary put purchase before executing a client’s stock sale. Is this practice permitted?

A

No, it is considered front-running

74
Q

According to FINRA’s rules on the exploitation of specified adults, what is the definition of specified adult?

A

Any person who is age 65 or older, as well as a person who is 18 or older and has a mental or physical impairment.

75
Q

True or False: Municipal dealers can satisfy disclosure requirements by directing customers to industry sources.

A

False

76
Q

A temporary hold will expire by no later than __ business days after the date that it was first placed on the account.

A

15 days

77
Q

____________ is the only form of price manipulation allowed by the SEC.

A

Stabilization

78
Q

True or False: For an IPO, the uncle of an RR is considered a restricted person

A

False

79
Q

True or False: Portfolio managers may purchase equity IPOs for their own accounts if not excessive.

A

False. Portfolio managers may purchase for the fund they represent, but not for their own accounts.

80
Q

True or False: Aunts and uncles are not considered immediate family under the New Issue Rule.

A

True

81
Q

Who should a FINRA member firm contact if it believes that a client is being exploited financially?

A

A trusted contact person whose contact information is documented when an account is opened.

82
Q

When is interpositioning acceptable?

A

When the member firm is able to demonstrate that the execution was advantageous to the client

83
Q

What are restricted (watch) lists?

A

Listings of securities that employees of investment banks are restricted from trading

84
Q

Is interpositioning an acceptable practice?

A

No, generally prohibited unless able to demonstrate execution was advantageous to the client

85
Q

True or False: Every account owner needs to designated a trusted contact person.

A

False. However, FINRA member firms are required to make a reasonable effort to obtain it.

86
Q

_____________ is the prohibited practice of a BD trading for its own account ahead of a customer’s block order.

A

Front-running

87
Q

According to the Equity IPO Rule, member firms and their associated persons are considered ___________ persons.

A

Restricted

88
Q

The criminal penalties for insider trading by individuals is a maximum of $____________ and/or ____ years in prison.

A

$5 million and/or 20 years in prison

89
Q

Define pump and dump.

A

Spreading rumors about a stock and then selling the shares before the rumors can be verified

90
Q

Due to staff shortage, BD 1 gives a client order to BD 2 to execute with extra costs passed to the client. Acceptable?

A

No. This is interpositioning and is not advantageous to the client.

91
Q

If a member firm places a hold on the disbursement of client funds or securities, when must it provide notification?

A

Within 2 business days

92
Q

Of what violation is an RR guilty when buying stock based on knowledge of a pending large client order?

A

Front running

93
Q

What regulation restricts activities that could be deemed manipulative during an offering?

A

Regulation M

94
Q

True or False: Using nonpublic information to avoid a loss would NOT be a violation of the Insider Trading Act.

A

False. Using inside information to make a profit or avoid a loss is prohibited.

95
Q

True or False: RRs are always prohibited from sharing in a customer’s account.

A

False. RRs may share in a customer’s account if they have permission and sharing is proportionate to their investment.

96
Q

What is interpositioning?

A

The placement of another BD between a customer and the best market

SIE (20 decks)

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