Chapter 4 Part 2

Question 1

Agents should always have

Answer 1

reasonable grounds for recommending a particular security ensuring that the recommendation is appropriate, given the information obtained from the client, such as financial status, needs, objectives, and ability to assume risk

Question 2

In making recommendations to a client, an agent may NOT

Answer 2

recommend transactions that are excessive in size in relation to the client’s financial resources, omit details relating to the risks of a transaction, Engage in churning a client’s account

Question 3

Commingling is the practice of

Answer 3

intermixing securities belonging to customers with those belonging to the broker-dealer

Question 4

Client securities retained by the broker-dealer must be

Answer 4

segregated (kept separate) from the securities owned by the broker-dealer

Question 5

In order to avoid possible commingling, securities can be registered in

Answer 5

a client’s name and sent directly to the client, or the securities may be held in safekeeping by the broker-dealer, for which the firm may charge a reasonable fee

Question 6

Conversion occurs when an agent

Answer 6

illegally takes possession of a client’s assets for his own personal use

Question 7

If an agent of a broker-dealer inadvertently receives a client’s cash or securities, the assets must be

Answer 7

deposited promptly with a qualified custodian or returned to the customer

Question 8

Agents inadvertently holding cash or securities for a period greater than

Answer 8

three days arc considered to have custody of the funds

Question 9

Generally, an agent may not share in the

Answer 9

profits or losses in a customer’s account. This is allowed only in a joint account where the agent is one of the owners of the account

Question 10

In order for an agent to share an account with a client and share in the profits or losses in the account, the following conditions must be met

Answer 10

“The sharing arrangement must be approved by the customer; The sharing arrangement must be approved by the agent’s broker-dealer; The sharing of profits and losses must be proportionate based on the funds invested by each
party.”

Question 11

Agents must be aware of the language used when making recommendations to clients. Using definitive words such as

Answer 11

always, only, will, guarantee, and never may he problematic when making statements to clients

Question 12

Agents must also be careful not to use the term

Answer 12

“guarantee when referring to profits resulting from a
securities transaction. They are prohibited from guaranteeing clients a minimum rate of return or a specific dollar profit on an investment. If a client loses money on an investment, agents are prohibited from reimbursing a client for any portion of those losses”

Question 13

Upon receipt of a written complaint, agents must

Answer 13

inform their supervisor. It is a violation of the USA to ignore the complaint

Question 14

Broker-dealers are required to respond to

Answer 14

all customer written complaints and must maintain a file with a copy of all complaints

Question 15

No person, including an agent, may participate in any form of

Answer 15

manipulation or any transaction that gives a misleading appearance of active trading in a security

Question 16

Front-running is the illegal practice of

Answer 16

“a brokerage firm executing orders on a
security for its own account while taking advantage of advance knowledge of pending orders from
its customers. The practice may involve either buying (where the broker-dealer buys for the firm’s account, before filling customer buy orders that drive up the price), or selling (where the brokerdealer sells for the firm’s account, before filling customer sell orders that drive down the price)”

Question 17

Under the Uniform Securities Act, the term guarantee refers to a

Answer 17

security for which payment of dividends, interest, and principal are guaranteed. In such cases, the guarantee is only as good as the guarantor

Question 18

Painting the Tape is an illegal trading activity where financial professionals

Answer 18

buy and/or sell securities among themselves to create false trading volume. When the trades are reported to the ticker tape, the appearance of more trading activity is intended to attract investors

Question 19

Shadowing is a manipulative practice where

Answer 19

a broker-dealer executes a trade for its own account after executing a (substantial size) trade for a client, but before the client’s trade is reported

Question 20

Trading ahead is

Answer 20

an illegal act