Chapter 4 - Section 3 - Model Rules for Broker-Dealers Flashcards
True or False: Broker-Dealers shall not engage in any pattern of unreasonable and unjustifiable delay in the delivery of securities purchased by customers and/or payments of free credit balances based on transactions of customers.
True. Customers must be given a written receipt immediately when securities are taken into custody.
BDs shall not exercise any discretionary power in effecting a transaction for a customer’s account without first obtaining written _______________ authority from the customer, unless the discretion relates solely to ___________ and/or ___________ for the execution of orders.
discretionary; time; price
True or False: BDs also have discretionary verbal authority for up to 10 days.
False. Broker-Dealers (BDs) must have written discretionary trading authority before executing any discretionary transactions. Unlike Investment Advisers (IAs), who can act on verbal instructions if written authority is obtained within 10 business days, BDs do not have this 10-day verbal authority period.
Broker-Dealers shall not execute any transaction in a ________ __________ without securing from the customer a properly executed written ___________ ___________ promptly after the initial transaction in the account.
margin account; margin agreement
The ______________________ states that the customer (pledges) the securities to the brokerage firm and gives the firm the right to (repledge) the securities to secure a loan at a bank. This is a required document that a customer must sign to open a margin account.
hypothecation agreement
Broker-dealers are responsible for ensuring that every customer who purchases a new issue receives a copy of the ______ ____________ by the date the transaction is confirmed. This requirement may also be fulfilled by providing the client with a written or electronic copy of the __________ ______________ together with an additional document so that the two documents together contain all the information in this final version.
final prospectus; preliminary prospectus
BDs shall not give a quote or enter into a transaction with or for a customer at a price reasonably related to the ____________ market price of the security or receive an unreasonable commission or profit.
current
True or False: BDs shall not charge unreasonable and inequitable fees for services performed, including miscellaneous services such as collection of monies due for principal, dividends or interest, exchange or transfer of securities, appraisals, safekeeping or custody of securities, and other services related to its securities business.
True
__________ _____________ involves deceptive practices to influence the price of securities. This can include spreading false information, creating fake trading activity, or using other tactics to mislead investors.
Market manipulation
This occurs when an investor sells a security at a loss and then repurchases the same or a substantially identical security within 30 days before or after the sale. This practice is often used to create a tax loss without actually changing the investor’s position in the security.
Wash Sales
This involves two parties coordinating to buy and sell the same security at the same time and price, creating the illusion of increased trading activity. This can mislead other investors about the true market value or liquidity of the security, potentially manipulating its price.
Matched Orders
___________ - ___________ is an illegal and unethical trading practice where a broker or trader uses advance, non-public information about a large pending transaction to make a trade for their own benefit. For example, if a broker knows that a large order to buy a stock is about to be placed, they might buy shares of that stock beforehand. When the large order is executed, the stock price typically rises, allowing the broker to sell their shares at a profit
Front-running
True or False: Broker-Dealers indicating that securities have been approved by the SEC is permissible.
False. It is prohibited.
True or False: Indicating that registration with the SEC does not mean approval for a Broker-Dealer.
True
True or False: A broker-dealer does not have to disclose in writing that the BD is controlled, affiliated with, or under any common control with an issuer of any security before entering into a contract with a customer.
False. A broker-dealer must disclose in writing if it is controlled by, affiliated with, or under common control with the issuer of any security before entering into a contract with a customer.
