Chapter 6

Question 1

What constitutes as fraud?

Answer 1

1. Misrepresentation of a material fact
2. Reliance on the misrepresentation
3. Injury or harm occurring as a result of that misrepresentation
   *Fraud is intentional

Question 2

Prohibited practices under the USA (6):

Answer 2

1) Claiming that securities are approved by a regulator
2) Stating that a security is to be listed without justification
3) Inducing the purchase of a security based on impending divdiend
4) Referring to a mutual fund as a “no load” if it has a 12-b1 fee that exceeds .25 of average net fund assets (no front end or back end loads)
5) Failing to disclose sales charges when soliciting investment company shares
6) Failing to disclose mutual fund breakpoints and letter of intent features
7) Soliciting orders for unregistered, NON EXEMPT securities
8) Churning (recommending trades frequently)

Question 3

When can BDs accept non written authorization?

Answer 3

During NOT HELD orders-
When they only have to choose the time and price but the client has chosen the security, the amount and whether or not to buy or sell.

Question 4

Commingling clients and firms securities (must be segregated)

Answer 4

BDs: not required to segregate client cash
IAs: must segregate both cash and securities

Question 5

Selling Away

Answer 5

When an agent sells stock away from the supervision of his broker-dealer

Question 6

Painting the tape

Answer 6

When 2 broker dealers agree to pre-arrange trades (collusion)

Question 7

Frontrunning

Answer 7

B/D trades from their own account before they trade from their customer’s account