Chapter 6 - Prohibited and Unethical Business Practices Under the USA Flashcards
Fraud typically has three parts:
- Misrepresentation of a material fact
- Reliance on the misrepresentation
- Injury or harm occurring as a result of the misrepresentation
True or False: Fraud is almost always unethical (i.e., against the law), but not all unethical activities are fraudulent (e.g., accidentally breaking the law).
True
True or False: Fraud is not intentional
False. Fraud is intentional.
True or False: Prohibited activities include making false or misleading statements, as well as failing to provide adequate disclosure.
True
Claiming that securities are approved by a regulator is permissible.
False. It is prohibited.
Stating that a security is to be listed without justification is prohibited.
True
Inducing the purchase of a security (stock or mutual fund shares) based on an impending dividend (“selling dividends”) is prohibited.
True
Referring to a mutual fund as “no load” if it has a 12b-1 fee that exceeds .25% of average net fund assets (can’t have a front-end or back-end load) is prohibited.
True
Failing to disclose sales charges when soliciting investment company shares is not prohibited.
False. It is prohibited.
Failing to disclose mutual fund breakpoints and letter of intent features is prohibited.
True
What is the rule regarding soliciting orders for unregistered, non-exempt securities?
Soliciting orders for unregistered, non-exempt securities is generally not allowed. However, it is acceptable if the order is unsolicited, and the client acknowledges this through a signed statement.
_________________ is placing a client in a fee-based account where there is little to no trading, resulting in the client paying unnecessary fees.
Reverse Churning
Excessive trading by a broker in a client’s account primarily to generate commissions is called what?
Churning
What is the rule for exercising discretion without written authorization for Broker-Dealers (B/Ds)?
Without written authorization, B/Ds may only accept “not held” orders.
What is the rule for exercising discretion without written authorization for Investment Advisers (IAs)?
IAs may exercise oral discretion for up to 10 days.
What is the rule regarding borrowing from or lending to a client?
Borrowing from or lending to a client is allowed if the client or firm is in the business of lending cash or securities.
Prohibited and Unethical Practices? Omitting Material Facts.
Yes
Prohibited and Unethical Practices? Failing to deliver a final prospectus when selling a new issue.
Yes
Prohibited and Unethical Practices? Failing to disclose conflicts of interest.
Yes
Prohibited and Unethical Practices? Failing to maintain client confidentiality
Yes
Prohibited and Unethical Practices? Syndicate members withholding sales of IPO shares.
Yes
Prohibited and Unethical Practices? Unnecessarily delaying payment or delivery of securities.
Yes
Prohibited and Unethical Practices? Splitting commissions with another agent
Yes.
*Permitted if both agents are registered with the same B/D or related B/Ds and registered in the B/D’s state.
Commingling clients’ and firm’s securities (must be segregated)?
- B/Ds are not required to segregate client cash
- IAs must segregate both client cash and securities
Can Agents share in profits or losses in a client’s account?
Yes, if:
* Agent has written permission from both his B/D and client
* Agent shares in direct proportion to his contribution
Are recommending variable annuities to senior investors or investors with short-term objectives considered a prohibited and unethical practice?
Yes.
Recommending variable annuities to senior investors or investors with short-term objectives is generally considered a prohibited and unethical practice. Variable annuities are designed for long-term investment goals, such as retirement, due to their complex structure, fees, and potential surrender charges.
For senior investors, the long-term nature and potential penalties for early withdrawal may not align with their financial needs. Similarly, for investors with short-term objectives, the high fees and surrender charges associated with variable annuities make them unsuitable.
True or False: If a client’s objective is capital appreciation and/or inflation protection, equity securities (stocks) should be recommended.
True. If a client’s objective is capital appreciation and/or inflation protection, equity securities (stocks) are generally recommended. Stocks have the potential for higher returns compared to other investment options, which can help achieve capital growth and protect against inflation over the long term.
True or False: If a client’s objective is income, bonds should not be recommended.
False. If a client’s objective is income, bonds are typically recommended. Bonds provide regular interest payments, which can be a reliable source of income for investors.
True or False: If a client’s objective is tax-free income, municipal bonds should be recommended.
True. If a client’s objective is tax-free income, municipal bonds are typically recommended. Municipal bonds often provide interest payments that are exempt from federal income tax, and sometimes state and local taxes as well, making them a suitable choice for investors seeking tax-free income.
True or False: Treasuries are not suitable for all investors; zero-coupon bonds are not suitable for investors in their 70s.
True. Treasuries, while generally considered safe investments, may not be suitable for all investors due to their lower yields compared to other investment options. Zero-coupon bonds are not typically suitable for investors in their 70s because they do not provide regular interest payments and may have significant price volatility. Older investors often prefer investments that provide steady income and lower risk.
If a client purchases securities in her margin account, an agent is prohibited from helping the client pay off her margin account balance?
Yes, an agent is generally prohibited from helping a client pay off her margin account balance. This includes actions such as lending the client funds or arranging loans on behalf of the client to meet margin calls. These practices are considered unethical and can lead to conflicts of interest and regulatory issues.
True or False: Cold calling prospective clients outside of the acceptable time frame (Telemarketing calls are only allowed between 8:00 a.m. and 9:00 p.m. local time of the person being called) is a prohibited and unethical practice.
True
True or False: Advisers must disclose all potential conflicts of interest to clients, such as effecting agency cross or principal transactions for its advisory clients.
True. Advisers must disclose all potential conflicts of interest to clients, including effecting agency cross or principal transactions for their advisory clients. This transparency helps ensure that clients are fully informed about any potential conflicts that could affect their investment decisions.
True or False: Advisers must disclose all potential conflicts of interest to clients, such as Adviser receives any compensation that’s related to the securities it recommends to its clients.
True. Advisers must disclose all potential conflicts of interest to clients, including any compensation they receive that is related to the securities they recommend.
True or False: Advisers do not need to disclose all potential conflicts of interest to clients, such as Adviser is paid to solicit for, or refer clients to, another adviser or B/D.
False. Advisers must disclose all potential conflicts of interest to clients, including if the adviser is paid to solicit for, or refer clients to, another adviser or broker-dealer. Full disclosure ensures that clients are aware of any potential biases or incentives that might influence the adviser’s recommendations.
True or False: Advisers must disclose all potential conflicts of interest to clients, such as Adviser receives rebates (cash or noncash), fees, or soft dollar arrangements from B/Ds (e.g., access to B/D’s research).
True. Advisers must disclose all potential conflicts of interest to clients, including if the adviser receives rebates (cash or noncash), fees, or soft dollar arrangements from broker-dealers (e.g., access to the broker-dealer’s research). This transparency helps clients understand any incentives that might influence the adviser’s recommendations.
Investment advisers must create compliance programs and consider these factors before using social media:
*Usage guidelines
*Content standards,
*Monitoring
*Approval of content
*Training of IARs
*Third-Party content
*Information security
*Record Keeping
True or False: Investment Adviser Representatives (IARs) that comment, like, or share posts made on their Investment Adviser’s (IA) website or social media pages are generally considered to have adopted the third-party post. This means they are responsible for the content and must ensure it complies with regulatory requirements.
True
An ____________________ refers to a situation where an investment adviser is involved in the creation or dissemination of a testimonial, such as paying for social media posts or directly influencing the content. In such cases, the adviser is responsible for ensuring the accuracy and compliance of the testimonial with regulatory standards. This includes disclosing any compensation arrangements and potential conflicts of interest to maintain transparency with clients.
entangled testimonial
___ and ___ cannot be used in email signatures or social media profiles.
IAR and RIA
For Broker-Dealers Social media posts are considered communication with the public and subject to filing and recordkeeping requirements.
True
True or False: Broker-dealers do not need to approve the social media site(s) before an agent may use it for business purposes.
False. Broker-dealers must approve the social media site(s) before an agent may use it for business purposes. A registered principal of the firm must review and approve the site to ensure that its use complies with all applicable rules and regulations.
Social media sites must be designed in a way that allows broker-dealers to comply with regulatory requirements, including supervision, recordkeeping, content approval, suitability, disclosure, and overall compliance with FINRA and SEC rules.
True
A person who violates insider trading regulations is potentially subject to both civil and criminal penalties. The maximum civil penalties are up to _____ times the amount gained, or loss avoided. For individuals, criminal penalties are a fine of up to $___ million and/or ____ years’ imprisonment. Corporations can be fined up to $__ million for insider trading violations.
three (treble damages), 5, 20, 25
Violations of the Uniform Securities Act are punishable with a maximum fine of $_____ and/or ______ years in prison. Violations of federal law can be punished with fines of up to $_______ and/or _____ years in prison.
5,000, three, 10,000, five
For exchange-listed initial public offerings (IPO), broker-dealers must provide a prospectus to customers who buy shares on the exchange for up to__ days after the IPO.
25
For non-listed IPOs, a prospectus must be provided for up to __ days.
90
Investors who buy shares of non-listed companies in the secondary market must receive a prospectus for up to __ days after a follow-on.
40
True or False: investors who buy shares of an exchange-listed company are not required to be provided with a prospectus even if the company has recently sold additional shares in a follow-on offering.
True
A registered representative who wants to sell securities outside of her normal course of employment must first notify her firm in _________ about the proposed transactions and must receive her firm’s _________ permission.
writing; written
