Prohibited and Ethical Business Practices Under the USA Flashcards
What three items must be specified on a not held order?
- Action (buy/sell),
- Amount (quantity), and
- Asset (security)
True or False: Principals must approve discretionary orders prior to entry.
False. The orders must be approved promptly afterward.
May a wife enter trades in a husband’s account?
Yes, with written third-party authorization.
Churning is described as _____________________ designed to _____________________.
Churning is described as excessive trading designed to generate commissions.
Define an insider.
- Officers,
- directors,
- partners,
- greater than 10% owners, and
- immediate family members of all listed
Define painting the tape.
Traders effecting transactions back and forth to create a misleading appearance of activity
A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?
Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.
For an agent to exercise discretion over a client’s account, the client must have signed a ________________________.
For an agent to exercise discretion over a client’s account, the client must have signed a power of attorney.
True or False: If churning in a client’s account generates large profits, it is not considered a violation.
False
BD securities and client securities must be segregated; in other words, they may not be ______________.
BD securities and client securities must be segregated; in other words, they may not be commingled.
John and Sam are continually trading QRS stock between their accounts to cause the price to rise. Is this permitted?
No, this prohibited practice is referred to as “painting the tape.”
An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is ____________.
An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is unsolicited.
True or False: It is an unethical practice for a BD to delay the delivery of securities purchased by a customer.
True
Joe places an order to sell 10,000 shares of ABC whenever it’s best. Is written discretionary authority required?
No. Since discretion is limited to time and/or price, written authority is not required.
What is required of a BD controlled by/affiliated with an issuer of a security being sold to/purchased by a customer?
Both oral and written disclosure of the relationship
Next week ABC plans to announce its earnings. If ABC’s CEO wants to sell some of her shares now, is the sale restricted?
Yes. Insiders are required to wait until an earnings report is released publicly before selling shares.
A firm promises a refund to all clients who invest in an IPO if shares fail to rise 20%. Is this permitted?
No. This is unethical since it is considered a guarantee against loss.
An IA directs transactions to a BD who rebates 15% of the commissions to the IA for the business. Is this acceptable?
Yes, provided the IA provides written disclosure (often in Form ADV) to clients.
May an agent use a new issue prospectus to create a marketing piece and only include positive details about the issue?
No. Material provided to clients must include all facts about the issue, not just the positive ones.
What restrictions exist in describing a fund as no-load?
It may have no front-end or deferred sales charge, and a 12b-1 fee may not exceed .25%.
True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.
False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.
True or False: If a customer receives a prospectus during a solicitation, an agent has provided full and fair disclosure.
False. The agent may still have omitted material facts.
True or False: Forward-looking statements regarding mutual fund performance may be used when soliciting clients.
False. Past performance is not indicative of future results.
An agent makes this statement to a client: “Go with us; we’re approved by the Administrator and SEC.” Is it acceptable?
No. Neither the SEC nor the Administrator provide approval for securities or securities professionals.
Define churning.
Excessive trading in a customer’s account for the primary purpose of generating commissions and other fees
May an adviser borrow money from a client?
Yes, if the client is in the business of lending money, or if the client is an affiliate of the adviser, or is a BD.
May an adviser or BD lend money to a client?
Yes, if the adviser or BD is in the business of lending money.
What is required of an IA that uses third-party research?
The IA must disclose the source of the research to its client.
May an adviser release account information to the spouse of a client?
No, not without the client’s written authorization.
Are advisory fees fixed and are they subject to administrative review?
Fees are not fixed, but must be in line with other advisers. Fees are subject to administrative review.
________ is the willful or intentional act of deceiving another person for gain or profit.
Fraud is the willful or intentional act of deceiving another person for gain or profit.
Define commingling.
The prohibited act of mixing client funds with those of the BD
May an agent share in the profits of a client’s account?
Yes, in a joint account with proportionate sharing. Permission is required from both the client and the firm.
What step must an IA complete when faced with a conflict of interest?
The conflict must be disclosed to the client. If disclosure is insufficient, the IA must abstain from the action.
Identify the acronym: POA
Power of Attorney
Define the prohibited practice of shadowing.
After executing a large block order, but before the trade is reported, a BD trades for its own account.
Define front running.
A firm/individual executing trades for its own account with knowledge of an impending large block customer order.
True or False: All illegal activities are intentional.
False. Some accidental or unintentional actions are considered unethical and, therefore, illegal.
An agent encourages a customer to buy a stock due to an upcoming dividend. Is this a legal practice?
No, this is a prohibited action known as selling dividends.
An agent of a BD lends $5,000 to his brother, is this acceptable?
Yes, lending to immediate family members is permissible.
