UNIT 29 CHECKPOINT EXAM Flashcards
The use of information that is material to a company’s prospects, and is not yet public, in order to make a profit or avoid a loss on a security is
A) insider trading.
B) wise investing.
C) day trading.
D) informed trading.
A) insider trading.
Explanation
The definition of insider trading is the use of material, nonpublic, information to make a profit or avoid a loss.
People who enter trades at or near the same time, in the same security as a person who has inside information, are known as
A) tippees.
B) tippers.
C) contemporaneous traders.
D) informers.
C) contemporaneous traders.
Explanation
The simple definition of contemporaneous is existing, occurring, or originating during the same time. Contemporaneous traders may sue persons that have violated insider trading regulations, and suits may be initiated up to five years after the violation has occurred.
All of these are steps that firms take to protect the interests of their senior customers except
A) place a hold on a customer account if exploitation is suspected.
B) make reasonable efforts to obtain the contact information of a trusted contact.
C) refuse to accept trades that appear suspicious.
D) refuse to open an account for senior citizens.
D) refuse to open an account for senior citizens.
Explanation
Refusing to do business with senior citizens is not only inappropriate, it is a bad business plan. All of the other actions may be allowed in order to protect a customer.
Pete, a registered representative, is discussing his work as an investment banker with is family during his grandfather’s birthday party. He was particularly excited about an upcoming IPO for Narcissus, a social media company. Several of his family members express an interest in purchasing the stock at the IPO. Which of Pete’s family would be allowed to participate in the IPO of Narcissus Inc., stock?
A) His brother
B) His grandfather
C) His parents
D) His brother’s spouse
B) His grandfather
Explanation
Pete’s grandfather is not a restricted person under Rule 5130. Parents, siblings, and in-laws are all prohibited from participating in the IPO.
Buzz the broker has a radio show where he discusses penny stocks. In a recent show, Buzz told his audience that he just bought into stock in the Dipper Diaper company at $0.05 a share. He continues to talk about the strength and great growth potential of the company for several days. The stock rises to $3.00 a share and Buzz sells his position. He continues to talk up Dipper Diapers for another week then drops it from his daily discussion. What activity does this exemplify?
A) Short-term trading
B) Disseminating rumors
C) Front running
D) Pump and dump
D) Pump and dump
Explanation
This is a classic pump and dump. Buzz abused his position as a public figure to perpetuate positive news about a company he owns. Shortly after closing his position, he stopped talking up the stock.
Brad is the brother of Chester. Chester is the CFO of Seabird Airlines. Over Sunday dinner, Chester mentions that Seabird is planning to raise its dividend payment significantly. He also tells Brad that the news will not be announced until this coming Tuesday, so keep it quiet. On Monday, Brad buys several hundred shares of Seabird and made a substantial profit. Brad is subject to which of these potential penalties?
I. Up to 20 years in prison
II. Up to 25 years in prison
III. Penalties of up to three times the profit made
IV. A maximum penalty of $1,000,000
A) II and III
B) I and IV
C) II and IV
D) I and III
D) I and III
I. Up to 20 years in prison
III. Penalties of up to three times the profit made
Explanation
The criminal penalties are up to 20 years and the greater of $1,000,000 or three times the profit made or loss avoided. Note that he may be subject to substantial civil penalties as well.
When responding to regulatory requests for documents a broker-dealer
A) must comply with the request promptly.
B) must comply with the request within three months.
C) may request a court hearing.
D) need not comply unless they are convinced of good cause.
A) must comply with the request promptly.
Explanation
Prompt compliance with regulatory requests is required. By becoming a member, or registering with regulators, a broker-dealer agrees to provide documents and other evidence on request.
All of these would be seen as reasons to investigate activity in a customer account except
A) transfers between customer and representative accounts.
B) setting up and RMD in January for a customer that is only 72 years old.
C) elements of the account information (i.e., an address) are not consistent.
D) trading activity in an account owned by a deceased person.
B) setting up and RMD in January for a customer that is only 72 years old.
Explanation
Setting up aRequired Minimum Distribution (RMD) for someone required to take an RMD is not suspicious. Funds should never travel between a customer and employee account. Deceased individuals are unable to place trades. If street numbers and zip codes do not match that is rather suspicious, for example.
Seacoast Securities is underwriting the IPO of WearTech Technology. Which of these may purchase the IPO at the POP?
A) Pete, a representative of Seacoast Securities
B) Ida, the CIO of Seacoast Securities
C) Patricia, a portfolio manager for an investment adviser that custodies at Seacoast Securities
D) Bob, a customer of Seacoast Securities
D) Bob, a customer of Seacoast Securities
Explanation
There are no restrictions against customers. Associates of the firms and portfolio managers are restricted persons.
Which of these customers are considered most susceptible to exploitation by others?
I. Individuals age 65 and over
II. Individuals age 62 and over
III. Individuals with significant physical or mental impairment
IV. Individuals who are legally retired regardless of age
A) I and III
B) II and IV
C) II and III
D) I and IV
A) I and III
I. Individuals age 65 and over
III. Individuals with significant physical or mental impairment
Explanation
Firms should take special precautions to protect customers over age 65 and individuals suffering from an impairment that may impair their ability to care for their own interests.
