UNIT 29 QBANK

Question 1

What dollar limit is placed on damages if a suit is filed based on allegations of manipulative practices?

A) $250,000
B) No dollar limit
C) 300% of the damages suffered
D) $500,000

Answer 1

B) No dollar limit

Explanation
No dollar limit is placed on damages collectible from a lawsuit based on allegations of fraudulent or manipulative practices.

Question 2

You have a client, Henry, who does much of his business overseas, and his assistant, sister Avery, often drops off checks at the branch for deposits in his individual account. Today Avery stopped by the office and said Henry forgot to sign some papers before he left and will be gone for three weeks. Because these are time critical documents Henry told her to have you sign them for him. Is this permissible? If so, under what circumstances would this action be allowed?

A) This would be permitted if Henry called you and said to go ahead and sign them for him.
B) This would be permitted because you know Avery is his sister.
C) This would not be permitted. Henry will have to sign them when he gets back.
D) This would be permitted because it is call a signature of convenience.

Answer 2

C) This would not be permitted. Henry will have to sign them when he gets back.

Explanation
You can never sign someone else’s name; that is forgery. Forgery is a crime. Don’t commit forgery.

Question 3

The penalties for trading on insider information include

I. civil penalties up to treble damages.
II. up to $1 million for registered representatives or broker-dealers.
III. criminal penalties up to $25 million for broker-dealers.
IV. jail time up to 30 years.

A) III and IV
B) I and IV
C) I and II
D) I, II, and III

Answer 3

D) I, II, and III

I. civil penalties up to treble damages.
II. up to $1 million for registered representatives or broker-dealers.
III. criminal penalties up to $25 million for broker-dealers.

Explanation
The penalties are stiff. Regulators really don’t want people trading on inside information. However, the maximum prison sentence is 20 years, not 30.

Question 4

An exception report would be most likely generated by which of the following observations?

I. Seeing activity in the account of a deceased person
II. Noting that a customer’s telephone area code matches the ZIP code provided
III. Receiving an execution for 300 shares when the order was for only 100
IV. Receiving a written complaint from a customer

A) II and III
B) I and II
C) I and III
D) II and IV

Answer 4

C) I and III

I. Seeing activity in the account of a deceased person
III. Receiving an execution for 300 shares when the order was for only 100

Explanation
There are a number of red flags that might generate an exception report. Among them are a trade in the account of a deceased person and a trade for an amount in excess of the customer’s order. Address numbers or area codes matching what we know or is expected is not a red flag nor is a single complaint, but excessive complaints could be.

Question 5

A free lunch seminar is advertised among senior citizens who may be looking to improve the results of their investment portfolio. Which of the following activities by the registered hosts of the seminar would be deemed a potential violation?

I. Use of a designation such as Chartered Senior Advisor, a largely unknown designation
II. The representative is introduced as someone approved by Financial Industry Regulatory Authority (FINRA) to answer questions from senior investors
III. Use of degrees and registration licenses
IV. Promoting technology stocks

A) I and IV
B) III and IV
C) I and II
D) II and III

Answer 5

C) I and II

I. Use of a designation such as Chartered Senior Advisor, a largely unknown designation
II. The representative is introduced as someone approved by Financial Industry

Explanation
Use of degrees or designations may never be used in a misleading fashion nor can any reference to nonexistent or largely unknown designations be made. The use of designations is permissible so long as the compliance department of the firm has performed due diligence and is satisfied the credentials are bona fide and would be reasonably recognized as true tokens of expertise. Using educational degrees or securities registration licenses is permissible. To say that the representative is approved by FINRA to offer advice to seniors would likely bring heavy sanctions. The promotion of any stock is permissible so long as it is a balanced presentation with disclosure of the potential risks.

Question 6

All of the following would require that updated account information be sent to the customer for confirmation within 30 days except

A) the customer informs the firm of a change in investment objectives.
B) the account records system has been changed to a new format.
C) the account is a newly opened one.
D) 36 months have passed since the account was opened.

Answer 6

B) the account records system has been changed to a new format.

Explanation
Updated account information must be sent to the customer with 30 days for confirmation upon the opening of the account, at least once every 36 months thereafter, and in the event of the customer notifying the firm of changes in any information shown or listed on the account form.

Question 7

Which of the following are elements of insider trading?

I. The information is material, nonpublic information.
II. The information is nonmaterial, nonpublic information.
III. It is illegal to trade on insider information.
IV. It is illegal to possess insider information.

A) I and III
B) I and IV
C) II and III
D) II and IV

Answer 7

A) I and III

I. The information is material, nonpublic information.
III. It is illegal to trade on insider information.

Explanation
The information must be of a material nature. In other words, it would affect the price of the security if it was known, and a trade must occur for there to be a violation.

Question 8

A customer of a broker-dealer purchases 100 shares of XYZ stock at $50 per share on Monday. Later that week, a confirmation arrives electronically indicating that the total cost of the transaction was $5,000. The client is puzzled that there is no additional charge for commission. The most likely reason for that is

A) there is a mistake on the confirmation.
B) XYZ stock probably dropped significantly between the trade date and the sending of the confirmation so the broker/dealer waived the commission.
C) the broker-dealer acted as a principal in the trade.
D) the broker-dealer acted as an agent in the trade.

Answer 8

C) the broker-dealer acted as a principal in the trade.

Explanation
Broker-dealers must always indicate their capacity on the confirmation. If the client had looked, there would have been a statement something to the effect of “we acted as principals in this trade.” When the firm does that, there is no commission; there is a markup (in the case of a buy) or a markdown (in the case of a sell). In this instance, the actual price of the stock would have been lower than $50 per share and the broker-dealer marked it up to $50. (e.g., price of $49.50 with a 0.50 markup = $50) When the firm is acting as an agent however, commissions are always disclosed.

Question 9

A customer of a broker-dealer purchases 100 shares of XYZ stock at $50 per share on Monday. Later that week, a confirmation arrives electronically indicating that the total cost of the transaction was $5,000. The client is puzzled that there is no additional charge for commission. The most likely reason for that is

A) there is a mistake on the confirmation.
B) XYZ stock probably dropped significantly between the trade date and the sending of the confirmation so the broker/dealer waived the commission.
C) the broker-dealer acted as a principal in the trade.
D) the broker-dealer acted as an agent in the trade.

Answer 9

C) the broker-dealer acted as a principal in the trade.

Explanation
Broker-dealers must always indicate their capacity on the confirmation. If the client had looked, there would have been a statement something to the effect of “we acted as principals in this trade.” When the firm does that, there is no commission; there is a markup (in the case of a buy) or a markdown (in the case of a sell). In this instance, the actual price of the stock would have been lower than $50 per share and the broker-dealer marked it up to $50. (e.g., price of $49.50 with a 0.50 markup = $50) When the firm is acting as an agent however, commissions are always disclosed.

Question 10

A form of market manipulation that attempts to keep the price of the stock from falling is called

A) capping.
B) supporting.
C) front running.
D) backing away.

Answer 10

B) supporting.

Explanation
Supporting is a form of market manipulation to keep the price of a security from falling. It is illegal if used to manipulate the market.

Question 11

A member firm believes that financial exploitation of a senior customer is being attempted. While not required to, but allowed to, they put a temporary hold on disbursements of cash and securities from the account. The temporary hold should be

A) for as long as is required for a complete and thorough investigation to be concluded.
B) no longer than 3 business days unless a state regulator or agency of jurisdiction extends it longer.
C) no longer than 15 business days with no extensions possible.
D) no longer than 15 business days unless a state regulator or agency of jurisdiction extends it longer.

Answer 11

D) no longer than 15 business days unless a state regulator or agency of jurisdiction extends it longer.

Explanation
The rule specifies that the temporary hold on disbursements if one is placed should be for no longer than 15 business days. A state regulator or agency of jurisdiction can terminate it sooner or extend it longer if they deem it warranted.

Question 12

A customer has just notified the brokerage firm of a change of address. How long does the broker-dealer have to provide the customer with an amended account record for confirmation?

A) 60 calendar days
B) 30 calendar days
C) 5 business days
D) 3 business days

Answer 12

B) 30 calendar days

Explanation
If a customer notifies a member firm of a change in account information, such as a change in address, marital status, or investment objective, the firm must amend the account information and send it to the customer for confirmation within 30 calendar days.

Question 13

Brokers placing orders for their own account ahead of notably large customer orders that are known to be entering the market in an attempt to gain from the price movement that is likely to occur is an example of what prohibited activity?

A) Marking the close
B) Front running
C) Breakpoint sale
D) Insider trading

Answer 13

B) Front running

Explanation
Although each of these choices is a violation of Financial Industry Regulatory Authority (FINRA) rules and securities laws, when an investment professional places an order for his own account or one that he controls ahead of other orders that are so large that they will likely move the market in an attempt to gain from the price movement is an illegal activity known as front running. Those caught front running would be subject to severe sanctions by market regulators.

Question 14

A customer has purchased a stock and then sold it before paying for the purchase. This is generally known as

A) pegging.
B) a wash sale.
C) backing away.
D) freeriding.

Answer 14

D) freeriding.

Explanation
Freeriding is a term used when securities are purchased and then sold before making payment for the purchase. Freeriding is generally prohibited in both cash and margin accounts.

Question 15

Each of the following are likely to be found on a trade confirmation except

A) CUSIP.
B) bond credit rating.
C) description.
D) commission.

Answer 15

B) bond credit rating.

Explanation
Trade confirmations are required to include many details about the trade and the securities including, but not limited to, the trade date, description of the security, CUSIP number, commissions (not markups or markdowns) and more. There is no obligation for the firm to print the bond credit rating on the trade confirmation.

Question 16

Which two of the following criteria, taken together, would cause a particular fact to be considered insider information under the Insider Information and Securities Fraud Enforcement Act of 1988?

I. It is personally embarrassing to the CEO of the corporation.
II. It is not known to the general public.
III. It could have a strong effect on the welfare of the corporation.
IV. It has only been reported in the industry’s technical journals.

A) II and III
B) I and IV
C) II and IV
D) I and III

Answer 16

A) II and III

II. It is not known to the general public.
III. It could have a strong effect on the welfare of the corporation.

Explanation
To be considered insider information, a fact must not be known to the general public and must be material, meaning that if it were public, the company could be strongly affected (either positively or negatively). Personal embarrassment to the CEO by itself is not sufficient, and any publication, even in an obscure technical journal, constitutes disclosure to the public.

Question 17

To ensure that the information obtained from each new customer is accurate, firms must furnish to each customer a copy of the account record within how many days of opening the account?

A) 20
B) 45
C) 10
D) 30

Answer 17

D) 30

Explanation
A copy of the account record must be furnished to each customer within 30 days of opening the account.

Question 18

All of the following are true of prohibited activities except

A) the improper use of customer assets is on FINRA’s list of prohibited activities.
B) the use of fraudulent devices is on FINRA’s list of prohibited activities.
C) FINRA has published a list of all the prohibited activities.
D) the use of manipulative devices is on FINRA’s list of prohibited activities.

Answer 18

C) FINRA has published a list of all the prohibited activities.

Explanation
There can never be a complete list of all the ways to cheat people. If it looks like lying, cheating, or stealing, don’t do it.

Question 19

If a registered representative is sharing in profits and losses with a customer, all of the following statements apply except

A) The representative may share in gains and losses, but only in proportion to the representative’s share of the investment money.
B) The representative’s expertise must be considered part of the contributions to the account.
C) The representative must receive prior written permission from the principal before the arrangement may be made.
D) If the customer is an immediate family member of the representative, sharing in gains and losses need not be proportional.

Answer 19

B) The representative’s expertise must be considered part of the contributions to the account.

Explanation
A registered representative may share in gains and losses with a customer, provided written permission is first obtained from the representative’s principal, the investments take place in a joint account, and the representative’s share of the gains and losses is proportional to the representative’s share of the investment funds. The representative’s knowledge and expertise may not be considered part of the representative’s contribution, only what proportion of the investment funds the representative has contributed.

Question 20

Which of the following might be considered a red flag in a customer’s account activities?

A) Several typos of little consequence are noted on the customer’s new account and margin forms.
B) The customer is constantly late for appointments with his registered representative.
C) Funds and securities are moved from one account to another for no apparent reason.
D) The customer repeatedly makes mistakes in simple arithmetic during investment discussions.

Answer 20

C) Funds and securities are moved from one account to another for no apparent reason.

Explanation
Moving assets about for no apparent good reason could constitute layering, one of the steps in money laundering. In addition, the movement of assets may not have been at the customer’s request, which might also need to be investigated because it might constitute improper use of customer funds and assets. The other activities may be unpleasant or distracting but would not amount to red flags.

Question 21

Electronic delivery of documents requires all of the following except

A) procedures to show that delivery took place as intended.
B) assurance of confidentiality of the documents and personal information.
C) a recording of the customer verbally agreeing to such receipt.
D) procedures to deliver the information in paper form upon request.

Answer 21

C) a recording of the customer verbally agreeing to such receipt.

Explanation
Consent to receive documents such as confirmations and account statements by electronic means must be in writing.

Question 22

An investor has a friend who mentions that an officer of the firm he works for reported to the CEO, in a confidential meeting, that a product had great test results. If this information were public, it would have a positive effect on the corporation’s stock price. If the investor now makes a large purchase of the corporation’s stock, who beside the investor might be liable under the Insider Trading and Securities Fraud Enforcement Act of 1988?

A) The officer in the meeting
B) The investor’s friend
C) The firms board of directors (BOD)
D) The CEO of the corporation

Answer 22

B) The investor’s friend

Explanation
In this scenario, the friend is the tipper, and the investor is the tippee. Both are liable under the act. The officer and the CEO of the corporation were exchanging information in a confidential meeting and are not liable. Note: The registered representative who does the trade and the representative’s broker-dealer firm could be liable if they should have known that the information was nonpublic and material information.

Question 23

A registered representative with discretionary authority has been doing two or three trades per week in her customer’s discretionary account. The volume of transactions is not in keeping with the historic activity in the account and the trades don’t all align very well with the account objectives. A principal noted that other than generating commissions, the trades seem to have little profit potential. This is likely a red flag for

A) market manipulation.
B) churning.
C) freeriding.
D) front running.

Answer 23

B) churning.

Explanation
Excessive trading in a customer’s account to generate commissions rather than to help achieve the customer’s stated investment objectives is an abuse known as churning. This can occur in both discretionary and nondiscretionary accounts

Question 24

A brokerage firm has accumulated a large holding in a little known company by purchasing several hundred thousand shares of the company’s stock. The firm instructs its registered representatives to begin touting the stock to every one of its customers and to make cold calls to new potential customers as well. This is most likely a scheme known as

A) marking the open.
B) pegging.
C) capping.
D) pump and dump.

Answer 24

D) pump and dump.

Explanation
A form of securities fraud commonly known as pump and dump is the act of inflating (pump) the price of an owned stock by perpetrating false and misleading positive rumors, in order to sell the stock at a higher price later. Generally the shares owned are first accumulated at lower prices before the misleading information is doled out to the investing public.

Question 25

A market maker owning 70,000 shares of HCHS stock noted that it is down 0.25 on the day so far. Near the very end of the trading day the market maker enters an order to buy 100 shares at the market. This is likely an attempt to

A) mark the close.
B) freeride.
C) front run.
D) churn.

Answer 25

A) mark the close.

Explanation
Effecting trades at or near the close of the trading day to influence the closing price of a stock is called marking the close. In this example the buy order at the close is likely intended to push the stock up so that the market maker’s position in the stock would be marked at a higher price.

Question 26

Which of the following are elements of insider trading?

I. The information is material, nonpublic information.
II. The information is nonmaterial, nonpublic information.
III. It is illegal to trade on insider information.
IV. It is illegal to possess insider information.

A) I and IV
B) II and III
C) I and III
D) II and IV

Answer 26

C) I and III

I. The information is material, nonpublic information.
III. It is illegal to trade on insider information.

Explanation
The information must be of a material nature. In other words, it would affect the price of the security if it was known, and a trade must occur for there to be a violation.

Question 27

Efforts to push up the price of stock one owns by soliciting buy orders from customers so that the stock owned can be sold later at a higher price is a violation commonly known as

A) pump and dump.
B) marking the close.
C) churning.
D) marking the open.

Answer 27

A) pump and dump.

Explanation
One form of securities fraud where an effort is made to push up the price of a stock that is currently owned by soliciting buy orders so that the stock can be sold later at a higher price is known as a pump and dump scheme.

Question 28

Which of the following would be considered excessive transactions?

A) A customer orders 100 shares. The registered representative places an order for him for 200 shares.
B) A registered representative buys and sells the same security for a customer three times during a single day
C) A registered representative places a customer’s securities into the firm’s investment account.
D) A customer orders 5,000 shares of an over-the-counter (OTC) stock. The registered representative orders 100 shares for himself before placing the customer’s order.

Answer 28

B) A registered representative buys and sells the same security for a customer three times during a single day

Explanation
Without further information, it would seem likely that trading the same security three times in one day would be viewed as excessive trading. Purchasing the incorrect amount, commingling and front running are prohibited practices, but are not classified as churning (excessive transactions).

Question 29

Which of the following statements best describes the term churning?

A) Trading in a customer’s account considered excessive, and for which no discernible investment purpose is detected.
B) Purchasing the same security in more than one customer account at a time.
C) Manipulation of market prices by a firm.
D) Making false or misleading statements to a customer for the purpose of inducing the customer to purchase or sell a security.

Answer 29

A) Trading in a customer’s account considered excessive, and for which no discernible investment purpose is detected.

Explanation
Churning is excessive trading for a particular customer’s circumstances or exceeding what would normally be considered suitable. This is equally true for both discretionary and nondiscretionary accounts.

Question 30

Which of the following is acceptable in a broker-dealer firm’s relations with its customers?

A) The firm offers to replace an investment loss for a customer of long standing.
B) The firm reimburses the customer for a loss due to a clerical error by the firm.
C) The firm offers to share the risk with a customer on an investment deemed speculative.
D) The firm makes up the expected gain when an investment doesn’t work out.

Answer 30

B) The firm reimburses the customer for a loss due to a clerical error by the firm.

Explanation
A broker-dealer firm is there to provide a service. It may not enter into guarantees of profits, sharing of risk, or protection from loss for a customer, unless the loss is due specifically to an error by the firm.

Question 31

What are some of the steps a firm could take to prevent potential exploitation of seniors?

I. Refuse to open accounts for people over 64 years old
II. Freeze the account if they suspect exploitation
III. Make a reasonable effort to obtain the name of a trusted contact person
IV. Close the account when the customer turns 65 unless they appoint a POA

A) II and III
B) I and III
C) II an IV
D) I and IV

Answer 31

A) II and III

II. Freeze the account if they suspect exploitation
III. Make a reasonable effort to obtain the name of a trusted contact person

Explanation
The firm must make a reasonable effort to obtain the name of a trusted contact, but if the customer refused, the account could still be opened. If the firm suspects abuse, they may freeze the account but are not required to.

Question 32

You have a client, Hank Brown, who does much of his business overseas, and his assistant who is his sister, Allie Brown, often drops off checks at the branch for deposit in his individual account. Today Allie stopped by the office and said Hank forgot to sign some papers before he left and will be gone for three weeks. Because these are time-critical documents, Hank told her to have you sign them for him. Which of the following is true?

A) This would be permitted if Hank called you and said to go ahead and sign them for him.
B) This would not be permitted. Hank will have to sign them when he gets back.
C) This would be permitted because it is call a signature of convenience.
D) This would be permitted because you know Allie is his sister.

Answer 32

B) This would not be permitted. Hank will have to sign them when he gets back.

Explanation
You can never sign someone else’s name. Doing so is forgery.

Question 33

To ensure that the information obtained from each new customer is accurate, firms must furnish to each customer a copy of the account record within how many days of opening the account?

A) 10
B) 45
C) 20
D) 30

Answer 33

D) 30

Explanation
A copy of the account record must be furnished to each customer within 30 days of opening the account.

Question 34

All of the following are true regarding customer account statements except

A) monthly statements need to be sent if the account activity is the receipt of interest or dividends.
B) customers must be alerted to report any inaccuracies or discrepancies promptly.
C) customer statements containing penny stocks must be sent monthly, even if no activity occurred in the account.
D) customer statements must be sent at least quarterly, activity or not.

Answer 34

A) monthly statements need to be sent if the account activity is the receipt of interest or dividends.

Explanation
Though most firms send a monthly statement, the requirement is that a BD send statements at least quarterly. In any month an account contains penny stocks, a statement is required to be sent. All statements sent require notice that inaccurate information should be reported promptly.

Question 35

An exception report would be most likely generated by which of the following observations?

I. Seeing activity in the account of a deceased person
II. Noting that a customer’s telephone area code matches the ZIP code provided
III. Receiving an execution for 300 shares when the order was for only 100
IV. Receiving a written complaint from a customer

A) I and III
B) II and IV
C) I and II
D) II and III

Answer 35

A) I and III

I. Seeing activity in the account of a deceased person
III. Receiving an execution for 300 shares when the order was for only 100

Explanation
There are a number of red flags that might generate an exception report. Among them are a trade in the account of a deceased person and a trade for an amount in excess of the customer’s order. Address numbers or area codes matching what we know or is expected is not a red flag nor is a single complaint, but excessive complaints could be.

Question 36

All of the following would require that updated account information be sent to the customer for confirmation within 30 days except

A) the customer informs the firm of a change in investment objectives.
B) the account records system has been changed to a new format.
C) the account is a newly opened one.
D) 36 months have passed since the account was opened.

Answer 36

B) the account records system has been changed to a new format.

Explanation
Updated account information must be sent to the customer with 30 days for confirmation upon the opening of the account, at least once every 36 months thereafter, and in the event of the customer notifying the firm of changes in any information shown or listed on the account form.

Question 37

Mr. Smith enters a trade in a stock at the same time as Mr. Jones, who has inside information regarding that company. Mr. Smith is considered

A) a contemporaneous trader.
B) an outside tippee.
C) an informer.
D) an inside tipper.

Answer 37

A) a contemporaneous trader.

Explanation
Someone who enters into a transaction at the same time as someone else who has and may be acting on inside information is known as a contemporaneous trader. Contemporaneous traders may sue persons who have violated insider trading regulations, and suits may be initiated up to five years after the violation has occurred.

Question 38

For each transaction, a customer must be sent or given a written confirmation of the trade at or before the completion of the transaction, the settlement date. Information on that trade confirmation would include

I. the markup (markdown) charged on a principal transaction.
II. the commission charged on an agency transaction.
III. the number of bonds purchased in a bond trade.
IV. the Committee on Uniform Securities Identification Procedures (CUSIP) number (if any).

A) I and IV
B) I and III
C) II and III
D) II and IV

Answer 38

D) II and IV

II. the commission charged on an agency transaction.
IV. the Committee on Uniform Securities Identification Procedures (CUSIP) number (if any).

Explanation
Commissions for agency transactions are shown on confirms but not markups or markdowns charged in principal transactions. In a bond trade, the par value of the bond purchase (or sale) is confirmed, not the number of bonds. If the security has one, the applicable CUSIP number is included.

Question 39

Your firm must provide an account statement to a customer this month if

I. five months have passed since the last activity in his account.
II. there are penny stocks in the account.
III. the account agreement states that statements are provided monthly.
IV. some of the securities in the account have lost significant market value this month.

A) II and III
B) I and IV
C) II and IV
D) I and III

Answer 39

A) II and III

Explanation
Financial Industry Regulatory Authority (FINRA) members must send at least quarterly account statements to their account holders. Monthly statements are required as long as the account holds penny stocks. Member firms must abide by the account agreement.

Question 40

A form of market manipulation that attempts to keep the price of the stock from falling is called

A) supporting.
B) front running.
C) capping.
D) backing away.

Answer 40

A) supporting.

Explanation
Supporting is a form of market manipulation to keep the price of a security from falling. It is illegal if used to manipulate the market.

Question 41

Which two of the following criteria, taken together, would cause a particular fact to be considered insider information under the Insider Information and Securities Fraud Enforcement Act of 1988?

I. It is personally embarrassing to the CEO of the corporation.
II. It is not known to the general public.
III. It could have a strong effect on the welfare of the corporation.
IV. It has only been reported in the industry’s technical journals.

A) II and III
B) II and IV
C) I and III
D) I and IV

Answer 41

A) II and III

II. It is not known to the general public.
III. It could have a strong effect on the welfare of the corporation.

Explanation
To be considered insider information, a fact must not be known to the general public and must be material, meaning that if it were public, the company could be strongly affected (either positively or negatively). Personal embarrassment to the CEO by itself is not sufficient, and any publication, even in an obscure technical journal, constitutes disclosure to the public.