Unit 19 - Business Ethics

19.1 - Prohibited Activities

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Market Rumors

 industry professionals are prohibited from sharing information or rumors to move the price of a stock up and down

Pump and Dump

 Inflating (pumping) the price of an owned stock by spreading information in order to sell the stock at a higher price later (dump)

Front Running

BD or RR placing order for their own account ahead of orders from a customer

Excessive Trading (Churning)

making an excessive number of trades for a customer strictly for the commissions rather than to meet the customers objectives

Marking the open

entering orders before the opening of a stock or falsely reporting trades that didn't happen to influence the opening price of a stock

Marking the close

entering trades at or near EOD or falsely reporting trades to influence the closing price of a stock

Backing Away

when a market maker doesn't honor the quote they provided

Freeriding

when securities are purchased and then sold before the payment is even made for the purchase

Rule 5130

prevents industry insiders from having advantages during IPOs

Placing a trade just ahead of a customer's trade is an activity known as

A)

freeriding.

B)

marking the close.

C)

frontrunning.

D)

pump and dump.

C

Jim is a restricted person under Rule 5130. Which of the following members of Jim's family may buy a new issue at the IPO?

A)

Jim’s sister DeAnn

B)

Jim’s grandfather Farris

C)

Jim’s daughter April

D)

Jim’s brother Robert

B

19.2 - Insider Trading

.

Insider information is _______ and ________

Material, Nonpublic

both the tipper and the tippee are….

liable

Civil penalties for insider trading may be up to…

3x (treble) the profit made or losses avoided

Criminal penalties are up to…

 $5 million and up to 20 years in jail

Then the firms are subject to either…

3x the damages or $25 million, whichever is greater

Contemporaneous Traders

people who enter trades (at or near the same time) on the opposite side of the market as the insider traders are allowed to sue

Bounty

financial award for ratting out people spreading insider information

Under the Insider Trading and Securities Fraud Enforcement Act of 1988 inside information is information that is

A)

nonmaterial and nonpublic.

B)

material and public

C)

nonmaterial and nonpublic

D)

material and nonpublic.

D

Civil penalties under the Insider Trading Act may be

A)

treble the profit made or the loss avoided.

B)

equal to the profit made or the loss avoided.

C)

double the profit made or the loss avoided.

D)

three times the profit made but no more than equal to any loss avoided.

 

A

19.3 - Serving Seniors and Other Specified Adults

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Seniors and other impacted individuals are defined as either (2)

• 65 or older

• Has a mental or physical impairment that renders them unable to protect their own interests

(2) rules to protect seniors and other impacted individuals

 

 

1. Must make an effort to obtain the name and contact for a "trusted contact person"

2. Permit member firms to place holds on disbursements from accounts where there is a reasonable belief of financial exploitation

Must make an effort to obtain trusted contact info whenever (2):

• Opening a customer's account

• Updating the account info for an existing account

Which of the following customers is of special concern for potential exploitation?

A)

Philip Johansen, age 70

B)

Bruce Henning, age 55, going through a midlife crisis

C)

Tony Gating, age 30, known to be irresponsible

D)

Tia Roberts, age 60

A

A broker-dealer must make a reasonable effort to obtain the name of a trusted contact person in all of the following circumstances except

A)

opening a new individual account.

B)

placing a buy order for a new security.

C)

opening a new IRA account.

D)

updating existing account information.

 

B

When a firm suspects financial abuse of a senior, it may place a temporary hold on withdrawals from the account. The hold will typically last for how long?

A)

30 days

B)

15 days

C)

45 days

D)

10 days

 

B

19.4 - Problematic Activities

.

Guarantees

BDs, advisors, and RRs may not guarantee a loss or gain

Sharing

sharing in profits/losses in a customer's account

Which of the following would not be a red flag for improper use of a customer's assets?

A)

A father and son open a joint account.

B)

Money is transferred to a third-party account.

C)

An elderly customer adds a caregiver to their account.

D)

The ZIP code provided does not match the address.

A

Seabird Securities does not have any firm policies regarding borrowing or lending arrangements between associated persons and customers. Under which of the following circumstances would a registered representative be allowed to borrow from a customer?

A)

Under no circumstance

B)

Borrowing from Dustin, his college buddy

C)

Borrowing from his Uncle Joe

D)

Borrowing from Dr. DuVall, his optometrist

A

Which of the following is true regarding sharing arrangements between a customer and a broker-dealer?

A)

This is not allowed.

B)

Both parties would need to open a joint account.

C)

Sharing in profits and losses must be proportional to the contribution to the account.

D)

The arrangement would require written approval from a principal.

 

A

A non-licensed associate of a broker-dealer may engage in which of the following activities?

A)

Determining investment suitability

B)

Suggesting a mutual fund

C)

Setting appointments

D)

Placing a trade

C

19.5 - Outside Activities

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An associated person can't work for any business other than their member firm without…

the employing firm's knowledge

• this is considered an Outside Business Activity (OBA)

Are passive investments considered an Outside Business Activity?

No. No disclosure required

Selling Away

Selling securities outside of the member firm's supervision or without its knowledge. This practice is prohibited under securities regulations.

MSRB Rule G-37

A regulation that prohibits municipal securities dealers from engaging in certain political contributions to influence the award of municipal securities business.

MSRB Rule G-37 limits political contribution’s to…

$250 for an election that the finance professional is eligible to vote in

You overhear a discussion about a registered representative (RR) being disciplined because of selling away. Which of FINRA's Conduct Rules was violated?

A)

Outside business activity

B)

Failure to direct the client’s trade to the best available market

C)

Private securities transactions

D)

Accepting excessive noncash compensation

C

A broker-dealer may give other firms' employees gratuities without violating the rules, provided the compensation's total value does not exceed

A)

$100.

B)

$250.

C)

$50.

D)

$500.

A

Under MSRB Rule G-37, a municipal finance professional (MFP) would be allowed to make a political contribution in which of the following circumstances?

A)

A $250 contribution to a mayoral campaign in a city near where they live

B)

A $300 contribution to a mayoral campaign in the city they live in

C)

A $250 contribution to a mayoral campaign in the city they live in

D)

A $300 contribution to a mayoral campaign in a city near where they live

 

C