Series 63 – Uniform Securities Agent State Law Exam Fraudulent and Prohibited Practices 2 — Questions and Answers
Question 1: Under the USA, which of the following constitutes 'market manipulation'?
- Placing large buy orders based on fundamental research
- Creating false or misleading appearances of active trading through wash sales (Correct answer)
- Recommending a security to multiple clients simultaneously
- Executing trades at the best available price
Correct answer: Creating false or misleading appearances of active trading through wash sales
Wash sales and matched orders that create artificial appearances of trading activity are forms of market manipulation prohibited under the USA.
Question 2: What is 'scalping' in the context of securities fraud?
- Selling securities at prices above their fair market value
- An investment adviser purchasing securities for personal accounts before recommending them to clients (Correct answer)
- Reselling securities immediately after purchase for a small profit
- Charging excessive commissions on securities transactions
Correct answer: An investment adviser purchasing securities for personal accounts before recommending them to clients
Scalping occurs when an investment adviser buys a security for their own account and then recommends it to clients, profiting from the price increase caused by client purchases.
Question 3: Under the USA, which of the following is required if an agent wants to share in the profits and losses of a client's account?
- Only oral authorization from the client
- Written authorization from the client and written authorization from the broker-dealer (Correct answer)
- Approval from the state Administrator
- A minimum investment of $50,000 by the client
Correct answer: Written authorization from the client and written authorization from the broker-dealer
Sharing in client account profits and losses requires both written client authorization and written broker-dealer authorization under the USA.
Question 4: Under the USA, an agent who recommends a security that is unsuitable for a client's investment profile is in violation of what principle?
- The registration requirement only
- The suitability obligation under the anti-fraud provisions (Correct answer)
- The prospectus delivery requirement
- The net capital requirement
Correct answer: The suitability obligation under the anti-fraud provisions
Recommending unsuitable securities violates the suitability standard, which is part of the anti-fraud provisions under the USA.
Question 5: What must an agent disclose to a client when the agent has a material conflict of interest in recommending a security?
- Nothing, as long as the recommendation is suitable
- The existence of the conflict so the client can make an informed decision (Correct answer)
- Only if the conflict involves more than $1,000 in potential benefit
- Only if requested by the client in writing
Correct answer: The existence of the conflict so the client can make an informed decision
Material conflicts of interest must be fully disclosed to clients so they can make informed investment decisions, regardless of the dollar amount involved.
Question 6: Under the USA, executing trades in a customer's account without prior written or oral authorization is known as what?
- Discretionary trading
- Unauthorized trading, which is a prohibited practice (Correct answer)
- Agency trading
- Institutional trading
Correct answer: Unauthorized trading, which is a prohibited practice
Unauthorized trading—executing transactions without client authorization—is a prohibited practice under the USA and may constitute fraud.
Series 63 – Uniform Securities Agent State Law Exam Fraudulent and Prohibited Practices 2
Under the USA, which of the following constitutes 'market manipulation'?