Series 63 – Uniform Securities Agent State Law Exam Fraudulent and Prohibited Practices 1 — Questions and Answers
Question 1: Under the USA, which of the following is an example of a fraudulent act?
- Selling a registered security at its market price
- Making an untrue statement of a material fact in connection with a securities transaction (Correct answer)
- Recommending a security after conducting due diligence
- Charging a standard commission for executing a trade
Correct answer: Making an untrue statement of a material fact in connection with a securities transaction
Making untrue statements or misleading omissions of material facts in connection with securities transactions is explicitly fraudulent under the USA.
Question 2: What is 'churning' in the context of securities regulation?
- Selling securities at a loss to offset capital gains
- Excessive trading in a client's account primarily to generate commissions (Correct answer)
- Recommending speculative securities to conservative investors
- Failing to execute trades in a timely manner
Correct answer: Excessive trading in a client's account primarily to generate commissions
Churning is the practice of excessive and unnecessary trading in a client's account for the purpose of generating commissions, which is a prohibited practice.
Question 3: Under the USA, an agent who guarantees a client that they will not lose money on an investment is in violation of what?
- The registration requirements only
- The anti-fraud provisions and prohibited practices rules (Correct answer)
- Only FINRA rules, not state law
- No rule if the guarantee is in writing
Correct answer: The anti-fraud provisions and prohibited practices rules
Guaranteeing a client against loss is a prohibited practice under the USA regardless of whether the guarantee is verbal or written.
Question 4: Under the USA, which of the following is NOT a prohibited practice for a registered agent?
- Recommending a security after conducting reasonable research (Correct answer)
- Sharing in the profits and losses of a client's account without written consent
- Borrowing money from a client who is not a financial institution
- Executing trades in a client's account without prior authorization
Correct answer: Recommending a security after conducting reasonable research
Recommending a security after conducting reasonable due diligence is a proper and permitted activity for a registered agent.
Question 5: What does 'front-running' mean in securities regulation?
- Selling securities before they have been fully registered
- Trading a security in advance of a large pending client order to profit from the anticipated price movement (Correct answer)
- Recommending securities before providing clients with research reports
- Executing trades at the opening of the market before other investors
Correct answer: Trading a security in advance of a large pending client order to profit from the anticipated price movement
Front-running involves trading for one's own account ahead of a known pending customer order, taking advantage of the expected price impact of that order.
Question 6: Under the USA, an agent who uses a customer's funds or securities for personal use without authorization is guilty of what?
- A minor regulatory violation only
- Misappropriation, which is a fraudulent act (Correct answer)
- Only a civil offense under state law
- A technical violation requiring only a fine
Correct answer: Misappropriation, which is a fraudulent act
Misappropriation of client funds or securities is a serious fraudulent act under the USA and may result in criminal prosecution.
Series 63 – Uniform Securities Agent State Law Exam Fraudulent and Prohibited Practices 1
Under the USA, which of the following is an example of a fraudulent act?