Stock Broker Ethics & Professional Standards 2

Question 1

What is 'unauthorized trading' and what are its consequences for a registered representative?

Accepted Answer

Executing trades in a customer's account without the customer's prior knowledge or approval; can result in termination, FINRA sanctions, and civil liability

Answer

Unauthorized trading involves executing transactions in a customer's account without their knowledge or prior approval, violating the customer's rights and trust, and can result in termination, FINRA disciplinary action, fines, and customer restitution.

Question 2

What is the FINRA arbitration process and what types of disputes is it designed to resolve?

Accepted Answer

An industry dispute resolution forum for resolving securities-related disputes between investors and broker-dealers or between industry members, outside of court

Answer

FINRA arbitration is a binding dispute resolution process for securities-related claims between customers and broker-dealers, or between industry professionals, providing a faster and less expensive alternative to court litigation.

Question 3

What does it mean for a registered representative to 'guarantee' a customer against investment losses, and why is it prohibited?

Accepted Answer

Promising that an investment will not lose money or will achieve a certain return; prohibited because all investments carry risk and such promises are fraudulent misrepresentations

Answer

Guaranteeing an investment against losses is prohibited because it involves making false promises — all investments carry inherent risk, and such guarantees violate anti-fraud provisions and FINRA rules.

Question 4

What is 'market manipulation' and which behavior is an example of the prohibited practice of 'painting the tape'?

Accepted Answer

Artificially influencing a security's price or trading volume through deceptive practices; an example is executing a series of trades to create the appearance of active trading with no economic purpose

Answer

Market manipulation involves artificial or deceptive acts to distort a security's price or volume; 'painting the tape' means executing a series of transactions between colluding parties to create the illusion of active trading and interest in the security.

Question 5

What is a 'Chinese wall' (information barrier) in broker-dealer firms, and why is it important?

Accepted Answer

An internal information barrier separating departments that possess material non-public information (e.g., investment banking) from those that trade securities (e.g., sales and trading), to prevent insider trading

Answer

A Chinese wall (information barrier) is a set of policies and procedures separating investment banking (which handles MNPI) from trading and research departments, preventing the misuse of material non-public information in trades.

Stock Broker Practice Test

Stock Broker Practice Test

Stock Broker Ethics & Professional Standards 2