Stock Broker Ethics & Professional Standards

Question 1

What does 'fiduciary duty' mean for a registered investment adviser compared to a broker-dealer's suitability standard?

Accepted Answer

A fiduciary must always act in the client's best interest; a suitability standard only requires recommendations be suitable, not necessarily optimal

Answer

Both require the same level of care

Answer

A fiduciary can charge higher fees; suitability advisers charge lower fees

Answer

A fiduciary only works with institutional clients; suitability advisers work with retail clients

Question 2

What is 'insider trading' and why is it illegal?

Accepted Answer

Buying or selling securities based on material non-public information; illegal because it provides an unfair advantage and undermines market integrity

Answer

Trading in small-cap stocks; illegal due to manipulation risk

Answer

Trading after market hours; illegal due to low liquidity

Answer

Short selling before an earnings announcement; illegal due to potential market manipulation

Question 3

Under FINRA rules, what is 'selling away' and why is it prohibited?

Accepted Answer

A registered representative conducting securities transactions outside the member firm without the firm's knowledge or approval; prohibited because the firm cannot supervise these activities

Answer

Selling a client's securities without their knowledge; prohibited as unauthorized trading

Answer

Selling securities at a below-market price; prohibited as market manipulation

Answer

Selling foreign securities to US investors; prohibited without proper licensing

Question 4

What is the 'code of conduct' that all FINRA-registered representatives must adhere to regarding conflicts of interest?

Accepted Answer

Disclose and manage all material conflicts of interest with customers fairly

Answer

Disclose conflicts only if they exceed $10,000 in value

Answer

Avoid all personal investing

Answer

Never accept any gifts from clients or issuers

Question 5

What is 'misrepresentation' in securities sales and what rule prohibits it?

Accepted Answer

Making false or misleading statements about a security or omitting material facts; prohibited by SEC Rule 10b-5

Answer

Disclosing risk factors in a prospectus; prohibited by Reg D

Answer

Charging undisclosed commissions; prohibited by FINRA Rule 2010

Answer

Recommending unsuitable investments; prohibited by FINRA Rule 2111

Question 6

What ethical obligation does a broker have regarding the 'best execution' of customer orders?

Accepted Answer

Seek the most favorable terms available for the customer considering price, speed, and likelihood of execution

Answer

Execute all orders at exactly the ask price

Answer

Always route orders to the exchange with the lowest fees

Answer

Execute orders only on national exchanges, never in dark pools