Ethics & Professional Standards Flashcards

What is the obligation regarding 'fair and balanced' communications under FINRA Rule 2210?

Answer: All customer communications must be fair, balanced, and not misleading, providing a sound basis for evaluation and not omitting material risks

FINRA Rule 2210 requires that all member firm communications with the public be fair, balanced, and not misleading, including a sound basis for evaluation and not omitting material information about risks.

What is a 'conflict of interest disclosure' and when must it be provided to customers?

Answer: A statement informing customers of any situation where the firm's or representative's interests could conflict with the customer's interests, required before or at the time of a recommendation

Conflict of interest disclosures inform customers of situations where the broker-dealer's financial incentives may not fully align with the customer's best interest, and must be provided to allow customers to make informed decisions.

What is 'churning' and which test is commonly used to determine if it has occurred?

Answer: Excessive trading to generate commissions; the turnover rate test and the cost-equity ratio test

Churning is excessive trading to generate commissions; courts and regulators use the turnover rate (how often the portfolio is replaced annually) and cost-to-equity ratio (break-even return needed to cover costs) to determine if trading was excessive.

Under FINRA's gifts and gratuities rule, what is the maximum annual gift a registered representative may give to a person associated with another FINRA member firm?

Answer: $100

FINRA Rule 3220 limits gifts and gratuities to $100 per person per year to prevent undue influence on business decisions between registered representatives and their counterparts at other firms.

What does 'supervisory liability' mean for a principal at a broker-dealer firm?

Answer: The responsibility of supervisors to establish and enforce adequate supervisory procedures; they can be held liable for failing to supervise registered representatives who engage in misconduct

Supervisory liability holds principals and supervisors accountable for failing to maintain adequate oversight of registered representatives; a supervisor who ignores red flags or fails to implement proper controls can face FINRA sanctions and fines.

What is the ethical significance of 'prompt response' to customer complaints under FINRA rules?

Answer: Broker-dealers must address customer complaints promptly and keep records; failure to do so can indicate a systemic compliance failure

FINRA rules require broker-dealers to promptly respond to customer complaints, maintain records of all complaints, and use complaint data as part of their supervisory system to identify patterns of misconduct.