Ethics & Professional Standards Flashcards

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

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

Investment advisers (RIAs) have a fiduciary duty to always act in the client's best interest, while broker-dealers under the suitability standard only need to ensure recommendations are appropriate — Reg BI has narrowed but not eliminated this distinction.

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

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

Insider trading involves trading securities based on material, non-public information, giving the trader an unfair advantage over other investors and undermining the integrity and fairness of capital markets.

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

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

Selling away occurs when a registered representative conducts private securities transactions outside their member firm without the firm's knowledge or approval, bypassing the firm's supervisory system and investor protections.

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

Answer: Disclose and manage all material conflicts of interest with customers fairly

FINRA rules require registered representatives to disclose material conflicts of interest to customers and handle them fairly, ensuring customers can make informed decisions despite the representative's potentially competing interests.

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

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

Misrepresentation involves making false or misleading statements, or omitting material facts, in connection with the purchase or sale of a security; SEC Rule 10b-5 is the primary anti-fraud rule prohibiting this.

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

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

Best execution requires brokers to seek the most favorable execution terms reasonably available for customer orders, considering factors like price, speed of execution, likelihood of execution, and overall quality.