Stock Lawyer Stock Broker Fraud Lawyer 2

Question 1

Which FINRA rule requires broker-dealers to have a reasonable basis for believing a recommended investment is suitable for the customer?

Accepted Answer

Rule 2111

Answer

FINRA Rule 2111 (Suitability) requires broker-dealers to have a reasonable basis to believe a recommended transaction is suitable for the customer based on their profile.

Question 2

What is 'reverse churning' in the context of stockbroker fraud?

Accepted Answer

Placing a client in a fee-based account and then making no trades, collecting fees without activity

Answer

Reverse churning occurs when a broker places a client in a fee-based account but generates little or no trading activity, earning fees without providing corresponding service.

Question 3

Under SEC Rule 10b-5, which of the following is NOT an element a plaintiff must prove?

Accepted Answer

The defendant held a Series 7 license at the time of the fraud

Answer

Rule 10b-5 claims require proof of a material misrepresentation, scienter, connection to a securities transaction, reliance, and damages — a Series 7 license is irrelevant to liability.

Question 4

What is a 'Ponzi scheme' and which famous case is considered the largest in U.S. history?

Accepted Answer

Using new investor funds to pay existing investors; Bernie Madoff

Answer

A Ponzi scheme uses money from new investors to pay earlier investors; Bernie Madoff's scheme defrauded investors of approximately $65 billion, making it the largest in U.S. history.

Question 5

Which document must broker-dealers provide that discloses conflicts of interest, compensation, and the nature of their relationship with the client?

Accepted Answer

Form CRS (Customer Relationship Summary)

Answer

Form CRS (Customer Relationship Summary) must be provided to retail investors and discloses the nature of the firm's relationship, services offered, fees, and conflicts of interest.

Stock Lawyer Practice Test

Stock Lawyer Practice Test

Stock Lawyer Stock Broker Fraud Lawyer 2