Stock Trading Professional Standards & Competencies 2 — Questions and Answers
Question 1: A trader learns that a corporate executive is about to announce a merger that will significantly boost the stock price. Trading on this information before the announcement is an example of:
- Front-running
- Insider trading (Correct answer)
- Market manipulation
- Spoofing
Correct answer: Insider trading
Insider trading involves buying or selling securities based on material non-public information, which is illegal under SEC regulations.
Question 2: Under FINRA Rule 4511, how long must broker-dealers retain customer account records?
- 2 years
- 3 years
- 6 years (Correct answer)
- 10 years
Correct answer: 6 years
FINRA Rule 4511 requires broker-dealers to retain most books and records for a minimum of six years.
Question 3: Which regulatory body oversees the conduct of registered investment advisers managing assets above $110 million?
- FINRA
- SEC (Correct answer)
- State securities regulators
- CFTC
Correct answer: SEC
The SEC has jurisdiction over investment advisers with assets under management exceeding $110 million, while smaller advisers are regulated at the state level.
Question 4: A portfolio manager consistently allocates the best trade executions to their personal account ahead of client accounts. This practice is called:
- Cherry-picking (Correct answer)
- Front-running
- Scalping
- Layering
Correct answer: Cherry-picking
Cherry-picking occurs when a trader selectively assigns profitable trades to personal accounts while allocating losing trades to client accounts, violating fiduciary duty.
Question 5: The CFA Institute's Code of Ethics requires members to place whose interests first?
- Their employer's interests
- Their own professional interests
- Their clients' interests (Correct answer)
- The market's integrity
Correct answer: Their clients' interests
The CFA Institute Code of Ethics mandates that members place client interests above their own and their employer's interests.
Question 6: What does the term 'suitability' mean in the context of broker-dealer obligations?
- Recommending investments that generate the highest commissions
- Recommending investments appropriate for the customer's financial situation and risk tolerance (Correct answer)
- Recommending only SEC-registered securities
- Recommending investments with the lowest risk profile
Correct answer: Recommending investments appropriate for the customer's financial situation and risk tolerance
Suitability requires that broker-dealer recommendations be appropriate for a customer based on their financial situation, investment objectives, and risk tolerance.
Question 7: When must a registered representative disclose a potential conflict of interest to a client?
- Only when the conflict results in a financial loss to the client
- Only when required by management
- Before making any recommendation affected by the conflict (Correct answer)
- After the transaction is completed
Correct answer: Before making any recommendation affected by the conflict
Conflicts of interest must be disclosed to clients before making recommendations that could be influenced by those conflicts, allowing the client to make an informed decision.
Stock Trading Professional Standards & Competencies 2
A trader learns that a corporate executive is about to announce a merger that will significantly boost the stock price.
Trading on this information before the announcement is an example of: