Stock Trading Professional Standards & Competencies 3

Question 1

What is 'churning' in the context of professional trading standards?

Accepted Answer

Excessively trading a client's account to generate commissions

Answer

Churning is the unethical and illegal practice of excessively trading a client's account primarily to generate commissions for the broker rather than to benefit the client.

Question 2

Under SEC Regulation Best Interest (Reg BI), broker-dealers must act in whose best interest when making recommendations?

Accepted Answer

The retail customer's best interest

Answer

SEC Regulation Best Interest requires broker-dealers to act in the best interest of the retail customer at the time a recommendation is made.

Question 3

A trader places large buy orders to artificially raise a stock's price, then sells their holdings at the inflated price. This scheme is known as:

Accepted Answer

Pump and dump

Answer

A pump-and-dump scheme involves artificially inflating a stock's price through false or misleading information, then selling shares at the peak before the price collapses.

Question 4

Which of the following best describes the 'know your customer' (KYC) obligation?

Accepted Answer

Understanding a customer's financial situation, investment objectives, and risk tolerance before recommending investments

Answer

KYC requires broker-dealers to gather sufficient information about customers to make suitable investment recommendations tailored to their individual circumstances.

Question 5

What is the primary purpose of a firm's written supervisory procedures (WSP)?

Accepted Answer

To establish guidelines ensuring compliance with securities laws and firm policies

Answer

Written supervisory procedures establish the compliance framework and controls a firm uses to ensure adherence to securities laws, regulations, and internal policies.

Stock Trading Practice Test

Stock Trading Practice Test

Stock Trading Professional Standards & Competencies 3