Conduct and Practices Handbook Course (CPH) Quiz 44

The risks disclosures include: day trading is extremely risky; be cautious of claims of large profits from day trading; day trading requires knowledge of securities markets; day trading requires knowledge of a firm’s operations; day trading will generate substantial commissions, even if the per trade cost is low; day trading on margin or short selling may result in losses beyond your initial investment; and potential registration requirements.

Networking arrangements between members and financial institutions (FINRA Rule 3160) – a member that is a part of a networking agreement under which it conducts broker-dealer services on or off the premises of a financial institution is subject to the Rule. Setting – the member is to be clearly identified and have its services distinguished from the services of the financial institution, have its name displayed where it conducts business, and maintain its services physically separate from that of the financial institution if at all possible.

Customer account information- Financial Industry Regulatory Authority (FINRA) Rules 4512 and 4515 describe the exact information that a broker-dealer is required to have on file prior to opening an account for a new customer.

NASD Rule 3050 imposes certain obligations on associated persons who work with accounts that are owned by investment advisers, banks, or other financial institutions.

Prior to opening the account or placing trades for one of the above customers, associated persons must notify their employer in writing of either the intent to execute the transactions or the intent to open the account. Additionally, the associated person must provide the customer with duplicate copies of confirmations, statements, or other information about the account or order upon the written request of either the customer or the associated person’s member firm. Finally, if the customer’s account was opened prior to the associated person’s association with the member firm, then the associated person must comply with this rule on an ongoing basis immediately upon their association.

Rule 405, also endorsed by FINRA, requires that a representative gather enough information from the customer to make appropriate and suitable investment recommendations.

Know your customer (FINRA Rule 2090) – members of FINRA are to use reasonable diligence when opening and maintaining accounts for customers, and to get to know essential facts about the customer and concerning the authority of each person acting on behalf of a customer

No member is to recommend a customer purchase or sell short any OTC equity security unless the member has reviewed the current financial statements and material business information of the issuer and determined that the information provides a reasonable basis. The registered person designated to make this review is to be a General ecurities Principal or General Securities Sales Supervisor

Breakpoint sales (FINRA Rule 2342) – a member is not to sell investment company shares at a price below the point that the sales charge is reduced on quantity transactions in order to gain the applicable higher sales charges.

FINRA Rule 2020—Use of Manipulative, Deceptive or Other Fraudulent Devices states-The importance of this rule is in ensuring the integrity of the capital markets and the confidence of retail investors that the markets are not “rigged” for the larger, institutional investors or those with critical inside information.

Front-running is the practice of a registered individual benefitting from the knowledge of a customer or multiple customers’ placing a block order that may affect the price of the security in question by placing trades on the underlying security in their own accounts. This is unethical in every situation

Fraud and misrepresentation (Rule 15c1-2) – it is prohibited to make untrue statements of material fact, or to omit to state a material fact with knowledge or reasonable grounds to believe that the statement is such.

Trading “on the basis of” material nonpublic information in insider trading ( SEA Rule 10b5-1) – a
person is deemed to be trading on the basis of material nonpublic information if the person was
aware of the information at the time of the transaction unless:
A. he became aware of the information after entering into an agreement to transact;
B. he instructed another to transact prior to becoming aware of the information;
C. he adopted a written plan for trading securities before becoming aware of the information.

Regulation SHO accomplished three specific goals. First, it created uniformity among delivery requirements. Second, Regulation SHO created uniform marking requirements for all equity securities. Regulation SHO created a standard procedure for the removal of short sale price tests and restrictions when these provisions become unnecessary

As stated in FINRA Rule 3240, borrowing from or lending to customers is prohibited unless:

1. The member maintains written procedures for such transactions
3. The customer is a registered person with the same member firm
4. The lending arrangement is based on a personal relationship with the customer
5. The lending arrangement is based on a business relationship outside of the broker-customer
relationship.

Rule 2262 states that if common control exists between a member firm and the issuer of a security, the firm must disclose the relationship in writing to any customer wanting to buy or sell said security.

Rule 2269 states that if a firm is participating in or has a financial interest in any security either in primary or secondary distribution, this has to be disclosed in writing to the customer

This list includes members of FINRA and their employees, representatives of the underwriters that underwrote the new issue, a shareholder that owns more the 10 percent of a FINRA member firm, portfolio managers, and immediate family members of the preceding.

FINRA Rule 5190 outlines the required notifications for new public offerings. It provides requirements for securities subject to a restricted period under SEC Regulation M as well as actively traded securities

Affiliate – a person who directly or indirectly controls or is under common control with the specified person.

Market order – an order to purchase a security at the most advantageous price.

NYSE Rule 123D – Designated market makers (DMMs) are to ensure that registered securities open as close to the opening bell as possible

A. Equipment changeover
B. Investment company units or index-linked securities
C. Dissemination of net asset value

it is the obligation of the lead underwriter to notify NASDAQ the IPO has been released by the SEC.

Deflation refers to a decline in the general price level of goods, usually as measured by the consumer price index (CPI) or the producer price index (PPI).

“In the money” means that the strike price and market value of the stock are such that exercising the option would be a gain for the investor

SROs are self-regulatory organizations. These types of organizations are not backed with government power, but nonetheless are granted limited power and authority to enforce regulations and standards within their industry and over the members belonging to the organization

The Form U-5 is the form filed by a broker dealer upon a registered representative’s departure from the firm

Research reports are any documents which communicate information related to the characteristics, strengths, and weaknesses of some particular stock, financial instrument, industry, commodity, or geographic region.

These reports are generally prepared by investment research teams.

Research reports need not be done “in house,” but can also be performed by a third party

Quiet periods are the durations of time when an issuer of initial public offerings (IPOs) are forbidden by the SEC from publicly promoting themselves, including the publication of research reports.

Product advertisements are advertisements related to specific municipal securities, issues of municipal securities, or features of
municipal securities

The Investment Advisers Act of 1940 prohibits investment advisers from providing their services to any government client for a period of two years following any political contribution they have made. And this rule applies not merely to those who make contributions to officials who are elected or to officials who later become elected, but to all officials who may become elected. Furthermore, advisers are forbidden from soliciting contributions for various officials or candidates if he is also pursuing or providing business with the government.