Section 3 Quiz

Agent recommendations are considered solicitations and must be identified as such on order tickets.

When an order is associated with a specific trigger or execution price, or the customer has requested the order be held until the end of the trading day before being executed, these are considered special instructions that an agent must transmit to the order department of the firm to ensure the order is carried out properly.

In order to bypass discretionary account/discretionary order requirements, customers are required to provide the following information for each securities order: (1) the identity of the security; (2) whether to buy or sell that security; and (3) the quantity to be bought or sold. The customer in this example has asked the registered representative to decide on the quantity, which cannot be done without a written discretionary authorization form signed by the client and approved by the branch manager on file.

You can’t lose what you never had. According to the IRS this investor could receive a tax deduction for their $10 per share initial investment, assuming the stock value drops to zero, in a bankruptcy proceeding. However, the $4 ‘gain’ was never theirs; they ‘could’ have turned it into cash by selling when the stock reached $14, at which point they’d have a taxable gain of $4.

The IRS holds that an investor’s cost basis is the original amount of their investment, i.e., how much they have put ‘at risk.’ In this example, the cost basis is $10 per share.

Shares are doubled in 2-for-1 stock splits thus the stockholder in this example, who already owns 100 shares, will have 200 shares after the split. The rules for 2-for-1 splits further require that the new share price be reduced by half to keep the value of each shareholder’s stake the same. $150/2 = a new price of $75 per share.

Anti-money laundering (AML), suspicious activity report (SAR), Financial Crimes Enforcement Network (FinCEN), Office of Financial Asset Control (OFAC) – these are just some of the many resources available to detect and prevent financial criminal activity.

FINRA Rule 4370 requires every member firm to have in place a business continuity plan in the event natural or other disasters occur.

Every transaction is confirmed in writing through a trade confirmation, to be provided to the customer no later than the trade settlement date.

Using proceeds from one sale to pay for another is known as ‘freeriding’ and violates a number of regulations, including Regulation T of the Securities & Exchange Act of 1934. This customer has no ownership of these securities that have gone up in value – nor are they entitled to any profits – until they have paid for the securities with cash, not sale proceeds.

Providing a firm quote and then failing to honor the quote is a serious regulatory violation known as ‘backing away.’

With extremely narrow exceptions, all employees of FINRA member broker-dealers are prohibited from purchasing a new issue of an equity security (initial public offering or IPO).

Also known as ‘insider information’, significant (material) information that is not yet available to the general public cannot be taken advantage of by investors until such information has been publicly disseminated, which generally happens through news or press releases – not through regulators.

An increase in trading activity in an account could potentially be normal if a client has notified their agent of a desire to change their approach to the market. However, when an account becomes discretionary, this increase is often evidence of the agent seeking to increase their commission income, referred to as ‘churning’ the account through excessive trading.

When acting as a principal/dealer in a trade with a customer, the firm is selling to the customer from their own inventory of securities and as such will add a mark-up to the transaction. In contract, they charge mark-downs when buying from customers. Commissions are the compensation a firm receives when acting solely as an intermediary between a buying customer and a selling customer, acting in an ‘agency’ capacity.

In order to receive the next scheduled dividend, shareholders must own the stock before the ex-dividend date (April 29). If the stock is purchased on or after the ex-dividend date then the seller of the stock gets to keep the dividend.

Most retirement plans come with required minimum distributions, meaning account owners must start withdrawing annual minimum amounts from their accounts when they reach a predetermined age. Unlike traditional IRAs, however, required minimum distributions are not required for Roth IRAs if the individual is the original account owner.

A tender offer is one way to acquire a company and is achieved by an investor (commonly referred to as an acquirer) making a public offer directly to a target company’s shareholders to buy some or all of their shares, often at a price higher than the current market price.

Financial institutions — such as banks — are required to file a currency transaction report (CTR) with FinCEN whenever a customer completes a transaction (deposit, withdrawal, or other payment or transfer) in currency of more than $10,000.

Broker-dealers and associated persons are required by FINRA Rule 2111 to have a reasonable basis to believe a recommended securities transaction (or investment strategy involving securities) is suitable for the customer. The three main suitability obligations of Rule 2111 are reasonable-basis suitability, customer-specific suitability, and quantitative suitability.