Business Practices - Other Trade Practices

Discretion
If an agent is managing a discretionary account, there is an added fiduciary responsibility. He/she may make the choice of whether to buy or sell, the quantity and the security on behalf of the client. While the discretion portion of the exam can mean several things, please think: use common sense. By this, terms like "pump and dump", (i.e. create or spread false rumors) are fraudulent. Misusing client funds or accounts, soliciting orders that are in direct violation of the USA, failing to disclose commissions, or capacity of commission structure and/or disclosing that certain transactions will require different commission structures - are FRAUDULENT practices!

Conflict of interest
This term should be self explanatory, simply don't do something in one client's account, with the intention of doing/trading something different in another, in an attempt to defraud. Another rule is that any potential conflict of interest must be disclosed to the client. For example if the broker dealer or its officers are owners or market makers in the security.

Compliance
If a customer files a formal complaint, the agent involved must bring the complaint to the attention of his/her supervising principal, the firm's compliance officer and/or broker-dealer officials.

Guarantees
It is considered fraudulent to guarantee any returns to any client. It is also considered fraudulent to guarantee a client's account against loss.

Commingling funds
Commingling funds is when customer and agent funds are mixed together. By law, an agent is required to use a separate trust or escrow fund to temporarily hold a client's funds. Basically, an agent cannot deposit a customer's funds that are intended for securities transactions in their own personal account. This activity is considered fraudulent, and violation could result in state or federal prosecution.

An agent may share in a client's account profits, if:

  • The agent's participation has been approved by a principal, and
  • The agent's participation is directly proportional to his/her contributions to the account.

Trading Ahead
The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients have been given the information.

Painting the tape
An illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, lures in unsuspecting investors as they perceive unusual volume. This is similar to matching orders. Simply: this is cheating.

Borrowing money from clients
It is considered fraudulent to borrow money from clients for personal use, unless the person loaning the money (or securities) is specifically in the legitimate business of lending. Simply, this would be considered theft.

Anti-Money Laundering
Related Articles
  1. Term

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  2. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  3. Professionals

    Is a Google Robo-Advisor on the Horizon?

    It's possible that Google is looking to get into the robo-advisor business, either as a new venture or as a way to provide more benefits to employees.
  4. Economics

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  5. Professionals

    Understanding Series 6

    Upon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
  6. Professionals

    Top Strategies on How to Become a Stock Broker

    Gunning to be a stock broker and want an edge? Here's some veteran advice.
  7. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  8. Professionals

    Understanding Series 63

    Series 63 is a securities license that entitles the holder to sell securities in a particular state.
  9. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  10. Economics

    When Will The Fed Raise Interest Rates?

    We discuss how the actions of U.S. central bank leaders (i.e. “The Fed”) will affect interest rates in the near future.
RELATED TERMS
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  3. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  4. Division Of Reserve Bank Operations ...

    An entity under the Federal Reserve System that manages certain ...
  5. Series 79

    A examination to ensure a candidate is qualified to become a ...
  6. Research Analyst

    A person who prepares investigative reports on equity securities. ...
RELATED FAQS
  1. Is there a limit on the number of times I can re-take the Series 63 exam?

    There is no limit to the number of times a candidate may retake the Series 63 exam. The North American Securities Administrators ... Read Full Answer >>
  2. How long must I wait after failing the Series 63 exam before I can take it again?

    Waiting periods are in place for candidates who wish to retake the Series 63 exam. Between retakes, the waiting period is ... Read Full Answer >>
  3. My 120-day Series 63 exam window is about to close, but I need more time to study. ...

    Extensions are available on rare occasions. Candidates should apply for an extension with the North American Securities Administrators ... Read Full Answer >>
  4. Do I have to be a U.S. citizen to sit for the Series 63 exam?

    United States citizenship is not required for Series 63 test-takers. Candidates may take the exam inside or outside the U.S. ... Read Full Answer >>
  5. Are waivers granted to the 180-day waiting period to re-take the Series 63 exam?

    Candidates retaking the Series 63 exam must wait for 30 days after failing it on the first or second attempt. After failing ... Read Full Answer >>
  6. If I failed the Series 66, does the waiting period apply if I want to take the Series ...

    The waiting period only applies to retaking the same North American Securities Administrators Association (NASAA) exam. Candidates ... Read Full Answer >>
  7. How often, and how, is a series 63 exam updated?

    Series 63 exams draw questions from a test bank based on state regulations, the Uniform Securities Act and North American ... Read Full Answer >>
  8. Are series 63 exams given outside of the United States?

    Series 63 exams are offered at authorized testing centers around the world. The exam does not require U.S. citizenship. Test ... Read Full Answer >>
  9. Does NASAA or anyone else give out the series 63 exam questions?

    Outside of the proctored exam, no access to Series 63 exam questions is offered. Providing access to questions would invalidate ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!