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

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