Practice Quiz

FINRA Series 63 (NASAA)

Category - Series 63

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Ken Con is an agent with Blue Sky Broker-Dealers. He gets up early each morning so that he can study any late-breaking news that may affect the markets and figure out ways to incorporate this news into conversations with select clients in order to pressure them to restructure their portfolios by selling holdings they have in one particular industry to invest the money in another particular industry. Ken has been very successful with this strategy and executes more trades for his clients than any other agent with the firm, but is he in danger of losing his license?
  1. Yes. Ken is engaging in churning, a prohibited practice and can have his license revoked or suspended.
  2. It depends. If his clients have lost money, Ken may lose his license; but if a review indicates that his clients’ accounts earn profits, then his license is safe.
  3. Yes. Ken is guilty of the prohibited practice of “tailgating.”
  4. No. Ken is just a successful sales person who is working harder than the other agents in the firm.
Explanation
Answer: A - Yes. If Ken is getting up each morning in order to collect news that he can use to pressure his clients to buy and sell their securities, Ken is engaging in churning and can have his license revoked or suspended for this prohibited practice. A lot of the news might have a short-term effect on a particular industry, but any profits gained by trying to time the market will often not be sufficient to cover the commissions that the investor had to pay on the transactions and the taxes they may have to pay on the short-term capital gains they realized when they sold securities. Regardless, it doesn’t matter whether his clients’ accounts show a profit or not.
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