NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesEasy
An agent of a broker-dealer is found to have placed a purchase order for a client's account without obtaining prior authorization. The client had not granted discretionary authority to the agent. This action is considered an unethical business practice known as:
- AChurning
- BSelling away
- CFront-running
- DUnauthorized trading
Show answer & explanationAnswer & explanation
Correct answer: D. Unauthorized trading
Placing a trade in a client's account without their explicit permission or without having discretionary authority is a clear violation of ethical standards and is known as unauthorized trading.
Why the other options are wrong
- A. Churning involves excessive trading to generate commissions, not simply trading without authorization.
- B. Selling away refers to an agent selling securities not offered through their broker-dealer.
- C. Front-running is when a broker trades on advance knowledge of a client's large order.
Unauthorized Trading
Unauthorized trading occurs when a registered representative executes a securities transaction in a client's account without the client's prior consent or without having proper discretionary authority.
- Requires client consent for each trade unless discretionary authority is granted.
- Violation of ethical conduct and securities regulations.
- Can lead to disciplinary action against the agent and firm.
Memory trick: Don't touch client funds without their nod.