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3.5.1 Examples Of Unethical Practices

Explore common unethical practices in the securities industry, including deceit, market manipulation, and misleading clients. Understand potential consequences and the responsibilities of securities dealers.

Overview

Understanding unethical practices in the securities industry is crucial to maintaining integrity and trust. Regulators define a set of behaviors that are deemed unethical. Knowing these can help professionals and investors navigate this landscape and avoid potential pitfalls.

Common Unethical Practices

Below are some examples of conduct considered unethical by securities regulators:

  • Deceiving the public, buyer, or vendor: This includes falsifying transaction prices or misrepresenting the value of securities.
  • Creating a false appearance of active trading: Attempting to make a profit by misleading others into believing there’s significant public interest in a security.
  • Market manipulation through arrangements: Entering into agreements to sell and repurchase securities for the purpose of market manipulation.
  • Fictitious trades: Making trades that do not change the beneficial ownership to create false perceptions of market activity.
  • High-pressure selling techniques: Using undue pressure tactics to sell securities, which is considered undesirable and unethical.
  • Violating applicable statutes: Breaching any relevant laws governing the sale of securities.
  • Misleading clients about risk: Deceiving a client regarding the risks involved in purchasing specific securities.
  • Front running: Trading in one’s own account before executing the same trade for a client.
  • Disreputable conduct: Engaging in behavior that could tarnish the reputation of the securities business, exchanges, or the Investment Industry Regulatory Organization of Canada (IIROC).

Responsibilities of Securities Dealers

Securities dealers are responsible for the actions of their employees. Unethical conduct by an advisor can be treated as though it were the conduct of the dealer itself, making accountability a crucial component of regulatory compliance.

Glossary and Definitions

  • Securities: Financial instruments that represent ownership in a company (stocks), a creditor relationship with a company or government (bonds), or rights to ownership (options, derivatives).
  • Front running: The unethical practice where a trader executes orders on a security for their account, knowing that other orders are about to be transacted on the same security for clients.
  • IIROC: Investment Industry Regulatory Organization of Canada, a self-regulatory organization overseeing investment dealers and trading activity in Canadian equity and debt markets.

Key Takeaways

  1. Ethical Practices are Fundamental: Maintaining ethical standards is essential for the credibility and health of the securities market.
  2. Awareness is Crucial: Investors and professionals must be vigilant and knowledgeable about what constitutes unethical behavior.
  3. Responsibility and Accountability: Securities dealers must ensure their employees adhere to ethical practices, or they risk being held accountable for their employees’ actions.

Frequently Asked Questions

Q: What is market manipulation?

A: Market manipulation refers to practices that create misleading appearances of market activity, usually to profit from distorted prices.

Q: What is front running?

A: Front running is when a broker or other entity trades on information about a client’s pending trade to profit from the anticipated move in the security price.

Q: How can clients protect themselves from unethical practices?

A: Clients should seek information from reliable sources, work with licensed and reputable advisors, and have a clear understanding of the risks involved in any investment.

Charts and Diagrams

High-Pressure Sales Tactics Flowchart

    graph TD;
	    A[Cold Call] --> B[Promise High Returns];
	    B --> C[Push for Immediate Investment];
	    C --> D[Client Feels Pressure];
	    D --> E[Client Makes Uninformed Decision];

Front Running Sequence Diagram

    sequenceDiagram
	    participant T as Trader
	    participant C as Client
	    T->>T: Receives Large Client Order
	    T->>M: Executes Personal Trade
	    M->>C: Executes Client Trade

Conclusion

Being knowledgeable about unethical practices and knowing how to identify and avoid them is vital for anyone participating in the securities market. Upholding ethical standards not only ensures compliance with regulations but also safeguards the integrity of the market.


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Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

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## Which of the following is considered an unethical practice in the securities industry? - [ ] Providing accurate information about the value of a security - [ ] Using low-pressure, ethical selling techniques - [x] Deceiving the public about the value of a security - [ ] Informing clients of the risks involved in a purchase > **Explanation:** Deceiving the public, the buyer, or the vendor as to the price of any transaction or the value of any security is considered an unethical practice by the regulators. ## What does entering into an arrangement to sell and repurchase a security with the intent to manipulate the market exemplify? - [ ] Proper trading practice - [x] An unethical attempt to manipulate the market - [ ] A regular market fluctuation - [ ] A lawful transaction > **Explanation:** Entering into any arrangement to sell and repurchase a security in an effort to manipulate the market is considered unethical. ## What is "front running" in the context of unethical practices in trading? - [x] Trading in one’s own account before effecting the same trade for a client - [ ] Trading in a client’s account with their explicit permission - [ ] Trading large volumes to impact market price - [ ] Selling underperforming stocks promptly > **Explanation:** "Front running" refers to trading in one's own account before executing the same trade for a client, which is considered unethical. ## Which practice creates a false appearance of active public trading? - [ ] Organic market growth - [x] Creating a misleading appearance of active public trading in a security - [ ] Accurate reporting of trades - [ ] Implementing client-driven trades > **Explanation:** Creating, or attempting to create, a false or misleading appearance of active public trading in a security to make a profit is considered unethical. ## Which of the following is not considered an unethical practice? - [ ] Making a fictitious trade involving no beneficial ownership change - [ ] Violating applicable statutes related to securities sales - [ ] Misleading clients about the risks involved in securities purchases - [x] Accurate representation of securities' risks > **Explanation:** Accurate representation of securities' risks is an ethical practice, unlike making fictitious trades, violating statutes, or misleading clients. ## Is using high-pressure selling techniques considered ethical? - [ ] Yes, if it benefits the client - [ ] Yes, if it results in higher sales - [ ] Only if the security being sold is low-risk - [x] No, it is considered unethical > **Explanation:** Using high-pressure or otherwise undesirable selling techniques is considered unethical by regulators. ## Which of the following actions can bring the securities business into disrepute according to IIROC? - [ ] Acting with high ethical standards - [ ] Making genuine trades and disclosing all risks - [x] Conducting oneself unethically in the course of business - [ ] Adhering to IIROC regulations > **Explanation:** Unethical conduct can bring the securities business, exchanges, or IIROC into disrepute. ## Who is accountable for the ethical conduct of a securities advisor? - [ ] Only the advisor - [ ] The public holding securities - [x] Both the advisor and the securities dealer - [ ] Neither party > **Explanation:** Securities dealers are held accountable for the acts or omissions of their employees, including unethical conduct of advisors. ## What would be considered an unethical practice when providing a client with information about a specific security? - [ ] Explaining the potential risks involved - [x] Misleading the client as to the risks involved - [ ] Offering clear and accurate information - [ ] Providing a balanced view of the security > **Explanation:** Misleading a client as to the risk involved in purchasing a specific security is unethical. ## What is an example of a statutory violation in securities sales? - [ ] Making a transparent transaction - [ ] Informing clients about market conditions - [x] Violating applicable statutes in the sale of securities - [ ] Following compliance regulations strictly > **Explanation:** Violating any statute applicable to the sale of securities is considered an unethical practice.

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Tuesday, July 23, 2024