General Securities Sales Supervisor (Series10) Practice Exam

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Which of the following is a requirement for firms when recommending securities to customers?

  1. A The firm must only disclose fees if asked by the client

  2. B The firm should disclose ownership of securities by anybody in the firm

  3. C The firm must inform customers about previous market performance of the securities

  4. D The firm must not disclose any associated risks

The correct answer is: B The firm should disclose ownership of securities by anybody in the firm

The requirement that firms should disclose ownership of securities by individuals within the firm is rooted in the principle of transparency and conflict of interest management. When firms and their employees own securities that they recommend, there is a potential conflict of interest that could influence the recommendation made to customers. Disclosing this ownership ensures that customers are fully aware of any potential biases that might exist. This transparency is vital as it helps customers make informed decisions based on all relevant information. For instance, if a firm recommends a stock that its employees own, customers need to be aware of this ownership to understand the potential motivations behind the recommendation. Failure to disclose such ownership may lead to a lack of trust and could violate regulatory standards aimed at protecting investors from conflicts of interest. In contrast, the other choices do not align with the best practices for firms. Firms are required to disclose fees transparently and not just upon request, as upfront clarity on costs is critical for customers to evaluate the total expense involved in an investment. Regarding the previous performance of securities, while firms can provide historical data, they must be careful not to imply that past performance guarantees future results. Lastly, firms have an obligation to disclose associated risks instead of withholding that information, as informed investing requires an understanding of potential risks involved with

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