Appears in our practice questions for: Series 63, Series 65
Failure to state an important fact when necessary to keep other statements from being misleading, a form of deceptive conduct covered by securities antifraud standards. It matters when evaluating a client's financial decision.
Practice questions using Material Omission
Original questions written against the published FINRA and NASAA exam content outlines — not actual exam questions. Every choice is explained.
An agent fails to disclose a control relationship between the broker-dealer and the issuer of a recommended security. This is:
A.Irrelevant to customersA customer weighing the recommendation would want to know that the recommending firm is affiliated with the issuer, because the affiliation gives the firm a stake in the sale beyond the commission. That is exactly what makes the fact material.
B.A prohibited material omissionCorrect - control relationships must be disclosed.
C.Only an SEC issueThis assumes affiliation disclosure lives only at the federal level. State antifraud authority reaches material omissions made in connection with a sale in the state, and an undisclosed control relationship is one of them.
D.Allowed if profitableA gain does not repair an omission. What the customer lost was the information needed to weigh the recommendation before agreeing to it, and that evaluation is what the disclosure requirement protects.
Why: Failing to disclose a control relationship is a prohibited material omission.
Omitting a material fact when recommending a security is:
A.FraudCorrect - omissions of material facts are fraudulent.
B.Permitted for exempt securitiesAn exemption relieves a security from the registration requirement and does nothing more. The antifraud provisions reach every security offered or sold in the state, exempt or not, so exempt status is no license to leave out a material fact.
C.Only unethical, never fraudThis draws a line between bad manners and illegality that the Act does not draw. Fraud is defined to include an omission of material fact as well as an affirmative lie, so staying silent about something that matters is not merely unethical.
D.Acceptable if unintentionalThis imports a state-of-mind requirement that civil liability under the Act does not carry. A buyer seeking recovery need not prove the agent meant to deceive, and materiality is judged by what a reasonable investor would want to know, not by what the agent happened to think of.
Why: A material omission in connection with a securities transaction is fraud under the USA.
8 questions in our bank involve Material Omission. Practise them with instant explanations.
Finance Exam Pro is not affiliated with FINRA, NASAA, or any exam sponsor. Practice questions are original and are not actual exam questions. Rules change — confirm current requirements with the relevant regulator.