Securities Fraud

Securities regulators, the definition of a security, and insider trading, misrepresentation and other securities fraud schemes.

5 minutes 5 Questions

Securities fraud, in the context of the Certified Fraud Examiner (CFE) body of knowledge, refers to deceptive practices connected with the offer, purchase, or sale of securities such as stocks, bonds, options, and other investment instruments. It falls under the CFE's Financial Transactions and Fra…

Concepts covered
Securities Fraud SchemesSecurities Regulators and Self-Regulatory OrganizationsSecurities and Investment Contracts DefinedPreventing and Detecting Securities Fraud
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CFE - Securities Fraud Example Questions

Test your knowledge of Securities Fraud

Question 1

Under the widely used test for an investment contract, an investor puts money into a common enterprise expecting profits to come primarily from the investor's own managerial efforts.

Correct Answer: False

The statement is false because the investment contract test requires that the investor expect profits to come primarily from the efforts of others, such as a promoter or third party. The other elements are correct: an investment of money in a common enterprise with an expectation of profits. An arrangement in which profits depend mainly on the investor's own efforts generally falls outside the definition of an investment contract.

Question 2

A securities self-regulatory organization is a nongovernmental body that sets and enforces conduct rules for its member firms under the oversight of a government securities regulator.

Correct Answer: True

Self-regulatory organizations, such as securities exchanges and broker-dealer industry associations, are private, nongovernmental bodies. They write rules for their members, examine members for compliance and discipline those who break the rules. They do this under the supervision of a governmental securities regulator, which approves their rules and oversees their enforcement.

Question 3

A broker can commit an unsuitable recommendation scheme by recommending a legitimate, fully disclosed security that conflicts with the customer's investment objectives, risk tolerance, and financial situation.

Correct Answer: True

Suitability is judged against the particular customer's profile, including objectives, risk tolerance, financial situation and investment experience. It is judged without regard to whether the product itself is lawful or accurately described. A sound, properly disclosed security can therefore be an unsuitable recommendation when it is inappropriate for the investor who receives it.

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