Financial Industry Regulatory Authority (FINRA) Practice Exam

A firm participating in a public offering agrees to repurchase shares at no less than the original sales price. What is this action classified as?

1. Prohibited as fraudulent and manipulative

2. Permissible if the securities are deposited into escrow

3. Prohibited unless the firm immediately sets aside funds for the repurchase

4. Permissible if the customers retain the right to sell the securities into the open market

The correct answer is: Prohibited as fraudulent and manipulative

The action described, where a firm participating in a public offering agrees to repurchase shares at no less than the original sales price, is deemed prohibited because it is recognized as a manipulative practice. This type of arrangement can create an artificial market for the securities involved, potentially misleading other investors about the true demand and value of the shares. By committing to repurchase shares at the original price, the firm may circumvent the natural market forces that dictate price movements, thus violating regulatory guidelines designed to maintain fair and transparent trading practices. In public offerings, it is crucial for all participants to adhere to the principles of fairness and integrity in the marketplace. Such practices raise red flags among regulators and can lead to enforcement actions against the firm, as they threaten market stability and investor confidence. Other options might suggest conditions under which such actions could be permissible; however, any agreement to repurchase shares at a guaranteed price in this context is fundamentally counter to the ethical standards and legal regulations in place to protect market participants. Therefore, the classification of this action as fraudulent and manipulative aligns with the regulatory framework established by the Financial Industry Regulatory Authority (FINRA) and other governing bodies in the financial industry.