General Securities Sales Supervisor (Series10) Practice Exam

Which of the following statements about underwriters is incorrect?

1. Underwriters can retain commissions from profits of their own short positions

2. Underwriters must disclose any conflicts of interest

3. Underwriters may not engage in short selling within a specific timeframe before public offerings

4. Underwriters assume responsibility for the underwriting process

The correct answer is: Underwriters can retain commissions from profits of their own short positions

The statement regarding underwriters retaining commissions from profits of their short positions is indeed incorrect. Underwriters play a critical role in the underwriting process for securities offerings, including public offerings and private placements. Generally, underwriters cannot profit from their own short positions in a manner that would create a conflict with their duties to clients and the integrity of the market. Retaining commissions from profits derived from short positions can lead to ethical dilemmas and violations of regulations put in place to ensure that underwriters act fairly and in the best interest of their clients and investors. On the other hand, the requirement for underwriters to disclose conflicts of interest, their prohibition against short selling during specific timeframes prior to public offerings, and their responsibility for the entire underwriting process are all standard practices and regulatory requirements in the underwriting industry. These rules exist to maintain transparency, protect investors, and uphold market integrity.