Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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____________ is the only form of price manipulation allowed by the SEC.

Stabilization
Firm commitment underwriting
Churning
Painting the tape

The correct answer is: Stabilization

Stabilization is a permitted form of price manipulation under SEC regulations, specifically during the initial public offering (IPO) process. This practice involves underwriting firms purchasing shares of a new issue to support the stock price and prevent it from falling excessively in the immediate aftermarket. Stabilization is intended to help provide a smooth transition in pricing and assure investors of the stock's value when it first hits the market. In contrast, the other options represent practices that are generally considered manipulative and are prohibited. Firm commitment underwriting refers to a method where the underwriter buys the entire issue from the issuer and resells it to the public, but it does not involve price manipulation. Churning is an unethical practice of excessively trading securities to generate commissions for a broker, which is against regulatory guidelines. Painting the tape involves creating fictitious trading activity to mislead investors about the true demand or price of a security, which is also illegal. Thus, stabilization is recognized by the SEC as a controlled method of maintaining market integrity during certain transactions, while the others are deemed illicit actions within the financial markets.