General Securities Sales Supervisor (Series10) Practice Exam

What is the consequence of an issuer aggressively buying its own stock in the market?

1. It must notify all shareholders

2. It can be considered constructive manipulation of market price

3. It is allowed without any limitations

4. It results in mandatory reporting to the SEC

The correct answer is: It can be considered constructive manipulation of market price

When an issuer aggressively buys its own stock in the market, it can indeed be considered constructive manipulation of market price. This practice raises concerns because it may artificially inflate the stock’s price by creating an impression of higher demand or trading volume. The intent behind these purchases may not be to acquire shares for corporate benefits but to influence market perceptions or investor behavior. This aggressive buyback can lead to regulatory scrutiny as it could mislead investors regarding the stock’s true market performance. Regulatory authorities, such as the SEC, monitor such activities to ensure compliance with laws designed to prevent market manipulation. Understanding this context is crucial as it highlights the importance of ethical conduct and transparency in market operations. The other options relate to requirements or notifications that do not generally apply in the context of aggressive buybacks. For example, while there are reporting requirements for certain stock repurchases, they are not inherently mandatory in all circumstances cited in other choices.