Series 7

Securities Markets - Prohibited Activities


NYSE Rule 435: Miscellaneous Prohibitions
One item which you should pay close attention to is NYSE Rule 435: Miscellaneous Prohibitions. According to this provision, you, as a registered representative, cannot do any of the following:
  • paint the tape, or trade the same securities among various accounts over which you have control just to give the illusion of heavy market interest in those securities;

  • practice inter-positioning, or make a trade on your own account to acquire a stock that your client wants to buy, then sell it to your client out of your account at a higher price;

  • recommend shares to or solicit them from customers if you own the stock or otherwise have a financial interest in its performance; or

  • circulate rumors to affect market conditions.
Rules on Blocks of 10,000 Shares or More
The Big Board also has some rules governing trading stock in blocks of 10,000 shares or more:
  • Execution of a smaller transaction at the current quoted price takes precedence over execution of a more favorable "trade through" order placed simultaneously for a block (NYSE Rule 15A: ITS "Trade Throughs" and "Locked Markets").

  • If a member firm holds a long position in a stock on its own account as a result of a block transaction with a customer, that member may not buy that stock on a plus tick within 20 minutes of the close of trading. The exception is if it is at a price lower than the lowest price at which a block was acquired on that day for an account in which the member has an interest (NYSE Rule 97: Limitation on Members' Trading Because of Block Positions).

  • A member that receives an order on a block that might not be readily absorbed by the market should explore the market by ascertaining the extent of the specialist's interest in participating at an indicated price. If a member is buying a block to establish or increase its position, it must first fill all public limit orders at the clean-up price. If the member is covering a short position or liquidating a long position, however, the member need not fill those public limit orders at the clean-up price (NYSE Rule 127: Block Positioning).

Other Prohibited Activities:
  • Rumors, knowingly false and misleading statements, incomplete information: this entails conveying or withholding material information, an example of fraudulent and misleading conduct. Recommendations should be well researched and consistent with a client's objectives and constraints.
  • Front Running (NASD IM-2110-3): a registered representative may not trade on a stock or option on it while possessing material non-public information. Doing so could violate insider trading rules and subject the representative to civil liability and criminal charges, to say nothing of disciplinary action.
  • Churning (NASD IM-2310-2): the purchase and sales of securities in an account over which the broker has discretion, solely to generate commissions and without consideration of the client's needs and circumstances. The broker may be liable for damages and subject to discipline by FINRA.
  • Parking securities and maintaining fictitious accounts : "parking" or holding or concealing securities in the account of another person, real or fictitious, is a fraudulent and prohibited practice
  • Prohibition Against Guarantees (NYSE Rule 2150): when a broker guarantees that he or she will make a client whole for any losses that the client sustains. This practice is prohibited.
  • Sharing in Accounts (Rule 2330): a representative typically may not share in the performance of an account (gains and losses) with a client, except in certain circumstances where a family member is involved.
  • Fraud and Misrepresentation
  • Insider Trading (SEC Rule 10b-5): trading while in possession of material non-public information or passing along such information for another's benefit, is illegal.
  • Backing Away (NASD IM-3320): market makers whose job it is to maintain an orderly market by serving as an entrepôt between buyers and sellers must honor quoted bid and ask prices for a minimum quality purchase.
  • Selling Away (NASD Rule 3040): a prohibited practice and violation of FINRA rules, selling away occurs when a representative trades securities through a firm other than the one through which he or she is registered, and without his or her firm's knowledge and permission. Additionally, certain products or arrangements that a representative can create for his client to purchase under FINRA rules are deemed securities, making such purchases additional instances of selling away.
  • Trading Ahead of Research Reports (NASD IM-2110-4): a member firm may not trade ahead of a research report that its firm is to issue, in a way that changes its position on that security (e.g. the report may make a buy recommendation, but the firm initiates a sale of its position in the security that is the subject of the research report).
  • Trading Ahead of Customer Limit Orders (NASD IM-2110-2): a FINRA member firm that is a market maker may not trade ahead of a client's limit order and must ensure best execution given current market conditions.
  • Anti-Intimidation/Coordination (NASD IM-2110-5): member firms may not collude to coordinate prices with other member firms or collude with the objective of intimidating other firms to alter trades or trade reports or refuse to do business with firms on this basis.
  • Commingling: client funds for securities purchases may not under any circumstances be placed in the account of a registered representative. Doing so is an egregious violation of FINRA rules that could lead to criminal prosecution.
  • Suitability ((NASD Rule 2310): investment selections and trades must be in the client's best interest and consistent with that client's objectives of risk and return and any constraints or unique circumstances.
  • Freeriding and Withholding (NASD Rule 2110-1): new issues trading immediately above the offering price in the aftermarket must be distributed to the public first. The circumstances under which such issues may be placed into accounts of securities personnel and their immediate families are very specific.
  • Conflicts of Interest: the representative should avoid any conflict of interest that would appear to benefit him or her at the client's expense. Owning shares of a company or mutual fund and recommending client purchases of it, in an effort to impact the price for the representative's rather than the client's benefit, would be deemed a potential violation.
  • Switching and Breakpoint Sales for Mutual Funds (NASD Rule 2830):
  • Switching: trading mutual funds without a reasonable basis would appear to benefit the representative and disregard client suitability. The practice would generate larger commissions for the representative and unwanted tax liability for the client in non-qualified accounts. Mutual fund investment, in most circumstances, should be for a longer term.
  • Break-Point Sales: many mutual funds offer lower sales charges when the customer's purchases of a fund's shares exceed pre-established thresholds. However, when a broker recommends a purchase just below a break-point, it results in larger commissions for him or her and is often not in the client's best interest and may be deemed a violation.
  • Unauthorized Trades: a representative may never enter a trade on behalf of a client, unless he or she receives written permission to do so from the client.
  • Failure to Cooperate: registered persons or candidates for registration must cooperate with any request from FINRA for information. Failure to do so may result in disciplinary action that may include a fine, suspension or bar from the securities industry.
  • Cheating on Exams (NASD Rule 1080): exam candidates may not receive assistance on any FINRA exam. If the applicant is found guilty of cheating, he or she may be barred from the securities industry.




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