Almost every prohibited activity on the exam comes down to one move: turning an edge in information, a customer's trust or a customer's money into personal gain. A question describes the move and asks you to name the violation.
Prices should reflect real supply and demand. Market manipulation is conduct meant to create a false picture of trading activity or price, so other investors buy or sell on bad signals. Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act) bans any manipulative or deceptive device used in connection with buying or selling any security.
The Financial Industry Regulatory Authority (FINRA), the self-regulatory organization for broker-dealers, adds two rules. FINRA Rule 2020 bars members from effecting or inducing any trade through a manipulative, deceptive or fraudulent device. FINRA Rule 2010 demands high standards of commercial honor and just and equitable principles of trade. It catches misconduct that no specific rule names.
Each scheme fakes volume or price. Questions usually describe the conduct without naming it:
Common mistakes
- Requiring control for churning: Control stopped being an element on June 30, 2020. A customer's approval of every trade is no defense.
- Restricting every relative under Rule 5130: A rep's sibling is restricted only if there is more than 25% support between them, the rep works at the selling member or its affiliate, or the rep controls the allocation.
- Capping a 2165 hold at 25 business days: After a report to a state regulator, agency or court, the firm alone can reach 55 business days. Transactions can be held as well as withdrawals.
Bottom line
- Manipulation fakes price or volume: pump and dump schemes, matched orders, wash trades, marking the close, spoofing and backing away from a quote (Rule 5220).
- Regulation M bars offering participants from buying during the 1- or 5-business-day restricted period.
- Insider trading is trading while aware of MNPI in breach of a duty, and tippers and knowing tippees are both liable.
- Under Rule 10b5-2, a duty arises from a confidentiality agreement, a history of sharing confidences, or a spouse, parent, child or sibling source.
Exam shortcut
Before reading the choices, sort each question by the edge being abused. A faked price or faked volume is manipulation. An information edge is insider trading or trading ahead. Misuse of the customer's money is Rule 2150 or 3240.
The full lesson (about 4,126 words, 28 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- C18
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