Prohibited Activities

Fraud and manipulation

SEC Rule 10b-5, under Section 10(b) of the Securities Exchange Act of 1934, makes it unlawful in connection with the purchase or sale of any security to employ any scheme to defraud, to make an untrue statement of material fact or omit a material fact necessary to make statements not misleading, or to engage in any practice that operates as a fraud.

Three features matter. It reaches omissions as well as statements. It applies to every security, including exempt ones — a municipal bond is exempt from registration and not from Rule 10b-5. And materiality is the test: a fact is material if a reasonable investor would consider it important.

Manipulation is prohibited by Section 9(a) of the 1934 Act, which forbids transactions creating a false or misleading appearance of active trading. The named practices:

Matched orders — entering a buy order knowing an offsetting sell order will be entered by a colluding party.

Wash trades — transactions involving no change in beneficial ownership, creating the appearance of volume.

Painting the tape — a series of transactions creating artificial activity, often near the close to affect the closing price.

Marking the close, capping and pegging — transacting to move or hold a price at a particular moment.

Spoofing and layering — entering orders with no intention of executing them, to create a false impression of supply or demand, and cancelling them.

Front running — trading ahead of a customer's or the firm's block order to profit from the price impact it will have.

Spreading false rumours to affect a price.

Insider trading

There is no statutory definition; the prohibition is built on Rule 10b-5 and two theories.

Under the classical theory, an insider — an officer, director or employee — who trades on material non-public information breaches a duty to the shareholders on the other side.

Under the misappropriation theory, a person who takes confidential information from a source to whom they owe a duty and trades on it commits fraud on that source. This catches lawyers, printers, accountants — and a representative who trades ahead of a client's order.

Tipping extends both. A tipper who discloses in breach of duty for a personal benefit is liable, and a tippee who trades knowing of the breach is liable too.

Rule 14e-3 covers tender offers and is broader: once substantial steps toward a tender offer have been taken, anyone in possession of material non-public information about it who knows it came from the offeror or the target may not trade, whether or not a duty was breached.

The Insider Trading and Securities Fraud Enforcement Act of 1988 sets the penalties: civil penalties of up to three times the profit gained or loss avoided, plus disgorgement, alongside criminal fines and imprisonment. Firms can be liable as controlling persons for failing to maintain and enforce adequate procedures — which is why firms maintain information barriers, watch lists and restricted lists, and monitor employees' personal accounts.

Regulation FD addresses the issuer's side: a public company disclosing material non-public information to securities professionals must make simultaneous or prompt public disclosure.

Misusing the customer relationship

These catch more representatives than everything above, because they cover ordinary conduct.

Churning is excessive trading in a customer's account primarily to generate commissions. It requires control of the trading — formal discretion, or de facto control where the customer follows every recommendation — trading excessive in light of the customer's objectives, and intent or reckless disregard. Quantitative suitability reaches the same conduct without requiring proof of intent.

Reverse churning is placing an inactive customer in a fee-based account where they pay far more than commissions would have cost.

Unauthorized trading is executing any transaction without authority in an account where no discretion was granted. It is a violation regardless of whether the trade made money.

Selling away is participating in a private securities transaction without giving the firm prior written notice. FINRA Rule 3280 requires that notice, and where the representative will receive selling compensation, written approval and supervision by the firm. Selling away is one of the most common causes of a representative being barred, frequently in cases where the underlying investment was itself a fraud.

Outside business activities require prior written notice to the firm under FINRA Rule 3270 — notice, not permission, though the firm may impose conditions or prohibit the activity.

Gifts are capped by FINRA Rule 3220 at $300 per person per year in relation to the business of the recipient's employer — raised from $100 effective 30 March 2026, so older material has the wrong number.

Borrowing from or lending to customers is prohibited under FINRA Rule 3240 unless the firm's written procedures permit it and the arrangement falls within a defined category, such as an immediate family member or a customer in the business of lending.

Sharing in a customer's account is prohibited by FINRA Rule 2150 unless authorized in writing in advance and in proportion to the person's financial contribution. Guaranteeing a customer against loss is prohibited outright, with no exception — and it is most often violated by a representative trying to make good on a bad recommendation out of their own pocket.

Other named prohibitions: misrepresentation of any material fact, commingling customer funds with the firm's, market timing and late trading in mutual fund shares, and improper use of a customer's funds or securities.