Prohibited Practices

Fraud

Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 under it are the general anti-fraud provisions. Rule 10b-5 makes it unlawful, in connection with the purchase or sale of any security, to employ any device, scheme or artifice 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 act, practice or course of business that operates as a fraud or deceit.

Three features are worth noting. It reaches omissions as well as statements. It applies to any security, including exempt securities — 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 in making the decision.

Section 17(a) of the Securities Act of 1933 covers fraud in the offer or sale of securities. Rule 10b-3 prohibits brokers and dealers from employing manipulative or deceptive devices, and Rule 10b-1 extends the manipulative-device prohibitions to exempted securities.

MSRB Rule G-17 carries the same anti-fraud principle into the municipal market and adds an affirmative fair dealing duty on top.

Manipulation

Section 9(a) of the 1934 Act prohibits transactions creating a false or misleading appearance of active trading, or of the market for a security. The named practices:

Matched orders — entering a buy order knowing an offsetting sell order of substantially the same size and price has been or will be entered by the same or a colluding party.

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

Painting the tape — a series of transactions creating an artificial appearance of activity, often near the close to affect the closing price, which is sometimes called marking the close.

Capping and pegging — transacting to keep a price down or hold it up, typically around an option expiration or a distribution.

Spreading false rumours to affect a price.

Front running is trading ahead of a customer's or the firm's own block order to profit from the price impact it will have. It is prohibited because the representative is using the customer's order as their own information.

Trading ahead of a research report, and trading in advance of the firm's own recommendation, are the same abuse in different clothes.

Rule 10b-18 provides a safe harbour for an issuer repurchasing its own shares, setting conditions on manner, timing, price and volume — because a company buying its own stock is otherwise doing something that looks a great deal like supporting the price.

Regulation M, covered in lesson 8.2, prohibits distribution participants from bidding for a security they are distributing, with the narrow stabilization exception.

Insider trading

There is no statutory definition of insider trading. The prohibition is built on Rule 10b-5 and two judicially developed theories.

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

The misappropriation theory: a person who misappropriates confidential information from the source to whom they owe a duty and trades on it commits fraud on that source. This is what catches lawyers, printers, accountants and, notably, a broker who trades on information about a client's pending order.

Tipping liability extends both theories. A tipper who discloses material non-public information in breach of duty, for a personal benefit, is liable; and the tippee who trades knowing of the breach is liable too. A person who receives inside information without any duty and without knowing it was disclosed in breach is not automatically liable, but the safe course is not to trade.

Rule 14e-3 is the exception to all of this, covering tender offers, and it 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 any duty was breached.

The Insider Trading and Securities Fraud Enforcement Act of 1988 sets the penalties. Civil penalties for the person who traded reach three times the profit gained or loss avoided — treble damages — plus disgorgement. Criminal penalties reach substantial fines and imprisonment. Controlling persons, including the firm, can be liable for failing to maintain and enforce policies reasonably designed to prevent insider trading — which is why firms maintain information barriers, watch lists and restricted lists, and require employee accounts to be disclosed and monitored.

Regulation FD addresses the problem from the issuer's side: a public company that discloses material non-public information to securities professionals or shareholders must make simultaneous or prompt public disclosure. It is why a representative cannot obtain an informational edge from an issuer's investor relations department.

Misusing the customer relationship

The rules in this section catch more registered representatives than everything above combined, because they cover ordinary conduct rather than dramatic conduct.

Outside business activities. FINRA Rule 3270 requires a registered person to give prior written notice to their member before being employed by, or accepting compensation from, any other person, or being an independent contractor or a sole proprietor, outside the scope of their relationship with the firm. Notice, not permission — but the firm may impose conditions or prohibit the activity.

Private securities transactions. FINRA Rule 3280 requires prior written notice to the member of any securities transaction outside the regular course of the person's employment. If the person will receive selling compensation, the firm must approve it in writing and, if it does, record the transaction on its books and supervise it as if it were the firm's own. Doing this without notice is selling away, and it is one of the most common causes of a representative being barred — often in cases where the underlying investment was itself a fraud. One change is in flight and worth knowing about: in January 2026 FINRA filed a proposed rule change to replace both Rule 3270 and Rule 3280 with a single Rule 3290, Outside Activities Requirements. As of this writing the SEC has instituted proceedings and has not approved it, so 3270 and 3280 remain the rules in force and the rules the exam tests.

Gifts and gratuities. FINRA Rule 3220 prohibits giving anything of value exceeding $300 per person per year in relation to the business of the recipient's employer. That figure changed on 30 March 2026, when amendments adopted under FINRA's Forward initiative raised it from the $100 that had stood since 1992, with conforming increases in Rules 2310, 2320, 2341 and 5110. Older study material still says $100. Ordinary business entertainment is treated separately under the firm's policies, and separate compensation for services requires the employer's prior written consent.

Borrowing from and lending to customers. FINRA Rule 3240 prohibits borrowing money from or lending money to a customer unless the firm has written procedures allowing it and the arrangement falls into a permitted category — such as an immediate family member, a customer in the business of lending, or a personal relationship outside the broker-customer relationship — with notice and, generally, pre-approval.

Sharing in a customer's account. FINRA Rule 2150 prohibits sharing directly or indirectly in the profits or losses of a customer's account unless the firm and the customer have given prior written authorization and the sharing is in direct proportion to the person's financial contribution. It also prohibits guaranteeing a customer against loss — a prohibition with no exception, and one of the most frequently violated rules in the book, usually by a representative trying to make good on a bad recommendation out of their own pocket.

Improper use of customer funds or securities. Rule 2150 also prohibits making improper use of a customer's securities or funds; conversion is the extreme case and is treated as such.

Unauthorized trading, covered in lesson 9.3, belongs in this list too.