Unethical actions
Improper use of customers’ securities or funds
No registered person can make any guarantees to a customer as to a gain in the account or even against a loss. They cannot offer to buy back the investment at the purchase price later, as that would be guaranteeing against a loss.
Registered representatives would be allowed to share in customers account, only with written permission from the employing firm, customer, and increased supervision from the principal. If the firm allows sharing with customers, that sharing must be in direct proportion with how much each contributed. If the client contributes 80% and the rep 20%, than the rep only can get 20% of the gains, and must pay 20% of the losses.
Borrowing from or lending to customers
No associated person in any registered capacity may borrow or lend money to any customer unless they are in the borrowing/lending industry, Immediate family, Both associated with the same member, Close personal relationship before the customer relationship, or Legitimate outside business partner that requires borrowing/lending between the two. Broker Dealer house rules may be different, and of course, you have to follow your broker/dealers rules.
To be clear, the client in the business of borrowing/lending would be if your customer was a bank, or mortgage company, not an employee of the bank, or the manager of the mortgage company.
Front running of block transactions
No Associated person not buy or sell a security if they have material non-public information about unplaced large block trades. A chinese wall is an information barrier designed to prevent this non-public information from being discovered and used.
Large block orders will raise or lower the price of stock because it will use up all the market maker quotes at the best prices for the purchases or sales. Using that information for personal gain is not allowed, and using chinese walls, or other information barriers, to prevent other persons from getting and benefiting from that information.
Transactions related to Initial Public Offerings
During an IPO period, no member or associated person of a member shall execute a transaction other than on an exchange, until such security has first opened for trading on the national exchange listing the security. That is indicated by the listing exchange letting the public know that the opening transaction has occurred; “dissemination of opening transaction”.
Pump and dump
Someone purchasing a lot of a cheap stock, and then likely through rumors pumping up the price and then selling it at the artificially higher price.
They could use any means for this, print media, online, forums, reddit, youtube, they could make a whole bunch of accounts, join a forum, and talk to themselves through these accounts making it appear to be a talked about investment. Anything really, to get people interested, they buy it, price goes up, scammer sells it.
It must involve pumping and dumping, simply talking about how great a stock is in your portfolio enough, and the price goes up, if you hold it, and don’t sell it, there can be no pump and dump.
Capping and pegging
Capping and pegging are 2 very similar forms of market manipulation. They are designed to try and prevent a stock price from crossing a certain number the person capping or pegging chooses. We will not go into how, the specific types of trades aren’t needed.
Capping is trying to prevent a stock from going above a certain value. Pegging is trying to prevent a stock from falling below a certain value. Otherwise, in test-world, they are the same, and often will actually be simply referred to as “capping and pegging”, not separated.
Artificial pricing
No one can execute purchases or sales at successively higher or lower prices simply to create a false sense of activity.
Trades must involve “change of beneficial ownership”
Change of beneficial ownership is a complicated phrase that basically means in plain english, that an actual, legitimate trade has taken place. If someone places an order to buy 100,000 shares and at the exact same time another order to sell 100,000 shares, of the same company, how much is that really gonna cost them? Nothing but the commissions on the orders, but it looks like 100,000 shares just moved. There was no change of beneficial ownership in this case, as the person committing this violation, never really had ownership.
Other miscellaneous prohibited practices
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No trades in any designated security for any account in which the member is interested.
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No member shall participate in or profit from manipulative operations or knowingly manage or finance manipulative operations.
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No one can lie about securities or spread information they know to be false, misleading, or manipulative.
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No member or AP shall hold an interest in any joint account for buying/selling a designated security, unless that joint account is reported to FINRA.
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No one can offer a transaction in a designated security that will influence the closing transaction of that security.
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Designated Securities means all NMS, national market system, stocks as designated by rule 600(b)
Improper use of assets
No broker, dealer, or municipal professional can make improper use of securities or funds held by another person. No advisory company with custody can either. Some of these rules seem rather obvious sometimes.
No broker, dealer, municipal professional, or advisory can make any guarantees to a profit, or guarantee against any type of loss. Puts and repurchase agreements can be used to help lower and control risks in certain situations, but are not guarantees against loss and can not be described that way. It is very easy for an investor to lose money with protective puts.