ch 9 - prohibited activities
An investor buys 100 shares of ABC corp then sells the same shares that day, but did not pay for the original purchase. (prohibited activity?)
free-riding
excessive trading (churning)
a broker engages in excessive buying/selling of securities in a customer's account to influence the price of a security or to generate commissions
free-riding
a customer buys shares then sells them before paying for the original purchase
an insider
a director, officer, or owner of 10%+ of the stock of the corp (anyone who has nonpublic material info about corp)
backing away
a market maker does not honor a published quote (bid or ask)
bear raiding
a trader or group of traders attempt to push down the price of a security by heavy selling or short selling
insiders are prohibited from...
acting on material nonpublic info for their own profit
if anyone uses insider info to trade who is guilty?
all parties involved, whether or not the actually made a profit or avoided a loss
pump & dump
artificially increasing (pumping up) the price of a stock by making positive statements that are false/misleading in order to sell (dump) the stock at a higher price
criminal penalties are given to those who
at the time of the violation, directly or indirectly controlled the person who committed the insider trading violation
marking the close
attempting to influence the closing price of a security by executing purchase or sale orders at or near the close of normal trading hours
FINRA Rule 5240
b/d's may not engage in any type of activity that threatens, harasses, coerces, or intimidates another member firm or associated person
A market maker doesn't honor a published quote. (prohibited activity?)
backing away
A trader or group of traders attempt to force down the price of a stock by heavy selling or short selling. (prohibited activity?)
bear raiding
A registered rep's manager notices that a previously inactive account owned by a retired dance teacher with a buy & hold strategy is now being actively traded. (prohibited activity?)
churning/excessive trading
market manipulation techniques
- spreading false/misleading info about a company - improperly limiting the # of publicly available shares - rigging quotes, prices, or trades to create a false/deceptive picture of the demand for a security
marking the open
entering a trade when the market opens to influence the price of the security
what act/law requires b/d to establish, maintain, and enforce procedures for the prevention of misuse in inside info by any person associated with the firm
- the 1934 act "People Act" - the Insider Trading & Securities Fraud Enforcement Act of 1988
maximum civil penalty for insider trading violations
3x the profit gained or loss avoided from use of info (aka treble damages)
communication between analyst & investment banking
- ANY communication must go through compliance/legal (online) - compliance/legal must be present for ANY communication in person
types of market manipulation
- backing away - bear raiding - excessive trading (churning) - free-riding - front running - market rumors - marking the close/open - painting the tape - pump & dump
examples of material nonpublic info
- business transactions - changes in management - financial problems
criminal penalties of insider trading
- fines (up to $5mil per person, $25mil for corps) - expulsion - incarceration (up to 20 yrs per person)
who is prohibited from acting on material nonpublic info for their own profit?
- insiders (directors, officers, own 10%+ of stock) - any employees/personnel who have access to insider info
anyone who becomes an insider is required to...
- notify the SEC within 10 days of becoming an insider - report changes in their positions within 2 days of the change
analyst rules
- should not be supervised by investment banking - should not be paid based on specific ibanking deals - research should be independent of ibanking & trading - research not shares w/ others before releasing to public - can verify facts on a new offering w/ ibank personnel as long as compliance/legal are present
information barriers between different departments
Chinese walls
A large institutional buyer places an order to buy 500k shares of a stock. A registered rep, who is aware of the order before it is executed, places an order to buy 300 shares of the same stock for his own account. (prohibited activity?)
front running
private right of action
if a normal trader was trading without the same info as the investor w/ insider info, the trader w/ the disadvantage can file a lawsuit for damages against the person who is in violation of insider trading rules
material nonpublic info
info that would affect the market value of a security & has not yet been disseminated to the general public
Chinese walls
internal procedures that limit & control the passing of potentially sensitive, nonpublic info btw the departments of a firm
A registered rep who owns shares of a software co that is working on a promising new app begins to spread the word that a large well-known tech co is involved in negotiations to buy the company. (prohibited activity?)
market rumors
A registered rep enters trades at or near the close of normal trading hours to influence the price of the stock. (prohibited activity?)
marking the close
FINRA Rule 5290
member firms or associated persons can't split orders into multiple smaller orders for purpose of maximizing monetary or in-kind pmts
FINRA Rule 6438
member firms that display priced quotes on a real-time basis for an OTC equity in 2+ quote mediums must display the same priced quotes in each medium (except for customer limit order on ECN)
A group of traders buy/sell XYZ corp stock among themselves & are able to push the price of the stock higher. (prohibited activity?)
painting the tape
FINRA Rule 5230
prohibits pmts made in connection w/ published info meant to influence market prices (doesn't apply to clearly paid advertising, communications that disclose the receipt/amount of comp, & research reports)
After buying shares of a small biotech co, a group of people who regularly participate in an internet chat room begin discussing successful, but unsubstantiated, drug trials for a new Alzheimer's drug. The stock soars overnight, at which point the group sells their shares. (prohibited activity?)
pump & dump
market rumors
spreading false/misleading info about a company to impact the price of a security
any person who buys/sells securities while in the possession of material nonpublic info or communicates such info to another person is in violation of...
the Insider Trading & Securities Fraud Enforcement Act of 1988
civil penalties for insider trading violations are determined by...
the court & vary according to the circumstances
market manipulation
the intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security
insider trading
the use of info that is unavailable to the public (material nonpublic info) fo the purposes of manipulating or exploiting a market opportunity (IS PROHIBITED BY LAW)
FINRA Rule 2020
those who engage in manipulation are subject to various civil/criminal sanctions
painting the tape
traders buy/sell a security among themselves to create an artificially high level of activity that doesn't exist in order to influence the price of a stock
front running
when a broker buys a stock for its own account in front of a large (or block) trade or trades ahead of customer orders
when must insiders report their trades to the SEC?
within 2 biz days
