Conduct of Associated Persons

The whole unit on one sheet: every prohibition, the catch-all that stacks on top, and the exact thresholds.

The One-Liners That Win Points

• Standards of commercial honor are the catch-all ethics requirement; they can stand alone or stack on any substantive violation, and they reach off-the-job conduct (a felony conviction, lying on a Form U4) with no customer harm needed.
• The federal general antifraud rule has three prongs: scheme to defraud, material misstatement or omission, and fraudulent course of business. Materiality = a reasonable investor would find it important.
• Misuse of customer assets has three branches: improper use (unauthorized borrowing, commingling, personal use), no guarantees against loss, and no sharing in customer profits or losses.
• Sharing needs BOTH prior written firm approval AND customer approval, PLUS the rep's split must be proportionate to contribution. Immediate-family accounts waive proportionality but NOT firm approval.
• Only the firm may reimburse a loss after the fact; a rep's pre-trade promise to "cover any losses" is always a prohibited guarantee.
• Fiduciary information (from acting as paying agent, transfer agent, or trustee) may not be used to solicit, EXCEPT solicitation at the request and on behalf of the issuer. The test is USE, not receipt.
• Insider trading is "on the basis of" MNPI whenever the trader was AWARE of it; the SEC need not prove it motivated the trade. A prearranged trading plan adopted BEFORE awareness is the affirmative defense.
• Classical theory = insider breaches a duty to shareholders. Misappropriation theory = trader breaches a duty to the SOURCE (no issuer connection needed); family members are presumed to owe a duty of confidence.
• Every broker-dealer must maintain written information-barrier policies to prevent MNPI misuse; a watch list is internal and pre-public, a restricted list is firm-wide and post-public.
• Wash trade = one party trading with itself (no beneficial-ownership change). Matched order = two parties prearranging both sides. Both are manipulation.
• OBA = any outside employment or compensated activity; requires prior written notice, and "compensation" includes equity. PST = any securities transaction outside the rep's employment; requires prior written notice. Together they capture "selling away."
• Borrowing from or lending to a customer is prohibited unless a firm's written supervisory procedures (WSPs) permit an exception; the exceptions are not stand-alone permissions.

Numbers to Lock In

Memory Aid: The Exchange Act Criminal Ladder (5-20-25)

• 5 million dollar individual fine
• 2(0) years individual prison
• 2(5) million dollar entity fine

Memory Aid: The Transaction-Review Reporting Clocks

• 5 business days for violations found (urgent: something happened)
• 10 business days quarterly for investigations initiated (recurring administrative report)

Top Gotchas

• Intent to repay is irrelevant. "Borrowing" $5,000 from a customer's account Monday and repaying Friday is still improper use.
• A guarantee is a violation regardless of whether a loss ever occurs or whether the firm's policies allow it.
• The prearranged-plan cooling-off for officers and directors is "the LONGER of," capped at 120 days; modifying a plan after becoming aware of MNPI destroys the defense.
• The 10-day corporate-action notice runs to the record date, not the ex-date.
• The issuer buyback rule is a safe harbor, not an obligation: miss any one of the four daily conditions and you lose that day's protection for ALL that day's volume, but you have not automatically violated the law. The block exception waives ONLY the volume cap.
• The 5-day and 10-day transaction-review reports apply ONLY to firms engaged in investment-banking services; pure retail firms still review but do not report under this rule.
• A PST with selling compensation, once approved, must be recorded on the firm's books and supervised as if it were a firm trade; "selling compensation" includes commissions, finder's fees, warrants, equity, and expense reimbursement.
• The outside-account requirement reaches beneficial interest, so it captures spousal, joint, and trust accounts, not just the rep's own brokerage account.
• Borrowing/lending exceptions require the firm's WSPs to permit the activity; a firm that bans all borrowing wipes out all five exception categories.

One-Breath Recap

Commercial honor is the catch-all that stacks on everything; the general antifraud rule (scheme, misstatement or omission, fraudulent course of business) is the federal bedrock, with $5 million/20-year individual and $25 million entity criminal penalties. Do not misuse customer assets: no unauthorized borrowing, no guarantees against loss, and no sharing without both written approvals plus proportionate contribution (family waives proportionality, never firm approval). Fiduciary-derived holder data may only solicit on the issuer's behalf. Trading while AWARE of MNPI is insider trading unless a pre-awareness prearranged plan protects you, misappropriation reaches non-insiders, and firms owe written information barriers backed by treble-damage controlling-person liability. Know the manipulation practices, the 25% buyback safe harbor with its four daily conditions, the 10-day record-date notice, the 30-day outside-account window, and the 5-and-10-business-day transaction-review reports for investment-banking firms, and this unit answers itself.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Conduct of Associated Persons unit for the complete lesson.