Quick Answer
This unit is the conduct rulebook: anti-fraud catch-alls, misuse of customer assets, fiduciary-information limits, insider trading and material nonpublic information (MNPI), manipulation, personal-trading disclosure, outside business activities (OBAs), private securities transactions (PSTs), and borrowing or lending with customers. Master the notice, approval, and reporting deadlines the exam tests.
The whole unit on one sheet: every prohibition, the catch-all on top, and the exact thresholds.
The One-Liners That Win Points
- Standards of commercial honor are the catch-all ethics rule: stand alone, stack on any violation, reaching off-the-job conduct (felony conviction, lying on Form U4), 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: what a reasonable investor finds important.
- Misuse of customer assets has three branches: improper use (unauthorized borrowing, commingling, personal use), no guarantees against loss, and no sharing in profits or losses.
- Sharing needs BOTH prior written firm AND customer approval, PLUS a proportionate split 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 a prohibited guarantee.
- Fiduciary information (paying, transfer, or trustee agent) bars solicitation, EXCEPT at the issuer's request and on its behalf. Test is USE, not receipt.
- Insider trading is "on the basis of" MNPI whenever the trader is AWARE; the SEC need not prove motive. A prearranged plan adopted BEFORE that 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 confidence.
- Every broker-dealer must maintain written information-barrier policies against MNPI misuse; a watch list is internal, pre-public; a restricted list is firm-wide, 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; PST: any securities transaction outside the rep's employment. Both require prior written notice; OBA "compensation" includes equity. Together: "selling away."
- Borrowing from or lending to a customer is prohibited unless a firm's written supervisory procedures (WSPs) permit an exception; exceptions are not stand-alone permissions.
Numbers to Lock In
| Item | Value |
|---|---|
| Exchange Act criminal fine/prison, individual | $5 million/20 years |
| Exchange Act criminal fine, entity | $25 million |
| SEC insider-trading civil penalty | up to 3x profit or loss avoided (treble) |
| Controlling-person insider-trading penalty | greater of $1 million or 3x the profit/loss |
| Insider-trading civil-penalty statute of limitations | 5 years from the trade |
| Contemporaneous-trader damages | capped at the violator's profit or loss avoided |
| Prearranged-plan cooling-off, officers/directors | longer of 90 days OR 2 business days post-disclosure, capped at 120 days |
| Prearranged-plan cooling-off, other insiders | 30 days after adoption |
| Single-trade plan limit (officers/directors, other insiders) | one per 12-month period |
| Corporate-action record-date notice | at least 10 days before the record date |
| Issuer buyback volume cap | 25% of average daily trading volume (prior 4 weeks) |
| Buyback block exception | $200,000+ purchase, OR 5,000+ shares worth $50,000+ |
| Buyback timing limit | no trades at the open or last 10 minutes (30 for less-active stocks) |
| Outside-account pre-existing grandfather window | 30 calendar days after associating |
| Transaction-review report, violation found (IB firms) | within 5 business days of completing the investigation |
| Transaction-review quarterly report (IB firms) | within 10 business days of quarter-end |
Memory Aid: The Exchange Act Criminal Ladder (5-20-25)
5-20-25: $5 million individual fine, 20 years individual prison, $25 million entity fine.
Memory Aid: The Transaction-Review Reporting Clocks
5 business days for violations found (urgent); 10 business days quarterly for investigations initiated (routine).
Top Gotchas
- Intent to repay is irrelevant. "Borrowing" $5,000 from a customer's account Monday and repaying Friday is improper use.
- A guarantee is a violation regardless of whether a loss occurs or the firm's policy allows it.
- The officer/director cooling-off is "the LONGER of," capped at 120 days; modifying a plan after MNPI awareness 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: missing any of the four daily conditions loses protection for that day's full volume, not an automatic violation; the block exception waives only the volume cap.
- The 5-day and 10-day transaction-review reports apply ONLY to IB firms; retail firms review but skip the report.
- A PST with selling compensation, once approved, is recorded and supervised as a firm trade; "selling compensation" includes commissions, finder's fees, warrants, equity, and expense reimbursement.
- The outside-account requirement reaches beneficial interest, capturing spousal, joint, and trust accounts, not just the rep's brokerage account.
- Borrowing/lending exceptions require the firm's WSPs to allow it; a firm banning all borrowing wipes out all five exceptions.
One-Breath Recap
Commercial honor is the catch-all, reaching everything. The antifraud rule (scheme, misstatement/omission, fraudulent course of business) is the federal bedrock: $5 million/20 years individual, $25 million entity, criminal penalties. No misuse of customer assets: unauthorized borrowing, guarantees against loss, or sharing without written approvals and proportionate contribution (family waives proportionality, never firm approval). Fiduciary-derived holder data may solicit only on the issuer's behalf. AWARE-of-MNPI trading is insider trading unless a prearranged, pre-awareness plan shields you; misappropriation reaches non-insiders; firms owe information barriers, backed by treble-damage controlling-person liability; manipulation rules, the 25% buyback safe harbor's four daily conditions, 10-day record-date notice, 30-day outside-account window, and 5-and-10-business-day transaction-review reports for investment-banking firms.
Need more than the recap? Read the full Conduct of Associated Persons unit.