Welcome to Identifying and Avoiding Prohibited Activities: the unit that names the trading conduct a securities trader may never engage in, and the narrow paths the rulebook still leaves open.
Exam Weight: about 4 of the 50 scored items (CertFuel planning estimate; FINRA publishes weights only by function, and Function 1, Trading Activities, is 41 items / 82%)
What You'll Learn
In this unit, you'll cover:
- Trading Ahead of Research Reports: the four inventory moves a member may not make on advance knowledge of a report, and the information barrier that has to sit between research and trading
- Front Running of Block Transactions: what makes market information about an imminent block off limits, which accounts the rule reaches, and the transactions it still permits
- Use of Material Nonpublic Information for Insider Trading: the three antifraud prohibitions, when a duty of trust or confidence arises, and the written policies and procedures every registered firm must establish, maintain and enforce
- Manipulation of Security Prices: the statutory prohibitions on wash sales, matched orders, price-moving series of transactions, touting and pegging
- Use of Trading Schemes: prearranged trading, self-trades, the two named patterns of disruptive quoting and trading activity, and how a pump and dump is charged
- Engaging in Conduct That Influences or Intimidates Other Market Participants: the three coordination and intimidation prohibitions, and the seven competitive freedoms the rule preserves
- Payments Involving Publications That Influence the Market Price of a Security: the ban on paying for coverage that moves or is meant to move a price, its three exceptions, and the research report definition one of them borrows
- Order Entry and Execution Practices: the ban on splitting an order or an execution to maximise a payment, and the open definition of what counts as a payment
Why This Matters
Prohibited conduct is the part of the rulebook where a wrong answer on the desk is a disciplinary matter rather than a bad trade. FINRA writes these rules tightly, and the exam tests the tight parts: which actor is bound, whether a list is open or closed, and which condition switches a prohibition off.
The unit builds from the narrow, desk-level prohibitions out to the broad antifraud and manipulation provisions:
- What a trader may not do with information the market does not have
- What a trader may not do to a price, a quotation or a book
- What a firm must have in writing before any of it happens
- Where the rulebook stops prohibiting and starts protecting competition
Let's start with the report the desk sees before the market does.