Quick Answer
The statutory manipulation prohibition reaches any person using the mails, interstate commerce or an exchange facility, and any member of a national securities exchange. Its main subsection states six prohibitions covering wash sales, matched orders, price-moving series of transactions, touting and pegging. Its carve-out disapplies that whole subsection to an exempted security.
This statute is the source most manipulation questions trace back to. It is broad in its reach, precise in its six named prohibitions, and narrower than students expect on who has to be paid and who has to be selling.
Who Does the Manipulation Statute Reach, and What Does It Exempt?
The opening words carry two separate limbs. The statute reaches any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange. It then separately reaches any member of a national securities exchange.
One carve-out cuts across the whole of the main subsection: its provisions do not apply to an exempted security.
Exam Tip: Gotchas
- The exchange-member limb stands beside the jurisdictional means. A member of a national securities exchange is named in its own right, so the analysis does not depend on finding a mailing or an interstate wire.
- The exempted-security carve-out is written against the main subsection. It is not a general exemption from the statute, so the option, endorsement and short sale provisions are untouched by it.
What Are the Six Prohibitions in the Statute's Main Subsection?
Two of the six are written for a defined class of actor rather than for any person. That class is a dealer, broker, security-based swap dealer, major security-based swap participant, or other person selling or offering for sale or purchasing or offering to purchase the security, a security-based swap, or a security-based swap agreement with respect to it. This lesson calls it the trading-side class.
| Prohibited conduct | What the provision states |
|---|---|
| Creating a false appearance of active trading | Three lettered acts, each done for the purpose of creating a false or misleading appearance of active trading in a security other than a government security, or a false or misleading appearance with respect to the market for it. First, effecting a transaction involving no change in the beneficial ownership. Second, entering an order to purchase knowing that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price to sell has been or will be entered. Third, the mirror image, an order to sell entered with knowledge of a matching purchase order. The matching orders may be entered by or for the same or different parties |
| A price-moving series of transactions | To effect, alone or with one or more other persons, a series of transactions in a security registered on a national securities exchange, a security not so registered, or in connection with a security-based swap or such an agreement with respect to it, creating actual or apparent active trading, or raising or depressing the price, for the purpose of inducing the purchase or sale of that security by others |
| Ordinary-course circulation about market operations | For the trading-side class, to induce the purchase or sale by the circulation or dissemination in the ordinary course of business of information to the effect that the price will or is likely to rise or fall because of market operations of one or more persons conducted for the purpose of raising or depressing the price |
| A false or misleading statement of material fact | For the trading-side class, to make a statement which was at the time, and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, for the purpose of inducing the purchase or sale, and which that person knew or had reasonable ground to believe was so |
| Paid circulation about market operations | For a consideration received directly or indirectly from a person in the trading-side class, to induce the purchase of a security by the circulation or dissemination of information to the effect that the price will or is likely to rise or fall because of the market operations of one or more persons conducted for the purpose of raising or depressing the price |
| Pegging, fixing or stabilizing | To effect, either alone or with one or more other persons, any series of transactions for the purchase and/or sale of a security other than a government security for the purpose of pegging, fixing, or stabilizing the price, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors |
Four of the six reach the same four categories: any security registered on a national securities exchange, any security not so registered, any security-based swap, and any security-based swap agreement with respect to that security. Unregistered securities are inside the statute alongside listed ones.
The ordinary-course circulation, false-statement and paid circulation provisions name those four directly. The price-moving provision reaches the swap and the swap agreement as conduct in connection with them. The false-appearance and pegging provisions are drawn differently again, each reaching any security other than a government security.
Exam Tip: Gotchas
- The two touting provisions are not interchangeable. The paid one requires a consideration received from the trading-side class, reaches inducing the purchase alone, and carries no ordinary-course-of-business clause. The unpaid one reaches inducing the purchase or sale.
- The paid touting provision does not require the tout to be a dealer. The trading-side class describes who paid, not who circulated, so the actor there is any person under the statute's opening words.
- Pegging is prohibited only in contravention of Commission rules. Stabilization is therefore lawful when done inside the rules that permit it, and Regulation M's stabilization rule is covered in the unit on IPOs, secondary offerings and safe harbor.
- A single transaction is not a series. The price-moving prohibition needs a series of transactions and a purpose of inducing others to trade, so one large order that moves a price does not satisfy it on those facts alone.
What Does the Statute Say About Options and Swap Interests?
One subsection makes three transactions unlawful for any person, and only in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. The three differ in whose interest matters.
- The acquisition limb. Any transaction in connection with any security whereby any party to the transaction acquires a put, call, straddle, or other option or privilege of buying the security from or selling the security to another without being bound to do so; a security futures product on the security; or a security-based swap involving the security or the issuer of the security.
- The own-interest limb. Any transaction in connection with any security with relation to which the person has, directly or indirectly, any interest in any such put, call, straddle, option, or privilege, any such security futures product, or any such security-based swap.
- The other-account limb. Any transaction in any security for the account of any person who the acting person has reason to believe has, and who actually has, directly or indirectly, any interest in any such put, call, straddle, option, or privilege, any such security futures product with relation to that security, or any security-based swap involving that security or its issuer.
A separate provision binds any broker, dealer, or member of a national securities exchange. It makes it unlawful to endorse or guarantee, directly or indirectly, the performance of any put, call, straddle, option, or privilege in relation to any security other than a government security, again only in contravention of Commission rules.
Exam Tip: Gotchas
- The three limbs turn on three different facts. One asks whether a party acquired the interest, one asks whether the acting person holds it, and one asks whether the account owner holds it.
- The other-account limb has a double knowledge test. The acting person must have reason to believe the account owner has an interest, and the account owner must actually have one.
- Both of these prohibitions run only in contravention of Commission rules. Without a rule to contravene, the described transaction is not made unlawful by the statute alone.
What Else Does the Statute Prohibit?
A further prohibition stands outside the option provisions: the manipulative short sale prohibition.
It is unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, or for any member of a national securities exchange, to effect, alone or with one or more other persons, a manipulative short sale of any security.
The mechanics of short selling, including order marking and locate requirements, are covered in the unit on handling and executing short sales.
Which Subsection Is Limited to Equity Securities?
A further subsection makes it unlawful for any person, by the use of the mails or any means or instrumentality of interstate commerce or of any facility of any national securities exchange, to use or employ any act or practice in connection with the purchase or sale of any equity security in contravention of such rules or regulations as the Commission may adopt.
Exam Tip: Gotchas
- This subsection is limited to equity securities. The main prohibitions are not, so do not carry the equity limit across to them.
What Does the Statute Exclude?
The definitional exclusion states that the terms put, call, straddle, option and privilege, as used in this statute, do not include any registered warrant, right, or convertible security.
Exam Tip: Gotchas
- A registered warrant, right or convertible security is outside the option vocabulary. That exclusion applies to the terms as this statute uses them.
What Should You Check on Exam Day?
- Identify the actor. Two of the six prohibitions require the trading-side class, and the paid touting one requires only that the payment came from it.
- Look for a series of transactions and a purpose of inducing others before applying the price-moving prohibition.
- Ask whether a Commission rule is being contravened; the option, endorsement and pegging provisions all need one.
- Check whether the security is an exempted security, which disapplies the whole main subsection but nothing else.