The Other Trading Practices Rule and Its Scope

This rule appears in the outline for this section, so it is worth knowing what it covers. The one thing to carry away from it here is its scope term, because that term sets the reach of all but one of its prohibitions.

What Is a Designated Security?

The rule defines its subject inside its first sentence rather than in a definitions paragraph. A designated security is any national market system (NMS) stock as the Regulation NMS definitions define that term.

Six of the rule's seven prohibitions are written against a designated security. Those six speak to listed and other NMS names, and they do not speak to an OTC Equity Security, which the OTC equity definitions define as an equity security that is not an NMS stock, other than a Restricted Equity Security, which the definition carves out.

The seventh prohibition names no security at all. It bars a member from participating or having any interest, directly or indirectly, in the profits of a manipulative operation, or from knowingly managing or financing one.

One sentence under that paragraph reaches the scope term instead: a pool, syndicate or joint account organized or used intentionally for the purpose of unfairly influencing the market price of a designated security is deemed to be a manipulative operation.

Exam Tip: Gotchas

• The definition sits inside the first prohibition, not in a separate paragraph. A reader who skips to a later paragraph can miss the scope term entirely and apply the rule to the wrong security.
• A non-listed OTC Equity Security is outside all but one of these prohibitions. Because an OTC Equity Security is by definition not an NMS stock, the six prohibitions written against a designated security do not reach it. The manipulative operation paragraph names no security.

Which Practices Does the Rule Prohibit?

The rule collects seven manipulation-related prohibitions. Six of them name a designated security, and the manipulative operation paragraph names no security.

• Purchases at successively higher prices, or sales at successively lower prices, for the purposes the rule names
• Transactions and orders entered for the purpose of creating or inducing a false or misleading appearance of activity or of the market, namely a transaction involving no change in beneficial ownership and matched buy and sell orders
• Excessive purchases or sales for an account in which the member is directly or indirectly interested
• Participating or having an interest in the profits of a manipulative operation, or knowingly managing or financing one
• Statements or information about a designated security that the member knows or has reasonable grounds for believing are false or misleading or would improperly influence its market price
• Holding, directly or indirectly, any interest or participation in a joint account for buying or selling a designated security unless the account is promptly reported to FINRA
• Offering that a transaction will influence the closing transaction in the security

These prohibitions are taught in full in the unit on meeting obligations to customers regarding orders. Treat this lesson as the scope boundary rather than as the substantive treatment.

Exam Tip: Gotchas

• One word sets the reach of six of the seven prohibitions. Those six are drafted around a designated security, so the analysis starts with whether the security is an NMS stock. The manipulative operation paragraph carries the term only in the sentence that deems a pool, syndicate or joint account to be such an operation.

What Should You Check on Exam Day?

• Confirm the security is an NMS stock before applying any prohibition except the manipulative operation paragraph, which names no security.
• Where the security is an OTC equity security, look elsewhere for the applicable prohibition, remembering that the manipulative operation paragraph is not limited by the scope term.
• Read the first sentence of the rule as the definitions paragraph, since that is where the scope term is stated.