Other Trading Practices: FINRA Rule 6140

Rule 5330 governs the adjustment of legitimate open orders. Rule 6140 draws the line against illegitimate trading patterns: coordinated buys that manufacture the appearance of activity, orders with no real change in ownership, and similar price-moving schemes. A Series 6 rep is unlikely to execute National Market System (NMS) stock transactions as principal, but the rep must recognize manipulative patterns if a customer requests one.

What does FINRA Rule 6140(a) prohibit?

The core prohibition targets coordinated price manipulation.

A member may not execute or participate in any account where purchases of NMS stocks occur at successively higher prices, or sales at successively lower prices, for the purpose of:

• Creating or inducing a false, misleading, or artificial appearance of activity in the security
• Unduly or improperly influencing the market price for the security
• Establishing a price that does not reflect the true state of the market

Key element: the prohibition turns on the purpose (intent) of the trading, not simply the pattern. A legitimate series of buys at rising prices (e.g., accumulating a position as news emerges) is not manipulation; coordinated buys designed to simulate activity are.

Exam Tip: Gotchas

• The 6140(a) prohibition depends on PURPOSE, not just pattern. A legitimate accumulation at rising prices is not manipulation. The violation requires purpose (intent) to create false activity, influence price improperly, or establish a price not reflecting the true market.

What is a wash trade under FINRA Rule 6140(b)?

A second prohibition targets trades with no real economic substance.

• Prohibits executing a transaction in a designated security that involves no change in beneficial ownership, when done for the purpose of creating a false or misleading appearance of activity or of the market in the security
• Wash trade: an investor trades with themselves (through nominee accounts or coordinated orders) to manufacture apparent volume

Think of it this way: a wash trade is a customer "selling" to themselves (often through a second account they control) to make it look like the security is trading. No real buyer and seller changed hands, so no real volume happened. The prohibition catches the deception, not the trade mechanics.

Exam Tip: Gotchas

• Wash TRADES under Rule 6140(b) are distinct from wash SALES under IRC Section 1091. Rule 6140(b) prohibits manufactured trades with no change in beneficial ownership done to create false activity (a regulatory violation). IRC Section 1091 disallows a tax loss where the investor repurchases a substantially identical security within 30 days (a tax-treatment rule). Both use "wash" language; only 6140(b) is a FINRA violation.

How does FINRA address spoofing and disruptive quoting activity?

Rule 6140 operates alongside a cluster of related rules.

• FINRA Rule 5210 (Publication of Transactions and Quotations), including Supplementary Material .03, addresses disruptive quoting and trading activity: entering multiple limit orders on one side, then a matching order on the other side, then cancelling the original orders (known as "spoofing")
• The Series 6 exam tests the prohibition framework, not market-making mechanics

How does FINRA Rule 6140 apply to a Series 6 representative?

The Series 6 rep is usually the intermediary, not the principal trader. Pattern recognition is the exam focus.

A Series 6 rep does not typically execute NMS-stock transactions as principal, but must recognize manipulative patterns if a customer requests:

• Coordinated buys to "drive up" a closed-end fund's price
• Cross-trades between related accounts to establish an artificial price
• Wash sales for tax-generation purposes (which also trigger Internal Revenue Code (IRC) Section 1091 wash-sale loss disallowance, a different rule in a different context)

Exam Tip: Gotchas

• A Series 6 rep does not typically execute NMS-stock transactions as principal. The rep's duty here is pattern recognition, not execution skill. If a customer asks the rep to coordinate buys, cross-trade related accounts, or match orders to "show volume," the rep must refuse and escalate.