Quick Answer
Prohibited trading activities include trading ahead of block transactions or customer orders, excessive trading, market manipulation, excessive markups, improper market-related payments, prohibited breakpoint sales, and improper sharing in customer profits or losses. Broker-dealer recommendations are also subject to Regulation Best Interest (Reg BI), the federal best-interest standard.
These restrictions protect customers and market integrity by preventing firms from placing their interests ahead of proper trading conduct.
Trading Ahead and Excessive Trading
- Front running of block transactions means trading in advance of a block transaction in prohibited circumstances.
- Trading ahead of customer orders means trading for the member's own account ahead of a customer order in prohibited circumstances.
- Churning or excessive trading is excessive activity in a customer account, including activity that is unsuitable when considered together.
- Regulation Best Interest (Reg BI) is the federal best-interest standard for broker-dealer recommendations.
Exam Tip: Gotchas
- Front running and trading ahead of customer orders are separate prohibitions. A block-transaction fact pattern points to front running; a customer-order fact pattern points to trading ahead of the customer.
- Excessive trading is evaluated in the context of the customer account's activity, not by looking at one trade in isolation.
Manipulation, Markups, and Payments
- Market manipulation is prohibited conduct that improperly affects a security's market price.
- An excessive markup is a prohibited markup charged in a securities transaction.
- Payments involving publications cannot be used to influence a security's market price in prohibited circumstances.
- Payments for market making are also prohibited in the circumstances covered by the market-making payment prohibition.
Exam Tip: Gotchas
- The prohibited conduct can take different forms, including a trade, a markup, or a payment. Focus on whether the conduct improperly affects price or market activity.
Breakpoint Sales and Customer Sharing
- A prohibited breakpoint sale occurs when investment company shares are sold just below a breakpoint so the seller can share in the higher sales charge.
- Improper sharing in profits and losses is prohibited sharing in the profits or losses of customer accounts.
- Commercial honor and just and equitable principles of trade require high standards of commercial honor and fair dealing.
- Form CRS (Customer Relationship Summary) is prepared, filed, and delivered under the applicable federal customer-relationship-summary requirements.
Exam Tip: Gotchas
- A breakpoint sale is prohibited when the amount is kept just below the breakpoint to preserve the higher sales charge. The issue is the avoidance of the available discount.
- Sharing in customer profits or losses is improper. The prohibition covers both sides of the account result.