Quick Answer
Market manipulation fakes price or volume, insider trading exploits material nonpublic information (MNPI), and both are prosecuted under the broad SEC antifraud rule. Add improper use of customer funds, falsified records, senior exploitation, unregistered activity, and IPO restrictions. Know each scheme, who is liable, and the penalty numbers.
The whole unit on one sheet: the schemes, the liability chains, and the numbers the exam loves to test.
Core Concepts
- Market manipulation = intentional conduct that artificially influences a security's price or trading volume. The key word is "artificially."
- Three prohibiting rules: the broad SEC antifraud rule (the catch-all, covers manipulation AND insider trading), the Securities Exchange Act of 1934 antimanipulation provision (narrower, targets fake trading activity), and the FINRA antimanipulation rule (FINRA members only).
- Insider trading = trading on material nonpublic information (MNPI) in breach of a duty of trust. Being an insider is legal; trading on MNPI is not.
- Insiders = officers, directors, and 10%-or-more shareholders, plus any tippee who receives MNPI.
- MNPI two-part test: material (a reasonable investor would care) AND nonpublic (not yet widely disseminated and absorbed). Both must apply.
Manipulation Schemes (One-Liners)
- Pump and dump: hype a thin stock, sell into the inflated price.
- Front running: broker trades ahead of a known pending customer order (not MNPI, so not insider trading).
- Churning: excessive trading for commissions; needs control, excessiveness, and intent.
- Marking the close / open: trades near the bell to move the closing or opening price.
- Backing away: market maker refuses to honor its published quote (market makers only).
- Wash trading / matched orders: pre-arranged trades between cooperating parties, fake volume, no real ownership change.
- Painting the tape: a series of real trades by one party to simulate genuine interest.
- Freeriding: selling in a cash account before paying (Reg T violation). Withholding: keeping hot-IPO shares for the firm or its employees.
The One-Liners That Win Points
- SEC antifraud rule covers three things: material misstatements, material omissions, and any fraudulent course of business.
- An omission only violates if it makes other statements misleading; silence alone is not always a violation.
- Tipper is liable even if they never trade (as long as the tippee trades). A tippee who receives MNPI but does NOT trade is not liable.
- "Should have known" is an objective test; claiming naivety does not defeat liability.
- Firms must maintain information barriers (Chinese walls) between investment banking and trading.
- OBA (outside business activity) = written notice before starting. Private securities transaction (selling away) = written notice, plus firm must approve AND supervise if compensation is involved.
Numbers to Lock In
| Item | Value |
|---|---|
| Insider-trading / manipulation criminal fine (individual) | up to $5 million |
| Criminal fine (entity) | up to $25 million |
| Maximum prison | up to 20 years |
| Civil penalty (treble damages) | up to 3x profit gained or loss avoided |
| Controlling-person penalty | greater of $1 million or 3x |
| Senior hold: initial | up to 15 business days |
| Senior hold: standard extension | +10 business days (25 total) |
| Senior hold: further extension | +30 business days (up to 55 total) |
| Trusted-contact notice after a hold | within 2 business days |
| Specified adult | age 65+, OR 18+ with an impairment |
| IPO de minimis restricted interest | not more than 10% |
| IPO written representation window | within 12 months before sale |
| Failure-to-cooperate: suspension to bar | after 90 days |
Memory Aid: 5 / 25 / 20 / 3x
- $5 million criminal fine (individual)
- $25 million criminal fine (entity)
- 20 years maximum prison
- 3x profit gained or loss avoided (civil treble damages)
Improper Use, Records, and Seniors
- Borrowing: reps generally cannot borrow from OR lend to customers. Five exceptions (family, financial-institution customer, pre-existing personal relationship, pre-existing business relationship, registered person at the same firm), most needing written firm approval.
- Sharing in accounts: needs written customer AND firm approval, and must be proportionate, unless the customer is immediate family.
- Segregate customer assets from firm assets; never use customer securities for the firm's own loans.
- Signatures of convenience are prohibited even with oral permission; predating, falsifying records, or destroying records is a violation on its own.
- Senior protection: firms may place a temporary hold on a specified adult's account when they reasonably suspect exploitation.
Top Gotchas
- Front running vs. insider trading: front running is a pending customer order; insider trading is MNPI from a corporate source.
- Backing away applies only to market makers; ordinary investors publish no firm quotes.
- The $5 million fine is for individuals; entities face $25 million.
- Disgorgement (give back the profit) comes FIRST, then the treble penalty is calculated on top: a $100,000 profit can cost $400,000 total.
- A specified adult is not just seniors; a 40-year-old with a cognitive impairment qualifies.
- The trusted contact person is NOT a power of attorney; they cannot direct trading.
- IPO restrictions apply only to the offering price; restricted persons can buy in the aftermarket. Immediate family is restricted by circumstances (shared household, over 25% financial support, or firm employment), not automatically.
- Trailing commissions to a retired rep are fine; soliciting new business is not.
One-Breath Recap
Manipulation fakes price or volume, insider trading exploits MNPI, and the broad SEC antifraud rule covers both. Layer on the customer-funds rules, records integrity, senior holds, registration gatekeeping, and IPO restrictions, then lock in 5 / 25 / 20 / 3x and the senior-hold day counts, and this heavily tested unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Prohibited Activities unit for the complete lesson.