12.4 Prohibited & Fraudulent Activities
FINRA strictly punishes market manipulation, self-dealing, and unauthorized outside activities that endanger customer funds or market integrity.
Key FINRA Exam Takeaways
- Front-running: Trading for the firm's or rep's own account ahead of a pending large customer block order.
- Trading ahead of research: Transacting in a security ahead of the firm publishing a new research report or rating upgrade.
- Market manipulation: Painting the tape (wash sales between colluding accounts to create fake volume), pegging/capping (artificially keeping a stock price at a specific level).
- Selling Away (Private Securities Transactions, FINRA Rule 3280): Selling securities not sponsored by the BD without prior written notification and approval.
- Outside Business Activities (OBAs, FINRA Rule 3270): Engaging in any outside business for compensation requires prompt prior written notice to the BD (approval not required unless securities-related).
Selling Away vs. Outside Business Activities (OBAs)
Selling Away (Rule 3280): Selling private securities away from the firm. If compensated: firm must approve in writing and supervise transaction on its books. If not compensated: written notice required. OBA (Rule 3270): Non-securities outside employment (e.g., bartending, consulting). Requires written notice to the BD; no formal approval needed.
A registered representative introduces several clients to a friend's private tech startup and earns a $10,000 referral commission for selling shares of the startup, without notifying or obtaining approval from their broker-dealer. What severe violation has been committed?