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12.4 Prohibited Activities

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Series 7 General Securities Representative

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1 Introduction

About the Series 7 How to Use This Guide

2 Chapter 1: Equity Securities

1.1 Common Stock Basics 1.2 Dividends and Stock Splits 1.3 Preferred Stock 1.4 Rights and Warrants 1.5 ADRs and Foreign Securities

3 Chapter 2: Debt Securities

2.1 Bond Fundamentals 2.2 Bond Yields and Pricing 2.3 Corporate Bonds 2.4 Bond Features and Risks

4 Chapter 3: U.S. Government & Agency Securities

3.1 Treasury Securities 3.2 Agency Securities 3.3 Mortgage-Backed Securities 3.4 Money Market Instruments

5 Chapter 4: Municipal Securities

4.1 Municipal Bond Basics 4.2 General Obligation Bonds 4.3 Revenue Bonds 4.4 Municipal Bond Analysis 4.5 Municipal Securities Rules

6 Chapter 5: Investment Companies

5.1 Investment Company Basics 5.2 Mutual Funds (Open-End Funds) 5.3 Mutual Fund Pricing and Fees 5.4 Closed-End Funds and ETFs 5.5 Investment Company Taxation

7 Chapter 6: Variable Products & Annuities

6.1 Annuity Basics 6.2 Variable Annuities 6.3 Annuity Taxation 6.4 Variable Life Insurance

8 Chapter 7: Alternative Investments & DPPs

7.1 Direct Participation Program Basics 7.2 Types of DPPs 7.3 DPP Suitability and Risks 7.4 Real Estate Investment Trusts (REITs) 7.5 Hedge Funds and Other Alternatives

9 Chapter 8: Options

8.1 Options Basics 8.2 Long and Short Option Positions 8.3 Hedging Strategies 8.4 Spreads and Combinations 8.5 Index and Non-Equity Options 8.6 Options Account Requirements

10 Chapter 9: Customer Accounts

9.1 Account Types 9.2 Cash Accounts 9.3 Margin Accounts 9.4 Margin Calculations 9.5 Fiduciary and Institutional Accounts

11 Chapter 10: Retirement & Education Plans

10.1 ERISA and Qualified Plans 10.2 Defined Benefit vs. Defined Contribution 10.3 Individual Retirement Accounts 10.4 Education Savings Plans 10.5 Plan Distributions and Taxation

12 Chapter 11: Securities Markets & Trading

11.1 The Primary Market 11.2 The Secondary Market 11.3 Order Types and Execution 11.4 Trade Settlement and Reporting 11.5 Market Participants

13 Chapter 12: Rules, Regulations & Ethics

12.1 Regulatory Framework 12.2 Suitability Requirements 12.3 Communications with the Public 12.4 Prohibited Activities 12.5 Customer Protection Rules 12.6 Ethics and Professional Conduct

12.4 Prohibited Activities

Key Takeaways Explain This Topic AI

Insider trading is trading on material, non-public information; both tipper and tippee can be liable.

Insider-trading civil penalties reach up to three times the profit gained or loss avoided.

Market manipulation includes pump-and-dump, wash sales, matched orders, spoofing, and marking the close.

Stabilization by underwriters is the only lawful price support and may not exceed the public offering price.

Selling away requires written notice under Rule 3280 even when the rep is not compensated.

Last updated: June 2026

Insider Trading

Insider trading is buying or selling a security while in possession of material, non-public information (MNPI) , in breach of a duty. Information is material if a reasonable investor would consider it important to a buy/sell/hold decision — think pending mergers, earnings surprises, FDA decisions, executive departures, or a fraud discovery.

Liability is broad. Tippers (who pass MNPI), tippees (who trade on it), corporate insiders, and misappropriators (people who steal information, like a printer or lawyer) can all be charged. The governing law is the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) , layered on the 1934 Act's Rule 10b-5.

  • Penalty Maximum
  • Civil penalty Up to 3× the profit gained or loss avoided
  • Criminal fine (individual) Up to $5 million
  • Criminal prison (individual) Up to 20 years
  • Criminal fine (firm/entity) Up to $25 million
  • Market Manipulation

Manipulation artificially distorts a security's price or volume. The exam wants you to recognize each named scheme:

  • Scheme What it is
  • Pump-and-dump Hype a stock with false info, then sell into the buying
  • Wash sale Buy and sell with yourself to fake volume
  • Matched orders Coordinate trades with a partner to mislead the tape
  • Marking the close/open Trade at the bell to set an artificial print
  • Spoofing / layering Enter orders you intend to cancel before execution
  • Painting the tape A run of trades to suggest active interest
  • Stabilization — The Only Legal "Manipulation"

During a new-issue distribution, an underwriter may place a stabilizing bid to support the price. It is the only lawful form of price support, and two limits define it: the stabilizing bid may not exceed the public offering price , and it must be disclosed in the prospectus . Any bid above the offering price is illegal manipulation.

Front-Running and Trading Ahead

Front-running (FINRA Rule 5270) is trading a security (or a related option) while holding MNPI about an imminent block transaction — for example, buying ahead of a customer's known 100,000-share order to profit from the expected price move. Trading ahead is the related sin of executing firm proprietary orders before holding customer limit orders at the same or a better price.

Churning and Unauthorized Trading

Churning is excessive trading to generate commissions; proving it requires control of the account, excessive activity, and intent to enrich the rep over the client. Unauthorized trading is executing in a non-discretionary account without the customer's prior consent for that specific trade. Verbal discretion as to time and price (a "market not held" order) is fine for a day; discretion as to asset, action, or amount requires prior written authorization.

Selling Away and Other Bans

Selling away is offering securities outside the employing firm. FINRA Rule 3280 (Private Securities Transactions) requires prior written notice to the firm; if the rep is compensated , the firm must approve and supervise the activity. Even with no compensation, written notice is still required. Other prohibitions: interpositioning (inserting a needless middleman that raises cost), backing away (a market maker refusing to honor a firm quote), borrowing from or lending to customers (narrow family exceptions), and guaranteeing customers against loss.

Sharing in Customer Accounts and Borrowing — Rules 2150 and 3240

Under FINRA Rule 2150 , a representative generally may not share in the profits or losses of a customer account. The narrow exception requires prior written approval from the firm and that the rep share only in proportion to the rep's own capital contribution — except for a joint account with an immediate family member , where the proportionality rule is relaxed.

Rule 3240 restricts borrowing from or lending to customers : it is prohibited unless the firm permits it and the parties fall into a defined relationship (immediate family, a customer in the lending business such as a bank, a personal/business relationship outside the brokerage, or registered persons at the same firm). Commingling customer funds with the rep's own is always prohibited.

A Front-Running Worked Example

A rep learns at 9:50 a.m. that an institutional client will enter a market order to buy 250,000 shares of a thinly traded stock at the open of the next session. Before placing the client's order, the rep buys 2,000 shares for a personal account, then sells into the price spike the large order creates. This is textbook front-running under Rule 5270: the rep traded while holding material, non-public market information about an imminent block. The violation exists even if the personal trade is tiny — the breach is using the customer's order information for personal gain, not the size of the profit.

Manipulation vs. Legitimate Activity

Students confuse lawful trading with manipulation. Use this contrast:

Looks similar Lawful Manipulative

Supporting a new issue's price Stabilizing bid at/below the offering price, disclosed Bid above the offering price

Trading the same stock repeatedly Genuine market-making with real risk Wash sales / matched orders to fake volume

  • Buying near the close Bona fide order with economic purpose Marking the close to set a print
  • Posting then canceling orders Cancelling because the market moved Spoofing — never intending to fill

The dividing line is intent and economic reality : a real change in beneficial ownership and a genuine purpose are lawful; deception about supply, demand, or price is not.

On the Exam

Know that both tipper and tippee are liable, the 3× civil and $5M/20-year criminal ceilings, the stabilization rules (at or below the offering price, disclosed), and that selling away always demands written notice even without pay.