The Other Prohibited Activities

This lesson covers the prohibited activities that sit outside market manipulation and insider trading. They share one idea. A registered person must not take what belongs to a customer, or hide what really happened. The exam gives you a short story and asks whether the conduct is allowed.

The new issue you cannot buy

A new issue is an initial public offering of an equity security, sold under a registration statement. Follow-on offerings, debt, preferred stock, convertible securities, rights offerings, and mutual funds fall outside the rule.

FINRA Rule 5130 keeps a restricted person, someone with an insider tie to the offering, from buying a new issue. A member may not sell a new issue to any account in which a restricted person holds a beneficial interest.

Restricted persons include:

• Member firms and their associated persons, whatever their job.
• Finders and fiduciaries for the managing underwriter, such as attorneys and accountants.
• Portfolio managers buying for their own accounts.
• People who own or control a broker-dealer.
• Immediate family members of the people above.

Immediate family under Rule 5130 means parents, in-laws, spouse, siblings, and children. Aunts, uncles, grandparents, and cousins sit outside the definition. The exam tests that line often.

A family member is restricted when the associated person materially supports them, works at the firm selling the issue, or can control the allocation. Material support means more than 25% of that person's income last year.

Before selling a new issue, the firm must get a representation that the account is eligible, valid for 12 months.

The antifraud catch-all

FINRA Rule 2020 bans any manipulative, deceptive, or fraudulent device used to induce a securities trade. Exchange Act Section 10(b) and SEC Rule 10b-5 say the same thing in federal law.

These rules reach any lie that moves a customer's decision: calling a bond insured when it is not, or hiding a fee. FINRA Rule 2010 sits behind them and requires high standards of commercial honor.

FINRA Rule 2150 prohibits guaranteeing a customer against loss. The promise itself breaks the rule, even if you pay the loss.

Customer money is not your money

FINRA Rule 2150 also bans improper use of a customer's securities or funds. Improper use covers taking the money, lending it out, and mixing it with the firm's own cash, which is called commingling.

FINRA Rule 3240 governs borrowing from or lending to a customer, and the default answer is no. The loan is allowed only when the firm's written procedures permit it and the relationship is one of five types:

• The customer is an immediate family member.
• The customer is a financial institution lending on commercial terms.
• Both people are registered with the same firm.
• A personal relationship existed outside the brokerage relationship.
• A business relationship existed outside the brokerage relationship.

Most arrangements also need notice to the firm and written pre-approval.

Sharing in a customer's account has its own three-part test. You need written approval from your firm and written approval from the customer. You also share profits and losses only in proportion to the money you put in. Accounts of your immediate family escape the proportion test, not the approval requirement.

Older and impaired customers

FINRA Rule 2165 lets a firm pause a payment out of an account when it suspects exploitation. The rule protects a specified adult: a customer aged 65 or older, or an adult aged 18 or older with a mental or physical impairment that stops them protecting their own interests.

Financial exploitation means the wrongful taking or use of that adult's funds or securities, including control gained by deception, intimidation, or undue influence.

The firm may hold a disbursement or a transaction for up to 15 business days. An internal review that supports the suspicion adds 10 business days. A report to a state regulator, agency, or court adds 30 more.

Within two business days of a hold, the firm notifies the people authorized on the account and the trusted contact person. A trusted contact person is an adult the firm may call about the account. FINRA Rule 4512 requires reasonable efforts to get one at account opening, and the customer may decline.

Unregistered persons

FINRA Rule 2040 stops a firm paying commissions to anyone who should be registered and is not.

An unregistered assistant may do clerical work: answer the phone, take a message, and send a prospectus on request. They may not solicit a customer, accept an order, or discuss the merits of a security.

A retiring representative may keep commissions on old accounts under a contract signed before retirement, but may not solicit new business.

Documents, signatures, and records

Signing another person's name is forgery, and the customer's permission does not fix it. The industry calls that a signature of convenience. If a customer cannot come in, send the form. Never sign for them.

FINRA Rule 8210 compels a member and its people to give FINRA information, documents, and testimony. A late, incomplete, or false answer usually ends a career.

Records must be true when made and kept for the required period. Marking a solicited order as unsolicited falsifies the order ticket. Backdating a form, altering a note, and destroying a record early all violate FINRA Rule 4511 and SEC Rules 17a-3 and 17a-4.

How this gets tested

Items here read like short stories. A rep signs for a travelling client. A rep's brother asks for IPO shares. A rep borrows $5,000 from a customer of ten years. You decide whether a rule permits it, and on what condition.

Two answers are almost always wrong. The customer agreed, and the rep paid the money back. Consent does not cure forgery, and repayment does not cure an improper loan.

Four numbers carry most of these items:

• 15 business days for the first Rule 2165 hold.
• Two business days for the notice that follows a hold.
• 25% of income for material support under Rule 5130.
• Age 65 for a specified adult.