Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Tuesday, June 25, 2013

FINRA’s Prohibited Conduct by Broker-Dealers and Market Makers

The Financial Industry Regulatory Authority (“FINRA”) require that broker-dealers and market makers observe “high standards of commercial honor and just and equitable principles of trade.” FINRA rules also prohibit broker-dealers and market makers from “any manipulative, deceptive, or fraudulent actions.”
Prohibited Conduct l Broker-Dealers l Market Makers
As a warning to the public, FINRA has drawn up a list of specific examples of activities that constitute serious violations of its rules and regulations. These violations harm investors and jeopardize the integrity of the securities markets. Some of the examples used by FINRA are self evident and apply to all market participants, not just those regulated by FINRA.
These include knowingly spreading false and misleading information in the markets or providing incomplete information to mislead other persons about a security.
The SEC and FINRA developed the following set of rules applicable to broker-dealers and market makers.
Insider trading (SEC Rule 10b-5) l Broker-Dealers l Market Makers
It is illegal to use or pass on to others material, nonpublic information or enter into transactions while in possession of such information.
Backing away (NASD IM-3320) l Broker-Dealers l Market Makers
A market maker in a given security is obliged to honor the quoted bid and ask prices for a minimum quantity.
Trading ahead of customer limit orders (NASD IM-2110-2) l Broker-Dealers l Market Makers
FINRA members acting as market makers are prohibited from trading ahead of customer limit orders and must ensure that such orders are executed at the most favorable price possible under prevailing market conditions.
Front-running (NASD IM-2110-3) l Broker-Dealers l Market Makers
A broker/dealer is prohibited from buying or selling a security or an option on a security while in possession of material, non-public information concerning an imminent block transaction in the security or option on the security.
Trading ahead of research reports (NASD IM-2110-4) l Broker-Dealers l Market Makers
FINRA member firms are prohibited from trading activity that changes the firm’s position in a Nasdaq or other exchange-listed security traded in the third market, or in any derivative security based on or related to the underlying security, in anticipation of the issuance of a research report in that security.
Anti-Intimidation/Coordination (NASD IM-2110-5) l Broker-Dealers l Market Makers
A FINRA member firm may not coordinate its prices (including quotations), trades, or trade reports with any other member; direct or request another member to alter a price (including a quotation); or engage, directly or indirectly, in any conduct that threatens, harasses, coerces, intimidates, or otherwise attempts improperly to influence another member. This includes any attempt to influence another member to adjust or maintain a price or quotation and refusals to trade or other conduct that retaliates against or discourages the competitive activities of another market maker or market participants.
Churning (NASD IM-2310-2) l Broker-Dealers l Market Makers
Frequent trading, or trading that is not consistent with the financial goals and risk tolerance of the customer, in a discretionary account (or an account over which the broker exercises de facto discretion) is an abuse of control over the customer’s account. Members who engage in this behavior can be found liable to their customers for damages and may be disciplined by FINRA.
Free-riding and withholding (NASD Rule 2110-1) l Broker-Dealers l Market Makers
New issues of securities that immediately begin trading at a higher price than originally offered must be distributed to the public. They may not be placed in the member’s account under any circumstances, and only under strict guidelines may they be placed in the accounts of financial services industry personnel or their immediate families.
Selling away (NASD Rule 3040) l Broker-Dealers l Market Makers
Selling securities without processing the order through the member’s firm and without the firm’s permission or knowledge is a violation of FINRA rules. Even products that an individual broker may not consider to be securities, such as leasing arrangements or promissory notes, may be securities under federal or state law. Members should check with their firm before engaging in any securities transactions for any purpose.
Conflicts of Interest l Broker-Dealers l Market Makers
Members must avoid even the appearance of conflict, let alone any actual conflict of interest, in transactions with customers. For instance, if a broker owns shares of a thinly traded stock in his personal account, his true motivation in recommending large purchases of those shares to his customers, when such a recommendation is likely to drive up the price of that stock, could be called into question.
Unauthorized Trading l Broker-Dealers l Market Makers
No matter how noble a member’s intentions may be, he must never enter an order without the express and detailed permission of the customer unless he and his firm have been granted written discretionary authority by the customer.
Parking Securities and Maintaining Fictitious Accounts l Broker-Dealers l Market Makers
Holding or hiding securities in someone else’s or a fictitious account is misleading and strictly prohibited.
Any investor who knows or believes his broker has been engaging in any of the prohibited behaviors described above should contact the firm’s Compliance office, or get in touch with FINRA or the SEC.

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