SIE Exam Podcast Series Episode 8 Prohibited Practices

Introduction

This tutorial outlines prohibited practices relevant to the Securities Industry Essentials (SIE) exam, focusing on market manipulation, insider trading, and other restricted activities. Understanding these concepts is crucial for maintaining ethical standards in the financial industry and avoiding severe penalties.

Step 1: Understand Market Manipulation

Market manipulation refers to actions that artificially influence the price or volume of securities. Familiarize yourself with the following types:

• Market Rumors: Spreading false information to affect stock prices.
• Pump and Dump: Inflating the price of a stock to sell it at a profit, leaving other investors with losses.
• Front Running: Executing orders on a security for one's own account while taking advantage of advance knowledge of pending orders from customers.
• Excessive Trading: Buying and selling securities with the intention of generating commissions rather than for the client's benefit.
• Marking the Close: Manipulating the price of a security at the end of the trading day to influence its closing price.
• Marking the Open: Similar to marking the close but occurs at the beginning of trading.
• Backing Away: Failing to honor a quote in a security.
• Freeriding: Selling a security before paying for it, which violates the rules regarding cash accounts.

Step 2: Recognize Insider Trading

Insider trading involves buying or selling a security based on material nonpublic information. Key points to understand include:

• Definition of Insider Trading: Trading based on information that is not available to the public, giving an unfair advantage.
• Material Nonpublic Information: Any information that could influence an investor’s decision and is not available to the general public.
• Identifying Involved Parties: Individuals with access to confidential information, including company executives, employees, or anyone who has received insider information.

Penalties for Insider Trading

• Fines: Significant financial penalties imposed by regulatory bodies.
• Expulsion: Removal from the industry.
• Incarceration: Criminal charges leading to imprisonment.

Step 3: Explore Other Prohibited Activities

Several other activities are restricted in the securities industry. Be aware of the following:

• Restrictions on IPOs: Associated persons cannot purchase shares in Initial Public Offerings.
• Manipulative Devices: Avoid using deceptive methods or fraudulent devices to manipulate the market.

Improper Use of Customer Funds

• Do not borrow from customers.
• Avoid sharing in customer accounts.
• Financial Exploitation of Seniors: Be vigilant against practices that could exploit older investors.

Activities of Unregistered Persons

• Prohibit paying commissions to unregistered individuals.
• Avoid soliciting customers or taking orders from unregistered persons.

Falsifying Documents

• Do not use signatures of convenience.
• Always respond accurately to regulatory requests.
• Maintenance of Books and Records: Ensure records are not falsified or improperly maintained.

Conclusion

Understanding prohibited practices is essential for anyone preparing for the SIE exam and working in the financial services industry. Familiarize yourself with market manipulation, insider trading, and other restricted activities to ensure compliance and maintain ethical standards. Next steps may involve further study or practice questions to solidify your knowledge in these areas.