Section 6, Fair Dealing With Customers, Best Execution, And Corporate Action Deadlines

Fair Dealing with Customers

Sales efforts must be judged on whether they represent fair treatment to the customer, not on potential profits to the customer.

What are examples of manipulative practices prohibited under FINRA rules?

Wash sales, matched orders (painting the tape), misleading statements, pump and dump, marking the open or close, backing away, freeriding, spoofing, and front running.

What is “painting the tape”?

Placing buy and sell orders simultaneously in a security to mislead investors into believing there is greater trading activity than actually exists.

What is “churning” or “overtrading”?

Excessive trading activity in a customer’s account, determined based on the customer’s objectives, financial situation, account turnover, and broker motivation.

What is “market manipulation”?

Creating a false or misleading appearance of active trading or market conditions in a security, unless it is a bona fide agency cross.

What is “front running”?

Executing an order to buy or sell a security when having material, non-public information about an imminent block transaction before the information is publicly available.

What transactions are permitted under front running rules?

Transactions unrelated to the block order, transactions to facilitate the execution of the customer block order, and transactions executed on a national securities exchange that comply with its rules.

What is “pump and dump”?

Inflating a stock’s price through fictitious trading or false stories to sell at an artificially high price.

What is “marking the close” and “marking the open”?

Placing orders at artificially high or low prices at the close or open of the market to influence the security’s price.

What is “backing away”?

A market maker failing to honor a bid for the minimum quantity in a security that it quotes as a firm quote.

What is “freeriding”?

Buying and selling a security before paying for it, prohibited under Federal Reserve Board Regulation T; the broker may freeze the account for 90 days.

What is “spoofing”?

Entering orders to create the appearance of liquidity, then canceling them to execute at a better price, a form of market manipulation.

Best Execution (FINRA Rule 5310)

Member firms must use reasonable diligence to find the best market and execution for customer orders, considering market character, transaction size and type, number of markets checked, accessibility of quotations, and order terms.

What is “interpositioning”?

Placing a second broker between a customer and market maker to generate unnecessary commissions; unethical and prohibited.

Executing unauthorized trades

Executing trades without customer authorization is unethical and prohibited, even if profitable for the customer.

Falsification of records

Examples include having clients pre-sign blank forms, altering signed forms without initials, or forging client signatures.

Corporate Actions

Include stock splits, dividends, rights offerings, spin-offs, and mergers/acquisitions; require notices and disclosures to shareholders.

Who handles corporate actions for OTC companies?

FINRA processes corporate action announcements for OTC-traded companies and publishes them on the Daily List.

Who handles corporate actions for exchange-listed companies?

The exchanges notify shareholders and ensure the announcements are available online.

Cash payments to associated persons

Must be disclosed in the prospectus and paid only by the member firm; include discounts, fees, commissions, overrides, loans, and employee benefits.

Non-Cash Compensation

Allowed if not tied to sales targets; includes gifts up to $100 per person per year, merchandise, prizes, travel and lodging for educational meetings, and occasional meals.

Guaranteeing a customer against loss

Registered Representatives may not guarantee against loss or buy back shares that fail to meet investment objectives. #