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Question

Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

Match each prohibited securities practice with its corresponding regulatory description.

  • ChurningExecuting trades in a customer account that are excessive in frequency or size primarily to generate additional commissions.
  • Front-runningEntering a proprietary trade ahead of a pending large customer block order to benefit from the anticipated price movement.
  • Marking the closeEntering buy or sell orders near the end of the trading day to artificially inflate or deflate a security's closing price.
  • FreeridingPurchasing securities in a cash account and then selling the same securities prior to paying for the initial purchase.

Answer

Churning corresponds to executing excessive trades to generate commissions; Front-running corresponds to entering a trade ahead of a pending customer block order; Marking the close corresponds to entering orders near market close to influence the final price; Freeriding corresponds to selling securities in a cash account before paying for the purchase.
Each practice represents a specific prohibited conduct defined by SEC rules and FINRA standards: Churning focuses on excessive commission generation; Front-running exploits pending customer block orders; Marking the close manipulates end-of-day pricing; and Freeriding violates payment requirements under Regulation T.

Step-by-Step Solution

1
Identify the key characteristics of Churning
Recognize that Churning involves excessive trading frequency/size driven by broker commission generation.
SRO rules strictly prohibit trading that benefits the broker at the expense of customer suitablity.
2
Identify the key characteristics of Front-running
Recognize that Front-running involves trading ahead of material non-public customer order information.
Brokers are prohibited from taking financial advantage of pending customer block orders.
3
Identify the key characteristics of Marking the close
Recognize that Marking the close targets closing market price manipulation.
Manipulating closing prices distorts market valuation and NAV calculations.
4
Identify the key characteristics of Freeriding
Recognize that Freeriding involves selling securities in a cash account before paying for the original purchase.
Regulation T requires full payment for cash account purchases before proceeds can be used.

Key Concept

Prohibited Market Manipulation and Fraudulent Practices
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Prohibited Market Manipulation and Fraudulent Practices