Examkin

Question

Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

Match each prohibited securities practice or market manipulation activity on the left with its corresponding regulatory definition on the right.

  • ChurningConducting excessive trading in a client account primarily to generate additional commission income for the registered representative.
  • Front-RunningEntering personal or firm proprietary trades immediately before executing a large customer block order to profit from the expected price impact.
  • FreeridingBuying a security in a cash account and selling it prior to depositing full payment for the purchase.
  • InterpositioningUnlawfully placing an unnecessary third party between a broker-dealer and the market maker to inflate customer execution costs.

Answer

Churning matches with conducting excessive trading to generate commissions; Front-Running matches with trading immediately prior to a large customer block order; Freeriding matches with buying and selling securities in a cash account before paying for the purchase; Interpositioning matches with placing an unnecessary third party between a broker-dealer and the market maker.
Each term directly aligns with its established regulatory definition under FINRA conduct rules and SEC anti-fraud provisions.

Step-by-Step Solution

1
Analyze the core characteristic of Churning.
Churning involves high account turnover driven by the broker's desire for commissions.
Broker-dealers must ensure recommendations and trading activity align strictly with customer suitability and interest.
2
Analyze the key element of Front-Running.
Front-running is trading ahead of a non-public customer block order to benefit from market movement.
Using material, non-public order information for firm or personal trading advantage violates FINRA rules.
3
Identify the definition of Freeriding under Regulation T.
Freeriding occurs when a trade is funded using proceeds from selling the exact same security before settling payment.
Regulation T mandates that transactions in cash accounts must be fully paid for within the required settlement timeframe.
4
Identify the definition of Interpositioning.
Interpositioning is adding an extra middleman into a transaction chain without benefit to the customer.
Broker-dealers owe customers a duty of best execution, which forbids adding redundant intermediaries that increase costs.

Key Concept

Prohibited Market Manipulation and Fraudulent Practices
Estimated Time:1m 0s
Rate this question

Topics

Prohibited Market Manipulation and Fraudulent Practices