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Difficulty: HardProhibited Market Manipulation and Fraudulent Practices

A registered representative at a member firm receives a large non-discretionary buy order for 200,000 shares of a thinly traded equity security from an institutional client. Before placing the client's order into the market, the representative buys 1,000 shares of the same security for their personal account, expecting the client's large order to drive up the market price. Which of the following statements correctly identifies the prohibited practice committed and the governing regulatory enforcement authority?

  1. The representative engaged in front-running by trading ahead of a pending customer block order, which violates FINRA and SEC rules and is subject to enforcement by both self-regulatory organizations and the SEC.Answer
  2. B
    The representative engaged in spoofing by submitting an order with the intent to cancel it after influencing market prices, an activity regulated exclusively by the Federal Reserve Board.
  3. C
    The representative engaged in front-running, but because self-regulatory organizations such as FINRA lack enforcement authority over trading violations, only the SEC has jurisdiction to sanction the representative.
  4. D
    The representative engaged in unauthorized dealer mark-up manipulation, which occurs whenever a firm acts in an agency capacity while simultaneously executing principal transactions.

Answer

The representative engaged in front-running by trading ahead of a pending customer block order, which violates FINRA and SEC rules and is subject to enforcement by both self-regulatory organizations and the SEC.
The representative committed front-running by purchasing security shares for a personal account prior to executing a customer's large block buy order. Front-running violates FINRA rules and federal securities laws, placing the representative and firm subject to enforcement actions from both self-regulatory organizations (FINRA) and federal regulators (SEC).

Step-by-Step Solution

1
Analyze the representative's trading action relative to the customer order.
The representative placed a personal order ahead of a known, pending customer block order to benefit from the anticipated price increase caused by the customer's trade.
This conduct directly fits the definition of front-running (also known as trading ahead), which is a prohibited market practice under FINRA Rule 5270.
2
Evaluate the regulatory enforcement framework governing member firm representatives.
Self-Regulatory Organizations (SROs) like FINRA establish trading rules and exercise disciplinary authority over member firms and associated persons, working in tandem with the SEC.
SRO authority includes conducting investigations and issuing sanctions for market manipulation and trading violations.

Key Concept

Front-Running and SRO/SEC Regulatory Authority
Estimated Time:1m 30s
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Topics

Prohibited Market Manipulation and Fraudulent Practices