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Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

To avoid a net capital charge prior to an upcoming regulatory audit, a broker-dealer temporarily sells a position in illiquid municipal bonds to another firm with a secret verbal agreement to repurchase the securities at a set price after the audit is complete. Which of the following prohibited market activities has the broker-dealer engaged in?

  1. Parking securitiesAnswer
  2. B
    Wash trading
  3. C
    Permissible principal dealer inventory management
  4. D
    Self-Regulatory Organization (SRO) safe-harbor financing

Answer

The broker-dealer has engaged in parking securities.
The scenario describes parking securities, which is the prohibited practice of temporarily moving assets to another account or firm with a prearranged agreement to repurchase them, intentionally hiding ownership and evading net capital or reporting requirements.

Step-by-Step Solution

1
Analyze the trading structure and underlying motivation
The broker-dealer executed a temporary transfer of illiquid securities paired with a secret commitment to buy them back after an audit.
The presence of an undisclosed buyback agreement indicates an intent to temporarily hide ownership and artificially inflate regulatory net capital.
2
Match the conduct to prohibited practice regulatory definitions
Temporarily placing securities in another entity's account to mask true ownership or evade financial compliance limits is defined as parking.
Parking is a fraudulent practice under FINRA and SEC rules designed to preserve financial integrity and accurate capital reporting.

Key Concept

Parking Securities
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Prohibited Market Manipulation and Fraudulent Practices