SIE Prohibited Activities: Manipulation, Insider Trading and the Conduct Rules in Section 3.3

Prohibited-activity questions rarely ask for a rule number. They describe something a representative did and ask whether it's allowed. The skill is spotting which prohibition the scenario points to, and then remembering the narrow exception, because several of these rules permit the conduct under specific conditions.

The three parts of Section 3.3 on the SIE outline

FINRA's 2025 content outline splits prohibited activities into market manipulation (3.3.1), insider trading (3.3.2) and other prohibited activities (3.3.3). Two broad rules sit underneath all of it:

• FINRA Rule 2020 forbids effecting any transaction in, or inducing the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance
• SEC Rule 10b-5 makes it unlawful, in connection with buying or selling any security, to use a scheme to defraud, to make an untrue statement of a material fact or omit one that makes a statement misleading, or to engage in any act that operates as a fraud on any person

FINRA Rule 2010 adds the general standard: a member must observe high standards of commercial honor and just and equitable principles of trade. When no specific rule fits a scenario, 2010 often still does.

Market manipulation types on the SIE outline

The outline names eight types. Here's what each one is, and where the definition comes from:

Two neighbors of front running are also on the outline's rule list. Rule 5280 bars a firm from building, reducing or liquidating an inventory position based on advance, nonpublic knowledge of a research report's content or timing. Rule 5320 bars a firm that holds a customer's equity order from trading the same security on the same side of the market at a price that would satisfy the customer's order, unless it immediately fills the customer's order at the same or a better price.

These are definition-heavy items where a short card per term works well, and 180 flashcards are planned for the Trading, Customer Accounts and Prohibited Activities section of full SIE prep.

Insider trading: the test and the penalties

The SEC's investor.gov definition gives the test in one sentence: illegal insider trading is buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security. It also covers tipping that information, trading by the person tipped, and trading by people who misappropriate the information.

Break a scenario into three questions:

1. Is the information material? Would it matter to an investor's decision?
2. Is it nonpublic? Has it been made available to the market, or is it still confidential?
3. Is there a duty? Did the person get it through a relationship of trust and confidence: as an insider, a tippee, or by misappropriating it from an employer, client, friend or family member?

The SEC lists the kinds of people it has charged: corporate officers, directors and employees; their friends, business associates and family members who were tipped; employees of law, banking, brokerage and printing firms who learned of the information while serving the company; government employees; political intelligence consultants; and others who misappropriated confidential information.

Penalties are on the outline too:

• Civil: under Section 21A of the Securities Exchange Act (15 U.S.C. 78u-1), a court can impose a penalty of up to three times the profit gained or loss avoided. A person who controlled the violator can face up to the greater of $1,000,000 (the statute's figure, which the SEC adjusts for inflation each year) or three times the profit gained or loss avoided. The SEC must show that the controlling person knew or recklessly disregarded the likelihood of the violation and failed to take appropriate steps to prevent it, or knowingly or recklessly failed to keep required policies and procedures in place
• Criminal: under Section 32 (15 U.S.C. 78ff), willful violations of the Exchange Act, which includes insider trading, can bring a fine of up to $5,000,000 and up to 20 years in prison for an individual, or a fine of up to $25,000,000 for an entity
• Liability to other traders: the outline also lists Section 20A, titled "Liability to Contemporaneous Traders for Insider Trading," which covers claims by people who traded at the same time as the insider

Other prohibited activities and their narrow exceptions

This is where most "is it allowed?" questions live. Each rule below permits something under conditions, and the conditions are what the exam tests.

IPO purchases by restricted persons (FINRA Rule 5130). A member may not sell a new issue, meaning an initial public offering of an equity security, to an account in which a restricted person has a beneficial interest. Restricted persons include broker-dealers and their personnel, certain immediate family members of those personnel (for example, family members they materially support or who live in the same household), finders and fiduciaries to the managing underwriter, portfolio managers, and owners of broker-dealers. An account still qualifies if restricted persons' beneficial interests total no more than 10% of it. Before selling a new issue, the firm must have obtained, within the prior 12 months, a representation that the account is eligible.

Guarantees and sharing in accounts (FINRA Rule 2150). No one may make improper use of customer funds or securities, or guarantee a customer against loss. A representative may share in a customer account's profits or losses only with prior written authorization from both the firm and the customer, and only in direct proportion to the representative's financial contribution to the account. Accounts of immediate family members are exempt from the proportion limit.

Borrowing from or lending to customers (FINRA Rule 3240). A registered person may do it only if the firm's written procedures allow it and the arrangement fits one of five categories:

1. The customer is an immediate family member
2. The customer is a lending institution, such as a bank, acting in the ordinary course of its business
3. The customer and the registered person are both registered persons of the same firm
4. The loan rests on a personal relationship outside the broker-customer relationship
5. The loan rests on a business relationship outside the broker-customer relationship

For the last three, the registered person must notify the firm in advance and the firm must pre-approve in writing. For the first two, the firm's written procedures may waive both notice and approval, but for a lending institution only if the loan is on commercial terms it offers the general public. Rule 3240's definition of immediate family is broad: it includes a spouse, parents, grandparents, in-laws, siblings, children, grandchildren, cousins, aunts, uncles, nieces and nephews, plus anyone the person supports to a material extent.

Paying unregistered persons (FINRA Rule 2040). A member may not pay commissions or other compensation to a person who would have to register as a broker-dealer to receive it but isn't registered. One permitted case: continuing commissions to a retiring registered representative under a contract made in good faith while registered that bars soliciting new business, opening accounts or servicing the accounts.

Financial exploitation of seniors (FINRA Rule 2165). A firm may place a temporary hold on a disbursement or transaction in the account of a specified adult, defined as a person 65 or older, or a person 18 or older the firm reasonably believes has a mental or physical impairment that leaves them unable to protect their own interests, when it reasonably believes financial exploitation is happening or will be attempted. It must notify the authorized parties and the trusted contact person within two business days, unless it believes they're involved, and start an internal review. The hold lasts up to 15 business days, can be extended by up to 10 more, and by up to 30 more if the firm has reported the matter to a state regulator, agency or court.

Your own accounts at other firms (FINRA Rule 3210). An associated person needs the employer's prior written consent to open a securities account at another firm, must tell that firm about the association, and the other firm must send duplicate confirmations and statements if the employer asks.

The outline closes 3.3 with falsifying or withholding documents (including signatures of convenience and responding to regulatory requests) and improper maintenance of books and records. Treat any scenario involving altered, back-dated or signed-for-the-customer paperwork as prohibited. The regulatory framework guide covers the registration side of "activities of unregistered persons," and the customer accounts guide covers discretion, where excessive trading usually starts.

Exceptions like these are easy to half-remember, which is why an explanation for every answer, right or wrong, is planned for the SIE question bank: the reasoning behind a wrong choice is often the exception you forgot.

A Passy practice question on borrowing from customers

This question was written by Passy for practice. It isn't a FINRA item.

A registered representative wants to borrow $5,000 from a customer who is also her aunt. Her firm's written procedures allow borrowing from immediate family members and don't require notice for those loans. Which statement is correct?

A. The loan is prohibited because the aunt is a customer of the firm B. The loan is permitted, and under these procedures no notice or pre-approval is required C. The loan is permitted only with the firm's prior written approval D. The loan is permitted only if the aunt is also registered with the same firm

Keyed answer: B. Rule 3240 allows borrowing from a customer when the firm's procedures allow it and the customer is immediate family, and its definition of immediate family includes an aunt. For immediate family loans, the firm's procedures may waive notice and approval, as these do. C describes the pre-approval required for the personal relationship, business relationship and same-firm categories. D describes one of the other permitted categories, not a requirement for this one.

Your next step with prohibited activities

Make one card per manipulation type with its source rule, and one card per exception rule with its numbers: 10% (Rule 5130), proportionate share (2150), five categories (3240), 2, 15, 10 and 30 business days (2165). Then check yourself with the free SIE practice questions. If you've already tested and Section 3 was your weak area, the free SIE retake planner builds a week-by-week plan around it, and Weak Spot drills on your lowest-scoring SIE section are planned for full prep.