Identify Prohibited Activities - Securities Industry Essentials SIE

1. Identify the violation: a representative executes trades in a non-discretionary account without contacting the customer.

   Unauthorized trading (no discretionary authority). Non-discretionary accounts require per-trade approval to maintain customer control and prevent unauthorized actions.

2. What is the prohibited practice called when a representative uses a customer's login or signs for the customer?

   Forgery or falsification of customer signature/authorization. This violates authenticity and consent requirements, undermining transaction integrity and exposing firms to legal risks.

3. What is "insider trading"?

   Trading on material, nonpublic information in breach of duty. Securities laws prohibit this to preserve market integrity and prevent unfair advantages from confidential information.

4. What is the prohibited activity called "parking" securities?

   Placing securities in another account to conceal true ownership. This conceals beneficial ownership to evade regulations, manipulate markets, or avoid reporting requirements.

5. Which option is prohibited: sharing in a customer account's profits and losses without approval?

   Sharing in profits/losses without written customer and firm consent. Regulations require consent to prevent undisclosed financial interests and potential conflicts in customer accounts.

6. Identify the violation: a representative directs a customer to wire funds to the representative's personal account.

   Misappropriation/conversion of customer funds. Directing funds personally constitutes theft, violating fiduciary obligations and securities regulations on asset handling.

7. What is the prohibited activity called when a representative guarantees a customer against loss?

   Guaranteeing a customer account or performance. Securities laws ban this to prevent misleading customers about investment risks and implying unauthorized firm guarantees.

8. Which action is generally prohibited: borrowing money from a customer without firm permission?

   Borrowing from a customer without firm written approval. FINRA rules restrict this to prevent conflicts of interest, exploitation, and potential misuse of the representative-customer relationship.

9. Which activity is prohibited for a registered representative unless properly registered: selling away or private securities transactions?

   Selling away (private securities transactions) without approval. This practice evades firm supervision, potentially leading to conflicts of interest and regulatory violations without proper oversight.

10. What is "unauthorized trading"?

    Executing trades without customer authorization or discretion. This breaches customer control and consent, violating FINRA rules on account management and investor protection.

11. Which action is generally prohibited: lending money to a customer without firm permission?

    Lending to a customer without firm written approval. Such lending is regulated to avoid undue influence, conflicts, or the appearance of impropriety in advisory relationships.

12. What is the key test factor that can trigger broker-dealer registration when "finding investors"?

    Transaction-based compensation (commissions or success fees). Receipt of such compensation indicates active solicitation in securities transactions, mandating broker-dealer registration to comply with SEC and FINRA regulations.

13. Identify the violation: a representative opens an outside business and does not notify the firm.

    Undisclosed outside business activity (OBA). FINRA mandates disclosure of outside activities to monitor for conflicts and ensure they do not interfere with securities duties.

14. What is "front running"?

    Trading ahead of a customer order to profit from price impact. It exploits nonpublic order information for personal gain, breaching fiduciary duties and market fairness rules.

15. What is "tipping" in insider trading cases?

    Providing material nonpublic information to someone who trades. This illegal act enables insider trading by disseminating confidential data, violating duties of trust and confidentiality.

16. Identify the violation: a representative receives a success fee for placing investors in a private deal.

    Unregistered broker activity due to transaction-based compensation. Such fees indicate broker activity, requiring registration to comply with securities laws and protect investors.

17. What is the required action before a registered representative participates in a private securities transaction?

    Provide prior written notice and obtain firm approval. FINRA rules mandate this process to allow the firm to supervise, record, and ensure compliance with securities regulations.

18. What is the prohibited practice called when a representative uses one customer's funds to pay another customer?

    Misappropriation of customer funds (conversion). Such use violates fiduciary duties and securities laws by treating customer assets as personal or firm resources without authorization.

19. What is the term for using customer securities or funds for the firm's own benefit without permission?

    Improper use of customer funds and securities. Securities regulations prohibit this to safeguard customer assets from unauthorized firm or personal use, maintaining trust and compliance.

20. What is "free riding" in a new issue context?

    Buying an IPO and selling immediately for a quick profit. FINRA prohibits this for restricted persons to ensure fair allocation of new issues to public investors.

21. What is the required authority to trade without contacting the customer for each order?

    Written discretionary authority accepted by the firm. FINRA requires this to authorize representatives to make independent trading decisions while ensuring firm oversight.

22. What is "commingling" in the context of customer funds at a broker-dealer?

    Mixing customer funds with firm or representative funds. This practice is forbidden to protect customer funds from firm risks, such as insolvency, ensuring segregation under regulatory standards.

23. What is "churning"?

    Excessive trading to generate commissions in a controlled account. This manipulative practice prioritizes commissions over customer objectives, violating suitability and fair dealing standards.

24. What does it mean to act as a broker-dealer in a transaction "effecting securities transactions" for others?

    Participating in securities trades for others for compensation. This activity constitutes effecting transactions as a broker, requiring registration to ensure regulatory oversight and investor protection under securities laws.

25. What is "selling away" on the SIE?

    Selling securities not held or approved by the member firm. This bypasses firm approval and oversight, risking the sale of unsuitable or unregistered products in violation of FINRA rules.

Study these flashcards