Prohibited activities — insider trading, manipulation, AML
**Insider trading — SEA Rule 10b-5:** it is unlawful in connection with the purchase or sale of any security to (a) employ any device/scheme/artifice to defraud, (b) make any untrue statement of material fact, or (c) engage in any act/practice/course of business which operates as a fraud or deceit. The 'abstain or disclose' rule applies to anyone with material non-public information (MNPI) under a duty of trust or confidence. **Misappropriation theory** (US v. O'Hagan, 1997) extends liability to outsiders who misappropriate MNPI from a source to whom they owe a duty.
Penalties (ITSFEA, STOCK Act): criminal — up to 20 years + $5M individual / $25M entity. Civil — treble the profit gained or loss avoided.
**Market manipulation:** • **Wash trades / matched orders** — creating false volume. • **Painting the tape** — a series of trades to create a misleading appearance of active trading. • **Marking the close** — trades at/near the close to influence closing price. • **Pump-and-dump, front-running, spoofing, layering** — all prohibited under SEA §9/§10 and FINRA Rule 5210.
**AML — Bank Secrecy Act + USA PATRIOT Act (FINRA Rule 3310):** • Written AML program with designated compliance officer, training, independent testing. • **SAR** (Suspicious Activity Report) — file within 30 days (60 if no suspect identified) for activity ≥$5,000 with no apparent lawful purpose. • **CTR** (Currency Transaction Report) — file for cash transactions > $10,000 in a single day. • **OFAC** SDN screening on every new account and ongoing.
**Other prohibited practices:** churning (excessive trading for commissions — FINRA Rule 2111), unauthorized trading, commingling, borrowing from customers (Rule 3240 — narrow exceptions), selling away (Rule 3280), outside business activities without firm notice (Rule 3270).