Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesEasy
A registered representative learns that their firm's research department is about to release a 'strong buy' recommendation for XYZ stock. Before the official release, the RR purchases shares of XYZ stock for their personal account. This action is considered:
- AAn acceptable practice if disclosed to the firm.
- BPermitted under 'de minimis' trading rules.
- CA beneficial investment strategy.
- DFront-running, a prohibited activity.
Show answer & explanationAnswer & explanation
Correct answer: D. Front-running, a prohibited activity.
Front-running occurs when a broker or other person with advance knowledge of a pending block transaction or research report trades on that information for their own benefit, ahead of their customers or the public. This is a prohibited activity.
Why the other options are wrong
- A. Disclosure does not make front-running acceptable; it remains a prohibited activity.
- B. 'De minimis' rules do not apply to using non-public information for personal gain.
- C. While it might be beneficial for the individual, it is an unethical and illegal practice.
Front-Running
The unethical and illegal practice of a broker or other market participant trading on advance, non-public information of a large block order or research report that is likely to affect the price of a security.
- Involves trading ahead of customer orders or public announcements.
- Considered a form of insider trading.
- Prohibited by FINRA and other regulatory bodies.
Memory trick: Front-Running: 'Don't run ahead of the news!'