Trading (or tipping others to trade) on material, nonpublic information in breach of a duty; both the tipper and the tippee are liable, and penalties reach treble civil damages plus criminal fines and prison.
On the SIE, the classic stem hands you a fact pattern and asks who is liable or whether a trade is permissible. The “tell” is information that is both material and nonpublic combined with a breach of duty — so an outsider who lawfully pieces it together (mosaic theory, original research) is fine, while an analyst, a friend who got a tip, or someone who traded on MNPI they overheard is not. Watch the tippee chain: a tippee who knew (or should have known) of the breach is liable too, and a tipper can be liable even if they never traded.
The trap is mixing this up with sibling violations that hinge on a different trigger. Front-running turns on knowledge of a pending customer order, not market-moving corporate news; market manipulation creates a false appearance of activity or price rather than exploiting real secret information; unauthorized trading is an authorization failure. Memory hook: insider trading = MNPI (Material, NonPublic Information) plus a duty you broke.
Conduct that creates a false appearance of market activity or price: pump-and-dump promotions, wash trades (trading with yourself), matched orders, spoofing/layering with fake orders, and marking the close.
The exam rarely names the scheme for you — it describes the mechanics and makes you classify. The tell is whether the conduct creates a false impression of activity, price, or demand: simultaneous matched buys and sells, hyped emails before a sell-off, or orders entered only to be canceled. The hinge is intent to deceive the market itself, not to profit from secret information — that distinction is what most questions reward.
The classic trap is confusing manipulation with its siblings. Insider trading turns on material nonpublic information and a breached duty; front running is a priority violation — trading ahead of a known customer order — even though no false price is created; freeriding is a Regulation T payment failure (selling a security before paying for the purchase in a cash account), not deception at all. Memory hook: manipulation fakes the tape, insiders know a secret, front-runners cut the line, and freeriders never paid. If the wrong “person” is misled — the market versus a counterparty versus the clearing system — you’ve picked the wrong answer.
Trading for the firm's or rep's own benefit ahead of a known customer order (typically a large block) that will move the price — exploiting knowledge of pending order flow.
Exam items hand you a fact pattern, not the label: a rep trades a security (or its options) for the firm or a personal account right before a customer’s market-moving block order. The tell is sequencing — if the firm’s trade lands first, pick front running. FINRA Rule 5270 reaches beyond the same stock to related financial instruments whose value tracks it — options, derivatives, security-based swaps — so a stock-tip-into-options play still counts (convertibles fit the same “substitute for the security” logic). Trading ahead of the firm’s own research-report release is the sibling violation often tested beside it.
The classic trap is confusing it with insider trading — front running exploits a pending order, not material nonpublic information about the company, so no corporate secret is needed. Don’t grab market manipulation either: front running rides a real order rather than faking activity (no wash trades or spoofing). And best execution (Rule 5310) is a separate duty owed on every order. Memory hook: front running is cutting the line ahead of your own customer.
Excessive trading in a customer's account, measured against the customer's objectives and resources, done to generate commissions rather than to benefit the customer — the control + excessive-activity violation.
Expect a fact-pattern question, not a definition: the SIE hands you a scenario and asks you to name the violation. The classic “tell” is a rep trading an account that doesn’t fit the customer — a high turnover ratio, an elevated cost-to-equity (“break-even”) ratio, or commissions that dwarf any plausible gain. When the choices include suitability or unauthorized trading, the hinge is whether the volume was excessive for that customer’s stated objectives; if so, pick churning.
The classic trap is confusing churning with unauthorized trading — unauthorized is a single trade made with no authority, while churning is too many trades by someone who can drive the activity (often a rep with discretionary or de facto control). Older exam banks list control as a required element, but FINRA dropped it from the quantitative-suitability rule to match Reg BI’s care obligation, so don’t treat a formal discretionary account as mandatory. Memory hook: churning = butter the broker, not the client — turnover for the firm’s benefit.
Executing a trade in a customer's account without the customer's permission and without written discretionary authority — including 'one free trade' a rep expects the customer to ratify later.
The exam loves the “one free trade” fact pattern: a rep buys a stock without asking, planning to call the customer afterward for a thumbs-up. Pick unauthorized trading even if the trade made money and even if the customer later approves — after-the-fact ratification does not cure it. The tell is timing: consent (or written discretion) must exist before the order is entered. A verbal “buy what you think is good” is still unauthorized, because choosing the security, amount, or action requires written discretionary authorization (a customer may verbally delegate only time or price on an order they already specified).
Don’t confuse it with its neighbors. Churning needs control plus excessive activity for commissions; unauthorized trading can be a single trade and needs neither control nor a profit motive. A discretionary account is the lawful version — prior written authority makes the same trade fine. And a customer’s written objection becomes a reportable customer complaint. Memory hook: no signature, no discretion — discretion lives on paper, not in conversation.
Buying a security in a cash account and selling it before paying for the purchase — riding free on the proceeds. The penalty: the account is frozen for 90 days, requiring cash up front for every buy.
On the exam the tell is a cash account whose owner never had the money — the customer buys, then funds the purchase only with proceeds from reselling the same shares. The answer hinges on payment timing: regular-way equities now settle T+1 (since May 28, 2024 — some older question banks still say T+2), and Reg T’s payment period runs to roughly two business days after settlement, so selling before paying for the original buy is the violation. Watch for the cure: a firm may request a Reg T extension only for a bona fide, exceptional reason — a customer is never entitled to one — and absent it the 90-day frozen-account restriction attaches.
The classic trap is dragging in margin rules: freeriding lives in a cash account, so Reg T’s 50% initial and FINRA’s 25% long / 30% short maintenance figures are pure distractors. Don’t confuse it with market manipulation either — freeriding is a payment failure, not a false-appearance fraud. Hook: “no cash, no stash.”
Two flat prohibitions: a rep may never guarantee a customer against loss or promise a result, and may not share in a customer account's profits or losses except with prior written authorization from both the firm and the customer, and in proportion to the rep's own contribution (proportionality waived for immediate family).
Expect the exam to bury the violation inside friendly-sounding rep dialogue: a script that says “I’ll buy it back at your cost if it drops” or “this is guaranteed to double” is testing the guarantee prohibition, and the correct answer flags it regardless of how confident or well-meaning the rep is. The classic trap pairs that with a tempting “as long as the customer agrees in writing” distractor — but no paperwork can cure a guarantee against loss. Don’t confuse it with a guaranteed security — a bond whose interest and/or principal is backed by a company other than the issuer (a parent guaranteeing a subsidiary’s debt). That guarantee is built into the security for all holders, so it’s legitimate — not a rep promising one customer a result.
On the sharing side, students confuse the rules with unauthorized trading (trading without consent or written discretion) and discretionary authority (making the trade decisions — Action, Asset, Amount — not splitting P&L). Sharing is the rep keeping a slice of an account’s gains or losses. Memory hook: a guarantee against loss is “never, ever”; sharing is “only with both signatures.”