SIE cheat sheetSection 3: Trading, Customer Accounts & Prohibited Activities (31%)
Prohibited Practices & Ethics
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Insider Trading
- Trading on Material Nonpublic Information (MNPI)
- Material: would a reasonable investor consider it important?
- Nonpublic: not yet disseminated to the general public
- BOTH the tipper and the tippee can be liable
- Penalties: Up to 3x profit or loss avoided (civil), criminal penalties up to $5M individual / $25M firm
Front-Running
- Trading ahead of a customer's large order to profit from the expected price movement
- Prohibited for all registered persons
Churning (Excessive Trading)
- Excessive transactions to generate commissions, not for customer benefit
- Rep controls the account + frequency/size of trades is excessive
- Indicators: high turnover ratio, cost-to-equity ratio
Market Manipulation
- Painting the tape: Creating appearance of trading activity with wash trades
- Marking the close: Placing trades near market close to affect closing price
- Pump and dump: Artificially inflating price then selling (common in penny stocks)
Free-Riding
- Buying securities and selling them before paying for them (in a cash account)
- Result: 90-day freeze on account (must deposit cash before trades)
Breakpoint Selling
- Selling mutual fund shares just below a breakpoint to deny investor the volume discount
- A prohibited practice — reps must inform investors of breakpoints
Selling Away
- Engaging in private securities transactions without firm approval
- Rep must give written notice to firm BEFORE the transaction
Sharing in Customer Accounts
- Rep may share in profits/losses ONLY with written firm approval
- AND must share proportionately to their own financial contribution
- Exception: immediate family members (proportional sharing not required)
Suitability / Reg BI (Best Interest)
- Must have reasonable basis to believe recommendation is suitable
- Reg BI: must act in BEST INTEREST of retail customer
- Consider: risk tolerance, time horizon, liquidity needs, tax status, investment objectives
- KYC (Know Your Customer): must gather customer information before recommending
Key facts to memorize
- Insider trading: trading on MNPI, both tipper/tippee liable
- Churning: excessive trading for commissions
- Front-running: trading ahead of customer's order
- Free-riding: 90-day account freeze
- Breakpoint selling: must inform investors of volume discounts
- Selling away: prior written notice to firm required
- Reg BI: best interest standard for retail customers
Mnemonics that stick
- "MNPI = Material Nonpublic Information = NEVER trade on it"
- "Churning = Commissions, not Customer benefit"
- "Free-riding = Free lunch? 90-day FREEZE on your account"
- "Selling Away = Selling securities Away from your firm without telling them"
- "Breakpoint Selling = Breaking the customer's savings by keeping them under the discount"
Exam traps
- BOTH the tipper AND tippee are liable for insider trading — not just the trader
- Front-running applies to ALL registered persons, not just traders
- Free-riding results in a 90-day FREEZE — not account termination
- Selling away requires PRIOR written notice to the firm (not after)
- Sharing in accounts requires WRITTEN firm approval AND proportionate sharing
- Breakpoint selling is about DENYING discounts — reps must inform customers of breakpoints
- Reg BI applies to RETAIL customers, not institutional
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