Glossary

The StarCompliance Glossary provides definitions of terms that are either unique to compliance, a specific industry, or are used in legal terminology.

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Conduct Risk

Conduct risk refers to the potential harm or negative impact resulting from individuals or organizations who engage in unethical or irresponsible behavior within the financial services industry. This encompasses such actions as fraud, market manipulation, sharing of MNPI (material nonpublic information), and other types of misconduct that can harm customers, investors, and the reputation of financial institutions as a whole.

Although the Financial Conduct Authority (FCA) has no formal definition of conduct risk, its rules ensure that all regulated firms operate in service of the FCA’s primary objectives of consumer protection, market integrity, and effective competition. (The KPMG of Ireland is one of the few regulatory bodies that does define conduct risk as “any action of a firm or individual that leads to consumer/investor detriment or has an adverse effect on market stability or even competition.”)

Understanding conduct risk is also a crucial component of employee compliance training. Employees need to fully comprehend the definition, examples, and consequences of conduct that falls out of compliance with applicable regulations. Establishing a framework for preventing and identifying conduct risk — along with implementing software and an effective training and competency program — ensures a firm’s employees are empowered to support market integrity and uphold a culture of compliance.

StarCompliance’s Employee Conflicts of Interest and MNPI & Enterprise Conflicts software suites can flag suspicious activities that fall into the “conduct risk” category and protect both employees and consumers.

Consumer Duty

Consumer Duty is a regulatory framework established by the UK’s Financial Conduct Authority (FCA) that sets higher standards for consumer protection in financial services. It requires firms to act in good faith, avoid foreseeable harm to customers, and support them in making informed decisions. The goal is to ensure that consumers receive fair value, clear information, and effective support from financial institutions.

With StarCompliance’s Accountability & Competency solutions, firms can ensure employees understand and adhere to Consumer Duty requirements by centralizing policies, automating attestations, and maintaining a clear audit trail of compliance efforts. Designed for compliance and HR departments alike, our solutions simplify everyday compliance processes while ensuring you meet the strictest regulatory and ethical standards.

FINRA Rule 3220

FINRA Rule 3220, also known as “Influencing or Rewarding Employees of Others” or “the Gifts Rule” is a regulation established by the Financial Industry Regulatory Authority (FINRA) to prevent firms from engaging in any activity that might influence or reward employees of other companies for securities business. The rule seeks to ensure fair dealing and prevent conflicts of interest in the securities industry.

FINRA rule 3220 specifically prohibits member firms from, directly or indirectly, giving or permitting to be given “anything of value, including gratuities, in excess of one hundred dollars ($100) per individual per year to any person, principal, proprietor, employee, agent or representative of another person where such payment or gratuity is in relation to the business of the employer of the recipient of the payment or gratuity. A gift of any kind is considered a gratuity.”

Additionally, firms are prohibited from offering or making payments to employees of other companies as an inducement to recommend or refer clients for securities business. FINRA Rule 3220 is part of a broader set of rules that seek to promote ethical behavior and maintain investor confidence in the securities industry.

FINRA Rule 3220 does not apply to contracts of employment with or to compensation for services rendered by member firms, provided that there is written agreement in existence prior to the time of employment or before the services are rendered. FINRA Rule 3220 also requires that a separate record of all payments or gratuities in any amount known to the member, any pre-existing employment agreement, and any employment compensation paid as a result thereof shall be retained by the member for a period of not less than 6 years, as specified by SEA Rule 17a-4.

Compliance with FINRA Rule 3220 is important for firms to avoid penalties and potential damage to their reputation. It is recommended that firms implement policies and procedures to ensure that they comply with the rule and to provide training to employees on the importance of ethical behavior in the securities industry. The Gifts and Entertainment solution from StarCompliance makes it easy for compliance teams to define limitations, simplify pre-clearance and reporting, and track transactions using automatic surveillance and a highly configurable rules engine.

FINRA Rule 3270

FINRA Rule 3270, titled “Outside Business Activities of Registered Persons” requires registered representatives to notify their member firm of proposed outside business activities (OBA) so the firm can determine whether to limit or allow those activities.

FINRA Rule 3270 specifically states that “no registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member.”

The member firm must evaluate the proposed OBA to determine if it is appropriate and complies with applicable regulations. In its evaluation, the member firm considers factors such as the nature of the activity, the person’s role, the potential conflicts of interest, and the impact on the person’s obligations to the member firm and its customers. Depending on its findings, the firm may either approve or disapprove the activity.

FINRA Rule 3270 is to ensure that registered persons’ involvement in outside business activities is properly disclosed, evaluated, and supervised by their member firms to determine if there are any potential conflicts of interest that could expose both the firm and its customers to potential risk. Passive investments and activities subject to the requirements of FINRA Rule 3280 are exempt from this requirement.

StarCompliance’s Outside Business Activity product allows representatives to quickly and easily declare outside business interests. STAR features fully customizable outside activity declaration forms, covering every possible external business interest, including board-level roles outside your firm, charitable donations, and family connections to other financial firms.

FINRA Rule 3280

FINRA Rule 3280 is a regulation that governs and limits private securities transactions by associated persons of a member firm. FINRA Rule 3280 applies to both purchases and sales of securities and is intended to protect investors and firms through increased oversight.

FINRA Rule 3280 requires the associated person to provide written notice to their member firm before participating in a private securities transaction even when they receive no compensation. The notice should include detailed information about the proposed transaction, the person’s role in it, and whether they will receive any selling compensation. If there is a series of related transactions without selling compensation, a single written notice is normally sufficient.

If the associated person expects to receive selling compensation, the member firm must respond to the notice, either approving or disapproving the person’s participation. If approved, the transaction must be recorded on the member firm’s books and records, and the firm must supervise the person’s involvement as if it were conducted on behalf of the firm. If disapproved, the person is prohibited from participating in the transaction in any capacity.

In cases where the associated person will not receive any selling compensation, the member firm must promptly acknowledge the notice. The firm may also impose specific conditions for the person’s involvement at its discretion.

FINRA Rule 3280 also provides specific definitions for certain terms:

“Private securities transaction” refers to any securities transaction that falls outside the associated person’s regular employment with the member firm, usually assets issued by privately owned companies that aren’t “traded” on the stock market. There are exclusions, such as transactions subject to Rule 3210 notification requirements, transactions among immediate family members, and personal transactions in investment companies and variable annuity securities.
“Selling compensation” encompasses various forms of compensation, whether direct or indirect, received in connection with or as a result of buying or selling securities, including commissions, finder’s fees, participation rights, and expense reimbursements.
“Participation” is broadly defined and considers representatives to have participated in a transaction if they meet any of the following conditions: they recommended or marketed the investment to customers, assisted with the mechanics of the transaction, or were compensated for their role in the transaction.

It’s important for associated persons and member firms to comply with this rule to ensure proper disclosure and supervision of private securities transactions. Proper compliance prevents someone from having a conflict of interest or committing insider trading. StarCompliance’s Private Investments product lets employees quickly and easily declare their non-publicly traded investments using fully configurable forms—ensuring all parties stay in the know from day one.

IAF (Individual Accountability Framework)

Ireland’s Individual Accountability Framework (IAF), introduced by the Central Bank of Ireland, is aimed at enhancing personal accountability and conduct standards within financial services. Similar to the UK’s SMCR, IAF includes the Senior Executive Accountability Regime (SEAR), Conduct Standards, and Fitness & Probity requirements to ensure that individuals in key roles are accountable for their actions and decisions.

StarCompliance’s Individual Accountability Regime and IAF tracking solutions help firms comply with IAF by mapping responsibilities, automating attestations, and ensuring that senior managers and certified individuals meet regulatory expectations. The dedicated IAF solutions further support compliance by enabling firms to proactively identify and address conduct risks before they become regulatory issues.

Market Manipulation

Market manipulation is any intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities. Also known as stock manipulation, it is an intentional interference with the free forces of supply and demand to drive a stock’s price up or down.

Artificially influencing the price or value of a financial instrument, such as stocks, bonds, commodities, or derivatives is considered both unethical and illegal. Market manipulation undermines the integrity and fairness of financial markets, erodes investor confidence, and can lead to significant financial losses for unsuspecting participants. There are several forms of market manipulation, the most common being:

Price manipulation: Intentionally buying or selling a large volume of securities to manipulate their prices. Traders may engage in practices like wash trading (simultaneously buying and selling the same security), painting the tape (creating artificial trading activity), or spoofing (placing and canceling orders to deceive other market participants).
Insider trading: Insider trading involves trading securities based on material nonpublic information (MNPI). Insider trading is illegal for individuals who have obtained privileged information about a company through their position or relationship and do not properly disclose their transaction in accordance with Rule 10b5-1.
Pump and dump: Artificially inflating the price of a security by spreading false or misleading information to create hype and attract investors. Once the price rises significantly, the manipulators sell their holdings, causing the price to collapse, and leaving other investors with losses.
Poop and scoop: An inverse of the pump and dump, in which individuals or groups make false derogatory statements about a stock to drop its value in order to then buy it on the cheap. When this scheme is executed by short-sellers in order to profit, it’s known as a short and distort.
Churning: When a broker excessively trades in a customer’s account to generate commissions rather than to benefit the client. This practice can result in unnecessary transaction costs and erode the value of the client’s portfolio.
Front-running: When a broker or trader executes trades on their behalf or for their firm’s account based on advance knowledge of pending customer orders. By placing their trades first, they can take advantage of the anticipated price movement caused by the customer’s order.

Regulators and authorities, such as the Securities and Exchange Commission (SEC) in the United States, take an active role in monitoring and enforcing regulations to detect and prevent market manipulation activities. For firms that want to protect themselves from market manipulation, software solutions such as StarCompliance’s Control Room Software can identify the MNPI of their advisors and track that against their personal actions or what they’re doing on their customers’ behalf to identify potential risks.

Rule 10b5-1

Rule 10b5-1 was established by the Securities and Exchange Commission (SEC) to provide a safe harbor for individuals to engage in insider trading activities while complying with securities laws to avoid accusations of insider trading. Insider trading refers to buying or selling securities based on material nonpublic information about the company.

Under Rule 10b5-1, an individual can establish a written trading plan, often referred to as a 10b5-1 plan, which allows for the purchase or sale of securities at a later date, even if the individual possesses material nonpublic information at the time the plan is established. By creating a predetermined plan, the individual can avoid potential accusations of insider trading because the trades are executed automatically according to the plan’s predetermined parameters.

While Rule 10b5-1 provides a safe harbor, it does not guarantee immunity from all forms of insider trading liability. It is advisable to consult with legal and compliance professionals when establishing and implementing a 10b5-1 plan to ensure compliance with all relevant regulations and requirements.

StarCompliance’s Insider Trading compliance solution helps companies reduce the chances of market abuse and insider trading by allowing companies to track which employees have material and non-public information. This solution also compares employees’ trades against high-impact global events and market activity to see if they are abusing the market and making trades when they have material nonpublic information.

Shadow Trading

Shadow trading occurs when an individual uses material nonpublic information (MNPI) about one company to trade securities of a different but economically linked company. Unlike traditional insider trading, which involves trading in the same company’s stock, shadow trading exploits indirect market connections, making it more challenging to detect. Regulators, including the SEC, have increased scrutiny on this practice to prevent unfair market advantages.

StarCompliance’s Insider Trading Detection solution helps firms mitigate the risk of shadow trading by monitoring employee trading activity against high-impact global events, market movements, and MNPI access lists. The MNPI & Enterprise Conflicts suite ensures firms have controls in place to track and restrict employees with access to sensitive market-moving information, reducing the risk of unethical trading behavior.

SMCR (Senior Managers and Certification Regime)

The Senior Managers and Certification Regime (SMCR) is a UK regulatory framework designed to improve accountability within financial services firms. Introduced by the FCA and the Prudential Regulation Authority (PRA), SMCR aims to enhance governance by clearly defining individual responsibilities, strengthening conduct standards, and ensuring firms certify key personnel as fit and proper for their roles.

StarCompliance’s Training & Competency solution streamlines SMCR compliance by automating annual certification processes, tracking senior management responsibilities, and ensuring employees meet conduct standards. Additionally, our dedicated SMCR solutions enable firms to efficiently distribute SMCR policies, track employee acknowledgments, and maintain comprehensive audit trails to demonstrate compliance to regulators.

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