Quick Answer
NASAA's Statement of Policy on Dishonest or Unethical Business Practices makes unfair pricing, unreasonable service fees, induced excessive trading, and unregistered commission splitting state-level violations. These provisions mirror and extend federal fair-pricing rules, so a single violation can trigger both federal and state enforcement.
Fair-pricing standards apply at the federal level. At the state level, NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents reinforces and expands on them.
What Counts as Unfair Pricing?
- It is a dishonest or unethical business practice for a broker-dealer to enter into a transaction with or for a customer at a price not reasonably related to the current market price of the security
- It is also dishonest to receive an unreasonable commission or profit
- This mirrors federal fair-pricing standards at the state level, meaning violations can trigger both federal and state enforcement
Exam Tip: Gotchas
- Unfair pricing or excessive fees count as a NASAA dishonest practice violation, which can trigger state enforcement action on top of any federal action.
What Makes a Service Fee Unreasonable?
- Charging unreasonable and inequitable fees for services performed is a dishonest practice
- This covers miscellaneous services such as:
- Collection of principal, dividends, or interest
- Exchange or transfer of securities
- Appraisals
- Safekeeping and custody
- Other services related to the securities business
Think of it this way: Even non-transaction fees are subject to a reasonableness standard. Charging $500 to transfer an account when industry norms are $75 could be a violation.
Exam Tip: Gotchas
- Unreasonable fees for non-transaction services (transfers, custody, appraisals) are also NASAA violations, not just unfair trade prices.
What Does NASAA's Provision Require for Excessive Trading?
- Inducing trading in a customer's account that is excessive in size or frequency in view of the financial resources and character of the account is a dishonest practice
- Churning generates excessive commissions for the broker-dealer/agent at the customer's expense
- NASAA's provision states only this single test: is the induced trading excessive in size or frequency, measured against the customer's financial resources and the character of the account? Its text does not add a separate control, motive, or numerical-turnover element
Evidence that can support a churning finding, even though none of it is a required element under NASAA's text:
| Indicator | Why It Matters |
|---|---|
| Turnover and cost-to-equity ratios | High figures suggest trading beyond what the account's resources justify |
| Control (discretionary or de facto) | Broader churning doctrine looks at whether the agent, not the customer, is driving the activity |
| Commission-seeking intent | Evidence the trading was motivated by generating commissions rather than serving the customer |
Exam Tip: Gotchas
- For a question asking specifically about NASAA's stated broker-dealer provision, apply its text: trading induced by the firm that is excessive in size or frequency given the customer's financial resources and account character. Control, motive, and a numerical turnover figure are not additional elements the provision states, even though they can be evidence in a broader churning analysis.
- A customer who independently decides to trade frequently is not being churned under this provision; the trading must be induced by the firm.
When Can an Agent Share Commissions?
- An agent may not divide or split commissions, profits, or other compensation with any person who is not also registered as an agent for:
- The same broker-dealer, OR
- A broker-dealer under direct or indirect common control
- This prevents payments to unregistered persons for securities-related activities
Why this matters: If an agent pays a referral fee to an unregistered friend for bringing in a client, that is a commission-splitting violation, even if the friend never touches a security.
Exam Tip: Gotchas
- Commission splitting is only allowed with other registered agents at the same firm (or an affiliated firm under common control).
What Should You Check on Exam Day?
- Unfair pricing (price not reasonably related to current market price, or an unreasonable commission) is a NASAA dishonest practice, mirroring federal fair-pricing rules.
- Unreasonable service fees (transfers, custody, appraisals, collection of principal/dividends/interest) are also violations, not just excessive trade prices.
- NASAA's excessive-trading provision tests only whether firm-induced trading is excessive in size or frequency relative to the customer's resources and account character. Control, motive, and a turnover number are supporting evidence, not separately required elements of that text.
- Commission splitting is allowed only with another registered agent at the same broker-dealer or one under common control; paying an unregistered person a referral fee is a violation.