Welcome to Conflicts of Interest, Criminal Activities, and Other Ethics Issues: the unit that tells you exactly what securities professionals cannot do, how they must manage the conflicts that arise when handling other people's money, and where prohibited conduct crosses into outright fraud.
Exam Weight: Part of 25% (15 questions total for Chapter 8: Ethical Practices and Obligations)
What You'll Learn
This is the largest unit on the exam. It splits into three groups.
Prohibited practices and conflicts:
- NASAA Dishonest Practices (Broker-Dealers and Agents): The comprehensive list of prohibited conduct under the 1983 Statement of Policy
- Churning (Excessive Trading): Trading excessive in size or frequency relative to the customer's resources and the character of the account
- Loans to and from Customers: Why agents face an absolute prohibition while investment advisers have limited exceptions
- Sharing in Profits and Losses: Dual-authorization requirements for agents
- Selling Away: Off-book transactions and why written pre-approval is the only lawful route
- Outside Securities Accounts: Notification and consent rules for accounts held at other firms, including payments to unregistered persons
- Other Prohibited Activities: Guaranteeing against loss, unauthorized trading, discretionary-authority timing, fictitious accounts, and commission splitting
- Investment Company Share Practices: Breakpoint disclosure, share class suitability, switching, and the "no-load" definition
- Agency Cross Transactions and Principal Transactions: The conditions and consent rules that govern an adviser trading with or against its own client
- Conflicts of Interest: Written disclosure for advisers and the best-interest standard for broker-dealers
Market manipulation:
- Manipulative, Deceptive, and Fraudulent Devices: Wash trades, matched orders, and painting the tape
- Front-Running: Trading ahead of customer orders for personal gain
- Spoofing and Layering: Placing orders never meant to execute in order to move a price
Criminal activity and investor protection:
- Insider Trading: Trading on material nonpublic information in breach of a duty of trust or confidence
- Exploitation of Vulnerable Adults: The NASAA Model Act's mandatory reporting and disbursement delay provisions
The antifraud provisions themselves are covered in State Enforcement and Antifraud Authority, under Regulations of Securities and Issuers, because they define the Administrator's reach rather than a single practice.
Why This Matters
At 25% of the exam, this chapter is the most heavily tested, and this unit carries most of it. NASAA expects you to know not just what is prohibited, but the specific rules and exceptions that apply differently to broker-dealers, agents, and investment advisers.
Many exam questions present a scenario and ask whether the conduct is permissible. The answer often turns on which type of professional is involved, so the distinction between broker-dealer rules and adviser rules is what makes these questions answerable.
Let's start with the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.