Fair-pricing standards apply at the federal level. At the state level, NASAA's Statement of Policy on Dishonest or Unethical Business Practices reinforces and expands on them.
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.
Unreasonable Service Fees
- 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.
Excessive Trading / Churning
- 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
Three elements of churning:
| Element | Description |
|---|---|
| Excessive trading | High turnover rate, high cost-equity ratio, patterns of in-and-out trading |
| Control | The broker-dealer must have control over the account, either discretionary authority or de facto control through the customer's reliance on the agent's recommendations |
| Intent | The trading is motivated by generating commissions, not by serving the customer's interest |
Exam Tip: Gotchas
- Churning requires control over the account. If a customer independently decides to trade frequently, it is not churning, even if the turnover is high. The broker must have either discretionary authority or de facto control (the customer rubber-stamps everything the agent suggests).
Agent Commission Splitting
- 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).