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 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.