Introduction

Welcome to Prohibited Activities and Conflicts of Interest: the section that tells you exactly what securities professionals cannot do and how they must manage the conflicts that inevitably arise when handling other people's money.

Exam Weight: Part of 25% (15 questions total for Chapter 7: Ethical Practices and Obligations)

What You'll Learn

In this unit, you'll cover:

• NASAA Dishonest Practices (Broker-Dealers and Agents): The comprehensive list of prohibited conduct under the 1983 Statement of Policy, including churning, unauthorized trading, guaranteeing against loss, and selling away
• NASAA Model Rule for Investment Advisers: Fiduciary duty, prohibited IA practices, the 10-business-day discretionary authority rule, and borrowing/lending restrictions
• Churning (Excessive Trading): The three elements required to establish churning: control, excessive activity, and intent to defraud
• Loans to and from Customers: Why agents face an absolute prohibition while IAs have limited exceptions
• Sharing in Profits and Losses: Dual-authorization requirements for agents who want to participate in customer account performance
• Selling Away: Off-book transactions and why written pre-approval from the BD is the only way to conduct them lawfully
• Outside Securities Accounts: FINRA Rule 3210 notification requirements for accounts at other firms
• Agency Cross Transactions: When an IA acts as broker for both sides and the six conditions that must be met
• Principal Transactions: Per-transaction disclosure and consent when an IA trades from its own account with a client
• Other Prohibited Activities: Guaranteeing against loss, unauthorized trading, fictitious accounts, and commission splitting
• Investment Company Share Practices: Breakpoint disclosure, share class suitability, switching, and the "no-load" definition
• Conflicts of Interest: Written disclosure obligations for IAs and the Reg BI framework for broker-dealers

Why This Matters

This unit is frequently tested on the Series 63 exam. 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 hinges on which type of professional is involved. Understanding the distinctions between BD rules and IA rules is the key to answering these questions correctly.

Let's start with the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.