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
- Churning (Excessive Trading): What NASAA's provision actually requires: trading excessive in size or frequency relative to the customer's resources and account character, not a fixed set of control-plus-scienter elements
- 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: Notification requirements for accounts held at other firms
- 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: The conditions that let an investment adviser act as broker-dealer for both sides of a client's trade
- Principal Transactions: Why per-transaction written disclosure and consent, not blanket consent, governs when an adviser trades against a client from its own account
- Conflicts of Interest: Written disclosure obligations for IAs and the best-interest standard 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.