NASAA Dishonest Practices - Broker-Dealers and Agents
The NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents (originally adopted in 1983, most recently amended in 2025) is the foundation of ethical conduct regulation for broker-dealers (BDs) and their agents under state law.
General Standard
- Every broker-dealer and agent shall observe high standards of commercial honor and just and equitable principles of trade
- The prohibited practices listed are not inclusive - other conduct such as forgery, embezzlement, nondisclosure, or manipulative practices also qualifies as dishonest
- Violations may result in denial, suspension, or revocation of registration
Prohibited Practices of Broker-Dealers
The following practices apply to broker-dealers. Many also apply to agents (see below).
| Practice | What It Prohibits | Key Details |
|---|---|---|
| Unreasonable delays | Delays in delivering securities or paying free credit balances | Must be a pattern of delays - a single incident is not enough |
| Churning | Excessive trading in size or frequency | Must be excessive relative to financial resources and account character |
| Unsuitable recommendations | Recommending transactions without reasonable grounds to believe they are suitable | Must inquire into objectives, financial situation, and needs |
| Failure to act in best interest (Reg BI) | Placing BD or agent interest ahead of retail customer interest | Must comply with SEC Regulation Best Interest |
| Misuse of "adviser" title | Using any variant of "adviser" or "advisor" without investment adviser (IA) or investment adviser representative (IAR) licensure | Unless otherwise permitted by law |
| Unauthorized trading | Executing transactions without customer authorization | Every trade must be authorized |
| Unauthorized discretion | Exercising discretion without written authority | Exception: discretion over time and/or price only |
| Margin without agreement | Trading on margin without a written agreement | Must secure written agreement promptly after initial margin transaction |
| Failing to segregate | Not separating customer free securities from firm securities | Customer assets must be kept separate |
| Improper hypothecation | Pledging customer securities without a lien or without written consent | Customer consent required promptly after initial transaction |
| Unfair pricing | Transactions at prices not reasonably related to current market | Includes unreasonable commissions or profits |
| Failing to deliver prospectus | Not furnishing a prospectus by confirmation date | Final or preliminary prospectus plus supplement required |
| Unreasonable service fees | Charging excessive fees for miscellaneous services | Dividends, transfers, safekeeping, custody fees must be reasonable |
| Failing to honor quoted prices | Quoting a price then refusing to transact | Must be prepared to buy/sell at stated price under stated conditions |
| False "at the market" | Claiming a security is offered "at the market" when no independent market exists | Market must exist other than one made by the BD |
| Market manipulation | Wash sales, matched orders, painting the tape | Any manipulative, deceptive, or fraudulent device |
| Guaranteeing against loss | Guaranteeing a customer will not lose money | Prohibited regardless of form (written, oral, implied) |
| False transaction reports | Publishing reports of transactions not believed to be bona fide | Includes quoting prices that are not genuine bids or offers |
| Deceptive advertising | Misleading sales presentations or advertisements | Cannot defeat the purpose of a prospectus |
| Failing to disclose control relationships | Not disclosing BD's affiliation with the issuer | Must disclose before entering the contract; written disclosure at or before completion |
| Withholding securities | Not making a bona fide public offering of allotted securities | Must offer all securities allocated for distribution |
| Failing to respond to requests | Ignoring customer inquiries or formal complaints | Must furnish entitled information and respond to written requests |
| Failing to pay arbitration awards | Not satisfying final judgments or arbitration awards | Must pay unless alternative written payment arrangements are agreed upon |
| Attempting to avoid awards | Trying to evade payment of arbitration awards | A separate violation from nonpayment |
| Failing to pay regulatory penalties | Not paying fines, restitution, or disgorgement | Imposed by SEC, state regulators, or SROs |
Prohibited Practices Specific to Agents
In addition to many of the BD prohibitions above, agents face additional restrictions:
| Practice | What It Prohibits | Key Details |
|---|---|---|
| Borrowing/lending from customers | Any borrowing or lending of money or securities | Also cannot act as custodian for customer money or securities |
| Selling away | Off-book transactions not recorded on the BD's books | Must have written pre-approval from the BD before execution |
| Fictitious accounts | Creating accounts with false information | Used to execute otherwise-prohibited transactions |
| Sharing in customer accounts | Participating in profits or losses of a customer account | Requires written authorization from both the customer AND the BD |
| Commission splitting | Dividing compensation with unregistered persons | Can only split with agents registered at the same BD or a BD under common control |
Agents are also subject to BD prohibitions 1b through 1y (churning, unsuitable recommendations, Reg BI, unauthorized trading, and others).
Exam Tip: Gotchas
- The agent borrowing/lending prohibition is absolute. There are no exceptions. Even if the customer is a bank, a family member, or a financial institution, an agent may never borrow from or lend to a customer. Investment adviser (IA) rules have limited exceptions; this rule does not.