Quick Answer
Every broker-dealer and agent must observe high standards of commercial honor and just and equitable principles of trade. NASAA's Statement of Policy lists dozens of specific prohibited practices, but the list is not exhaustive, and violating the general standard through unlisted conduct still exposes a firm or agent to denial, suspension, or revocation of registration.
This Statement of Policy is the foundation of ethical conduct regulation for broker-dealers (BDs) and their agents under state law, and it is the single most heavily tested authority in this chapter.
What Is the General Standard, and Is the List of Violations Complete?
- 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
Exam Tip: Gotchas
- The list is illustrative, not exhaustive. A fact pattern can violate the general standard even if the specific conduct is not one of the enumerated items below. Do not eliminate an answer choice just because it isn't on the list.
What Practices Are Prohibited for 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 |
What Additional Practices Are Prohibited for 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 most of the BD prohibitions listed above (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.
What Should You Check on Exam Day?
- The general standard (high standards of commercial honor) covers conduct even when it isn't on the enumerated list; do not assume "not listed" means "not prohibited."
- Match each fact pattern to whether it's a BD-level prohibition, an agent-specific prohibition, or both; several agent restrictions (borrowing/lending, selling away, sharing in accounts) have no BD-level counterpart.
- A "pattern" is required for the unreasonable-delays violation; a single late delivery is not enough on its own.