Conflicts of Interest, Criminal Activities, and Other Ethics Issues

The whole unit on one sheet.

What Does the Dishonest Practices Catalog Cover?

• The list is not exhaustive. Broker-dealer: a pattern of unreasonable delays, churning, unsuitable recommendations, unauthorized trading, margin without a written agreement, failing to segregate customer securities, unfair pricing, and unpaid arbitration awards.
• Agent: borrowing or lending with customers, selling away, fictitious accounts, sharing in customer accounts, and improper commission splitting.
• Churning is trading excessive in size or frequency relative to the customer's resources and account character. Control and intent to defraud are not separate NASAA elements.

What Are the Agent Bright Lines?

• An agent may never borrow from, lend to, or act as custodian for a customer.
• Sharing in an account needs written consent from both the customer AND the broker-dealer, which is the whole state-law test. FINRA adds proportionality, waived for immediate family.
• Selling away is a private transaction off the firm's books, lawful only with written pre-approval before execution.
• Outside securities accounts need the employer's prior written consent plus written notice to the executing firm.
• Commission splitting works only with an agent at the same firm or one under common control.
• A firm, not an agent, may pay a retiring representative or a foreign finder, under set conditions.

What Do the Antifraud Provisions Prohibit?

• The universal antifraud provision bans a scheme to defraud, an untrue statement of material fact or misleading omission, and conduct that operates as a fraud, in any offer, sale, or purchase, by any person; a half-truth still counts.
• The advisory antifraud provision bans schemes and fraud-or-deceit conduct by anyone paid for securities advice, and misstatements in soliciting clients. Each principal trade needs written capacity disclosure and consent before completion, except a broker-dealer's trade with its own customer when it is not advising on that trade.

Which Manipulation and Information-Advantage Violations Matter?

• Wash trade: a transaction with no change in beneficial ownership. Matched orders: entering an order knowing a substantially matching opposite-side order has been or will be entered, to create a false or misleading appearance of active trading; a bona fide agency cross is not one.
• Painting the tape: a series of trades creating active trading or moving the price to induce others to trade.
• Front-running: Block violations require material nonpublic information (MNPI) about an imminent block. Non-block trading ahead can breach other customer-order protections. Profit is not required.
• Spoofing: orders placed with intent to cancel (layering spans price levels); a limit order canceled for a real reason is neither. Insider trading: trading on MNPI in breach of a duty, so insiders disclose or abstain. A tipper's breach needs a personal benefit; a tippee must know of both and trade.

How Do Agency Cross and Principal Transactions Differ?

• Agency cross allows prospective written consent, plus dual-role disclosure, a written confirmation per transaction, an annual summary, and a standing revocation right. Never recommend the trade to both sides.
• Principal transactions do not: trading from the adviser's own account needs fresh written disclosure and consent before completion of each transaction.

How Does the Vulnerable-Adults Model Act Work?

• Financial exploitation includes misuse through a power of attorney, guardianship, or conservatorship, not just outright taking.
• Mandatory: reporting to Adult Protective Services and the Administrator, and providing records on request. Permissive: delaying a disbursement after an internal review, and notifying a designated third party, who must not be a suspect.

Which One-Liners Win Points?

• An exemption from registration is never an exemption from fraud liability.
• Fund shares: disclose sales charges, breakpoints, and letter-of-intent features. A fund cannot be called "no-load" if 12b-1 and service fees total more than 0.25%. Switching to a similar fund without reasonable grounds for suitability is a dishonest practice, and a prospectus alone is not dispositive of full disclosure.
• A broker-dealer or agent needs written discretionary authority before the first discretionary trade; an adviser gets 10 business days after the first oral-discretion trade.
• Conflicts are largely manageable through disclosure: an adviser discloses in writing before advising under the higher fiduciary standard, a broker-dealer under Regulation Best Interest.

Which Numbers Matter Most?

Which Gotchas Trip Students Up?

• The agent borrowing and lending ban is absolute: a customer being a bank does not help the agent.
• The antifraud provisions cover exempt securities and exempt transactions, and reach any offer made or accepted in the state.
• Turnover ratios are evidence, not a threshold; verbal approval never authorizes selling away.

One-Breath Recap

The NASAA dishonest and unethical practices catalog bans churning, unauthorized trading, guaranteeing against loss, market manipulation, and unpaid arbitration awards. Agents live under bright lines: never borrow from or lend to a customer, never sell away without written pre-approval before execution, and share in an account only with written consent from both the customer and the broker-dealer, which is the whole state-law test. Add the mutual-fund rules on breakpoints, the no-load label, and switching, plus the conflict framework of written adviser disclosure before advice and broker-dealer disclosure under Regulation Best Interest, and this unit answers itself.

Need more than the recap? Read the full Conflicts of Interest, Criminal Activities, and Other Ethics Issues unit.