Quick Answer
The NASAA dishonest and unethical practices bar churning, unauthorized trading, guaranteeing against loss, and selling away. Agents may never borrow from or lend to customers, and may share in an account only with written consent from both the customer and the broker-dealer, proportional to their contribution. Most conflicts are manageable through disclosure.
The whole unit on one sheet: the dishonest-practices catalog, the agent bright lines, and the conflict rules the exam loves.
NASAA Dishonest Practices for Broker-Dealers and Agents
- The governing standard: observe high standards of commercial honor and just and equitable principles of trade.
- The prohibited list is not exhaustive. Forgery, embezzlement, nondisclosure, and manipulation also qualify.
- Broker-dealer (BD) prohibitions: a pattern of unreasonable delays, churning, unsuitable recommendations, failing best interest under Regulation Best Interest, unauthorized trading, margin without a written agreement, failing to segregate customer securities, unfair pricing, false "at the market" quotes, market manipulation (wash sales, matched orders, painting the tape), guaranteeing against loss, and failing to pay arbitration awards or regulatory penalties.
- Agent-specific prohibitions: borrowing/lending with customers, selling away, fictitious accounts, sharing in customer accounts, and commission splitting with unregistered persons.
- Violations can bring denial, suspension, or revocation of registration.
The One-Liners That Win Points
- Churning = trading excessive in size or frequency relative to the customer's objectives, resources, and account character; three elements: control (actual or de facto), excessive activity, and intent to defraud (scienter).
- A suitable individual trade can still be part of a churning pattern; suitability judges each recommendation, churning judges the whole account.
- An agent may never borrow from, lend to, or act as custodian for a customer. No exceptions, not for family, banks, or affiliates. (Investment advisers have limited exceptions; agents do not.)
- Sharing in an account needs written consent from both the customer AND the broker-dealer, and must be proportional to the agent's contribution. Family accounts waive the proportionality requirement.
- Selling away = a private securities transaction not on the BD's books; lawful only with written pre-approval before execution. Oral approval fails; informing the firm afterward does not cure it.
- Outside securities accounts: notify both firms in writing and get the employer's written consent; the employer may demand duplicate statements.
- Commission splitting is allowed only with an agent registered at the same BD or one under common control. A "finder's fee" to an unregistered friend violates the rule.
- A half-truth (technically true but misleading) is still a prohibited misrepresentation, as is any material omission.
Investment Company Share Practices
- All sales charges (front-end loads, asset-based fees, contingent deferred sales charges) must be adequately disclosed.
- A fund is not "no-load" if it has a front-end load, a contingent deferred sales charge, or asset-based plus service fees above 0.25% of average annual net assets.
- Must proactively disclose relevant breakpoints and letter-of-intent features, even if the customer never asks.
- Switching customers between similar funds mainly to generate new sales charges is a dishonest practice; recommend a suitable share class.
- Delivering a prospectus by itself does not satisfy the independent duty to disclose.
Conflicts of Interest: Disclose and Manage
- Not every conflict is a prohibition; many are manageable through disclosure.
- A BD must disclose control relationships with an issuer before entering the transaction (oral disclosure supplemented in writing at or before completion).
- Standard of care: a BD answers to Regulation Best Interest (a best-interest standard); an investment adviser answers to a fiduciary duty, the higher standard.
Numbers to Lock In
| Item | Value |
|---|---|
| Turnover ratio suggestive / presumptive / conclusive of churning | 2 / 4 / 6 |
| Outside-account notice if account predates employment | within 30 calendar days |
| "No-load" disqualifier: annual asset-based plus service fees | above 0.25% |
Top Gotchas
- Sharing requires BOTH written approval and proportionality; the family exception waives only proportionality, not the dual written consent.
- Churning turns on activity being excessive relative to the customer's objectives and resources, not on a raw trade count; de facto control (the customer always follows along) is enough.
- Selling away is any unapproved private transaction, and it is still a violation even if the security was legitimate and the customer profited.
- The agent borrowing/lending ban is absolute: a customer being a bank does not help the agent (that exception is for advisers only).
- The no-load label dies once asset-based plus service fees exceed 0.25%, even with zero front-end load.
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 (no exceptions), 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, proportional to contribution unless the customer is family. Add the mutual-fund rules (breakpoint and no-load disclosure, no switching for new sales charges) and the conflict framework (disclose and manage, best interest for BDs versus fiduciary duty for advisers), and this unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Prohibited Activities and Conflicts of Interest unit for the complete lesson.