Kan. Admin. Regs. § 81-3-6 - Dishonest or unethical practices of broker-dealers and agents
(a) Unethical conduct. "Dishonest or
unethical practices," as used in K.S.A. 17-12a412(d) (13) and amendments
thereto, shall include the conduct prohibited in this regulation and the
failure to adhere to standards of conduct specified in this
regulation.
(b) Fraudulent conduct.
"An act, practice, or course of business that operates or would operate as a
fraud or deceit," as used in K.S.A. 17-12a501(3) and amendments thereto, shall
include the conduct prohibited in paragraphs (e)(9)(A), (9)(B), (10), (11),
(14) through (18), (20), (21), (24), and (27), paragraphs (f)(1) through (6),
and subsections (g) and (i).
(c)
General standard of conduct. A person registered as a broker-dealer or agent
under the act shall not fail to observe high standards of commercial honor and
just and equitable principles of trade in the conduct of the person's
business.
(d) FINRA, NASD, New York
stock exchange, and SEC rules and laws. Failure by a person registered as a
broker-dealer or agent under the act to comply with any of the following rules
and laws, as adopted by reference in K.A.R. 81-2-1, shall constitute unethical
conduct in violation of this regulation:
(1)
NASD conduct rules within the series of rules 2300, 2400, 2500, 2700, 2800,
3000, and 3100 and FINRA rules within the series of rules 2100, 2200, 2300,
3100, 3200, 3300, 5100, 5200, and 5300;
(2) rule 472 of the New York stock exchange,
"communications with the public";
(3) section 17 of the securities act of 1933,
15 U.S.C. §
77 q;
(4) sections
9 and 10 of the securities exchange act of 1934, 15 U.S.C. §§ 78 i and
78j;
(e)
Prohibited conduct: sales and business practices. Each person registered as a
broker-dealer or agent under the act shall refrain from the following practices
in the conduct of the person's business. For purposes of this subsection, a
security shall include any security as defined by K.S.A. 17-12a102, and
amendments thereto, including a federal covered security as defined by K.S.A.
17-12a102, and amendments thereto, or section 2 of the securities act of 1933,
15 U.S.C. §
77 b, as adopted by reference in K.A.R. 81-2-1.
(1) Delays in delivery or payment. A
broker-dealer shall not engage in a pattern of unreasonable and unjustifiable
delays in the delivery of securities purchased by any of the broker-dealer's
customers or in the payment upon request of free credit balances reflecting
completed transactions of any of its customers.
(2) Excessive trading. A broker-dealer or
agent shall not induce trading in a customer's account that is excessive in
size or frequency in view of the financial resources and character of the
account.
(3) Unsuitable
recommendations. A broker-dealer or agent shall not recommend to a customer the
purchase, sale, or exchange of any security without reasonable grounds to
believe that the transaction or recommendation is suitable for the customer
based upon reasonable inquiry concerning the customer's investment objectives,
financial situation and needs, and any other relevant information known by the
broker-dealer or agent.
(4)
Unauthorized trading. A broker-dealer or agent shall not execute a transaction
on behalf of a customer without authorization to do so.
(5) Improper use of discretionary authority.
A broker-dealer or agent shall not exercise any discretionary power in
effecting a transaction for a customer's account without first obtaining
written discretionary authority from the customer, unless the discretionary
power relates solely to the time or price for the execution of
orders.
(6) Failure to obtain
margin agreement. A broker-dealer or agent shall not execute any transaction in
a margin account without securing from the customer a properly executed written
margin agreement promptly after the initial transaction in the
account.
(7) Failure to segregate.
A broker-dealer shall not hold securities carried for the account of any
customer that have been fully paid for or that are excess margin securities,
unless the securities are segregated and identified by a method that clearly
indicates the interest of the customer in those securities.
(8) Improper hypothecation. A broker-dealer
shall not hypothecate a customer's securities without having a lien on the
securities unless the broker-dealer has secured from the customer a properly
executed written consent, except as permitted by SEC rule 8c-1, 17 C.F.R.
240.8c-1, or SEC rule 15c2-1, 17 C.F.R. 240.15c2 - 1, as adopted by reference in
K.A.R. 81-2-1.
(9) Unreasonable
charges. A broker-dealer or agent shall not engage in any of the following
conduct:
(A) Entering into a transaction with
or for a customer at a price not reasonably related to the current market price
of the security;
(B) receiving an
unreasonable commission or profit; or
(C) charging unreasonable and inequitable
fees for services performed, including the collection of monies due for
principal, dividends, or interest; exchange or transfer of securities;
appraisals; safekeeping or custody of securities; and other miscellaneous
services related to the broker-dealer's securities business.
(10) Failure to timely deliver
prospectus. A broker-dealer or agent shall not fail to furnish to a customer
purchasing securities in an offering, no later than the date of confirmation of
the transaction, either a final prospectus or a preliminary prospectus and an
additional document that together include all information set forth in the
final prospectus.
(11)
Contradicting prospectus. A broker-dealer or agent shall not contradict or
negate the importance of any information contained in a prospectus or any other
offering materials with the intent to deceive or mislead.
(12) Non-bona fide offers. A broker-dealer
shall not offer to buy from or sell to any person any security at a stated
price, unless the broker-dealer is prepared to purchase or sell at the price
and under the conditions that are stated at the time of the offer to buy or
sell.
(13) Misrepresentation of
market price. A broker-dealer shall not represent that a security is being
offered to a customer "at the market" or at a price relevant to the market
price, unless the broker-dealer knows or has reasonable grounds to believe that
a market for the security exists other than a market made, created, or
controlled by the broker-dealer, any person for whom the broker-dealer is
acting or with whom the broker-dealer is associated in the distribution of
securities, or any person controlled by, controlling, or under common control
with the broker-dealer.
(14) Market
manipulation. A broker-dealer or agent shall not effect any transaction in, or
induce the purchase or sale of, any security by means of any manipulative,
deceptive, or fraudulent device, practice, plan, program, design, or
contrivance, including the following:
(A)
Effecting any transaction in a security that involves no change in its
beneficial ownership;
(B) entering
an order or orders for the purchase or sale of any security with the knowledge
that an order or orders of the same security for substantially the same volume,
time, and price have been or will be entered for the purpose of creating a
false or misleading appearance of active trading in the security or a false or
misleading appearance with respect to the market for the security. However,
nothing in this paragraph shall prohibit a broker-dealer from entering bona
fide agency cross transactions for the broker-dealer's customers;
(C) effecting, alone or with one or more
other persons, a series of transactions in any security creating actual or
apparent active trading in the security or raising or depressing the price of
the security for the purpose of inducing the purchase or sale of the security
by others;
(D) engaging in general
solicitation and using aggressive, high-pressure, or deceptive marketing
tactics to affect the market price of the security; and
(E) using fictitious or nominee
accounts.
(15)
Guarantees against loss. A broker-dealer shall not guarantee a customer against
loss in any securities account of the customer carried by the broker-dealer or
in any securities transaction effected by the broker-dealer.
(16) Deceptive advertising. A broker-dealer
or agent shall not use any advertising or sales presentation in a manner that
is deceptive or misleading, including the following:
(A) Using words, pictures, or graphs in an
advertisement, brochure, flyer, or display to present any nonfac-tual data or
material; any conjecture, unfounded claims or assertions, or unrealistic claims
or assertions; or any information that supplements, detracts from, supersedes
or defeats the purpose or effect of any prospectus or disclosure; and
(B) publishing or circulating, or causing to
be published or circulated, any notice, circular, advertisement, newspaper
article, investment service, or communication of any kind that purports to
report any transaction as a purchase or sale of any security unless the
broker-dealer or agent believes that the transaction was a bona fide purchase
or sale of the security or that purports to quote the bid price or asked price
for any security unless the broker-dealer or agent believes that the quotation
represents a bona fide bid for or offer of the security.
(17) Failure to disclose conflicts of
interest. A broker-dealer shall not fail to disclose to any customer that the
broker-dealer is controlled by, controlling, affiliated with, or under common
control with the issuer of a security that is offered or sold to the customer.
The disclosure shall be made before entering into any contract with or for the
customer for the purchase or sale of the security, and if the disclosure is not
made in writing, the disclosure shall be supplemented by the giving or sending
of written disclosure before the completion of the transaction.
(18) Withholding securities. A broker-dealer
shall not fail to make a bona fide public offering of all of the securities
allotted to the broker-dealer for distribution, whether acquired as an
underwriter, as a selling group member, or from a member participating in the
distribution as an underwriter or selling group member, by engaging in conduct
including the following:
(A) Parking or
withholding securities; and
(B)
transferring securities to a customer, another broker-dealer, or a fictitious
account with the understanding that those securities will be returned to the
broker-dealer or the broker-dealer's nominees.
(19) Failure to respond to customer. A
broker-dealer shall not fail or refuse to furnish a customer, upon reasonable
request, information to which the customer is entitled, or to respond to a
formal written request or complaint.
(20) Misrepresenting the possession of
nonpublic information. A broker-dealer or agent shall not falsely lead a
customer to believe that the broker-dealer or agent is in possession of
material, nonpublic information that would impact the value of a
security.
(21) Contradictory
recommendations. A broker-dealer or agent shall not engage in a pattern or
practice of making contradictory recommendations to different investors of
similar investment objectives for some to sell and others to purchase the same
security, at or about the same time, if not justified by the particular
circumstances of each investor.
(22) Lending, borrowing, or maintaining
custody. An agent shall not lend or borrow money or securities from a customer,
or act as a custodian for money, securities, or an executed stock power of a
customer.
(23) Selling away. An
agent shall not effect a securities transaction that is not recorded on the
regular books or records of the broker-dealer that the agent represents, unless
the transaction is authorized in writing by the broker-dealer before the
execution of the transaction.
(24)
Fictitious account information. An agent shall not establish or maintain an
account containing fictitious information.
(25) Unauthorized profit-sharing. An agent
shall not share directly or indirectly in the profits or losses in the account
of any customer without the written authorization of the customer and the
broker-dealer that the agent represents.
(26) Commission splitting. An agent shall not
divide or otherwise split the agent's commissions, profits, or other
compensation from the purchase or sale of securities with any person who is not
also registered as an agent for the same broker-dealer or a broker-dealer under
direct or indirect common control.
(27) Misrepresenting solicited transactions.
A broker-dealer or agent shall not mark any order ticket or confirmation as
unsolicited if the transaction was solicited.
(28) Failure to provide account statements. A
broker-dealer or agent shall not fail to provide to each customer, for any
month in which activity has occurred in a customer's account and at least every
three months, a statement of account that contains a value for each
over-the-counter non-Nasdaq equity security in the account based on the closing
market bid on a date certain, if the broker-dealer has been a market maker in
the security at any time during the period covered by the statement of
account.
(f) Prohibited
conduct: over-the-counter transactions. A broker-dealer or agent shall not
engage in the following conduct in connection with the solicitation of a
purchase or sale of an over-the-counter, unlisted non-Nasdaq equity security:
(1) Failing to disclose to a customer, at the
time of solicitation and on the confirmation, any and all compensation related
to a specific securities transaction to be paid to the agent, including
commissions, sales charges, and concessions;
(2) in connection with a principal
transaction by a broker-dealer that is a market maker, failing to disclose to a
customer, both at the time of solicitation and on the confirmation, the
existence of a short inventory position in the broker-dealer's account of more
than three percent of the issued and outstanding shares of that class of
securities of the issuer;
(3)
conducting sales contests in a particular security;
(4) failing or refusing to promptly execute
sell orders after a solicited purchase by a customer in connection with a
principal transaction;
(5)
soliciting a secondary market transaction if there has not been a bona fide
distribution in the primary market;
(6) engaging in a pattern of compensating an
agent in different amounts for effecting sales and purchases in the same
security; and
(7) failing to
promptly provide the most current prospectus or the most recently filed
periodic report filed under section 13 of the securities exchange act of 1934
when requested to do so by the customer.
(g) Prohibited conduct: designated security
transactions.
(1) Except as specified in
paragraph (g)(2), a broker-dealer or agent shall not engage in the following
conduct in connection with the solicitation of a purchase of a designated
security:
(A) Failing to disclose to the
customer the bid and ask price at which the broker-dealer effects transactions
of the security with individual retail customers, as well as the price spread
in both percentage and dollar amounts at the time of solicitation and on the
trade confirmation documents; and
(B) failing to include with the confirmation
a written explanation of the bid and ask price.
(2) Exceptions. Paragraph (g)(1) shall not
apply to the following transactions:
(A)
Transactions in which the price of the designated security is five dollars or
more, exclusive of costs or charges. However, if the designated security is a
unit composed of one or more securities, the unit price divided by the number
of components of the unit other than warrants, options, rights, or similar
securities shall be five dollars or more, and any component of the unit that is
a warrant, option, right, or similar securities, or a convertible security
shall have an exercise price or conversion price of five dollars or
more;
(B) transactions that are not
recommended by the broker-dealer or agent;
(C) transactions by a broker-dealer whose
commissions, commission equivalents, and markups from transactions in
designated securities during each of the immediately preceding three months,
and during 11 or more of the preceding 12 months, did not exceed five percent
of its total commissions, commission-equivalents, and markups from transactions
in securities during those months and who has not executed principal
transactions in connection with the solicitation to purchase the designated
security that is the subject of the transaction in the immediately preceding 12
months; and
(D) any transaction or
transactions that, upon prior written request or upon the administrator's own
motion, the administrator conditionally or unconditionally exempts as not
encompassed within the scope of paragraph (g)(1).
(h) Prohibited conduct: investment
company shares.
(1) A broker-dealer or agent
shall not engage in the following conduct in connection with the solicitation
of a purchase or sale of investment company shares:
(A) Failing to adequately disclose to a
customer all sales charges, including asset-based and contingent deferred sales
charges, that could be imposed with respect to the purchase, retention, or
redemption of investment company shares;
(B) stating or implying to a customer, either
orally or in writing, that the shares are sold without a commission, are "no
load," or have "no sales charge" if there is associated with the purchase of
the shares a front-end charge; a contingent deferred sales charge; a fee
pursuant to SEC rule 12b-1, 17 C.F.R. §
270.12b-1, as adopted by reference
in K.A.R. 81-2-1, or a service fee that in total exceeds .25 percent of average
net fund assets per year; or, in the case of closed-end investment company
shares, underwriting fees, commissions, or other offering expenses;
(C) failing to disclose to a customer any
relevant sales charge discount on the purchase of shares in dollar amounts at
or above a breakpoint, or failing to disclose any relevant letter of intent
feature, if available, that will reduce the sales charges;
(D) recommending to a customer the purchase
of a specific class of investment company shares in connection with a
multiclass sales charge or fee arrangement without reasonable grounds to
believe that the sales charge or fee arrangement associated with the class of
shares is suitable and appropriate based on the customer's investment
objectives, financial situation, other securities holdings, and the associated
transaction or other fees;
(E)
recommending to a customer the purchase of investment company shares that
results in the customer's simultaneously holding shares in different investment
company portfolios having similar investment objectives and policies without
reasonable grounds to believe that the recommendation is suitable and
appropriate based on the customer's investment objectives, financial situation,
other securities holdings, and any associated transaction charges or other
fees;
(F) recommending to a
customer the liquidation or redemption of investment company shares for the
purpose of purchasing shares in a different investment company portfolio having
similar investment objectives and policies without reasonable grounds to
believe that the recommendation is suitable and appropriate based on the
customer's investment objectives, financial situation, other securities
holdings, and any associated transaction charges or other fees;
(G) stating or implying to a customer the
fund's current yield or income without disclosing the fund's average annual
total return, as stated in the fund's most recent form N-1A filed with the SEC,
for one-year, five-year, and 10-year periods and without fully explaining the
difference between current yield and total return. However, if the fund's
registration statement under the securities act of 1933 has been in effect for
less than one, five, or 10 years, the time during which the registration
statement was in effect shall be substituted for the periods otherwise
prescribed;
(H) stating or implying
to a customer that the investment performance of an investment company
portfolio is comparable to that of a savings account, certificate of deposit,
or other bank deposit account without disclosing to the customer the fact that
the shares are not insured or otherwise guaranteed by the federal deposit
insurance corporation ("FDIC") or any other government agency and the relevant
differences regarding risk, guarantees, fluctuation of principal or return or
both, and any other factors that are necessary to ensure that the comparisons
are fair, complete, and not misleading;
(I) stating or implying to a customer the
existence of insurance, credit quality, guarantees, or similar features
regarding securities held, or proposed to be held, in the investment company's
portfolio without disclosing to the customer the other kinds of relevant
investment risks, including interest rate, market, political, liquidity, and
currency exchange risks, that could adversely affect investment performance and
result in loss or fluctuation of principal despite the creditworthiness of the
portfolio securities;
(J) stating
or implying to a customer that the purchase of shares shortly before an ex
dividend date is advantageous to the customer unless there are specific,
clearly described tax or other advantages to the customer, or stating or
implying that a distribution of long-term capital gains by an investment
company is part of the income yield from an investment in the shares;
and
(K) making projections of
future performance, statements not warranted under existing circumstances, or
statements based upon nonpublic information.
(2) In connection with the solicitation of
investment company shares, the delivery of a prospectus shall not be
dispositive that the broker-dealer or agent has given the customer full and
fair disclosure or has otherwise fulfilled the duties specified in this
subsection.
(i)
Prohibited conduct: use of senior-specific certifications and professional
designations.
(1) A broker-dealer or agent
shall not use a senior-specific certification or designation that indicates or
implies that the user has special certification or training in advising or
servicing senior citizens or retirees in any way that misleads any person. This
prohibition shall include the following:
(A)
The use of a certification or professional designation by a person who has not
earned or is otherwise ineligible to use the certification or
designation;
(B) the use of a
nonexistent or self-conferred certification or professional
designation;
(C) the use of a
certification or professional designation that indicates or implies a level of
occupational qualifications obtained through education, training, or experience
that the person using the certification or professional designation does not
have; and
(D) the use of a
certification or professional designation that was obtained from a designating
or certifying organization that meets any of the following conditions:
(i) Is primarily engaged in the business of
instruction in sales or marketing;
(ii) does not have reasonable standards or
procedures for ensuring the competency of its designees or certificate
holders;
(iii) does not have
reasonable standards or procedures for monitoring and disciplining its
designees or certificate holders for improper or unethical conduct;
or
(iv) does not have reasonable
continuing education requirements for its designees or certificate holders to
maintain the professional designation or certification.
(2) There shall be a rebuttable
presumption that a designating or certifying organization is not disqualified
solely for purposes of paragraph (i)(1)(D) if the organization has been
accredited by any of the following:
(A) The
American national standards institute;
(B) the national commission for certifying
agencies; or
(C) an organization
that is on the United States department of education's list titled "accrediting
agencies recognized for title IV purposes," if the designation or credential
does not primarily apply to sales or marketing, or both.
(3) In determining whether a combination of
words or an acronym or initialism standing for a combination of words
constitutes a certification or professional designation indicating or implying
that a person has special certification or training in advising or servicing
senior citizens or retirees, the factors to be considered shall include the
following:
(A) The use of one or more words
including "senior," "retirement," "elder," or similar words, combined with one
or more words including "certified," "registered," "chartered," "adviser,"
"specialist," "consultant," "planner," or similar words, in the name of the
certification or professional designation; and
(B) the manner in which the words are
combined.
(4) For
purposes of this subsection, the terms "certification" and "professional
designation" shall not include a job title within an organization that is
licensed or registered by a state or federal financial services regulatory
agency, including an agency that regulates broker-dealers, investment advisers,
or investment companies, if that job title indicates seniority or standing
within the organization or specifies an individual's area of specialization
within the organization.
Notes
State regulations are updated quarterly; we currently have two versions available. Below is a comparison between our most recent version and the prior quarterly release. More comparison features will be added as we have more versions to compare.
No prior version found.