02-032 C.M.R. ch. 504, § 8 - Dishonest and unethical practices

Broker-dealers and agents shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business and shall give particular consideration to any conflicts of interest that may arise or exist. The practices listed below are examples of practices that may be considered contrary to such standards and may thus constitute grounds for discipline under Section 16412 of the Act.

This section is not intended to be all inclusive, and thus practices not enumerated herein may also be deemed dishonest or unethical. This section is also not intended to limit or define fraudulent and other prohibited practices under Subchapter 5 of the Act or to preclude application of the general anti-fraud provisions contained therein against any person for practices similar in kind to those listed below.

For purposes of this section, the delivery of a prospectus, in and of itself, shall not be dispositive that the broker-dealer or agent provided the customer full and fair disclosure.

A person may be deemed to have engaged in "dishonest or unethical practices" under Section 16412(4)(M) of the Act if the person has engaged in practices including but not limited to one or more of the following:

1. Engaging in any unreasonable or unjustifiable delay or failure in executing orders, liquidating customer accounts, making delivery of securities purchased, or in paying upon request free credit balances reflecting completed transactions of any customer;

2. Switching or churning of securities in a customer's account or inducing trading in a customer's account which is excessive in size or frequency in view of the financial situation and needs of the customer and the character of the account;

3. Recommending to a customer the purchase, sale or exchange of any security without reasonable grounds to believe that such transaction or recommendation is suitable for the customer based upon reasonable inquiry concerning the customer's other securities holdings, investment objectives, financial situation and needs, and any other relevant information known by the person;

4. Marking any order tickets or confirmations as unsolicited when in fact the person recommended the transaction to the customer or introduced the customer to the security;

5. Effecting a transaction in a customer's account without authority to do so;

6. Exercising 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 executing of orders, or both;

7. Executing any transaction in a margin account without obtaining from the customer a properly executed written margin agreement promptly after the initial transaction in the account, or failing, prior to or at the opening of a margin account, to explain to a non-institutional customer the operation of a margin account and to disclose the risks associated with trading on margin;

8. Hypothecating a customer's securities without having a lien thereon unless the broker-dealer secures from the customer a properly executed written consent, except as permitted by rules of the United States Securities and Exchange Commission;

9. Extending, arranging for, or participating in arranging for credit to a customer in violation of the Securities Exchange Act of 1934 or the regulations of the Federal Reserve Board;

10. Entering into a transaction with or for a customer in any security at an unreasonable price or at a price not reasonably related to the current market price of the security or receiving an unreasonable commission, markup or profit;

11. Charging unreasonable and inequitable fees for services performed, including but not limited to miscellaneous services such as collection of monies due for principal, dividends or interest, exchange or transfer of securities, appraisals, safekeeping, or custody of securities;

12. Charging a fee based on the activity, value or contents (or lack thereof) of a customer account unless written disclosure pertaining to the fee, which shall include information about the amount of the fee, how imposition of the fee can be avoided and any consequence of late payment or non-payment of the fee, was provided no later than the date the account was established or, with respect to an existing account, at least 60 days prior to the effective date of the fee;

13. Offering to buy or sell any security at a stated price unless the person is prepared to purchase or sell, as the case may be, at such price and under such conditions as are stated at the time of such offer to buy or sell;

14. Representing that a security is being offered to a customer "at the market price" or a price related to the market price unless the person knows or has reasonable grounds to believe that a market for such security exists other than that made, created or controlled either by such person, by any other person for whom such person is acting or with whom such person is associated, or by any other person controlled by, controlling or under common control with such person;

15. Representing that securities will be listed, or that application for listing will be made, on a securities exchange or quotation system without a reasonable basis in fact for the representation;

16. Guaranteeing a customer against loss in any securities account of such customer or in any securities transaction effected by the person with or for such customer;

17. Publishing or circulating, or causing to be published or circulated, any notice, circular, advertisement, newspaper article, investment service, or communication of any kind which purports to report any transaction as a purchase or sale of any security unless the person believes that such transaction was a bona fide purchase or sale of such security, or which purports to quote the bid price or asked price for any security unless the person believes that such quotation represents a bona fide bid for, or offer of, such security;

18. Using any advertising, research materials or sales presentation in such a fashion as to be deceptive or misleading or which would detract from, supersede or defeat the purpose or effect of any prospectus or disclosure document. An example of this practice would be a distribution of any non-factual data, material or presentation based on conjecture, unfounded or unrealistic claims or assertions in any brochure, flyer, or display by words, pictures, graphs or otherwise;

19. Failing to accurately describe or disclose, in advertising or other promotional materials (including business cards, stationery or signs) relating to an agent's business, the identity of the broker-dealer or issuer with whom the agent is associated or the nature of the securities services offered by the agent;

20. Holding oneself out as representing any person other than the broker-dealer with whom the agent is associated and, in the case of an agent whose normal place of business is not on the premises of such broker-dealer, failing to conspicuously disclose the name of such broker-dealer when representing the broker-dealer in effecting or attempting to effect purchases or sales of securities;

21. Failing to disclose that the broker-dealer is controlled by, controlling, affiliated with or under common control with the issuer of any security before entering into any contract with or for a customer for the purchase or sale of such security, or if such disclosure is not made in writing, failing to give or send a written disclosure at or before the completion of the transaction;

22. Failing to segregate a customer's free securities or securities held in safekeeping;

23. Failing to make a bona fide public offering of all of the securities allotted to a broker-dealer for distribution by, among other things, (A) 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 its nominees, or (B) parking or withholding securities;

24. Establishing, maintaining or permitting a person to open or use a fictitious or nominee account in order to execute otherwise prohibited transactions, or permitting a person to open an account for another person or to transact business in that account without prior written authorization from the person in whose name the account is carried;

25. Failing to furnish to a customer purchasing securities in an offering, no later than the due date of confirmation of the transaction, either a final prospectus or a preliminary prospectus and an additional document, which together include all information set forth in the final prospectus, or making oral or written statements contrary to or inconsistent with the disclosures contained in the prospectus or additional documents furnished;

26. Failing or refusing to furnish a customer, upon reasonable request, information to which the customer is entitled, or to respond to a formal written demand or complaint;

27. Entering into an agreement with any unlicensed broker-dealer or agent to receive selling concessions, discounts, commissions or allowances as consideration for services in connection with the distribution or sale of a security, or dividing or otherwise splitting agent commissions, profits or other compensation from the purchase or sale of securities with any person not also licensed as an agent for the same broker-dealer, or for a broker-dealer under direct or indirect common control;

28. Failing to disclose to a customer in writing, before a transaction is effected, any compensation agreement connected with that security which is in addition to compensation from the customer for that transaction;

29. In a principal transaction, stating or implying to the customer that the agent would not receive a commission or other similar remuneration when, in fact, the agent would receive such commission or remuneration;

30. Engaging or aiding in high pressure tactics in connection with the solicitation of a sale or purchase of a security by means of an intensive telephone, e-mail or fax campaign or unsolicited calls to persons not known by, nor having an account with, the agent or broker-dealer represented by the agent, whereby the prospective purchaser is encouraged to make a hasty decision to buy, irrespective of his or her investment needs and objectives;

31. Soliciting prospective customers who have informed the person that they do not want to be solicited, contacting customers or prospective customers by telephone at times before 8:00 a.m. or after 9:00 p.m. or at any other time that the person knows or should know is unreasonable with respect to the person being called, or soliciting by telephone prospective customers who have had their telephone numbers registered on the Federal Trade Commission's national do-not-call registry;

32. Misrepresenting to any customer or prospective customer the qualifications of the broker-dealer, agent, or any other employee or person associated with the broker-dealer, or misrepresenting the nature of services being offered or the fees to be charged for such services, or omitting a material fact necessary to make any such representations not misleading in light of the circumstances under which they are made;

33. In connection with the offer, purchase, or sale of a security, leading a customer to believe that the person is in possession of material, non-public information that would affect the value of the security;

34. In connection with the solicitation of a purchase or sale of a security, engaging in a pattern or practice of making contradictory recommendations to different investors with similar investment objectives for some to sell and others to purchase the same security, at or about the same time, when not justified by the particular circumstances of each investor;

35. Failing to protect the security and confidentiality of the non-public personal information of any client;

36. As an agent, lending money or securities to, or borrowing money or securities from, a customer, or acting as a custodian for money, securities or an executed stock power of a customer, unless:

A. The broker-dealer has written procedures allowing such an arrangement; and

B. The customer is:

(1) a member of the agent's immediate family or another person whom the agent supports, directly or indirectly, to a material extent;

(2) a financial institution regularly engaged in the business of providing credit, financing, or loans, or other person that regularly arranges or extends credit in the ordinary course of business; or

(3) a licensed agent of the same broker-dealer, if the broker-dealer has given advance written authorization for the arrangement;

37. As an agent, effecting a securities transaction where the transaction is not recorded on the regular books or records of the broker-dealer that the agent represents, unless the broker-dealer has given advance written authorization;

38. As an agent, sharing directly or indirectly in profits or losses in the account of any customer without first obtaining the written authorization of the customer and the broker-dealer that the agent represents;

39. Engaging in any act, practice, or course of business which is fraudulent, deceptive, or manipulative; or employing a device, scheme or artifice to defraud, making an untrue statement of material fact, omitting a material fact necessary to state in order to make other statements not misleading, or engaging in an act, practice or course of business that operates or would operate as a fraud or deceit upon another person;

40. Including in any contract or agreement with a customer any condition, stipulation, or provision binding the customer to waive compliance with any provision of the Act or any rule of the Office of Securities;

41. Failing to comply with any securities-related arbitration award, unless a proceeding to vacate or modify such award is pending or unless the time limit to commence such a proceeding has not yet expired;

42. Violating any of the conduct or fair practice rules of the NASD or any ethical rules or standards promulgated by the Securities and Exchange Commission, the Commodity Futures Trading Commission or a self-regulatory organization approved by either the Securities and Exchange Commission or the Commodity Futures Trading Commission;

43. Engaging in conduct prohibited by Chapter 512 of the Rules of the Office of Securities; or

44. Accessing a client's account by using the client's own unique identifying information (such as username and password).

Notes

02-032 C.M.R. ch. 504, § 8