Haw. Code R. § 16-39-470 - Denial; suspension and revocation

(a) A proceeding to deny an application for registration, or to suspend or revoke the effectiveness of a registration may be instituted by the commissioner if the action is in the public interest, reasonable grounds exist that the applicant or registrant has violated or failed to comply with any provision of chapter 485A, HRS, or this chapter, or the applicant or registrant has demonstrated its unworthiness to transact the business of a brokerdealer, agent, investment adviser, or investment adviser representative.

(b) Without in any way limiting the generality thereof, for the purposes of section 485A-412(d)(14), HRS, any of the following shall demonstrate an applicant's or registrant's unworthiness to transact the business of a broker-dealer or agent:

(1) Delivery delays. Engaging in a pattern of unreasonable and unjustifiable delays in the delivery of securities purchased by any of its customers or in the payment upon request of free credit balances reflecting completed transactions of any of its customers, or both;

(2) Churning. Inducing trading in a customer's account which is excessive in size or frequency in view of the financial resources and character of the account;

(3) Unsuitable recommendations. Recommending 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 transactions. Executing a transaction on behalf of a customer without authorization to do so;

(5) Discretionary authority. 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;

(6) Margin accounts. Executing 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) Segregation of client securities. Failing to segregate customers' free securities or securities held in safekeeping;

(8) Hypothecating customer securities. Hypothecating a customer's securities without having a lien thereon unless the broker-dealer secures from the customer a properly executed written consent promptly after the initial transaction, except as permitted by rules of the SEC;

(9) Unreasonable price, commission. Entering into a transaction with or for a customer at a price not reasonably related to the current market price of the security, or receiving an unreasonable commission or profit;

(10) Prospectus delivery. 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;

(11) Unreasonable fees. Charging unreasonable and inequitable fees for services performed, including miscellaneous services such as collection of monies due for principal, dividends or interest, exchange or transfer of securities, appraisals, safekeeping, or custody of securities and other services related to its securities business;

(12) Offer to buy or sell at stated price. Offering to buy from or sell to any person any security at a stated price unless the broker-dealer or agent 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;

(13) Sales at the market. Representing that a security is being offered to a customer "at the market" or a price relevant to the market price unless the broker-dealer or agent knows or has reasonable grounds to believe that a market for the security exists other than that made, created, or controlled by the broker-dealer or agent, or by any person for whom one is acting or with whom one is associated in the distribution, or any person controlled by, controlling or under common control with the broker-dealer or agent;

(14) Manipulative, deceptive, or fraudulent practices. Effecting any transaction in, or inducing the purchase or sale of, any security by means of any manipulative, deceptive or fraudulent device, practice, plan, program, design or contrivance, which may include but not limited to:

(A) Effecting any transaction in a security which involves no change in the beneficial ownership thereof;

(B) Entering an order or orders for the purchase or sale of any security with the knowledge that an order or orders of substantially the same size, at substantially the same time and substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties 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; provided that nothing in this subsection shall prohibit a broker-dealer from entering bona fide agency cross transactions for its customers; or

(C) Effecting, alone or with one or more other persons, a series of transactions in any security creating actual or apparent active trading in such security or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security of others;

(15) Loss guarantees. Guaranteeing a customer against loss in any securities account of such customer carried by the broker-dealer or agent, or in any securities transaction effected by the broker-dealer or agent, or in any securities transaction effected by the broker-dealer or agent with or for such customer;

(16) Bona fide price reports. 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 such broker-dealer or agent believes that such transaction was a bona fide purchase or sale or such security; or which purports to quote the bid price or asked price for any security, unless such broker-dealer or agent believes that such quotation represents a bona fide bid for, or offer of, such security;

(17) Deceptive or misleading advertising. Using any advertising or sales presentation in any manner that is deceptive or misleading. An example would be the distribution of any nonfactual data, material, or presentation based on conjecture, unfounded or unrealistic claims or assertions in any brochure, flyer, or display by worlds, pictures, graphs or otherwise designed to supplement, detract from, supersede, or defeat the purpose or effect of any prospectus or disclosure;

(18) Disclosure of control. 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, the existence of such control to such customer, and if such disclosure is not made in writing, it shall be supplemented by the giving or sending of written disclosure at or before the completion of the transaction;

(19) Bona fide distribution. Failing to make a bona fide public offering of all of the securities allotted to a broker-dealer for distribution; whether acquired as an underwriter, a selling group member, or from a member participating in the distribution as an underwriter or selling group member;

(20) Customer communication. Failure or refusal to furnish a customer, upon reasonable request, information to which the customer is entitled, or to respond to a formal written request or complaint from a customer;

(21) Loans to or from customers. Engaging in the practice of lending or borrowing money or securities from a customer, or acting as a custodian for money, securities, or an executed stock power of a customer;

(22) Unrecorded transactions. Effecting securities transactions not recorded on the regular books or records of the brokerdealer which the agent represents, unless the transactions are authorized in writing by the broker-dealer prior to execution of the transaction;

(23) Fictitious accounts. Establishing or maintaining an account containing fictitious information in order to execute transactions which would otherwise be prohibited;

(24) Profit or loss sharing. Sharing directly or indirectly in profits or losses in the account of any customer without the written authorization of the customer and the broker-dealer which the agent represents;

(25) Splitting commissions. Dividing or otherwise splitting the agent's commissions, profits, or other compensation from the purchase or sale of securities with any person not also registered as an agent for the same broker-dealer, or for a brokerdealer under direct or indirect common control;

(26) Unsolicited transactions. Marking any order tickets or confirmations as unsolicited when in fact the transaction was solicited;

(27) Compliance with the rules of self-regulatory organizations. Failing to comply with any applicable provision of the Conduct Rules and any other Rules of Fair Practice of the NASD or any applicable fair practice or ethical standard promulgated by the SEC or by a self-regulatory organization approved by the SEC;

(28) Failure to cooperate. Failing to cooperate with, or providing false or incomplete information to, the commissioner in connection with any investigation under this chapter or chapter 485A, HRS;

(29) Statement of account for OTC securities. Failing to provide each customer with a statement of account which, with respect to all OTC non-NASDAQ equity securities in the account, contains a value for each security based on the closing market bid on a date certain for any month in which activity has occurred in a customer's account, but in no event less than every three months; provided that this paragraph shall apply only if the firm has been a market maker in the security at any time during the period for which the monthly or quarterly statement is issued;

(30) Credit to customer. Extending credit to a customer in violation of the Securities Exchange Act or the regulations of the Federal Reserve Board;

(31) Fee disclosures. 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 sixty calendar days prior to the effective date of the fee;

(32) Business disclosures. Failing to accurately describe or disclose, in any 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;

(33) Boiler room tactics. 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;

(34) Protection of non-public information. Failing to protect the security and confidentiality of the non-public personal information of any client;

(35) Minimum capital requirements. Operating a securities business while being unable to meet current liabilities, or violating any rule or order relating to minimum capital, bond, record-keeping and reporting requirements, or provision concerning use, commingling, or hypothecation of a customer's funds or securities;

(36) Outside business activity. Any agent associated with a broker-dealer registered under chapter 485A, HRS, and this chapter shall not engage in business activities, for which the agent receives compensation either directly or indirectly, outside the scope of the agent's regular employment unless the agent has provided prior written notice to his employing firm;

(37) Dual agency. Failing to disclose a dual agency capacity;

(38) Other terms or conditions. Effecting transactions upon terms and conditions other than those stated per confirmations; or

(39) False, misleading, deceptive, exaggerated, or flamboyant representations. Making false, misleading, deceptive, exaggerated, or flamboyant representations or predictions in the solicitation or sale of a security. Examples of this include without limitation misrepresenting:

(A) That the security shall be resold or repurchased;

(B) That the security shall be listed or traded on an exchange or established market;

(C) That the security shall result in an assured, immediate or extensive increase in value, future market price, or return on investment;

(D) With respect to the issuer's financial condition, anticipated earnings, potential growth, or success; or

(E) That there is a guarantee against risk or loss.

This subsection is not intended to be all-inclusive, and thus, acts or practices not enumerated in this subsection may also be deemed to demonstrate unworthiness to transact the business of broker-dealer or agent. Engaging in other conduct such as forgery, embezzlement, nondisclosure, incomplete disclosure or misstatement of material facts, or manipulative or deceptive practices shall also be grounds for denial, suspension, or revocation of registration.

(c) Without in any way limiting the generality thereof, for the purposes of section 485A-412, HRS, any of the following shall demonstrate an applicant's or registrant's unworthiness to transact the business of an investment adviser or investment adviser representative:

(1) Unsuitable recommendation. Recommending to a client to whom investment supervisory, management, or consulting services are provided the purchase, sale, or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client's investment objectives, financial situation and needs, and any other information known by the investment adviser;

(2) Discretionary authority. Exercising any discretionary power in placing an order for the purchase or sale of securities for a client without obtaining written discretionary authority from the client within ten business days after the date of the first transaction place pursuant to oral discretionary authority, unless the discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specified security shall be executed, or both;

(3) Churning. Inducing trading in a client's account that is excessive in size or frequency in view of the financial resources, investment objectives, and character of the account in light of the fact that an investment adviser or an investment adviser representative in such situations can directly benefit from the number of securities transactions effected in a client's account. This paragraph appropriately forbids an excessive number of transaction orders to be induced by an adviser for a "customer's account";

(4) Unauthorized transactions. Placing an order to purchase or sell a security for the account of a client without authority to do so;

(5) Unauthorized third-party trade. Placing an order to purchase or sell a security for the account of a client upon instruction of a third party without first having obtained a written third-party trading authorization from the client;

(6) Loans from clients. Borrowing money or securities from a client unless the client is a broker-dealer, an affiliate of the investment adviser, or a financial institution engaged in the business of loaning funds;

(7) Loans to clients. Loaning money to a client unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the investment adviser;

(8) Misrepresentations concerning advisory services. Misrepresenting to any advisory client or prospective advisory client, the qualifications of the investment adviser or any employee of the investment adviser, or misrepresenting the nature of the advisory services being offered or fees to be charged for such service, or to omit to state a material fact necessary to make the statements made regarding qualifications, services or fees, in light of the circumstances under which they are made, not misleading;

(9) Advisory report prepared by another. Providing a report or recommendation to any advisory client prepared by someone other than the adviser without disclosing that fact; provided that this prohibition shall not apply to a situation where the adviser uses published research reports or statistical analyses to render advice or where an adviser orders such a report in the normal course of providing service;

(10) Unreasonable advisory fees. Charging a client an unreasonable advisory fee;

(11) Conflict of interest. Failing to disclose to clients in writing before any advice is rendered any material conflict of interest relating to the adviser, or any of its employees which could reasonably be expected to impair the rendering of unbiased and objective advice including:

(A) Compensation arrangements connected with advisory services to clients which are in addition to compensation from such clients for such services; or

(B) Charging a client an advisory fee for rendering advice when a commission for executing securities transactions pursuant to such advice will be received by the adviser or its employees;

(12) Guaranteeing specific results. Guaranteeing a client that a specific result will be achieved (gain or loss) with advice that will be rendered;

(13) Advertising. Publishing, circulating, or distributing any advertisement which does not comply with the Investment Advisers Act, 17 CFR section 275-206(4)-1 ;

(14) Disclosure of private information. Disclosing the identity, affairs, or investments of any client unless required by law to do so, or unless consented to by the client;

(15) Action contrary to section 16-39-435. Taking any action, directly or indirectly, with respect to those securities or funds in which any client has any beneficial interest, where the investment adviser has custody or possession of such securities or funds when the adviser's action is subject to and does not comply with the requirements of section 16-39-435;

(16) Advisory contract disclosure. Entering into, extending, or renewing any investment advisory contract, unless such contract is in writing and discloses, in substance, the services to be provided, the term of the contract, the advisory fee, the formula for computing the fee, the amount of prepaid fee to be returned in the event of contract termination or non-performance, whether the contract grants discretionary power to the adviser and that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract;

(17) Protection of non-public information. Failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information contrary to the provisions of section 204A of the Investment Advisers Act;

(18) Advisory contract to comply with federal law. Entering into, extending, or renewing any advisory contract contrary to the provisions of section 205 of the Investment Advisers Act; provided that this provision shall apply to all advisers and investment adviser representatives registered or required to be registered under chapter 485A, HRS, and this chapter, notwithstanding whether such adviser or representative would be exempt from federal registration pursuant to section 203(b) of the Investment Advisers Act;

(19) Waiver of state or federal law prohibited. To indicate, in an advisory contract, any condition, stipulation, or provisions binding any person to waive compliance with any provision of chapter 485A, HRS, this chapter, or the Investment Advisers Act;

(20) Fraudulent, deceptive, or manipulative acts. Engaging in any act, practice, or course of business which is fraudulent, deceptive, or manipulative in contrary to the provisions of section 206(4) of the Investment Advisers Act, notwithstanding the fact that such investment adviser or investment adviser representative is not registered or required to be registered under section 203 of the Investment Advisers Act;

(21) Third party conduct. Engaging in conduct or any act, indirectly or through or by any other person, which would be unlawful for such person to do directly under the provisions of chapter 485A, HRS, and this chapter;

(22) Disclosure of material facts. Failing to disclose to any client or prospective client all material facts that may influence the client or prospective client's ability to make an informed decision;

(23) Compliance with exchange or SRO rules. Failing to comply with any rule of a national securities exchange or self-regulatory organization approved by the SEC;

(24) Failure to cooperate. Failing to cooperate with, or providing false or incomplete information to, the commissioner in connection with any investigation under chapter 485A, HRS, or this chapter;

(25) Outside business activity. Any investment adviser representative associated with an investment adviser registered under chapter 485A, HRS, and this chapter, shall not engage in business activities, for which the investment adviser representative receives compensation either directly or indirectly, outside the scope of the investment adviser representative's regular employment unless the investment adviser representative has provided prior written notice to the investment adviser representative's employing firm;

(26) Client communication. Failing or refusing to furnish a client, upon reasonable request, information to which the client is entitled, or to respond to a formal written demand or complaint from the client;

(27) Inside information. In connection with the offer, purchase, or sale of a security leading a client to believe that the investment adviser or investment adviser representative is in possession of material, non-public information that would affect the value of the security;

(28) Unreasonable delay. Causing unreasonable delay or failure to execute orders, liquidate customer's accounts, or in making delivery of securities purchased or remittances (or credits) for securities sold; or

(29) Unlicensed broker-dealer. Placing an order through an unlicensed broker-dealer or agent which the investment adviser should have known was unlicensed.

This subsection is not intended to be all inclusive, and thus, acts or practices not enumerated in this subsection may also be deemed to demonstrate unworthiness to transact the business of investment adviser or investment adviser representative. Engaging in other conduct such as non-disclosure, incomplete disclosure, or deceptive practices shall be deemed an unethical business practice. The federal statutory and regulatory provisions referenced in this section shall apply to investment advisers, investment adviser representatives, and federal covered investment advisers to the extent permitted by the National Securities Markets Improvement Act of 1996 (Pub. L. No. 104-290).

Notes

Haw. Code R. § 16-39-470

[Eff 6/30/08] (Auth: HRS § 485A-606) (Imp: HRS § 485A-412) Am and comp 11/18/2023