950 CMR, § 12.204 - Denial, Revocation, Suspension, Cancellation and Withdrawal of Registration

(1) Dishonest and Unethical Practices in the Securities Business.

(a) Broker-dealers. Each broker-dealer shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of its business. Acts and practices, including, but not limited to the following, are considered contrary to such standards and constitute dishonest or unethical practices which are grounds for imposition of an administrative fine, censure, denial, suspension or revocation of a registration, or such other appropriate action:

1. Being found by a court of competent jurisdiction to have violated M.G.L. c. 93A in connection with the sale of securities.

2. Engaging in a pattern of unreasonable and unjustifiable delays in the delivery of securities purchased by any of its customers and/or in the payment upon request of free credit balances reflecting complete transactions of any of its customers.

3. Inducing trading in a customer's account which is excessive in size and frequency in view of the financial resources and character of the account.

4. Except as provided in 950 CMR 12.207, recommending to a customer an investment strategy, the opening of or transferring of assets to any type of account, or 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 investment objectives, financial situation and needs, and any other relevant information known by the broker-dealer.

5. Executing a transaction on behalf of a customer without authorization to do so.

6. Exercising any discretionary power in effecting a transaction for a customer's account without first obtaining written authority from the customer, unless the discretionary power relates solely to the time and/or price for the execution of the order.

7. 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.

8. Failing to segregate customer's free securities or securities held in safekeeping.

9. 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 the rules of the SEC.

10. Entering into a transaction with or for a customer at a price not reasonably related to the current market price of the securities or receiving an unreasonable commission or profit.

11. Failing to furnish to a customer purchasing securities in a registered offering, no later than the date of confirmation of the transaction, a final or preliminary prospectus, and, if the latter, failing to furnish a final prospectus within a reasonable period after the effective date of the offering.

12. 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.

13. Offering to buy or sell to any person any security at a stated price, unless such broker-dealer is prepared to purchase or sell 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" or a price relevant to the market price, unless the broker-dealer knows or has reasonable grounds to believe that a market for such security exists other than that made, created or controlled by such broker-dealer, or by any person for whom he or she is acting or with whom he or she is associated in such distribution, or any person controlled by, controlling or under common control with such broker-dealer.

15. 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 is not necessarily limited to, the following:

a. Effecting any transaction in a security which involves no change in the 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 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 purpose of creating a false or misleading appearance of active trading in the security or false or misleading appearance with respect to the market for the security, provided, however, nothing in 950 CMR 12.204(l)(a)15. shall prohibit a broker-dealer from entering bona fide agency cross transactions for its customers so long as the cross transaction is noted on the confirmation and monthly account statements.

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 by others.

16. Guaranteeing a customer against loss in any securities account of such customer carried by the broker-dealer of in any securities transaction effected by the broker-dealer 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 such broker-dealer 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 such broker-dealer believes that such quotation represents a bona fide bid for, or offer of, such security.

18. Making any advertising or sales presentation, either in written or oral form, in such a fashion as to be deceptive or misleading including, but not limited to, the following:

a. Distributing any nonfactual 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 designed to supplement, detract from, supersede or defeat the purpose or effect of any prospectus or disclosure.

b. Using supplementary materials in connection with the offer of a particular security where the information in such materials is not consistent with, or adequately supported by, the prospectus or is not filed as part of the registration statement.

c. Using supplementary material not authorized by the issuer in connection with the offer of a particular security when any prospectus or other offering document required to be delivered in connection with such offer specifically states that no such material is authorized.

19. Failing to disclose that the broker-dealer is affiliated with the issuer of a security before entering into a contract with or for a customer for the purchase or sale of such security. If such disclosure is made orally, written disclosure must be given before the completion of the transaction.

20. Failing to make a bona fide 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.

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

22. Being found by a court or administrative tribunal of competent jurisdiction to have violated the anti-fraud and/or registration provisions of state or federal securities laws.

23. Marking any order ticket or confirmation as unsolicited when in fact the transaction was solicited.

24. In connection with the solicitation of a sale or purchase of an over-the-counter non-NASDAQ security, failing to provide promptly the most current prospectus or the most recently filed periodic report filed under the Securities Exchange Act § 13, when requested to do so by the customer.

25. For any month in which activity has occurred in a customer's account, but in no event less than every three months, failing to provide the customer with a statement of account with respect to all over-the-counter non-NASDAQ equity securities in the account, containing a value for each such security based on the closing market bid on a date certain. 950 CMR 12.204(5)(a)25. shall apply only if the firm has been a market maker in such security at any time during the month in which the monthly or quarterly statement is issued.

26. Failing to refrain from soliciting prospective customers who have informed the broker-dealer that such person does not want to be solicited, and conducting business by telephone at unreasonable times.

27. Failing to disclose to a person purchasing shares of an investment company on the premises of an insured depository institution that such investment is not covered by the Federal Deposit Insurance Corporation, or failing to cause a written statement to be presented to, and signed by such person, acknowledging that he has received such information.

28. Failing to comply with any applicable provision of FINRA member conduct rules or any applicable fair practice or ethical standard promulgated by the SEC or by a self-regulatory organization approved by the SEC.

29. Failing to act in accordance with the duties and standards described in 950 CMR 12.207.

(b) Agents. Each agent shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of his or her business. Acts and practices including, but not limited to, the following, are considered contrary to such standards and constitute dishonest or unethical practices in the securities industry and are thereby grounds for imposition of an administrative fine, censure, denial, suspension or revocation of a registration or such other action as is appropriate:

1. 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.

2. Effecting securities transactions not recorded on the regular books and records of the broker-dealer that the agent represents, unless the transactions are authorized in writing by the broker-dealer prior to execution of the transactions.

3. Establishing or maintaining an account containing fictitious information in order to execute transactions that would otherwise be prohibited.

4. Sharing directly or indirectly in profits and losses in the account of any customer without the written authorization of the customer and the broker-dealer that the agent represents.

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

6. Failing to disclose the name of the principal if different from name that the agent is doing business under, to the customer at the time of the first contact with the customer.

7. Contacting any customer who has requested to be placed on a list of persons who do not want to be contacted by the broker-dealer, and conducting business by telephone at unreasonable times.

8. Engaging in conduct specified in 950 CMR 12.204(l)(a) l., 2., 3., 4., 5., 6., 10., 11., 12., 13., 18., 19., 22., 23., 27., 28., or 29.

(2) Fraudulent Practices of Broker-dealer and Agents. 950 CMR 12.204(2) identifies practices in the securities business that are associated with schemes to deceive or manipulate. A broker-dealer or agent who engages in one or more of the following practices shall have engaged in an "act, practice or course of business which operates or would operate as a fraud or deceit" as used in M.G.L. c. 110A, § 101. 950 CMR 12.204(2) is not inclusive, and thus, acts or practices not enumerated may also be found fraudulent.

(a) Entering into a transaction with a customer in any security at an unreasonable price or at a price not reasonably related to the current market price or a price not reasonably related to the current market price of the security or receiving an unreasonable commission or profit.

(b) Contradicting or negating the importance of any information contained in a prospectus or other offering materials with the intent to deceive or mislead, or using any advertising or sales presentation in a deceptive or misleading manner including, but not limited to, using supplementary materials that do not consistently reflect or are not supported by information presented in any prospectus or offering materials required or permitted by 950 CMR 12.200 and the regulations of the SEC to be delivered in connection with the offer.

(c) In connection with the offer, sale or purchase of a security, falsely misleading a customer to believe that the broker-dealer or agent is in possession of material, non-public information which would impact on the value of the security.

(d) In connection with the solicitation of a sale or purchase 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.

(e) Failing to make a bona fide public offering of all the securities allotted to a broker-dealer for distribution by, among other things:

1. 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 nominee.

2. Parking or withholding securities.

(f) The following subsections specifically apply to transactions in securities sold in the over-the-counter market other than those in securities listed in the NASDAQ Global Market.

1. Failing to comply with SEC Rules 15g-l through 15g-9 ( 17 CFR 240.15g -l-9, and SEC Rule 15g-100 ( 17 CFR 240.15g-100) .

2. Conducting sales contests in a particular security.

3. After a solicited purchase by a customer, failing or refusing, in connection with a principal transaction, to promptly execute sell orders.

4. Soliciting a secondary market transaction when there has not been a bona fide distribution in the primary (issuer) market.

5. Engaging in a pattern of compensating an agent in different amounts for effecting sales and purchases in the same security.

(g) Effecting any transaction in, or inducing the purchase or sale of any security by means of any manipulative, deceptive or other fraudulent device or contrivance, including, but not limited to, the use of "boiler room" tactics, use of fictitious or nominee accounts, or any practice listed in 950 CMR 12.204(l)(a)15. "Boiler room" tactics include any high-pressure sales tactics that have the effect of creating an artificially short period in which to make a decision or are designed to overcome a customer's reluctance to make an investment. Such tactics include the use of scripts designed to meet the customer's objections, repeated phone calls, phone calls designed to "set up" the customer, threatening tones on the telephone, informing the customer that he or she has little time to make a decision, and other such similar techniques.

(h) Failing to comply with any prospectus delivery requirement promulgated under federal law.

(i)

1. Using a purported credential or professional designation that indicates or implies that a broker-dealer agent has special certification or training in advising or servicing senior investors, unless such credential or professional designation has been accredited by an accreditation organization recognized by the Secretary by rule or order. For the purposes of 950 CMR 12.204(2)(i), the term "senior investor" shall include a person 65 years of age or older.

2. In determining whether a combination of words (or an acronym standing for a combination of words) constitutes a purported credential or professional designation indicating or implying that a broker-dealer agent has special certification or training in advising or servicing senior investors, factors to be considered shall include:

a. use of one or more words such as "senior", "retirement", "elder", or like words combined with one or more words such as "certified", "chartered", "adviser", "specialist", or like words in the name of the credential or professional designation;

b. how those words are combined; and

c. whether they are capitalized.

950 CMR 12.204(2)(i) is not intended to apply to job titles provided by a broker-dealer specifying one's area of specialization within an organization unless the facts and circumstances associated with the provision or use of a job title indicate that it improperly suggests or implies certification or training beyond that which the titleholder possesses or that it otherwise misleads investors. It is also not intended to apply to job titles provided by a broker-dealer indicating seniority within an organization.

3. There shall be a grace period commencing June 1,2007 and running until two months after the date that at least one accreditation organization is recognized by the Secretary pursuant to 950 CMR 12.204(2)(i)5. In addition, there shall be a six month grace period with respect to any credential or professional designation that has been submitted to an accreditation organization described in 950 CMR 12.204(2)(i) l. for accreditation, running from the date of such submission; provided, that the Secretary may, at his discretion (consistent with the public interest and protection of investors), increase such grace period by an additional period of up to 12 months upon a showing of substantial progress in the accreditation process and a showing that such additional time is needed to complete the accreditation process; however, if accreditation of such credential has been denied in a final decision of such accreditation organization, any grace period provided for in 950 CMR 12.204(2)(i)3. shall terminate on the date of such denial.

4.950 CMR 12.204(2)(i) shall not apply to a degree or certificate evidencing completion of an academic program at an accredited institution of higher education unless the facts and circumstances associated with the provision or use of such degree or certificate indicate that it improperly suggests or implies certification or training beyond that which the degree holder or certificate holder possesses or that it otherwise misleads investors.

5. The Secretary may recognize any accreditation organization by rule or order. The Secretary shall consider any request for recognition by an accreditation organization. In determining whether to recognize an accreditation organization, the Secretary shall consider, among other factors that the Secretary deems appropriate in his or her discretion, whether or the extent to which the accreditation organization is nationally recognized and independent, whether it is for-profit or nonprofit, whether the primary purpose of the organization is to develop standards and implement methods for assuring competency and whether the organization has standards to address the status of designees who obtained the credential or designation prior to accreditation. The Secretary shall maintain a readily-accessible list, with contact information, of all accreditation organizations he recognizes.

(3) Examination Requirements.

(a) Every applicant for registration as an agent must pass either the Uniform State Law Exam (Series 63) or the Uniform Combined State Law Examination (Series 66) unless such requirement is waived by the Director. An applicant who has not been registered with FINRA or another self-regulatory organization during the two years prior to the filing of his application shall not be considered to have satisfied the examination requirements of 950 CMR 12.204(3). Waivers will be granted in the discretion of the Director on a showing of substantial experience in the industry or such other grounds suggesting awareness of the issues covered by the examinations.

(b) Every principal and supervisor who oversees the activities of agents operating in the Commonwealth must pass the examination required of such person by any self-regulatory organization of which such person's broker-dealer is a member.

(c) Every agent registered in the Commonwealth must pass any examination required by any self-regulatory organization of which such agent's broker-dealer is a member. The agent's activity is restricted to solely that activity for which he or she is permitted under the rules of the self-regulatory organization. Any activity outside that permitted constitutes unregistered activity and is in violation of M.G.L. c. 110A, § 201(a) unless the person is registered in another capacity or is appropriately exempt.

(4) Broker-dealer Withdrawal and Agent and Issuer-agent Transfer. A broker-dealer that seeks to withdraw or fails to renew its registration shall file Form BDW with the CRD or the Division. A broker-dealer or an issuer that seeks to terminate or fails to renew the registration of an agent or issuer-agent associated with it shall file a Form U-5 for such agent or issuer-agent with the CRD or the Division.

Notes

950 CMR, § 12.204

Amended by Mass Register Issue 1412, eff. 3/6/2020.