10 Pa. Code § 305.019 - Dishonest and unethical practices
(a) Every person registered under section 301
of the act (70 P.S. §
1-301) is a
fiduciary and shall:
(1) Act primarily for
the benefit of its customers.
(2)
Observe high standards of commercial honor and just and equitable principals of
trade in the conduct of their business.
(b) Under section 305(a)(ix) of the act
(70 P.S. §
1-305(a)(ix)),
the Department may deny, suspend, condition or revoke a broker-dealer, agent,
investment adviser or investment adviser representative registration or censure
a broker-dealer, agent, investment adviser or investment adviser representative
registrant if the registrant or applicant, or in the case of any broker-dealer
or investment adviser, any affiliate, has engaged in dishonest or unethical
practices in the securities business or has taken unfair advantage of a
customer within the previous 10 years.
(c) The Department, for purposes of section
305(a)(ix) of the act, will consider actions such as those in paragraphs
(1)-(3) to constitute dishonest or unethical practices in the securities
business or taking unfair advantage of a customer.
(1)
Broker-dealers. Includes
the following actions:
(i) Engaging in a
pattern of unreasonable and unjustifiable delays in the delivery of securities
purchased by any of its customers or in the payment on request of free credit
balances reflecting completed transactions of any of its customers.
(ii) 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.
(iii)
Recommending to a customer the purchase, sale or exchange of a security without
reasonable grounds to believe that the transaction or recommendation is
suitable for the customer based on reasonable inquiry concerning the customer's
investment objectives, financial situation and needs and other relevant
information known by the broker-dealer.
(iv) Executing a transaction on behalf of a
customer without authorization to do so.
(v) Exercising 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, or both, for the execution of
orders.
(vi) Executing a
transaction in a margin account without securing from the customer a properly
executed written margin agreement promptly after the initial transaction in the
account.
(vii) Failing to segregate
customers' free securities or securities held in safekeeping.
(viii) 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 Securities and Exchange
Commission.
(ix) 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.
(x) Failing 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, which together include information set
forth in the final prospectus.
(xi)
Charging unreasonable and inequitable fees for services performed, including
miscellaneous services such as collection of moneys 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.
(xii) Offering
to buy from or sell to a person at a stated price unless the broker-dealer is
prepared to purchase or sell at a price and under the conditions that are
stated at the time of the offer to buy or sell.
(xiii) 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 the security exists other than that made, created or controlled by
the broker-dealer, or by a person for whom the broker-dealer is acting or with
whom is associated in the distribution, or a person controlled by, controlling
or under common control with the broker-dealer.
(xiv) Effecting a transaction in, or inducing
the purchase or sale of, a security by means of a manipulative, deceptive or
fraudulent device, practice, plan, program, design or contrivance, which may
include:
(A) Effecting a transaction in a
security which involves no change in the beneficial ownership.
(B) Entering an order for the purchase or
sale of a security with the knowledge that an order of substantially the same
size, at substantially the same time and substantially the same price, for the
sale of the security, has been or will be entered by or for the same or
different parties to create 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. This subsection does not prohibit a broker-dealer from
entering bona fide agency cross transactions for its customers.
(C) Effecting, along or with one or more
other persons, a series of transactions in a security creating actual or
apparent active trading in the security or raising or depressing the price of
the security, to induce the purchase or sale of the security by
others.
(xv) Guaranteeing
a customer against loss in a securities account of the customer carried by the
broker-dealer or in a securities transaction effected by the broker-dealer with
or for the customer.
(xvi)
Publishing or circulating, or causing to be published or circulated, a notice,
circular, advertisement, newspaper article, investment service or communication
of any kind which purports to report a transaction as a purchase or sale of a
security unless the broker-dealer believes that the transaction was a bona fide
purchase or sale of the security; or which purports to quote the bid price or
asked price for a security, unless the broker-dealer believes that the
quotation represents a bona fide bid for, or offer of, the security.
(xvii) Using advertising or sales
presentation in a fashion as to be deceptive or misleading. An example of this
practice would be a distribution of nonfactual data, material or presentation
based on conjecture, unfounded or unrealistic claims or assertions in a
brochure, flyer or display by words, pictures, graphs or otherwise designed to
supplement, detract from, supersede or defeat the purpose or effect of a
prospectus or disclosure.
(xviii)
Failing to disclose that the broker-dealer is controlled by, controlling,
affiliated with or under common control with the issuer of a security before
entering into a contract with or for a customer for the purchase or sale of the
security, the existence of the control to the customer, and if the 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.
(xix) 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.
(xx) Failing or refusing to
furnish a customer, on reasonable request, information to which he is entitled,
or to respond to a formal written request or complaint.
(xxi) Failing to comply with an applicable
fair practice or ethical standard promulgated by the Securities and Exchange
Commission or by a self-regulatory organization approved by the Securities and
Exchange Commission.
(xxii) Failing
to comply with investor suitability standards imposed as a condition of the
registration of securities under section 205 or 206 of the act (70 P.S. §§
1-205 and
1-206) in connection with the
offer, sale or purchase of a security in this Commonwealth.
(2)
Agents. Includes the
following actions:
(i) 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.
(ii) Effecting securities
transactions not recorded on the regular books or records of the broker-dealer
which the agent represents, unless the transactions are authorized in writing
by the broker-dealer before execution of the transaction.
(iii) Establishing or maintaining an account
containing fictitious information to execute transactions which would otherwise
be prohibited.
(iv) Sharing
directly or indirectly in profits or losses in the account of a customer
without the written authorization of the customer and the broker-dealer which
the agent represents.
(v) Dividing
or otherwise splitting the agent's commissions, profits or other compensation
from the purchase or sale of securities with a person not also registered as an
agent for the same broker-dealer, or for a broker-dealer under direct or
indirect common control.
(vi)
Engaging in conduct specified in paragraph (1)(ii)-(vi), (ix), (x),
(xiv)-(xvii), (xxi) and (xxii).
(3)
Investment advisers and
investment adviser representatives. Includes the following actions:
(i) Recommending to a client to whom
investment supervisory, management or consulting services are provided the
purchase, sale or exchange of a 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 or investment adviser representative.
(ii) 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 10 business
days after the date of the first transaction placed under 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.
(iii)
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.
(iv) Placing an order to
purchase or sell a security for the account of a client without authority to do
so.
(v) Placing an order to
purchase or sell a security for the account of a client on instruction of a
third party without first having obtained a written third-party trading
authorization from the client.
(vi)
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.
(vii) 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.
(viii) Misrepresenting to
an advisory client, or prospective advisory client, the qualifications of the
investment adviser, investment adviser representative or an employee of the
investment adviser or misrepresenting the nature of the advisory services being
offered or fees to be charged for the 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.
(ix) Providing a report
or recommendation to an advisory client prepared by someone other than the
investment adviser or investment adviser representative without disclosing that
fact. This prohibition does not apply to a situation when the investment
adviser or investment adviser representative uses published research reports or
statistical analyses to give advice or when an investment adviser or investment
adviser representative orders the report in the normal course of providing
advice.
(x) Charging a client an
unreasonable advisory fee.
(xi)
Failing to disclose to a client in writing, before advice is given, a material
conflict of interest relating to the investment adviser, the investment adviser
representative or an employee of the investment adviser which could reasonably
be expected to impair the giving of unbiased and objective advice including:
(A) A compensation arrangement connected with
advisory services to a client which is in addition to compensation from the
client for the services.
(B) An
advisory fee charged to a client for giving advice when a commission for
executing securities transactions under the advice will be received by the
investment adviser, the investment adviser representative or an employee or
affiliated person of the investment adviser.
(xii) Guaranteeing a client that a specific
result will be achieved, either a gain or no loss, with advice which will be
given.
(xiii) Publishing,
circulating or distributing an advertisement which does not comply with Rule
206(4)-1 under the Investment Advisers Act of 1940 ( 15 U.S.C.A. §§ 80b -1-80 b-21).
(xiv) Disclosing the identity, investments or
other financial information of a client unless required under law to do so, or
unless consented to by the client.
(xv) Taking an action, directly or
indirectly, with respect to those securities or funds in which a client has a
beneficial interest, when the investment adviser has custody or possession of
the securities or funds when the adviser's action is subject to, and does not
comply with, the requirements of §
404.014 (relating to custody
requirements for investment advisers).
(xvi) Entering into, extending or renewing an
investment advisory contract unless the 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 a prepaid fee to
be returned in the event of contract termination or nonperformance, whether the
contract grants discretionary power to the adviser and that no assignment of
the contract shall be made by the investment adviser without the consent of the
other party to the contract.
(xvii)
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 of
1940 (15 U.S.C.A. §
80b-4a) and the rules and regulations
of the Securities and Exchange Commission promulgated thereunder.
(xviii) Entering into, extending, or renewing
any advisory contract contrary to the provisions of section 205 of the
Investment Advisers Act of 1940 (15 U.S.C.A. §
80b-5) and the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder. This applies to all investment advisers and investment adviser
representatives registered under section 301 of the act notwithstanding whether
the investment adviser is exempt from registration with the Securities and
Exchange Commission under section 203(b) of the Investment Advisers Act of 1940
( 15 U.S.C.A. § 80b -3(b)).
(xix) Indicating, in an advisory contract,
any condition, stipulation or provision binding any person to waive compliance
with any provision of the act.
(xx)
Engaging in any act, practice or course of business which is fraudulent,
deceptive or manipulative or contrary to the provisions of section 206(4) of
the Investment Advisers Act of 1940 (15 U.S.C.A. § 80b-6(4)) and the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder. This applies to all investment advisers and investment adviser
representatives registered under section 301 of the act notwithstanding whether
the investment adviser is exempt from registration with the Securities and
Exchange Commission under section 203(b) of the Investment Advisers Act of
1940.
(xxi) Engaging in conduct or
committing any act, directly, indirectly or through or by another person, which
would be unlawful for the person to do directly under the act or any rule,
regulation or order issued thereunder.
(d) In addition to the conduct described in
paragraphs (1)-(3), the Department may deny, suspend, condition or revoke a
registration or application for registration of a broker-dealer, agent,
investment adviser or investment adviser representative for conduct
inconsistent with the standards in subsection (a), including any of the
following:
(1) Forgery.
(2) Embezzlement.
(3) Nondisclosure, incomplete disclosure or
misstatement of material facts.
(4)
Manipulative or deceptive practices.
(5) Taking unfair advantage of a customer or
former customer in any aspect of a tender offer.
(e) This section does not apply to Federally
covered advisers unless the conduct otherwise is actionable under section
401(a) or (c) or 404 of the act (70 P.S. §§
1-401(a) and
(c) and
1-404).
Notes
The provisions of this § 305.019 issued under sections 305(a) and (f) and 609(a) of the Pennsylvania Securities Act of 1972 (70 P.S. §§ 1-305(a) and (f) and 1-609(a)); amended under section 202.C of the Department of Banking and Securities Code (71 P.S. § 733-202.C); section 609(a) of the Pennsylvania Securities Act of 1972 (70 P.S. § 1-609(a)); and section 9(b) of the Takeover Disclosure Law (70 P.S. § 79(b)).
This section cited in 10 Pa. Code § 102.021 (relating to definitions).
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