21-003 Code Vt. R. 21-030-003-X - UNETHICAL OR DISHONEST PRACTICES OF BROKER/DEALERS AND SALES REPRESENTATIVES - REGULATION 91-1

Section 1 AUTHORITY, SCOPE AND PURPOSE

1.01 This Regulation is issued by the Department of Banking, Insurance and Securities pursuant to the authority granted by 9 V.S.A. Section 4237 and 9 V.S.A. Section 4221a(a) (8).

1.02 This Regulation applies to all broker-dealers and sales representatives who transact business in Vermont.

1.03 The purpose of this Regulation is to implement 9 V.S.A. Section 4221a(a) (8). All broker-dealers and sales representatives shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business and shall give particular attention to any conflicts of interest that may arise or exist. The acts and practices set forth in Section 3 of this Regulation are considered contrary to such standards and may constitute grounds for denial, suspension or revocation of registration or such other action authorized by statute. This Regulation is not intended to be all inclusive, and thus acts or practices not enumerated herein may also be deemed unethical or dishonest. This Regulation is also not intended to limit or define fraudulent and other prohibited practices under 9 V.S.A. Section 4224a or to preclude the application of the general anti-fraud provisions contained therein against any person for acts or practices similar in kind to the acts or practices set forth in Section 3 of this Regulation.

Section 2 DEFINITIONS

The definitions set forth in 9 V.S.A. Section 4202a apply to this Regulation.

Section 3 GENERAL RULES

Unethical or dishonest practices in the securities business as used in 9 V.S.A. Section 4221a(a) (8) include, but are not limited to, the following:

3.01 Unreasonable or unjustifiable delay or failure in executing orders, liquidating customers' accounts, making delivery of securities purchased or in paying upon request free credit balances reflecting completed transactions of any customers;

3.02 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 of the security or receiving an unreasonable commission, markup or profit;

3.03 Effecting a transaction in the account of a customer without authority to do so; or 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 execution of orders or both;

3.04 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 resources and character of the account;

3.05 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 broker-dealer or sales representative;

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

3.07 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 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;

3.08 Making a false, misleading, deceptive or exaggerated representation or prediction in connection with solicitation of a sale or sale of a security about an issuer's financial condition, anticipated earnings, dividends, distributions, potential growth, future success or the ability or competency of management, or a statement that:

(a) The security will be resold or repurchased, except for a security issued by an investment company registered under the Investment Company Act of 1940;

(b) A market will be established in the security in which the security will be regularly bought and sold in the absence of a reasonable basis for such statement;

(c) There is an unqualified or absolute guarantee against risk or loss in the absence of a reasonable basis for such statement;

(d) Purchasing the security will result in an assured, immediate, or extensive increase in value, future market price, or return on investment;

(e) There will be, or the issuer contemplates, a stock split, merger or consolidation, unless such action has been announced or declared by the issuer; or

(f) The next or succeeding issue of securities of the same issuer will sell for a higher price than the present issue of securities;

3.09 Failing to disclose a dual-agency capacity or effecting a transaction upon terms and conditions other than those stated by the confirmation; or failing to disclose that the broker-dealer or sales representative 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;

3.10 Failing to segregate customers' free securities or securities held in safekeeping;

3.11 Establishing or maintaining fictitious or nominee accounts in order to execute transactions which would otherwise be prohibited;

3.12 Entering into agreements with any unregistered broker-dealer or sales representative for selling concessions, discounts, commissions or allowances as consideration for services in connection with the distribution or sale of a security in this state, or dividing or otherwise splitting sales representatives' commissions, profits or other compensation from the purchase or sale of securities in this state with any person not also registered as a sales representative associated with the same broker-dealer or with a broker-dealer under direct or indirect common control, unless such person is not required to be registered in order to engage in the securities business in this state;

3.13 Operating a securities business while unable to meet current liabilities, or violating any statutory provision, rule or order relating to minimum capital, surety bond, record-keeping and reporting requirements, or the use, commingling or hypothecation of customers' money or securities;

3.14 Failure or refusal to furnish a customer, upon reasonable request, information to which he or she is entitled, or to respond to a formal written demand or complaint;

3.15 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;

3.16 Executing any transaction in a margin account without obtaining from a customer a properly executed written margin agreement, including, but not limited to, written authorization for the existence of such account prior to the settlement date for the initial transaction in the account;

3.17 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 Securities and Exchange Commission;

3.18 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 broker-dealer or sales representative believes that such transaction was a bona fide purchase or sale of such security; or which purports to quote the bid or asked price for any security, unless the broker-dealer or sales representative believes that such quotation represents a bona fide bid for, or offer of, such security; or using any advertising or sales material in such a fashion as to be deceptive or misleading, such as the 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, designed to supplement, detract from, supersede or defeat the purpose or effect of any prospectus or disclosure;

3.19 Borrowing money or securities from, or lending money or securities to a customer by a sales representative, or for a sales representative to act as a custodian for money, securities or an executed stock power of a customer, unless the customer is a parent, grandparent, spouse, brother or sister, or child of the sales representative, or any relative to whose support the sales representative contributes directly or indirectly, and written authorization is first obtained from the broker-dealer which the sales representative represents;

3.20 Sharing, by a sales representative, directly or indirectly, in profits or losses in the account of any customer without first obtaining written authorization of the customer and the broker-dealer which the sales representative represents;

3.21 Effecting securities transactions not recorded on the regular books and records of the broker-dealer which the sales representative represents, unless the transactions are disclosed to, and authorized in writing by, the broker-dealer prior to the execution of the transactions;

3.22 Failing to make a bona fide public offering of all the securities allotted to a broker-dealer for distribution by, among other things, 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 parking or withholding securities;

3.23 Violating any provision of the Rules of Fair Practice of the National Association of Securities Dealers or any applicable fair practice or ethical standard 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 with respect to any customer, transaction or business in this state;

3.24 Marking any order tickets or confirmations as unsolicited when in fact the transaction was solicited;

3.25 After soliciting a purchase by a customer, failing or refusing, in connection with a principal transaction, to promptly execute sell orders on behalf of the customer;

3.26 In connection with the offer, purchase or sale of a security, leading a customer to believe that the broker-dealer or sales representative is in possession of material, non-public information that would affect the value of the security;

3.27 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 of similar investment objective 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;

3.28 Guaranteeing a customer against loss in any securities account of such customer carried by the broker-dealer or sales representative or in any securities transaction effected by the broker-dealer or sales representative with or for such customer;

3.29 Using advertising describing or relating to the sales representative's business unless the advertising clearly identifies the name of the broker-dealer with whom the sales representative is associated;

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

3.31 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 the securities business.

Notes

21-003 Code Vt. R. 21-030-003-X

Effective Date: January 7, 1992 (Secretary of State Rule Log #91-87)
AMENDED: June 2000 * Technical Revision only - changed Rule number from 21 020 026

Statutory Authority: 9 V.S.A. §§ 4221a(a)(8) and 4237