Sales Activities - Prohibited Sales Practices

Securities Act of 1933: Section 17 - Fraudulent Interstate Transactions

Use of Interstate Commerce for Purpose of Fraud or Deceit
It shall be unlawful for any person in the offer or sale of any securities or any security-based swap agreement by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly:

  • To employ any device, scheme, or artifice to defraud, or

  • To obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or

  • To engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

Use of Interstate Commerce for Purpose of Offering for Sale
It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.

Securities Act of 1933: Section 23 - Unlawful Representations
Neither the fact that the registration statement for a security has been filed or is in effect nor the fact that a stop order is not in effect with respect thereto shall be deemed a finding by the Commission that the registration statement is true and accurate on its face or that it does not contain an untrue statement of fact or omit to state a material fact, or be held to mean that the Commission has in any way passed upon the merits of, or given approval to, such security. It shall be unlawful to make, or cause to be made, to any prospective purchaser any representation contrary to the foregoing provisions of this section.

NASD (now known as FINRA) Conduct Rule 2790 - Restrictions on the Purchase and Sale of IPOs

  • A member or a person associated with a member may not sell, or cause to be sold, a new issue to any account in which a restricted person has a beneficial interest, except as otherwise permitted herein.

  • A member or a person associated with a member may not purchase a new issue in any account in which such member or person associated with a member has a beneficial interest, except as otherwise permitted herein.

  • A member may not continue to hold new issues acquired by the member as an underwriter, selling group member, or otherwise, except as otherwise permitted herein.

However, there are a number of exemptions from this rule, including investment company securities and separate accounts of insurance companies.

Rule 2790 replaces the Free Riding and Withholding Policy as found in IM-2110-1. That policy is detailed in the section on Prohibited Sales Practices.

Look Out!
Even though Rule 2790 replaces the Free Riding Policy, both are included in the FINRA outline and questions about both may be included on the test.

IM-2830-1- Avoiding Breakpoint Sales
The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions in order to share in the higher sales charges applicable on sales below the breakpoint is contrary to just and equitable principles of trade.

Investment company underwriters and sponsors, as well as dealers, have a definite responsibility in such matters and failure to discourage and to discontinue such practices will not be countenanced.

For purposes of determining whether a sale in dollar amounts just below a breakpoint was made in order to share in a higher sales charge, the FINRA will consider the facts and circumstances, including, for example, whether a member has retained records that demonstrate that the trade was executed in accordance with a bona fide asset allocation program that the member offers to its customers:

  • Which is designed to meet their diversification needs and investment goals
  • In which the member discloses to its customers that they may not qualify for breakpoint reductions that are otherwise available.
Other Prohibited Sales Practices
Related Articles
  1. Investing

    In Search of the Rate-Proof Portfolio

    After October’s better-than-expected employment report, a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall.
  2. Personal Finance

    Is An Ivy League Degree Worth It?

    In 600 B.C. Aesop determined that a bird in the hand was worth two in the bush. Warren Buffett claims that this axiom can be used to determine the most valuable uses of capital. In this article ...
  3. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  4. Chart Advisor

    ChartAdvisor for November 27 2015

    Weekly technical summary of the major U.S. indexes.
  5. Retirement

    Suddenly Pushed into Retirement, How to Handle the Transition

    Adjusting to retirement can be challenging, but when it happens unexpectedly it can be downright difficult. Thankfully there are ways to successfully transition.
  6. Mutual Funds & ETFs

    The Democratization of the Hedge Fund Industry

    The coveted compensations of hedge fund managers are protected by barriers of entry to the industry, but one recent startup is working to break those barriers.
  7. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  8. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  9. Financial Advisors

    Tips on Passing the CFA Level I on Your First Attempt

    Obtain valuable tips and helpful study instructions that can help you pass the Level 1 Chartered Financial Analyst exam on your first attempt.
  10. Professionals

    The Best Financial Modeling Courses for Investment Bankers

    Obtain information, both general and comparative, about the best available financial modeling courses for individuals pursuing a career in investment banking.
  1. Brand Identity

    Brand identity is the way a business wants consumers to perceive ...
  2. Elastic

    A situation in which the supply and demand for a good or service ...
  3. Earnings Stripping

    Earnings Stripping is a commonly-used tactic by multinationals ...
  4. Skinny Down Distribution

    Skinny down distribution is corporate practice of slimming down ...
  5. Education Loan

    Money borrowed to finance education or school related expenses. ...
  6. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, ...
  1. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  2. Is Israel a developed country?

    Israel is considered a developed country, although it has substantial poverty and large income gaps. The International Monetary ... Read Full Answer >>
  3. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  4. How many free credit reports can you get per year?

    Individuals with valid Social Security numbers are permitted to receive up to three credit reports every 12 months rather ... Read Full Answer >>
  5. Is the Wall Street Journal considered to be a conservative publisher?

    The Wall Street Journal is controlled by Rupert Murdoch via Dow Jones Publications, which in turn is owned by Murdoch's News ... Read Full Answer >>
  6. Is Spain a developed country?

    Spain is a developed country. Nearly all organizations that analyze development status classify it as such. Spain has a strong ... Read Full Answer >>
Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center