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
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