Series 63

AAA

Business Practices - Trade Practices

Suitability
Suitability comes in many forms, a few of which we will discuss here. If at any time, you knowingly recommend an investment to a client that is unsuitable, with the intention to defraud, you are liable for both civil and criminal penalties.

According to the USA, in a court of law, suitability comes down to: "Reasonable basis for recommending a security or investment strategy:

  • where brokers "conduct themselves in a fair and equitable manner with their customers,
  • have a reasonable basis for recommending a particular security or strategy to a particular customer and
  • have reasonable grounds for believing that the customer understands the investment or strategy, and the risks involved in the investment."

Exam Tips and Tricks
The SEC specifically gives suitability guidance as:

When your broker recommends that you buy or sell a particular security, your broker must have a reasonable basis for believing that the recommendation is suitable for you. In making this assessment, your broker must consider your risk tolerance, other security holdings, financial situation (income and net worth), financial needs and investment objectives.

Excessive trading
Any time an agent trades either on a discretionary basis or recommends trading excessively in, or for, a client's account for the sake of generating commissions, the agent is committing fraud. Legally, the term associated with this action is known as churning.

Exam Tips and Tricks
The SEC defines churning as follows:
Churning refers to excessive buying and selling in your account by your broker. For churning to occur, your broker must exercise control over the investment decisions in your account, either through a formal written discretionary agreement or otherwise, and must engage in excessive trading in light of the financial resources and character of the account for the purpose of generating commissions.

Insider Trading
As the SEC site informs, there are actually two types of insider trading, the legal kind and the illegal kind. The reason for this clarification is that many people simply associate the term with illegal activities. According to the SEC, legal insider trading occurs when insiders (officers, directors and certain other employees) trade their own firm's securities based on material, public information and report any/all transactions to the SEC.

Exam Tips and Tricks
According to the SEC, illegal insider trading occurs when insiders buy or sell securities"in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped" and securities trading by those who misappropriate such information."

The SEC lists examples of insider trading, such as:

  • Corporate officers, directors and employees who traded the corporation's securities after learning of significant, confidential corporate developments;
  • Friends, business associates, family members and other "tippees" of such officers, directors and employees, who traded the securities after receiving such information;
  • Employees of law, banking, and brokerage and printing firms, who were given such information to provide services to the corporation whose securities they traded;
  • Government employees who learned of such information because of their employment by the government; and
  • Other persons who misappropriated, and took advantage of, confidential information from their employers.

Selling Away
Selling away is a violation that occurs when an agent attempts to sell securities not held or offered by his or her brokerage firm, or that they not able to immediately gain possession of at the time of the offer.

As a rule, such activities are a violation of securities regulations.

Look Out!
The basic premise here is that if you are selling away, as an agent, you are attempting to sell something that you DO NOT have rights to, or have not been authorized to sell by your firm. Such activity IS considered fraudulent!
Other Trade Practices
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