Series 63

AAA

Business Practices - Unlawful Representations

The USA cites "prohibited conduct" as:

  1. Fraudulent investment advice:
    "It is unlawful for a person to provide any type of investment advice (for compensation) either directly or indirectly or through publications or writings, to the value of securities or the advisability of investing in, purchasing, or selling securities that:

    • Attempts to employ a device, scheme or artifice to defraud.

    • Engage in any act, or course of business that would operate as fraud."

  2. Advertising materials
    Distribution of any unregulated or fraudulent prospectuses, pamphlets, circulars, sales literature or advertising communications, including any/all hard copy and electronic materials.

  3. Misleading Filings
    Misleading filings are prohibited under the USA. Such items include any filings that make false or misleading statements, or omit material facts concerning investment advice or an offering.

  4. Other activities considered fraudulent include:
    • Informing a client that registration of a security means that the SEC or state Administrator has approved (likes) an offering, or a security is a "good offering".

    • Deliberately misquoting a security to effect a securities transaction.

    • Untrue or inaccurate statements regarding commissions, including both markups and markdowns.

    • Inaccurate statements regarding registration status. If you tell a client that a security will be approved for a NASDAQ listing, when in fact, the company has only submitted an application, you have committed fraud.

    • Any deliberate and/or misleading statements regarding financial statements, dividends, earnings or future expectations.

    • Telling a client anything about their account that is untrue - including returns.

    • Promising services that you, your firm or your associates cannot (or simply will not) fulfill - with the intention of promising such to gain securities related business. This includes anything from analyzing an investment to obtaining shares of an IPO.


Exam Tips and Tricks
The fourth section above is generally known as making false, or misleading, statements. At all times, it is fraudulent even to imply anything about a security that is not true. Omitting pertinent details with the intention to defraud will result in Administrative discipline!


The bottom line here is that if you state anything to your clients that is even REMOTELY untrue, (a lie) you are committing fraud. If you tell your client that a bulletin board stock is going to be huge, since it is soon to be listed on the NASDAQ National Market, and "he should buy it now", though you have no evidence that the stock will actually be listed, you have committed fraud. What's more, if you tell your client something misleading because you actually are trying to protect him/her from a loss, even if your intentions are sound, you have committed fraud.


Example
Johnny Fast talker is an Agent for Big Blue Brokerage, which has recently come out with an analyst's report regarding the OTC BB oil/gas stock: Gassed Up. The firm's analysts believe the stock is a good buy, indicating a promising future with attractive growth potential. While getting doughnuts one morning, Johnny Fasttalker notices an article in a newspaper mentioning that Gassed Up officers are anticipating that the stock will soon be quoted on the NASDAQ National Markets system (NNM). Johnny is very excited about the news, since it reaffirms how brilliant his firm's analysts are. In turn, he immediately calls his best client to tell them about the stock. While chatting with his most risk-tolerant client, Johnny mentions that he noticed Gassed Up in the morning paper, which mentioned the possible NNM listing. Johnny feels that when the papers pick up such news, the upgrade in the stock's quotation generally is inevitable, and his client would be wise to get in before the listing is actually approved. Has Johnny committed any fraudulent activity?

Answer
Yes, though the morning paper reported that Gassed Up company officials anticipate the quotation in the NNM, Johnny has no specific (or public) information as to any official confirmation of NASDAQNM's approval. Thus, he has fraudulently misled his client, and can be liable for both civil and criminal penalties.


Trade Practices
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