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.

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?

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
Related Articles
  1. Professionals

    Career Advice: Stockbroker Vs. Insurance Agent

    Compare and contrast careers as a stockbroker and insurance agent. Understand the skills and attributes required for success in each career.
  2. Professionals

    Series 63 Exam Prep: The Broker-Dealer

    Before you take the series 63, you need to understand jurisdiction and how it affects broker-dealers.
  3. Retirement

    What Was The Glass-Steagall Act?

    Established in 1933 and repealed in 1999, the Glass-Steagall Act had good intentions but mixed results.
  4. Forex

    How CPI Affects the Dollar Against Other Currencies

    The Consumer Price Index is a broad measure of inflation, and inflation can have a dramatic impact on a currency's value against rival currencies.
  5. Investing Basics

    How To Handle A Serious Dispute With Your Broker

    Find out what to do if you have a dispute with your broker.
  6. Economics

    3 Key Words in the Fed's Interest Rate Statement

    When you read the Federal Reserve Statement, read between the lines. There are three words in the last statement that especially stood out.
  7. Professionals

    Hedge Funds and the Law

    Learn how hedge funds have gotten in trouble for illegal insider trading. Read about questionable high-frequency trading (HFT) strategies.
  8. Economics

    Where Would the Dow Be Without Fed Intervention?

    What would the Dow look like without the accommodative monetary policies the Federal Reserve has implemented since the financial crisis?
  9. Investing

    Breaking Down the Federal Reserve's Dual Mandate

    The Fed has been tasked with a dual mandate by Congress to achieve monetary stability. We explain what the dual mandate is and what it means.
  10. Economics

    Should the Fed Be More Worried About Asset Bubbles?

    While the Fed should be concerned that assets bubbles might impact economic stability, monetary policy is not the best tool to mitigate this threat.
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  4. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  5. Division Of Reserve Bank Operations ...

    An entity under the Federal Reserve System that manages certain ...
  6. Series 79

    A examination to ensure a candidate is qualified to become a ...
  1. My 120-day Series 63 exam window is about to close, but I need more time to study. ...

    Extensions are available on rare occasions. Candidates should apply for an extension with the North American Securities Administrators ... Read Full Answer >>
  2. Do I have to be a U.S. citizen to sit for the Series 63 exam?

    United States citizenship is not required for Series 63 test-takers. Candidates may take the exam inside or outside the U.S. ... Read Full Answer >>
  3. How long must I wait after failing the Series 63 exam before I can take it again?

    Waiting periods are in place for candidates who wish to retake the Series 63 exam. Between retakes, the waiting period is ... Read Full Answer >>
  4. Is there a limit on the number of times I can re-take the Series 63 exam?

    There is no limit to the number of times a candidate may retake the Series 63 exam. The North American Securities Administrators ... Read Full Answer >>
  5. Are waivers granted to the 180-day waiting period to re-take the Series 63 exam?

    Candidates retaking the Series 63 exam must wait for 30 days after failing it on the first or second attempt. After failing ... Read Full Answer >>
  6. If I failed the Series 66, does the waiting period apply if I want to take the Series ...

    The waiting period only applies to retaking the same North American Securities Administrators Association (NASAA) exam. Candidates ... Read Full Answer >>
  7. Does NASAA or anyone else give out the series 63 exam questions?

    Outside of the proctored exam, no access to Series 63 exam questions is offered. Providing access to questions would invalidate ... Read Full Answer >>
  8. Are series 63 exams given outside of the United States?

    Series 63 exams are offered at authorized testing centers around the world. The exam does not require U.S. citizenship. Test ... Read Full Answer >>
  9. How often, and how, is a series 63 exam updated?

    Series 63 exams draw questions from a test bank based on state regulations, the Uniform Securities Act and North American ... 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