Recommendations Professional Conduct And Taxation - Fair Dealings With Customers

All broker dealers are required to act in good faith in all of their dealings with customers and are required to uphold just and equitable trade practices. FINRA’s rules of fair practice, also known as the rules of conduct, regulate how business is conducted with members of the general public. The rules of conduct prohibit all of the following:

  • Churning
  • Manipulative & deceptive practices
  • Unauthorized trading
  • Fraudulent acts
  • Blanket recommendations
  • Misrepresentations
  • Omitting material facts
  • Making guarantees
  • Selling Dividends
  • Recommending speculative securities without knowing the customer can afford the risk.
  • Short term trading in mutual funds
  • Switching fund families


Most representatives are compensated when the customer makes a transaction based on their recommendation. Churning is a practice of making transactions that are excessive in size or frequency, with the intention to generate higher commissions for the representative. When determining if an account has been churned, regulators will look at the frequency of the transactions, size of the transactions, and the amount of commission earned by the representative. Customer profitability is not an issue when determining if an account has been churned.

Manipulative and Deceptive Devises

It is a violation for a firm or representative to engage in or employ any artifice or scheme that is designed to gain an unfair advantage over another party. Some examples of manipulative or deceptive devises are:

  • Capping
  • Pegging
  • Front running
  • Trading ahead
  • Painting the tape / matched purchases / matches sales

Capping: Is a manipulative act designed to keep a stock price from rising or to keep the price down

Pegging:  Is a manipulative act designed to keep a stock price up or to keep the price from falling.

Front Running: Is the entering of an order for the account of an agent or firm, prior to the entering of a large customer’s order. The firm or agent is using the customer’s order to profit on the order they entered for their own account.

Trading Ahead: Is the entering of an order for a security, based on the prior knowledge of a soon to be released research report.

Painting The Tape: Is a manipulative act by two or more parties designed to create false activity in the security without any beneficial change in ownership. The increased activity is used to attract new buyers.

Unauthorized Trading

An unauthorized transaction is one, which is made for the benefit of a customer’s account at a time when the customer has no knowledge of the trade and the representative does not have discretionary power over the account.


Fraud is defined as any act that is employed to obtain an unfair advantage over another party. Fraudulent acts include:

  • False statements
  • Deliberate omissions of material facts
  • Concealment of material facts
  • Manipulative and deceptive practices
  • Forgery
  • Material omission
  • Lying

Blanket Recommendations

It is inappropriate for a firm or a representative to make blanket recommendations in any security especially low priced speculative securities. No matter what type of investment is involved, a blanket recommendation to a large group of people will always be wrong for some investors. Different investors have different objectives and the same recommendation will not be suitable for everyone.


Mr. Jones an agent with XYZ brokers has a large customer base that ranges from young investors who are just starting to save, to institutions and retirees Mr. Jones has been doing a significant amount of research on WSIA industries, a mining and materials company. Mr. Jones strongly believes that WSIA is significantly undervalued based on its assets and earning potential. Mr. Jones recommends WSIA to all his clients. In the next 6 months the share price of WSIA increases significantly as new production dramatically increases sales just as Mr. Jones’ research suggested. The clients then sell WSIA at Mr. Jones’ suggestion and realize a significant profit.


Even though the clients who purchased WSIA based on Mr. Jones’ recommendation made a significant profit Mr. Jones has still committed a violation because he recommended it to all of his clients. Mr. Jones’ clients have a wide variety of investment objectives and the risk or income potential associated with an investment in WSIA would not be suitable for every client. Even if an investment is profitable for the client it does not mean it was suitable for the client. Blanket recommendations are never suitable

Selling Dividends

Selling dividends is a violation that occurs when a registered representative uses a pending dividend payment as the sole basis of their recommendation to purchase the stock or mutual fund. Additionally, using the pending dividend as a means to create urgency on the part of the investor to purchase the stock is a prime example of this type of violation. If the investor was to purchase the shares just prior to the ex dividend date simply to receive the dividend, the investor in many cases will end up worse off. The dividend in this case will actually be a return of the money that the investor used to purchase the stock and then the investor will have a tax liability when they receive the dividend.


A representative or a firm may not knowingly make any misrepresentations regarding:

  • A client’s account status
  • The representative
  • The firm
  • An investment
  • Fees to be charged

Omitting Material Facts

A representative of a firm may not omit any material fact either good or bad when recommending a security. A material fact is one that an investor would need to know in order to make a well-informed investment decision. The representative may, however, omit an immaterial fact.


No representative, broker dealer, or investment advisor may make any guarantees of any kind. A profit may not be guaranteed and a promise of no loss may not be made.

Recommendations To An Institutional Customer
Related Articles
  1. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  2. Professionals

    Series 24

    FINRA/NASAA Series 24 Exam Guide
  3. Professionals

    Becoming A Registered Investment Advisor

    To become a registered investment advisor requires specific licensing, qualifications and regulations, but the greater freedom may be worth it.
  4. Professionals

    Career Advice: Financial Analyst Vs. Investment Banker

    Read an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
  5. Professionals

    Who Needs to Take the Series 65?

    Most states require individuals to pass the Series 65 exam in order to act as investment advisors.
  6. Investing Basics

    How to Vet Financial Advisors Via BrokerCheck

    Many people research restaurants or movies, but few select brokers or financial advisors with much research. Here's how BrokerCheck can help.
  7. Professionals

    Career Advice: Financial Planner Vs. Stockbroker

    Read an in-depth review of a career as a financial planner as opposed to a career as a stockbroker, including how to decide which is best for you.
  8. Term

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  9. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  10. Professionals

    Is a Google Robo-Advisor on the Horizon?

    It's possible that Google is looking to get into the robo-advisor business, either as a new venture or as a way to provide more benefits to employees.
  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. Series 79

    A examination to ensure a candidate is qualified to become a ...
  6. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  1. How does FINRA differ from the SEC?

    With all the financial organizations out there, knowing what they all do can be as complicated as knowing where to invest. ... Read Full Answer >>
  2. Am I qualified once I complete my FINRA certification exam?

    Even if you have completed your Financial Industry Regulatory Authority or FINRA (previously the National Association of ... Read Full Answer >>
  3. How can I find out if my employer is a member of FINRA?

    To find out if your employer is a member of the Financial Industry Regulatory Authority or FINRA (previously the National ... Read Full Answer >>
  4. I have a CFA designation. Do I qualify for any exemptions from FINRA licensing exams?

    Unfortunately, a CFA charter does not qualify you for any FINRA exam exemptions. Read Full Answer >>
  5. Do financial advisors need to pass the Series 7 exam?

    The exact nature of a financial advisor's job responsibilities determines whether he must have a Series 7 license. If a financial ... Read Full Answer >>
  6. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!