808 KAR 10:440. Examples of Dishonest or unethical practice for broker-dealers and agents

Link to law: http://www.lrc.ky.gov/kar/808/010/440.htm
Published: 2015

      808 KAR 10:440. Examples of dishonest or unethical practice

for broker-dealers and agents.

 

      RELATES TO: KRS 292.337, 292.480

      STATUTORY AUTHORITY: KRS 292.336(5), (6),

292.500(3)

      NECESSITY, FUNCTION, AND CONFORMITY: KRS

292.500(3) authorizes the commissioner of the Department of Financial

Institutions to promulgate administrative regulations necessary to carry out

the provisions of KRS Chapter 292. KRS 292.336(5) and (6) authorize the

commissioner to promulgate administrative regulations prohibiting unreasonable

charges, profits, commissions, or other compensation for broker-dealers and

agents and prescribing standards for the conduct of business by broker-dealers

and agents which the commissioner finds appropriate in the public interest and

for the protection of investors. This administrative regulation provides

examples of dishonest and unethical practices by broker-dealers and agents and

states the consequences of engaging in unacceptable conduct or practices.

 

      Section 1. Broker-dealers shall observe high

standards of commercial honor and just and equitable principles of trade in

their dealings with customers and the conduct of their business. Acts and

practices such as the following shall be considered contrary to these standards.

Violations may result in a fine, suspension, or revocation in proportion to the

seriousness of the offense, pursuant to KRS 292.337(1)

      (1) Engaging in a pattern of unreasonable

and unjustifiable delays in the delivery of securities purchased by any of its

customers or in the payment of free credit balances reflecting completed transactions

of any of its customers;

      (2) Failing or refusing to furnish a

customer, upon reasonable request, information to which the customer is

entitled, or to timely respond to a formal written demand or complaint by a

customer;

      (3) Attempting to enforce a condition,

stipulation, or provision against a customer in Kentucky if the result would:

      (a) Leave the customer without the choice

of a forum for dispute resolution in the state of Kentucky; or

      (b) Limit the timeliness of an action to

a period less than that established in KRS 292.480;

      (4) Failing to segregate a customer’s

securities held in safekeeping;

      (5) Hypothecating a customer’s securities

without having a lien thereon unless the broker-dealer secures from the

customer a properly executed written consent promptly after the initial

transaction, except as permitted by rules of the Securities and Exchange Commission;

      (6) Charging unreasonable and inequitable

fees for services performed, such as:

      (a) Collection of monies due for

principal;

      (b) Dividends or transfer of securities;

      (c) Appraisals;

      (d) Safekeeping; or

      (e) Custody of securities and other

services related to its securities business;

      (7) Offering to buy from or sell to any

person any security at a stated price unless the broker-dealer is prepared to

purchase or sell, as the case may be, at the price and under the conditions as

are stated when the offer is made;

      (8) Representing that a security is being

offered to a customer "at the market" or a price relevant to the

market price unless the broker-dealer knows or has reasonable grounds to

believe that a market for the a security exists other than that made, created,

or controlled by the broker-dealer, or by any person for whom the broker-dealer

is acting or with whom the broker-dealer is associated in the distribution, or

any person controlled by, controlling, or under common control with the

broker-dealer;

      (9) Failing to disclose in writing that

the broker-dealer is controlled by, controls, is affiliated with, or is under

common control with the issuer of any security, the existence of this control

before entering into any binding contract with or for a customer for the

purchase or sale of the security;

      (10) Failing to make a bona fide public

offering of all the securities allotted to the broker-dealer for distribution,

whether acquired directly as an underwriter or a selling group member or

indirectly from an entity participating in the distribution as an underwriter

or selling group member;

      (11) Inducing trading in a customer’s

account which is excessive in size or frequency in view of the financial

resources and character of the account;

      (12) Switching, churning, overtrading, or

reloading of a security in a customer’s account for the purpose of accumulating

or increasing a commission;

      (13) Recommending to a customer the

purchase, sale, or exchange of any security without reasonable grounds to believe

that the transaction or recommendation is suitable for the customer based upon

a reasonable inquiry concerning the customer’s investment objectives, financial

situation and needs, and any other relevant information known by the

broker-dealer;

      (14) Failing to furnish to a customer

purchasing securities in an offering, no later than the due date of

confirmation of the transaction, either a formal prospectus or a preliminary

prospectus and an additional document, which together include all information

set forth in the final prospectus;

      (15) Participating in the solicitation or

offer for sale of a security without the use of an offering document or

prospectus, if required, or making a statement contrary to or inconsistent with

disclosure contained in the offering document or prospectus;

      (16) Making a false, misleading,

deceptive, or exaggerated representation or prediction in the solicitation or

sale of a security, including:

      (a) That the security will be resold or

repurchased;

      (b) That the security will be listed or

traded on an exchange or established market;

      (c) That the security will result in an

assured, immediate, or material increase in value, future market price, or

return on an investment;

      (d) That there is a guarantee against

risk of loss; or

      (e) Any statement with respect to an

issuer’s financial condition, anticipated earnings, potential growth, or

success not supportable by information in the offering document or prospectus;

      (17) Engaging or aiding in boiler room

operations such as use of high pressure tactics to promote a speculative

offering or promotion of a security in an intensive campaign in which the

prospective purchaser is encouraged to make a hasty decision to buy a security

irrespective of the purchaser’s investment needs, objectives, or understanding

of the security being offered;

      (18) Executing a transaction on behalf of

a customer without authorization to do so;

      (19) Exercising any discretionary power

effecting a transaction for a customer’s account without first obtaining

written discretionary authority from the customer, unless the discretionary

power relates solely to the time or price for the executing of orders;

      (20) Executing any transaction in a

margin account without securing from the customer a properly executed written

margin agreement;

      (21) Entering into a transaction with or

for a customer at a price not reasonably related to the current market price of

the security or receiving an unreasonable commission or profit;

      (22) Effecting any transaction in, or

inducing the purchase or sale of, any security by means of any manipulative,

deceptive, or fraudulent device, practice, plan, program, design or

contrivance, which may include any of the following:

      (a) Effecting any transaction in a

security which involves no change in the beneficial ownership thereof;

      (b) Entering an order or orders of substantially

the same size, at substantially the same time and substantially the same price,

for the sale of any security, that has been or will be entered by or for the

same or different parties for the purpose of creating a false or misleading

appearance of active trading in the security or a false or misleading

appearance with respect to the market for the security; except, this subsection

shall not prohibit a broker-dealer from entering bona fide agency cross

transactions for its customers; or

      (c) Effecting, alone or with one or more

other persons, a series of transactions in any security creating actual or

apparent active trading in the security or raising or depressing the price of the

security, for the purpose of inducing the purchase or sale of the security by

others;

      (23) Guaranteeing a customer against loss

in any securities account of the customer carried by the broker-dealer or in

any securities transaction effected by the broker-dealer;

      (24) Publishing or circulating, or

causing the publication or circulation of, any notice, circular, advertisement,

newspaper article, investment service, or communication of any kind which

purports to report any transaction as a purchase or sale of any security unless

the broker-dealer reasonably believes that the transaction was a bona fide

purchase or sale of the security; or which purports to quote the bid price or

asked price for any security, unless the broker-dealer reasonably believes that

the quotation represents a bona fide bid or offer;

      (25) Using any advertising or conducting

any sales practice in a deceptive or misleading manner;

      (26) Entering into an agreement for a

concession, discount, commission, or allowance as consideration for a service

in connection with the distribution or sale of a security in Kentucky with a broker-dealer,

agent, investment adviser, or investment adviser representative who is not

either:

      (a) Registered in Kentucky; or

      (b) Exempted from the registration

requirements for conducting a securities business in Kentucky;

      (27) Lying to or otherwise misleading

representatives of the Department of Financial Institutions conducting an

authorized examination or investigation;

      (28) Failing to make requested records

available to or otherwise impeding a representative of the Department of Financial

Institutions conducting an authorized examination or investigation;

      (29) Failing to respond within the

specified time period to a written request from an authorized representative of

the Department of Financial Institutions for:

      (a) Information

      (b) An explanation of practices or procedures;

      (c) A response to a complaint filed with

the Department of Financial Institutions; or

      (d) A response to a written statement of

findings from an examination; and

      (30) Committing any act involving a customer,

a customer’s account, or any business records which would constitute a criminal

offense.

 

      Section 2. Broker-dealer agents shall

observe high standards of commercial honor and just and equitable principles of

trade in their dealings with customers. The following acts and practices are considered

contrary to these standards. Violations may result in a fine, suspension, or

revocation in proportion to the seriousness of the offense, pursuant to KRS

292.337(1):

      (1) Sharing directly or indirectly in

profits or losses in the account of a customer without the written

authorization of the customer and the broker-dealer which the agent represents;

      (2) Establishing or maintaining an

account containing fictitious information in order to execute transactions which

would otherwise be prohibited;

      (3) Effecting securities transactions not

recorded on the regular books and records of the broker-dealer which the agent

represents, unless the transactions are authorized in writing by the

broker-dealer prior to execution of the transaction;

      (4) Engaging in the practice of lending

to or borrowing from a customer either money or securities;

      (5) Acting as custodian of a customer’s

money, securities, or an executed stock power; and

      (6) Engaging in conduct specified in Section

1(11) through (30) of this administrative regulation.

 

      Section 3. Issuer agents shall observe

high standards of commercial honor and just and equitable principles of trade

in their dealings with customers. The following acts and practices are considered

contrary to these standards. Violations may result in a fine, suspension, or

revocation in proportion to the seriousness of the offense, pursuant to KRS

292.337(1):

      (1) Engaging in conduct specified in

Section 1(2), (13), (15) through (18), or (25) through (30) of this

administrative regulation; or

      (2) Engaging in conduct specified in

Section2(3) or (4).

 

      Section 4. The commissioner may determine

that an activity not included in the examples identified in Sections 1 through

3 of this administrative regulation constitutes a dishonest or unethical practice

if the activity is similar to an enumerated activity. (35 Ky.R. 1108; Am. 1775;

eff. 2-6-09; 37 Ky.R. 2500; 2847; eff. 7-1-11.)
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