Prohibited Business Practices

The Uniform Securities Act and NASAA model rules establish specific prohibited business practices that broker-dealers, agents, investment advisers, and investment adviser representatives must avoid. These prohibitions protect investors from unethical conduct and ensure fair dealing in the securities industry.

NASAA Statements of Policy on Dishonest and Unethical Business Practices

NASAA has adopted statements of policy that define what constitutes dishonest or unethical business practices. These apply to all securities professionals operating under state jurisdiction.

Prohibited Practices for Broker-Dealers and Agents

Blanket Recommendations

A blanket recommendation is a recommendation made to all customers regardless of their individual investment objectives, financial situation, or risk tolerance.

Examples of Blanket Recommendations

❌ Prohibited: "Everyone should buy this stock—it's going to double!"

❌ Prohibited: Mass mailing recommending the same investment to all clients

✅ Permitted: Individual analysis and tailored recommendations based on each client's suitability profile

Exam Tip: Any recommendation that doesn't consider the individual customer's needs, objectives, and financial situation is likely a prohibited blanket recommendation.

Guarantees Against Loss

It is absolutely prohibited to guarantee a customer against loss in their account. This includes:

• Promising to cover any losses
• Guaranteeing a minimum return
• Promising to make the customer whole if an investment declines
• Verbal or written guarantees of any kind

Why Guarantees Are Prohibited

1. All investments carry risk—no legitimate guarantee can eliminate it
2. Guarantees may induce customers to take inappropriate risks
3. The guarantee may be worthless if the agent cannot pay
4. It creates a conflict of interest

Key Point: Even if an agent has good intentions and plans to cover losses personally, making the guarantee is still a violation.

Sharing in Customer Accounts

Agents may share in the profits or losses of a customer account only if ALL of the following conditions are met:

Exception for Family Members

An agent may share disproportionately in the profits and losses of a family member's account (such as a spouse, parent, or child), provided the broker-dealer has approved in writing.

Borrowing From or Lending to Customers

Generally, agents are prohibited from borrowing money from or lending money to customers. This rule prevents:

• Conflicts of interest
• Potential for financial abuse
• Inappropriate relationships with customers

Limited Exceptions

Borrowing or lending may be permitted in limited circumstances:

• The customer is a lending institution in the business of making loans
• The customer is a family member of the agent
• Both parties are registered persons of the same firm
• The arrangement is based on a personal relationship outside the business relationship

Exam Alert: Even when an exception applies, firm approval is typically required.

Commingling Customer Funds

Broker-dealers must never commingle (mix) customer funds or securities with the firm's own assets. Customer assets must be:

• Segregated from firm assets
• Properly identified and accounted for
• Protected in the event of firm insolvency

Unreasonable Compensation

Charging excessive or unfair commissions, markups, or fees is prohibited. What constitutes "unreasonable" depends on:

• The type of security
• The availability of the security
• The price of the security
• The amount of work involved
• Industry standards for similar transactions

Prohibited Practices for Investment Advisers

Investment advisers have additional prohibited practices:

Hedge Clauses

A hedge clause is contract language attempting to limit an adviser's liability or waive the client's rights under securities laws. Such clauses are void and unenforceable—they will not protect an adviser who violates the USA.

Key Takeaways

• Blanket recommendations that ignore individual suitability are prohibited
• Guaranteeing customers against loss is never permitted
• Sharing in customer accounts requires written authorization, firm approval, and proportionate contribution (except for family members)
• Borrowing from or lending to customers is generally prohibited
• Customer funds must never be commingled with firm assets
• Hedge clauses attempting to waive liability are void and unenforceable