Commerce, Securities

Section R164-6-1g

Dishonest or Unethical Business Practices

Notice of Proposed Rule

(Amendment)

DAR File No.: 33580
Filed: 04/28/2010 08:46:16 AM

RULE ANALYSIS

Purpose of the rule or reason for the change:

This proposal updates statutory references, makes clarifying amendments, and adds several practices the Division deems to be dishonest or unethical which may form the basis of a disciplinary action filed under Section 61-1-6 of the Utah Uniform Securities Act.

Summary of the rule or change:

The proposal updates statutory references in light of 2009 amendments to the Utah Uniform Securities Act, and clarifies that dishonest or unethical practices identified in the rule for investment advisers also apply to investment adviser representatives. In addition, the rule adds several dishonest or unethical practices: 1) the sharing of commissions by a broker-dealer with an unlicensed agent; 2) for an investment adviser representative to compensate a customer for losses in the customer's account without the prior written authorization of the customer and the representative's employing investment adviser; 3) for an investment adviser to fail to comply with a reasonable request from the Division for information or testimony; and 4) the use of designations or certifications which mislead any person.

State statutory or constitutional authorization for this rule:

• Section 61-1-6
• Section 61-1-24

Anticipated cost or savings to:

the state budget:

No additional costs or savings to the state budget are anticipated, because the proposal simply makes clarifying amendments and adds several practices that may form the basis for certain administrative actions.

local governments:

No additional costs or savings to local government are anticipated, because the proposal simply makes clarifying amendments and adds several practices that may form the basis for certain administrative actions.

small businesses:

No additional costs or savings to small businesses are anticipated, because the proposal simply makes clarifying amendments and adds several practices that may form the basis for certain administrative actions.

persons other than small businesses, businesses, or local governmental entities:

No additional costs or savings to such persons are anticipated, because the proposal simply makes clarifying amendments and adds several practices that may form the basis for certain administrative actions.

Compliance costs for affected persons:

There should be no compliance costs for affected persons because the proposal simply identifies dishonest or unethical practices that may form the basis for certain administrative actions.

Comments by the department head on the fiscal impact the rule may have on businesses:

This proposal should have no fiscal impact to businesses, because it does not add any new requirements, but rather better defines dishonest or unethical conduct for which a licensee may be sanctioned in an administrative action.

Francine A. Giani, Executive Director

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Commerce
Securities
160 E 300 S
SALT LAKE CITY, UT 84111-2316

Direct questions regarding this rule to:

• Charles Lyons at the above address, by phone at 801-530-6940, by FAX at 801-530-6980, or by Internet E-mail at clyons@utah.gov
• Keith Woodwell at the above address, by phone at 801-530-6606, by FAX at 801-530-6980, or by Internet E-mail at kwoodwell@utah.gov

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

06/14/2010

This rule may become effective on:

06/21/2010

Authorized by:

Keith Woodwell, Director

R164. Commerce, Securities.

R164-6. Denial, Suspension or Revocation of a License.

R164-6-1g. Dishonest or Unethical Business Practices.

(A) Authority and purpose

(1) The Division enacts this rule under authority granted by Sections 61-1-6 and 61-1-24.

(2) This rule identifies certain acts and practices which the Division deems to constitute dishonest or unethical practices in the securities business under[violative of] Subsection 61-1-6(2)(a)(ii)(G)[1)(g)]. The list contained herein should not be considered to be all-inclusive of such acts and practices[ which violate that subsection], but rather is intended to act as a guide to broker-dealers, agents, investment advisers, [and ]federal covered advisers and investment adviser representatives as to the types of conduct which may result in sanctions under Subsection 61-1-6(2)(a)(ii)(G)[are prohibited].

(3) Conduct which violates Section 61-1-1 may also be considered to constitute dishonest or unethical practices under[violate] Subsection 61-1-6(2)(a)(ii)(G)[1)(g)].

(4) This rule is patterned after well-established standards in the industry which have been adopted by the SEC, FINRA[the NASD], NASAA, the national securities exchanges and various courts. It represents one of the purposes of the securities laws: to create viable securities markets in which those persons involved are held to a high standard of fairness with respect to their dealings with the public.

(5) The provisions of this rule apply to federal covered advisers to the extent that the conduct alleged is fraudulent or deceptive, or to the extent permitted by the National Securities Markets Improvement Act of 1996 (Pub. L. No. 104-290).

(6) The federal statutory and regulatory provisions referenced in Paragraph (E) shall apply to investment advisers, [and ]federal covered advisers, and investment adviser representatives regardless of whether the federal provision limits its application to advisers subject to federal registration.

(B) Definitions

(1) "Division" means the Division of Securities, Utah Department of Commerce.

(2) "Market maker" means a broker-dealer who, with respect to a particular security:

[(2)](a) regularly publishes bona fide, competitive bid and ask quotations in a recognized inter-dealer quotation system, or

[(2)](b) regularly furnishes bona fide competitive bid and offer quotations to other broker-dealers upon request; and

[(2)](c) is ready, willing and able to effect transactions in reasonable quantities at his quoted price with other broker-dealers on a regular basis.

(3) "NASAA" means the North American Securities Administrators Association, Inc.

(4) "FINRA[NASD]" means the Financial Industry Regulatory Authority, formerly known as NASD[National Association of Securities Dealers].

(5) "NASDAQ" means National Association of Securities Dealers Automated Quotation System.

(6) "OTC" means over-the-counter.

(7) "SEC" means the United States Securities and Exchange Commission.

(C) Broker-Dealers

In relation to Broker-Dealers, as used in Subsection 61-1-6(2)(a)(ii)(G)[1)(g)] "dishonest or unethical practices" shall include:

(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, upon request, of free credit balances reflecting completed transactions of any of its customers, or both;[.]

(2) 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;[.]

(3) recommending to a customer the purchase, sale or exchange of any security without reasonable grounds to believe that such transaction or recommendation is suitable for the customer based upon reasonable inquiry concerning the customer's investment objectives, financial situation and needs, and any other relevant information known by the broker-dealer;[.]

(4) executing a transaction on behalf of a customer without prior authorization to do so;[.]

(5) exercising any discretionary power in 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 execution of orders, or both;[.]

(6) executing any transaction in a margin account without securing from the customer a properly executed written margin agreement promptly after the initial transaction in the account;[.]

(7) failing to segregate a customer's free securities or securities held in safekeeping;[.]

(8) 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 the rules and regulations of the SEC;[.]

(9) 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;[.]

(10) failing to furnish to a customer purchasing securities in an offering, no later than the date of confirmation of the transaction, either a final prospectus or a preliminary prospectus and an additional document, which together include all information set forth in the final prospectus;[.]

(11) charging fees for services without prior notification to a customer as to the nature and amount of the fees;[.]

(12) charging unreasonable and inequitable fees for services performed, including miscellaneous services such as collection of monies due for principal, dividends or interest, exchange or transfer of securities, appraisals, safekeeping, or custody of securities and other services related to its securities business;[.]

(13) 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 at the time of the offer to buy or sell;[.]

(14) 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 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;[.]

(15) 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 but not be limited to:

[(15)](a) effecting any transaction in a security which involves no change in the beneficial ownership thereof;

[(15)](b) entering an order or orders for the purchase or sale of a security with the knowledge that an order or orders of substantially the same size, at substantially the same time and substantially the same price, for the sale of the security, 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; provided, however, nothing in this subparagraph shall prohibit a broker-dealer from entering bona fide agency cross transactions for its customers; or

[(15)](c) effecting, alone or with one or more other persons, a series of transactions in any security creating actual or apparent active trading in a security or raising or depressing the price of a security, for the purpose of inducing the purchase or sale of the security by others;[.]

(16) 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 with or for the customer;[.]

(17) publishing or circulating, or causing to be published or circulated, any notice, circular, advertisement, newspaper article, investment service, or communication of any kind which:

[(17)](a) purports to report any transaction as a purchase or sale of any security unless the broker-dealer believes that the transaction was a bona fide purchase or sale of the security; or

[(17)](b) purports to quote the bid price or asked price for any security, unless the broker-dealer believes that the quotation represents a bona fide bid for, or offer of, the security;[.]

(18) using any advertising or sales presentation in such a fashion as to be deceptive or misleading. An example of the prohibited practice would be distribution of any nonfactual data, material or presentation based on conjecture, unfounded or unrealistic claims or assertions in any brochure, flyer, or display by words, pictures, graphs or otherwise designed to supplement, detract from, supersede or defeat the purpose or effect of any prospectus or disclosure;[.]

(19) failing to disclose to a customer that the broker-dealer is controlled by, controlling, affiliated with or under common control with the issuer of any security before entering into any contract with or for a customer for the purchase or sale of the security, and if the disclosure is not made in writing, it shall be supplemented by the giving or sending of written disclosure at or before the completion of the transaction;[.]

(20) failing to make a bona fide public offering of all of the securities allotted to a broker-dealer for distribution, whether acquired as an underwriter, a selling group member, or from a member participating in the distribution as an underwriter or selling group member;[.]

(21) failure or refusal to furnish a customer, upon reasonable request, information to which the customer is entitled, or to respond to a formal written request or complaint;[.]

(22) permitting a person to open an account for another person or transact business in the account unless there is on file written authorization for the action from the person in whose name the account is carried;[.]

(23) permitting a person to open or transact business in a fictitious account;[.]

(24) permitting an agent to open or transact business in an account other than the agent's own account, unless the agent discloses in writing to the broker-dealer or issuer with which the agent associates the reason therefor;[.]

(25) in connection with the solicitation of a sale or purchase of an OTC, non-NASDAQ security, failing to promptly provide the most current prospectus or the most recently filed periodic report filed under Section 13 of the Securities Exchange Act of 1934, when requested to do so by a customer;[.]

(26) marking any order tickets or confirmations as "unsolicited" when in fact the transaction is solicited;[.]

(27) for any month in which activity has occurred in a customer's account, but in no event less than every three months, failing to provide each customer with a statement of account which, with respect to all OTC non-NASDAQ equity securities in the account, contains a value for each security based on the closing market bid on a date certain; provided that, this subsection shall apply only if the firm has been a market maker in the security at any time during the month in which the monthly or quarterly statement is issued;[.]

(28) failing to comply with any applicable provision of the Conduct Rules of FINRA[the NASD] or any applicable fair practice or ethical standard promulgated by the SEC or by a self-regulatory organization to which the broker-dealer is subject and which is approved by the SEC;[.]

(29) any acts or practices enumerated in Section R164-1-3;[.]

(30) failing to comply with a reasonable request from the Division for information or testimony, or an examination request made pursuant to Subsection 61-1-5(5), or a subpoena of the Division;[.]

(31) dividing or otherwise splitting commissions, profits or other compensation from the purchase or sale of securities with any person not licensed as an agent of the broker-dealer, or of a broker-dealer under direct or indirect common control; or

(32) in connection with the offer, sale, or purchase of any security, using a specific certification or designation that indicates or implies that the user has special certification or training in advising or servicing clients or prospective clients, in such a way as to mislead any person. The prohibited use of such certification or professional designation includes, but is not limited to, the following:

(a) use of a certification or professional designation by a person who has not actually earned or is otherwise ineligible to use such certification or designation;

(b) use of a nonexistent or self-conferred certification or designation;

(c) use of a certification or professional designation that indicates or implies a level of occupational qualifications obtained through education, training or experience that the person using the certification or professional designation does not have; or

(d) use of a certification or professional designation that was obtained from a designating or certifying organization that:

(i) is primarily engaged in the business of instruction in sales and/or marketing;

(ii) does not have reasonable standards or procedures for assuring the competency of its designees or certificants;

(iii) does not have reasonable standards or procedures for monitoring and disciplining its designees or certificants for improper or unethical conduct; or

(iv) does not have reasonable continuing education requirements for its designees or certificants in order to maintain the designation or certificate.

(D) Agents[.]

In relation to agents of broker-dealers or agents of issuers, as used in Subsection 61-1-6(2)(a)(ii)(G)[1)(g)] "dishonest or unethical practices" shall include:

(1) engaging in the practice of lending or borrowing money or securities from a customer, or acting as a custodian for money, securities or an executed stock power of a customer;[.]

(2) effecting securities transactions not recorded on the regular books or records of the broker-dealer which the agent represents, in the case of agents of broker-dealers, unless the transactions are authorized in writing by the broker-dealer prior to execution of the transaction;[.]

(3) establishing or maintaining an account containing fictitious information in order to execute transactions which would otherwise be prohibited;[.]

(4) sharing directly or indirectly in profits or losses in the account of any customer without the prior written authorization of the customer and the broker-dealer which the agent represents;[.]

(5) dividing or otherwise splitting the agent's commissions, profits or other compensation from the purchase or sale of securities with any person not also licensed as an agent for the same broker-dealer, or for a broker-dealer under direct or indirect common control;[.]

(6) for agents who are dually licensed under Rule R164-4-1(D)(4)(b), failing to disclose the dual license to a client; or[.]

(7) engaging in conduct specified in subsections (C)(2), (C)(3), (C)(4), (C)(5), (C)(6), (C)(9), (C)(10), (C)(15), (C)(16), (C)(17), (C)(18), (C)(24), (C)(25), (C)(26), (C)(28), (C)(29), [or] (C)(30) or (C)(32)[of Rule R164-6-1g].

(E) Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers

In relation to investment advisers or investment adviser representatives, as used in Subsection 61-1-6(2)(a)(ii)(G)[1)(g)] "dishonest or unethical practices" shall include the following listed practices. In relation to federal covered advisers, as used in Subsection 61-1-6(2)(a)(ii)(G)[1)(g)], "dishonest or unethical practices" shall include the following, but only if such conduct involves fraud or deceit:

(1) [R]recommending to a client to whom investment supervisory, management or consulting services are provided the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client's investment objectives, financial situation and needs, and any other information known by the investment adviser;[.]

(2) [E]exercising any discretionary power in placing an order for the purchase or sale of securities for a client without obtaining written discretionary authority from the client within ten (10) business days after the date of the first transaction placed pursuant to oral discretionary authority, unless the discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specified security shall be executed, or both;[.]

(3) [I]inducing trading in a client's account that is excessive in size or frequency in view of the financial resources, investment objectives and character of the account if [that ]an adviser in such situations can directly benefit from the number of securities transactions effected in a client's account. The rule appropriately forbids an excessive number of transaction orders to be induced by an adviser for a "customer account[.]";

(4) [P]placing an order to purchase or sell a security for the account of a client without authority to do so;[.]

(5) [P]placing an order to purchase or sell a security for the account of a client upon instruction of a third party without first having obtained a written third-party trading authorization from the client;[.]

(6) [B]borrowing money or securities from a client unless the client is a broker-dealer, an affiliate of the investment adviser, or a financial institution engaged in the business of loaning funds;[.]

(7) [L]loaning money to a client unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the investment adviser;[.]

(8) [To ]misrepresenting to any advisory client, or prospective advisory client, the qualifications of the investment adviser or any employee of the investment adviser, or [to ]misrepresenting the nature of the advisory services being offered or fees to be charged for such service, or [to ]omitting to state a material fact necessary to make the statements made regarding qualifications, services or fees, in light of the circumstances under which they are made, not misleading;[.]

(9) [P]providing a report or recommendation to any advisory client prepared by someone other than the adviser without disclosing that fact[.] except that [(T]this prohibition does not apply to a situation where the adviser uses published research reports or statistical analyses to render advice or where an adviser orders such a report in the normal course of providing service;[.)]

(10) [C]charging a client an unreasonable advisory fee;[.]

(11) [F]failing to disclose to clients in writing before any advice is rendered any material conflict of interest relating to the adviser or any of its employees which could reasonably be expected to impair the rendering of unbiased and objective advice including:

[(11)](a) entering into [C]compensation arrangements connected with advisory services to clients which are in addition to compensation from such clients for such services; and

[(11)](b) [C]charging a client an advisory fee for rendering advice when a commission for executing securities transactions pursuant to such advice will be received by the adviser or its employees;[.]

(12) [G]guaranteeing a client that a specific result will be achieved (gain or no loss) with advice which will be rendered;[.]

(13) [P]publishing, circulating or distributing any advertisement which does not comply with Rule 206(4)-1 under the Investment Advisers Act of 1940;[.]

(14) [D]disclosing the identity, affairs, or investments of any client unless required by law to do so, or unless consented to by the client;[.]

(15) [T]taking any action, directly or indirectly, with respect to those securities or funds in which any client has any beneficial interest, where the investment adviser has custody or possession of such securities or funds when the adviser's action is subject to and does not comply with the requirements of Reg. 206(4)-2 under the Investment Advisers Act of 1940;[.]

(16) [E]entering into, extending or renewing any investment advisory contract unless such contract is in writing and discloses, in substance, the services to be provided, the term of the contract, the advisory fee, the formula for computing the fee, the amount of prepaid fee to be returned in the event of contract termination or non-performance, whether the contract grants discretionary power to the adviser and that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract;[.]

(17) [F]failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information in violation of Section 204A of the Investment Advisers Act of 1940;[.]

(18) [E]entering into, extending, or renewing any advisory contract which would violate section 205 of the Investment Advisers Act of 1940. This provision shall apply to all advisers and investment adviser representatives registered or required to be registered under this Act, notwithstanding whether such adviser or investment adviser representative would be exempt from federal registration pursuant to section 203(b) of the Investment Advisers Act of 1940;[.]

(19) [To ]including[dicate], in an advisory contract, any condition, stipulation, or provisions binding any person to waive compliance with any provision of this act or of the Investment Advisers Act of 1940, or any other practice that would violate section 215 of the Investment Advisers Act of 1940;[.]

(20) [E]engaging in any act, practice, or course of business which is fraudulent, deceptive, or manipulative in contravention of section 206(4) of the Investment Advisers Act of 1940 notwithstanding the fact that such investment adviser or investment adviser representative is not registered or required to be registered under section 203 of the Investment Advisers Act of 1940;[.]

(21) [E]engaging in conduct or any act, indirectly or through or by any other person, which would be unlawful for such person to do directly under the provisions of this act or any rule or regulation thereunder;[.]

(22) for an investment adviser representative compensating any customer for losses in the account of the customer without the prior written authorization of the customer and the representative's investment adviser;

(23) failing to comply with a reasonable request from the Division for information or testimony, or an examination request made pursuant to Subsection 61-1-5(5), or a subpoena of the Division; or

(24) in connection with the provision of advice as to the value of or the advisability of investing in, purchasing, or selling securities, either directly or indirectly or through publications or writings, or when issuing or promulgating analyses or reports relating to securities, using a specific certification or designation that indicates or implies that the user has special certification or training in advising or servicing clients or prospective clients, in such a way as to mislead any person. The prohibited use of such certification or professional designation includes, but is not limited to, the following:

(a) use of a certification or professional designation by a person who has not actually earned or is otherwise ineligible to use such certification or designation;

(b) use of a nonexistent or self-conferred certification or designation;

(c) use of a certification or professional designation that indicates or implies a level of occupational qualifications obtained through education, training or experience that the person using the certification or professional designation does not have; or

(d) use of a certification or professional designation that was obtained from a designating or certifying organization that:

(i) is primarily engaged in the business of instruction in sales and/or marketing;

(ii) does not have reasonable standards or procedures for assuring the competency of its designees or certificants;

(iii) does not have reasonable standards or procedures for monitoring and disciplining its designees or certificants for improper or unethical conduct; or

(iv) does not have reasonable continuing education requirements for its designees or certificants in order to maintain the designation or certificate.

 

KEY: securities regulation, dishonest or unethical practices, business practices, designations

Date of Enactment or Last Substantive Amendment: [March 4, 1998]2010

Notice of Continuation: July 30, 2007

Authorizing, and Implemented or Interpreted Law: 61-1-6(2)(a)(ii)(G)[1)(g)]; 61-1-24