Kentucky Administrative Regulations › Title 808 - PUBLIC PROTECTION CABINET - DEPARTMENT OF FINANCIAL INSTITUTIONS › Chapter 10 - Securities › Section 808 KAR 10:440 - Examples of dishonest or unethical practice for broker-dealers and agents

Current through Register Vol. 51, No. 1, July 1, 2024
RELATES TO:
				KRS
				292.337,
				292.480
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(7) and (8) 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 establishes requirements concerning 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. The following acts and practices shall
			 constitute violations of those standards and principles and shall be considered
			 to be dishonest and unethical practices that 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, including:
(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 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 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 the 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, including:
(a) Effecting any
			 transaction in a security which involves no change in the beneficial
			 ownership;
(b)
1. Entering an order or orders of
			 substantially the same size, time, and 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:
a. Of active trading in the security;
			 or
b. With respect to the market
			 for the security.
2. 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 (1) 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:
(a) 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
(b) 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;
(30) Committing any act involving a customer,
			 a customer's account, or any business records which would constitute a criminal
			 offense;
(31) Failing to pay and
			 fully satisfy any final order, final judgment, or arbitration award resulting
			 from an investment-related, customer-initiated arbitration or court proceeding,
			 unless:
(a) There is a written agreement for
			 alternative payment arrangements between the customer and the broker-dealer or
			 broker-dealer agent; and
(b) The
			 broker-dealer or broker-dealer agent complies with the terms of the alternative
			 payment arrangement;
(32)
			 Attempting to avoid payment of any final order, final judgment, or arbitration
			 award resulting from an investment-related, customer-initiated arbitration or
			 court proceeding, unless:
(a) There is a
			 written agreement for alternative payment arrangements between the customer and
			 the broker-dealer or broker-dealer agent; and
(b) The broker-dealer or broker-dealer agent
			 complies with the terms of the alternative payment arrangements;
			 or
(33) Failing to pay
			 and fully satisfy any fine, civil penalty, order of restitution, order of
			 disgorgement, or similar monetary payment obligation imposed upon the
			 broker-dealer or agent by the Securities and Exchange Commission, the
			 securities or other financial services regulator of any state or province, or
			 any self-regulatory organization.