Prohibited practices and market conduct

The NASAA Statements of Policy — how prohibited practices are codified

First, a structural fact worth knowing: state securities law does not list every prohibited practice in statute. Instead, NASAA issues Statements of Policy that enumerate dishonest and unethical practices for each kind of registrant, and state administrators incorporate them by reference. The practical consequence for you: the practices on these lists are testable by name.

• NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents — the primary list of prohibited BD and agent conduct. Includes churning, unauthorized trading, market manipulation, misrepresentations, and many more.
• NASAA Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers Model Rule 102(a)(4)-1 — the parallel list for advisory personnel.
• NASAA Statement of Policy on Dishonest or Unethical Practices in Connection with Investment Company Shares — covers mutual fund-specific abuses including breakpoint sales, switching, and share-class abuse.

Everything that follows organizes the prohibitions into four categories: market manipulation, misrepresentation and omission, account abuse, and personal conduct violations. Learn them as categories first — the individual practices file themselves once the drawers exist.

Market manipulation

Market manipulation is the deliberate creation of false or misleading market activity to influence price or volume — lying to the market with orders instead of words. It carries both civil and criminal liability under Section 9(a) of the Securities Exchange Act (manipulative trading) and Section 10(b) plus Rule 10b-5 (manipulative or deceptive devices).

• Spoofing — entering bids or offers with the intent to cancel before execution, creating false impressions of demand or supply. Made explicitly illegal by Dodd-Frank.
• Layering — a form of spoofing using multiple non-bona-fide orders at different price levels to push the market.
• Front-running — trading ahead of a known pending customer order to profit from the price movement that order will cause. Both an internal-policy violation and a Rule 10b-5 fraud.
• Wash sales and matched orders — transactions in which no real change of beneficial ownership occurs, designed to create the appearance of trading activity.
• Pump-and-dump — spreading false positive information to inflate a security's price, then selling personal holdings into the manufactured demand.

The Series 63 tests this as recognition: it describes trading behavior and asks you to name the practice. Memorize the tells — intent to cancel means spoofing or layering, trading ahead of customer flow means front-running, no real change of ownership means wash sales. The tell is the answer.

Disseminating false trading information — the publication prong of manipulation

Manipulation is not limited to placing orders. The NASAA Statement of Policy also prohibits the publication side: a broker-dealer may not publish or circulate — or cause anyone else to publish or circulate — any notice, advertisement, article, or communication that:

• Reports a transaction as a purchase or sale of a security unless the firm believes the trade was bona fide; or
• Quotes a bid or ask price for a security unless the firm believes the quotation represents a bona fide bid or offer.

Reporting fictitious trades or circulating made-up quotations creates the same false appearance of market activity as wash sales and matched orders — the exam treats it as a form of market manipulation. The tell in a fact pattern is a firm publicizing prices or volume it does not actually believe are real.

Misrepresentation and omission

Fraud comes in two grammatical forms: saying something false, and leaving out the fact that would have made the rest true. Misrepresentation includes both affirmative false statements and material omissions — failure to state a fact necessary to make other statements not misleading. Both are fraud under Section 17(a) of the Securities Act, Rule 10b-5, and state antifraud provisions. Three of these you met in the communications arc; here they are as NASAA enforcement categories:

• Guarantees of return or against loss — never permitted, in any product. "Guaranteed by FDIC" applies only to insured deposits; "guaranteed by the U.S. Treasury" applies only to direct Treasury obligations. Any other guarantee language is a violation.
• Off-prospectus claims — statements about a mutual fund that contradict or exceed prospectus disclosures, including hypothetical performance, projected returns, or unstated benefits.
• Misleading use of titles or credentials — representing oneself as a "senior specialist" or implying certifications not actually held. The NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations addresses this directly.
• Implying registration confers approval — never claim that registration with the SEC or a state means the regulator has approved the firm, an offering, or its merits. This is one of the most heavily tested violations because the answer is counterintuitive: registration is approval of paperwork, not of merit.

And don't rank the two forms — omissions are equal-rank violations. Failing to disclose a material conflict, a material fact about a security, or a material limitation on a representation is fraud, not an oversight.

Bank-network sales — NASAA Rules for Sales of Securities at Financial Institutions (1998). When securities are sold on the premises of a bank, savings institution, or credit union, customers must receive four mandatory disclosures — in writing at account opening and orally at the time of any recommendation: the securities are not FDIC-insured, are not a deposit or obligation of the bank, are not guaranteed by the bank, and may lose value, including loss of principal. The selling area must be physically distinct from the deposit-taking area whenever practicable, signage must be displayed, and the institution must establish written customer-complaint procedures. The rule exists because of one persistent confusion NASAA polices hard: customers mistaking securities products for insured deposits.

Account abuse — including the NASAA SoP on Investment Company Shares

Account abuse is the cluster of prohibited practices that mistreat the customer through the handling of their account — and the Series 63 tests every one of them as a fact pattern where you name the violation.

• Churning — excessive trading not justified by the customer's investment objectives. FINRA examiners look at turnover ratio (annualized purchases divided by account equity), cost-to-equity ratio, and the suitability of the pattern. Quantitative suitability under FINRA Rule 2111 codifies the standard.
• Unauthorized transactions — trades placed without the customer's prior consent, except in accounts where written discretionary authority has been granted. Even a "good faith" trade without authorization is a violation — motive doesn't launder the act.
• Unsuitable recommendations — failure to match the recommendation to the customer profile. Three suitability prongs apply: reasonable-basis, customer-specific, quantitative.
• Switching — recommending the sale of one mutual fund to buy another with the primary motivation of generating commissions, particularly where switching creates new sales charges that erode value.

Mutual funds get their own list. The NASAA Statement of Policy on Dishonest or Unethical Practices in Connection with Investment Company Shares codifies the fund-specific abuses by name:

• Breakpoint sales — failing to inform customers that an investment slightly above their planned amount would qualify for a reduced sales charge.
• Share-class abuse — recommending a higher-cost share class when the customer qualifies for or would be better served by a lower-cost class.
• Letter of intent failures — not offering a customer the option to use a Letter of Intent (LOI) to reach a breakpoint over 13 months.

Two more Investment Company SoP violations — selling dividends and unfair comparisons

The same NASAA Statement of Policy on Investment Company Shares that codifies breakpoint sales and switching names two additional practices tested by fact pattern:

• Selling dividends — telling or implying to a customer that buying fund shares shortly before the ex-dividend date is advantageous. It is not. On the ex-date the fund's NAV drops by the amount of the distribution, so the buyer simply receives part of the purchase price back — and owes tax on it immediately. The violation has a second prong: implying that a long-term capital gains distribution is part of the fund's income yield. A distribution of gains is a return of appreciation, not recurring income. The only exception is a specific, clearly described tax or other advantage to that customer.
• Unfair comparisons — comparing or implying that money market mutual funds are similar to insured bank savings accounts. Money market funds are generally low-risk, but they carry no FDIC insurance and their principal is not guaranteed. Presenting the two as equivalent is a named unethical practice.

Both violations turn on the sales pitch, not the product. The fund itself can be perfectly suitable — the misrepresentation of why or how to buy it is what triggers the violation.

Firm-level operational abuses — practices attributed to the broker-dealer

Several items on the NASAA list describe operational failures that only a firm can commit. The exam tests these by asking what a broker-dealer (not an agent) did wrong:

• Delivery delays — a pattern of unreasonable, unjustifiable delays in delivering securities customers have purchased, or in paying out a customer's free credit balance on request. A free credit balance is uninvested cash in the account that belongs to the customer and must be remitted when asked.
• Dishonoring quotes — quoting a price at which the firm is not actually prepared to trade. If a firm quotes a stock at $20.60 bid / $20.75 ask, it must stand ready to buy at $20.60 and sell at $20.75 under the stated conditions, at least for the minimum trading unit.
• Unreasonable servicing fees — charging unreasonable or inequitable fees for miscellaneous services: collecting dividends or interest, exchanging or transferring securities, appraisals, safekeeping, and custody. Firms offering a broader service menu may charge more, but the fees must be reasonable and disclosed.
• Withholding shares of a public offering — failing to make a bona fide public offering of all shares allotted to the firm in a distribution, whether the firm acted as underwriter or selling group member. Holding back shares of a hot issue for the firm's own account, its officers, or its agents — instead of allocating them equitably to the public — is the violation, regardless of what price insiders pay.

Two related practices reach both the firm and its agents:

• Higher-than-normal commissions — a thinly traded security can legitimately cost more to execute, which can justify an above-normal charge. The charge becomes a violation only when it is not disclosed to the client in advance of the trade. Undisclosed premium pricing, not premium pricing itself, is the offense.
• Free-lunch seminars — regulators treat "educational workshops" that include a free meal — often marketed to seniors with assurances that nothing will be sold — as sales presentations when the real goal is opening accounts, at the event or in follow-up contact. If the sales purpose is not clearly presented, both the sponsoring firm and the presenting agent are held responsible.

Personal conduct violations

The final category turns the lens on the registered person: acts by the individual that conflict with their duty to the firm and the firm's customers. Four FINRA rule numbers do the work here — and the exam expects you to match rule to conduct.

• Selling away (FINRA Rule 3280) — participating in any securities transaction outside the regular course of employment. Prior written notice to the firm is always required, regardless of compensation. If compensation is received, the firm must approve and supervise the transaction. The transaction need not involve a firm customer to be a violation.
• Outside business activities (FINRA Rule 3270) — non-securities business activities outside the firm, including any compensated outside work. Written notice to the firm is required prior to commencement.
• Outside brokerage accounts (FINRA Rule 3210) — brokerage accounts maintained by a registered person at any firm other than their employer require written consent from the employing firm. The executing firm must send duplicate confirmations and statements to the employing firm on request.
• Gifts and entertainment — FINRA Rule 3220 (enrichment — not on NASAA's Series 63 rule list) limits gifts to $300 per person per year (raised from $100, effective March 30, 2026) when the gift relates to the business of the recipient's employer, such as employees of an institutional customer, vendor, or counterparty; it does not govern gifts to individual retail customers or to a firm's own associated persons. Ordinary business entertainment is excluded.

The 3270-versus-3280 line is heavily tested, and one diagnostic settles it: does the outside activity involve a securities transaction? Yes → 3280 (selling away). No → 3270 (outside business activity). Ask that question first, every time.

Agent-only violations — fictitious account information and commission splitting

Alongside selling away and sharing in accounts, the NASAA list names two practices that only an individual agent can commit:

• Fictitious account information — establishing or maintaining an account containing false information in order to execute transactions that would otherwise be prohibited. The classic exam patterns: inflating a customer's stated net worth so the account qualifies for margin or options approval, or overstating investment experience to clear a firm's suitability screen. The customer's consent does not cure it — the false record is the violation.
• Splitting commissions — an agent may divide commissions or other compensation only with a person registered as an agent of the same broker-dealer or a broker-dealer under direct or indirect common control. Splitting with an agent of an unaffiliated firm — or with anyone unregistered — is prohibited. A permissible split does not need to be disclosed to the client unless it increases the client's transaction cost.

Contrast the disclosure logic: sharing in a customer's profits and losses requires prior written consent of both the customer and the firm, while a permissible commission split among affiliated agents ordinarily requires no client disclosure at all. The exam likes to swap those two rules.

Insider Trading — Material Non-Public Information (MNPI)

Two words carry this entire topic: material and non-public. Both must be true for information to be MNPI, and trading on it — or passing it along — is fraud under Section 10b-5 of the Securities Exchange Act of 1934:

• Material: Information that a reasonable investor would consider important in making an investment decision (e.g., earnings surprises, mergers, FDA approvals, executive departures)
• Non-public: Not yet widely disseminated to the investing public
• Who is liable — the whole chain:
  • The person who trades on MNPI
  • The person who tips others (even if they don't trade themselves)
  • The person who receives the tip and trades
  • The firm that fails to supervise and prevent it
• Penalties: Treble damages (3x the profit gained or loss avoided), criminal fines, imprisonment
• Prevention: Firms maintain information barriers ("Chinese walls") between departments that have MNPI and trading desks

Anti-Money Laundering (AML)

Securities firms are front-line gatekeepers against money laundering, and the obligations come with hard numbers the Series 63 tests verbatim:

• Bank Secrecy Act (BSA) and USA PATRIOT Act requirements — the statutory foundation for every firm's AML program
• Customer Identification Program (CIP): Verify identity before opening accounts — at opening, not after the first deposit
• Suspicious Activity Reports (SARs): File for transactions of $5,000+ that appear suspicious. Do NOT notify the customer.
• Currency Transaction Reports (CTRs): File for cash transactions exceeding $10,000