N.J. Admin. Code § 13:47A-6.3

Current through Register Vol. 56, No. 19, October 7, 2024

Section 13:47A-6.3 - Examples of dishonest or unethical practices for broker-dealers, agents, issuer-agents, advisers, and internet site operators

(a) "Dishonest or unethical practices" as used at N.J.S.A. 49:3-47 et seq., specifically at N.J.S.A. 49:3-53.a(3) and 49:3-58.a(2)(vii), shall include the following:

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 that is excessive in size or frequency in view of the financial resources and character of the account;

3. Recommending to a customer an investment strategy, or the purchase, sale, or exchange of any security or securities without reasonable grounds to believe that such strategy, 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. Placing an order or 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 consent to trade on margin from the customer before 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 first 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; by any person for whom the broker-dealer is acting or with whom the broker-dealer is associated in the distribution; or by 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:

i. Effecting any transaction in a security that involves no change in the beneficial ownership thereof;

ii. 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

iii. 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:

i. 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

ii. 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 by any person 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, press release, 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, or failing to supplement a disclosure not made in writing by giving or sending written disclosure at or before 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 or a selling group member, or from a member participating in the distribution as an underwriter or selling group member;

21. Failing or refusing 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 therefore;

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 (15 U.S.C. § 78m), 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 provision 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 Standards of Honor and Principles of Trade of FINRA or any applicable fair practice or ethical standard promulgated by the SEC or by a self-regulatory organization, which relate to honesty and fair dealings and just and equitable principles of trade;

29. Failing to comply with a suspension or bar order of the SEC, FINRA, any other self-regulatory organization, or any other securities regulator;

30. Failing to cooperate in accordance with N.J.A.C. 13:47A-14.16;

31. Making any misrepresentation or omission of a material fact or otherwise employing any form of concealment or deception in connection with the offer, sale, purchase or negotiation of any securities, commodity futures, banking or insurance contract, instrument or transaction;

32. Engaging in any material misrepresentation or omission or engaging in deceitful, deceptive or fraudulent conduct involving any aspect of the securities, banking, insurance, investment advisory or commodities futures industries or engaging in any conduct described above which, at the time, is prohibited by the statutes or rules governing the above industries in the jurisdiction where the conduct occurred;

33. Altering any document relevant to or on the books and records of any broker-dealer, investment adviser, bank, insurance or commodities futures business with any entry or deletion which is materially false or misleading;

34. In connection with any securities, banking, insurance, investment advisory, or commodity futures contract, instrument or transaction, signing any client's name without the prior knowledge and written consent of both the client and the applicant's or registrant's employing firm;

35. In the case of agents of broker-dealers, effecting securities transactions not recorded on the regular books or 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;

36. Establishing or maintaining an account containing fictitious information in order to execute transactions which would otherwise be prohibited;

37. Engaging in acts or practices that constitute deceptive market-timing in the trading of mutual funds, including, but not limited to:

i. Breaking a trade into smaller trades to avoid detection; or

ii. Using multiple accounts, nominees, agent numbers or multiple agents or representatives to avoid detection;

38. 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;

39. Dividing or otherwise splitting commissions or otherwise paying production-based compensation from the purchase or sale of securities to any person not registered with the Bureau, except where the broker-dealer has established a retirement plan which has received prior Bureau approval;

40. For agents who are dually registered, failing to disclose the dual license to a client;

41. Altering client account records to falsely change the client's investment objectives to conform to unsuitable or unauthorized trades made by the agent in the client's account;

42. 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;

43. Borrowing money or securities from a client unless the client is a broker-dealer, an affiliate of an investment adviser, or a financial institution engaged in the business of loaning funds;

44. Loaning money to a client except in the case of a broker-dealer, or where the lending party is a financial institution engaged in the business of loaning funds, or where the client is an affiliate;

45. Knowingly being designated, directly or indirectly, as a beneficiary of a client's account, estate, trust, insurance, or other property interest and, in the case of an agent or investment adviser representative, without the prior written authorization of the client and:

i. Any broker-dealer that the agent maintains registration with and with which the client has an account; and/or

ii. Any investment adviser that the investment adviser representative maintains registration with and with which the client has an account;

46. Misrepresenting to any advisory client, or prospective advisory client, the qualifications of the investment adviser or any employee of the investment adviser, or misrepresenting the nature of the advisory services being offered or fees to be charged for such service, or 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;

47. Using a certification or professional designation to indicate or imply that the user has special training in advising or servicing senior citizens or retirees (hereinafter, a "senior-specific certification" or "professional designation"), in such a way as to mislead any person, in connection with the offer, sale, or purchase of a security, or the provision of advice as to the value of or the advisability of investing in, purchasing, or selling a security, either directly or indirectly or through a publication or a writing, or by issuing or promulgating an analysis or report relating to a security.

i. Misusing a senior-specific certification or professional designation pursuant to this paragraph includes, but is not limited to, using:

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

(2) A nonexistent or self-conferred certification or professional designation;

(3) 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; and

(4) A certification or professional designation that was obtained from a certifying or designating organization that:

(A) Is primarily engaged in the business of instruction in sales or marketing;

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

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

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

ii. There is a rebuttable presumption that a certifying or designating organization is not included as an organization to which (a)47i(4) above is applicable, if the organization has been accredited by:

(1) The American National Standards Institute;

(2) The National Commission for Certifying Agencies; or

(3) An organization that is on the United States Department of Education's list entitled "Accrediting Agencies Recognized for Title IV Purposes" and the certification or professional designation issued by the organization does not primarily apply to sales or marketing.

iii. In determining whether a combination of words, or an acronym standing for a combination of words, constitutes a senior-specific certification or professional designation, the Bureau Chief will consider the following factors:

(1) The use of one or more words, such as "senior," "retirement," "elder," or like words, combined with one or more words, such as "certified," "registered," "chartered," "adviser," "specialist," "consultant," "planner," or like words, in the name of the certification or professional designation; and

(2) The manner in which those words are combined.

iv. For purposes of this paragraph:

(1) A senior-specific certification or professional designation shall not include a job title within an organization that is licensed or registered by a state or Federal financial services regulatory agency (which shall include, but not be limited to, an agency that regulates brokers, dealers, investment advisers, or investment companies as defined pursuant to the Federal "Investment Advisers Act of 1940" (15 U.S.C. §§ 80b-1 et seq.) or the Federal "Investment Company Act of 1940" (15 U.S.C. §§ 80a-1 et seq.)), if that job title:

(A) Indicates seniority or standing within the organization; or

(B) Specifies an individual's area of specialization within the organization.

v. Nothing in this section shall limit the Bureau Chief's enforcement authority under the law;

48. Providing a report or recommendation to any advisory client prepared by someone other than the adviser without disclosing that fact. This provision 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;

49. Charging a client an unreasonable advisory fee;

50. 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:

i. Compensation arrangements connected with advisory services to clients which are in addition to compensation from such clients for such services; and

ii. 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;

51. Guaranteeing a client that a specific result will be achieved (gain or no loss) with advice which will be rendered;

52. Publishing, circulating or distributing any advertisement which does not comply with Rule 206(4)-1 ( 17 CFR 275.206(4)-1 ) under the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-1 et seq.;

53. Disclosing the identity, affairs, or investments of any client or former client unless required by law to do so, or unless consented to by the client;

54. 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 (15 U.S.C. § 80b-4a);

55. Failing to adopt, maintain, and enforce written supervisory policies and procedures under the requirements of N.J.A.C. 13:47A-2.12;

56. 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 as defined in N.J.A.C. 13:47A-7.2:

i. When the adviser's action is subject to and does not comply with the requirements of Rule 206(4)-2 ( 17 CFR 275.206(4)-2 ) under the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-1 et seq.; or

ii. When the adviser's action fails to meet the requirements in this paragraph, in addition to those set forth in Rule 206(4)-2 (17 CFR 275.206(4)-2).

(1) Definitions. As used in this paragraph, the following words and terms shall have the following meanings, unless the context clearly indicates otherwise:

(A) As referenced in Rule 206(4)-2 (17 CFR 275.206(4)-2), "public accountant" shall mean certified public accountant.

(B) "Independent party" means a person that:

I. Is engaged by the investment adviser to act as a gatekeeper for the payment of fees, expenses, and capital withdrawals from the pooled investment;

II. Does not control, and is not controlled by, and is not under common control with the investment adviser;

III. Does not have, and has not had within the past two years, a material business relationship with the investment adviser; and

IV. Shall not negotiate or agree to have material business relations or commonly controlled relations with an investment adviser for a period of two years after serving as the person engaged in an independent party agreement.

(2) Special rule for limited partnerships and limited liability companies. With respect to Rule 206(4)-2(a)(5), the investment adviser must:

(A) Enter into a written agreement with an independent party who is obliged to act in the best interest of the limited partners, members, or other beneficial owners to review all fees, expenses, and capital withdrawals from the pooled accounts; and

(B) Send all invoices or receipts to the independent party, detailing the amount of the fee, expenses, or capital withdrawal and the method of calculation, such that the independent party can:

I. Determine that the payment is in accordance with the pooled investment vehicle standards (generally the partnership agreement or membership agreement); and

II. Forward, to the qualified custodian, approval for payment of the invoice with a copy to the investment adviser.

(3) Fee deduction. With respect to Rule 206(4)-2(b)(3) ( 17 CFR 275.206(4)-2(b)(3) ), an investment adviser is not required to obtain an independent verification of client funds and securities maintained by a qualified custodian if all of the following additional requirements are met:

(A) The investment adviser has written authorization from the client to deduct advisory fees from the account held with the qualified custodian;

(B) Each time a fee is directly deducted from a client account, the investment adviser concurrently:

I. Sends the independent party designated pursuant to Rule 206(4)-2(a)(7) an invoice or statement of the amount of the fee to be deducted from the client's account; and

II. Sends the client an invoice or statement itemizing the fee. Itemization includes the formula used to calculate the fee, the amount of assets under management the fee is based on, and the time period covered by the fee; and

(C) The investment adviser notifies the Bureau in writing that the investment adviser intends to use the safeguards of this sub-subparagraph. Such notification is required to be given on Form ADV.

(4) Limited partnerships subject to annual audit. With respect to Rule 206(4)-2(b)(4) ( 17 CFR 275.206(4)-2(b)(4) ):

(A) The adviser must also send to all limited partners (or members or other beneficial owners) at least quarterly, a statement showing:

I. The total amount of all additions to and withdrawals from the fund as a whole, as well as the opening and closing value of the fund at the end of the quarter based on the custodian's records;

II. A listing of all long and short positions on the closing date of the statement, in accordance with FASB Rule ASC 946-210-50; and

III. The total amount of additions to and withdrawals from the fund by the investor, as well as the total value of the investor's interest in the fund at the end of the quarter.

(B) The listing in (a)56ii(4)(A)II above follows FASB rule ASC 946-210-50-6, whereby long and short positions representing more than five percent of the net assets of the fund must be reported as outlined in this subsection of the FASB rule. All provisions of subsection FASB rule ASC 946-210-50-6 apply to the position disclosure required on the quarterly customer statement. This is the same reporting format required by rule 13F under the Securities Exchange Act of 1934 for investment managers' annual reports.

(C) The investment adviser must also notify the Bureau in writing that the investment adviser intends to employ the use of the statement delivery and audit safeguards described in this sub-subparagraph. Such notification is required to be given on Form ADV;

57. 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;

58. 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 registered or required to be registered under this Act, notwithstanding whether such adviser would be exempt from Federal registration pursuant to Section 203(b) of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-3(b));

59. To indicate, in an advisory contract any condition, stipulation, or provisions binding any person to waive compliance with any provision of N.J.S.A. 49:3-47 et seq., or of the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-1 et seq., or any other practice that would violate Section 215 of the Investment Advisers Act of 1940 ( 15 U.S.C. § 215 );

60. Retaining investment consulting services for compensation that is provided either directly to the consultant or indirectly through a matching or expert network service, shall be as follows:

i. Unless the adviser obtains a written certification that:

(1) Describes all confidentiality restrictions relevant to the potential consultation that the consultant has, or reasonably expects to have;

(2) Affirmatively states that the consultant will not provide any confidential information to the adviser; and

(3) Is signed and dated by the consultant, and is accurate as of the date of the initial, and any subsequent, consultation(s).

ii. Notwithstanding (a)60i above, an adviser who comes into possession of material confidential information through a consultation is precluded from trading any relevant security until such time as the confidential information is made public.

iii. Definitions. For purposes of this paragraph, the following terms shall have the following meanings, unless the context clearly indicates otherwise:

(1) "Confidential information" means any non-public information that one is bound by a confidentiality agreement or fiduciary (or similar) duty not to disclose.

(2) "Matching or expert network service" means a firm that, for compensation, matches consultants with advisers.

(3) "Investment consulting services" means a consultation for the purposes of assisting the adviser's decision as to whether to buy, sell, or abstain from buying or selling, positions in client accounts;

61. As to Internet site operators, failing to notify the Bureau within 30 days after the Internet site operator knows or should have known of the existence of any of the following by an issuer offering a security pursuant to N.J.S.A. 49:3-50(b)(14) on its internet site:

i. The issuer does not qualify for, or is not in compliance with, the exemption at N.J.S.A. 49:3-50(b)(14) or N.J.A.C. 13:47A-12A; or

ii. In conducting the offering pursuant to N.J.S.A. 49:3-50(b)(14), the issuer has previously, or is currently, violating the anti-fraud section of the Uniform Securities Law as set forth in N.J.S.A. 49:3-52;

62. As to Internet site operators, failing to adopt, maintain, and enforce written policies and procedures to ensure the requirements of N.J.A.C. 13:47A-12A.5 are met;

63. 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 (15 U.S.C. § 206(4)), notwithstanding the fact that such investment adviser is not registered or required to be registered pursuant to Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. § 203);

64. Failing to pay and fully satisfy any final judgment or arbitration award, resulting from an investment-related, customer-initiated arbitration, or court proceeding, unless alternative payment arrangements are agreed to between the customer and the investment adviser or investment adviser representative, or the broker-dealer or broker-dealer agent, in writing, and the investment adviser or investment adviser representative, or broker-dealer or broker-dealer agent complies with the terms of the alternative payment arrangement;

65. Attempting to avoid payment of any final judgment or arbitration award resulting from an investment-related, customer-initiated arbitration or court proceeding, unless alternative payment arrangements are agreed to between the customer and the investment adviser or investment adviser representative, or the broker-dealer or broker-dealer agent, in writing, and the investment adviser or investment adviser representative, or the broker-dealer or broker-dealer agent complies with the terms of the alternative payment arrangements;

66. Failing to pay and fully satisfy any fine, civil penalty, order of restitution, order of disgorgement, or similar monetary payment obligation imposed, whether administratively or through court proceedings, upon the investment adviser or investment adviser representative, or the broker-dealer or agent by the Securities and Exchange Commission, a court of competent jurisdiction, the securities or other financial services regulator of any state or province, or any self-regulatory organization; or

67. Engaging in conduct or any act, indirectly or through or by any other person, that would be unlawful for such person to do directly under the provisions of N.J.S.A. 49:3-47 et seq., or any rule promulgated thereunder.

N.J. Admin. Code § 13:47A-6.3

Amended by R.2015 d.130, effective 8/17/2015.
See: 47 N.J.R. 692(a), 47 N.J.R. 2155(a).
Section was "Registrants and applicants". Rewrote the section.
Special amendment, R.2016 d.109, effective 8/12/2016 (to expire August 11, 2017).
See: 48 N.J.R. 1964(a).
Section was "Examples of dishonest or unethical practices for broker-dealers, agents, issuer-agents, and advisers." Added new (a)61 and (a)62; and recodified former (a)61 and (a)62 as (a)63 and (a)64.
The provisions of R.2016 d.109 were readopted without change by R.2017 d.145, effective 6/23/2017.
See: 49 N.J.R. 2538(b).

Amended by 56 N.J.R. 1876(a), effective 9/16/2024