Unethical Practices by Role
Overview
Registered persons are always obligated to act ethically in the securities industry. Some situations fall into an ethical “grey area,” where the same action might be inappropriate in one context but acceptable in another.
📌 To make the expectations clear, this chapter covers:
- Unethical practices of broker-dealers and agents
- Unethical practices of investment advisers and investment adviser representatives (IARs)
Unethical practices of broker-dealers
The North American Securities Administrators Association (NASAA) identifies unethical practices of broker-dealers and agents in a published rule.
Unethical actions that apply to broker-dealers:
- Consistent late deliveries of securities to purchasing customers
- Consistent late deliveries of sales proceeds to selling customers
- Excessive trading in a customer’s account*
- Making unsuitable recommendations
- Executing transactions without proper authority
- Executing a margin trade without the margin agreement**
- Failing to segregate*** customer assets
- Executing a transaction at a price unrelated to the current market value
- Failing to deliver a prospectus in a new issue offering
- Charging unreasonable fees
- Offering a transaction without the intention of doing it
- Claiming a security has a market value if no market actually exists
- Engaging in any form of market manipulation
- Guaranteeing a customer against loss (performance guarantee)
- Advertising a security without the intention of trading it
- Engaging in dishonest or manipulative marketing
- Failing to disclose conflicts of interest
- Holding back securities meant for public sale****
- Failure to provide the necessary documentation to customers
- Failure to respond to customer complaints*****
Footnotes to the broker-dealer list
| Marker | Topic | Explanation |
|---|---|---|
| * | Excessive trading | Excessive trading is also known as churning. One way to spot churning is to compare the amount of trading to the customer’s investment objective. For example, if the objective is conservative (safety-focused) but the account has frequent trading, churning may be occurring. |
| ** | Margin agreement | Margin agreements must be signed and submitted promptly after the first margin trade. |
| *** | Segregation | Broker-dealers must segregate fully-paid (non-margin) securities, meaning they must be kept separate from the broker-dealer’s own assets. |
| **** | Holding back securities | A broker-dealer participating in a public offering of a new issue (e.g., an initial public offering) must offer those securities to the general public. The firm may not “hold back” the securities by keeping them in inventory or allocating them to employees. |
| ***** | Customer complaints | A complaint must be responded to only if the broker-dealer receives it in writing (including electronic submissions). Agents must forward any complaints they receive to their supervisor (principal), who will help resolve the issue. Regardless of the outcome, the broker-dealer must respond to the customer’s complaint. |
A complaint only triggers the response obligation if it is received in writing (electronic submissions count). Verbal complaints do not.
Unethical practices of agents
Some items repeat because they’re unethical for both broker-dealers and agents.
- Borrowing from or lending to customers*
- Maintaining custody of customer assets**
- Failing to record securities transactions***
- Selling away****
- Establishing a fake account in order to perform prohibited transactions
- Sharing an account with a customer*****
- Splitting commissions with agents not affiliated with the same broker-dealer
- Excessive trading in a customer’s account
- Making unsuitable recommendations
- Executing transactions without proper authority
- Executing a margin trade without the margin agreement
- Executing a transaction at a price unrelated to the current market value
- Failing to deliver a prospectus in a new issue offering
- Engaging in any form of market manipulation
- Guaranteeing a customer against loss (performance guarantee)
- Advertising a security without the intention of trading it
- Engaging in dishonest or manipulative marketing
Footnotes to the agent list
| Marker | Topic | Explanation |
|---|---|---|
| * | Borrowing / lending | Unlike FINRA rules, NASAA applies stricter standards to borrowing from or lending to customers. In particular, there is no exception for family members. Agents generally can’t borrow from anyone, but there is one exception: if the client is in the business of lending money (e.g., banks and lending institutions), the agent may take a loan from the customer. In addition, a customer may be set up with a loan through a margin account at a broker-dealer. Finally, loans may be made to clients that are affiliates of the broker-dealer (e.g., if the client is the Marketing Director at the firm). |
| ** | Custody | Broker-dealers maintain custody, not agents. In other words, an agent should never personally take possession of a customer’s assets. |
| *** | Recording transactions | Agents must ensure that all securities transactions are properly recorded on the books and records of their employing broker-dealer. Failing to record transactions, or maintaining transactions outside the firm’s records, violates recordkeeping rules and is considered unethical. |
| **** | Selling away | Selling away occurs when a representative executes a securities transaction outside their employing firm without disclosing the transaction and/or obtaining written approval from the firm. For example, an agent helps a friend sell stock in a small business on the weekend but doesn’t inform the firm. |
| ***** | Sharing an account | Agents generally may not share accounts with customers, but there is an exception. If the employing broker-dealer gives written approval and there is a written agreement with the customer, the agent may share gains and losses (e.g., participate in a joint account) with the customer. |
NASAA is stricter than FINRA on borrowing/lending — there is no family-member exception under NASAA.
Unethical practices of investment advisers and IARs
NASAA rules also describe unethical practices of investment advisers and IARs. Unlike the NASAA rule for broker-dealers and agents, this rule does not separate the list by role. Instead, it provides one combined list of unethical practices.
- Making unsuitable recommendations
- Executing transactions without proper authority*
- Excessive trading in a customer’s account
- Borrowing from or lending to clients**
- Misrepresenting professional qualifications***
- Providing a third-party analysis or report without proper disclosure****
- Charging unreasonable fees
- Failing to disclose conflicts of interest
- Guaranteeing a customer against loss (performance guarantee)
- Sharing an account with a client*****
Footnotes to the investment adviser / IAR list
| Marker | Topic | Explanation |
|---|---|---|
| * | Discretionary authority | Investment advisers and IARs may execute discretionary transactions on 10 days of verbal authority, while broker-dealers and agents must have written authorization before any discretionary transaction. |
| ** | Borrowing / lending | The same rule discussed for agents (above) applies here. An investment adviser or IAR may borrow money from a client who is in the business of lending money. Otherwise, borrowing from or lending to clients is unethical and prohibited. |
| *** | Misrepresenting qualifications | A common form of misrepresentation involves registration and designations. For example, an IAR may not imply that being registered means they are successful or qualified to handle any client account. Registration only means the person may legally operate in a state; it does not indicate skill, experience, or performance. |
| **** | Third-party analysis | If a third-party analysis or report is provided to a client, the investment adviser or IAR must disclose that it was created by a third party. Without that disclosure, the client could reasonably assume the adviser created it, which would be misleading. |
| ***** | Sharing an account | Agents may be permitted to share an account with a customer if there is written broker-dealer approval and a written customer agreement. IARs, however, may never share accounts with clients. In all situations, it is considered unethical. |
🔑 Discretion: authority comparison
| Role | Authority required for discretionary trades |
|---|---|
| Investment advisers and IARs | May act on 10 days of verbal authority |
| Broker-dealers and agents | Must have written authorization before any discretionary transaction |
⚠️ Sharing an account: agent vs IAR
| Role | May share an account with the client? | Condition |
|---|---|---|
| Agent (broker-dealer) | Yes, with permission | Written broker-dealer approval and written customer agreement; shares gains and losses |
| IAR / investment adviser | Never | Unethical in all situations |
Key points
Unethical actions for broker-dealers
- Consistent late deliveries of securities to purchasing customers
- Consistent late deliveries of sales proceeds to selling customers
- Excessive trading in a customer’s account (churning)
- Making unsuitable recommendations
- Executing transactions without proper authority
- Executing a margin trade without the margin agreement
- Failing to segregate customer assets
- Executing a transaction at a price unrelated to the current market value
- Failing to deliver a prospectus in a new issue offering
- Charging unreasonable fees
- Offering a transaction without the intention of doing it
- Claiming a security has a market value if no market actually exists
- Engaging in any form of market manipulation
- Guaranteeing a customer against loss (performance guarantee)
- Advertising a security without the intention of trading it
- Engaging in dishonest or manipulative marketing
- Failing to disclose conflicts of interest
- Holding back securities meant for public sale
- Failure to provide the necessary documentation to customers
- Failure to respond to customer complaints
Unethical actions for agents
- Borrowing from or lending to customers
- Unless the client is in the business of lending money
- Maintaining custody of customer assets
- Performing a private securities transaction without written authorization (selling away)
- Establishing a fake account in order to perform prohibited transactions
- Sharing an account with a customer
- Unless a written agreement with broker-dealer and customer exists
- Splitting commissions with agents not affiliated with the same broker-dealer
- Excessive trading in a customer’s account
- Making unsuitable recommendations
- Executing transactions without proper authority
- Executing a margin trade without the margin agreement
- Executing a transaction at a price unrelated to the current market value
- Failing to deliver a prospectus in a new issue offering
- Engaging in any form of market manipulation
- Guaranteeing a customer against loss
- Advertising a security without the intention of trading it
- Engaging in dishonest or manipulative marketing
Unethical actions for investment advisers and IARs
- Making unsuitable recommendations
- Executing transactions without proper authority
- Excessive trading in a customer’s account
- Borrowing from or lending to clients
- Unless the client is in the business of lending money
- Misrepresenting professional qualifications
- Providing a third-party analysis or report without proper disclosure
- Charging unreasonable fees
- Failing to disclose conflicts of interest
- Guaranteeing a customer against loss
- Sharing an account with a client
Sources
Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.
| # | Source | Publisher |
|---|---|---|
| 1 | Model Rule 102(a)(4)-1 — unethical practices of IAs and IARs | NASAA |
| 2 | Rule 102(a)(4)-1 text (2022) — enumerated prohibited practices | NASAA |
| 3 | Investment Advisers Act rules (206(4)-x, custody, brochure) | eCFR (17 CFR Part 275) |
| 4 | Model Rule 102(e)(1)-1 — custody of client funds or securities | NASAA |
| 5 | Achievable Series 65 — chapter 4.6.4 | Achievable (course text) |
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