Prohibited Practices

The investment threshold at which mutual fund sales charges (loads) decrease, encouraging larger investments through volume discounts. Breakpoints typically occur at specific dollar amounts ($25K, $50K, $100K, $250K, etc.). A broker-dealer or agent soliciting fund shares must disclose any relevant breakpoint discount and any available letter of intent feature (where the fund offers rights of accumulation, existing holdings also count toward a breakpoint). Selling shares just below a breakpoint to avoid the reduced load (and earn higher commission) is a prohibited practice called a "breakpoint sale."

Example: A fund charges 5.75% on investments under $50K, 4.50% for $50K-$99K, and 3.75% for $100K+. An invest...

Excessive trading in a client's account to generate commissions without regard to the client's investment objectives. Requires three elements: control over the account, excessive trading activity, and intent to generate commissions. A prohibited practice that violates fiduciary duty and suitability standards.

Example: An adviser with discretionary authority buys and sells the same securities multiple times per month ...

The prohibited practice of trading in a security ahead of a client's order to profit from the anticipated price movement caused by the client's trade. For an investment adviser, it breaches the fiduciary duty of loyalty and misuses material non-public information. For a broker-dealer, trading while holding material, non-public market information about an imminent block transaction violates FINRA Rule 5270, and trading ahead of other customer orders may violate other FINRA rules or the federal securities laws.

Example: An investment adviser receives a $5 million buy order for ABC stock from a pension fund client. Befo...

Trading securities based on material, non-public information (MNPI) in breach of a duty of trust or confidence owed to the issuer, its shareholders, or the source of the information. The information itself must have two features: it must be material (would affect investment decisions) and non-public (not available to the general investing public). Violations can result in civil penalties (up to 3x the profit gained or loss avoided), disgorgement of profits, and, on conviction for a willful violation, imprisonment of up to 20 years.

Example: A corporate CFO learning of an upcoming merger and buying stock before the public announcement const...

A false or misleading statement or omission of fact that a reasonable investor would consider important in making an investment decision. Prohibited under Investment Advisers Act Section 206, materiality is judged by whether the misrepresentation would likely influence a reasonable investor's decision. Both affirmative false statements and material omissions violate anti-fraud provisions.

Example: An adviser tells a client that a mutual fund "has never had a down year" when the fund actually lost...

The third prong of FINRA Rule 2111 suitability obligations, requiring the broker-dealer to have a reasonable basis to believe that a series of recommended transactions is not excessive and unsuitable for the customer when taken together in light of the customer's investment profile. Addresses churning and over-trading concerns by evaluating the frequency and volume of transactions collectively, even when each individual trade may be suitable. Rule 2111 does not apply to recommendations covered by Regulation Best Interest; for a retail customer, Regulation Best Interest's care obligation carries a parallel test that a series of recommended transactions is not excessive and is in the retail customer's best interest when taken together.

Example: A broker recommends five different suitable equity trades to a risk-averse retiree over two weeks, e...