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COMMONWEALTH OF PENNSYLVANIA

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The Pennsylvania Code website reflects the Pennsylvania Code changes effective through 51 Pa.B. 6892 (October 30, 2021).

10 Pa. Code § 305.019. Dishonest and unethical practices.

§ 305.019. Dishonest and unethical practices.

 (a)  Every person registered under section 301 of the act (70 P.S. §  1-301) is a fiduciary and shall:

   (1)  Act primarily for the benefit of its customers.

   (2)  Observe high standards of commercial honor and just and equitable principals of trade in the conduct of their business.

 (b)  Under section 305(a)(ix) of the act (70 P.S. §  1-305(a)(ix)), the Department may deny, suspend, condition or revoke a broker-dealer, agent, investment adviser or investment adviser representative registration or censure a broker-dealer, agent, investment adviser or investment adviser representative registrant if the registrant or applicant, or in the case of any broker-dealer or investment adviser, any affiliate, has engaged in dishonest or unethical practices in the securities business or has taken unfair advantage of a customer within the previous 10 years.

 (c)  The Department, for purposes of section 305(a)(ix) of the act, will consider actions such as those in paragraphs (1)—(3) to constitute dishonest or unethical practices in the securities business or taking unfair advantage of a customer.

   (1)  Broker-dealers. Includes the following actions:

     (i)   Engaging in a pattern of unreasonable and unjustifiable delays in the delivery of securities purchased by any of its customers or in the payment on request of free credit balances reflecting completed transactions of any of its customers.

     (ii)   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.

     (iii)   Recommending to a customer the purchase, sale or exchange of a security without reasonable grounds to believe that the transaction or recommendation is suitable for the customer based on reasonable inquiry concerning the customer’s investment objectives, financial situation and needs and other relevant information known by the broker-dealer.

     (iv)   Executing a transaction on behalf of a customer without authorization to do so.

     (v)   Exercising 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, or both, for the execution of orders.

     (vi)   Executing a transaction in a margin account without securing from the customer a properly executed written margin agreement promptly after the initial transaction in the account.

     (vii)   Failing to segregate customers’ free securities or securities held in safekeeping.

     (viii)   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.

     (ix)   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.

     (x)   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 information set forth in the final prospectus.

     (xi)   Charging unreasonable and inequitable fees for services performed, including miscellaneous services such as collection of moneys 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.

     (xii)   Offering to buy from or sell to a person at a stated price unless the broker-dealer is prepared to purchase or sell at a price and under the conditions that are stated at the time of the offer to buy or sell.

     (xiii)   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 a person for whom the broker-dealer is acting or with whom is associated in the distribution, or a person controlled by, controlling or under common control with the broker-dealer.

     (xiv)   Effecting a transaction in, or inducing the purchase or sale of, a security by means of a manipulative, deceptive or fraudulent device, practice, plan, program, design or contrivance, which may include:

       (A)   Effecting a transaction in a security which involves no change in the beneficial ownership.

       (B)   Entering an order for the purchase or sale of a security with the knowledge that an order 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 to create 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. This subsection does not prohibit a broker-dealer from entering bona fide agency cross transactions for its customers.

       (C)   Effecting, along or with one or more other persons, a series of transactions in a security creating actual or apparent active trading in the security or raising or depressing the price of the security, to induce the purchase or sale of the security by others.

     (xv)   Guaranteeing a customer against loss in a securities account of the customer carried by the broker-dealer or in a securities transaction effected by the broker-dealer with or for the customer.

     (xvi)   Publishing or circulating, or causing to be published or circulated, a notice, circular, advertisement, newspaper article, investment service or communication of any kind which purports to report a transaction as a purchase or sale of a security unless the broker-dealer believes that the transaction was a bona fide purchase or sale of the security; or which purports to quote the bid price or asked price for a security, unless the broker-dealer believes that the quotation represents a bona fide bid for, or offer of, the security.

     (xvii)   Using advertising or sales presentation in a fashion as to be deceptive or misleading. An example of this practice would be a distribution of nonfactual data, material or presentation based on conjecture, unfounded or unrealistic claims or assertions in a brochure, flyer or display by words, pictures, graphs or otherwise designed to supplement, detract from, supersede or defeat the purpose or effect of a prospectus or disclosure.

     (xviii)   Failing to disclose that the broker-dealer is controlled by, controlling, affiliated with or under common control with the issuer of a security before entering into a contract with or for a customer for the purchase or sale of the security, the existence of the control to the customer, and if the disclosure is not made in writing, it shall be supplemented by the giving or sending of written disclosure at or before the completion of the transaction.

     (xix)   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, a selling group member or from a member participating in the distribution as an underwriter or selling group member.

     (xx)   Failing or refusing to furnish a customer, on reasonable request, information to which he is entitled, or to respond to a formal written request or complaint.

     (xxi)   Failing to comply with an applicable fair practice or ethical standard promulgated by the Securities and Exchange Commission or by a self-regulatory organization approved by the Securities and Exchange Commission.

     (xxii)   Failing to comply with investor suitability standards imposed as a condition of the registration of securities under section 205 or 206 of the act (70 P.S. § §  1-205 and 1-206) in connection with the offer, sale or purchase of a security in this Commonwealth.

   (2)  Agents. Includes the following actions:

     (i)   Engaging in the practice of lending or borrowing money or securities from a customer, or acting as a custodian for money, securities or an executed stock power of a customer.

     (ii)   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 before execution of the transaction.

     (iii)   Establishing or maintaining an account containing fictitious information to execute transactions which would otherwise be prohibited.

     (iv)   Sharing directly or indirectly in profits or losses in the account of a customer without the written authorization of the customer and the broker-dealer which the agent represents.

     (v)   Dividing or otherwise splitting the agent’s commissions, profits or other compensation from the purchase or sale of securities with a person not also registered as an agent for the same broker-dealer, or for a broker-dealer under direct or indirect common control.

     (vi)   Engaging in conduct specified in paragraph (1)(ii)—(vi), (ix), (x), (xiv)—(xvii), (xxi) and (xxii).

   (3)  Investment advisers and investment adviser representatives. Includes the following actions:

     (i)   Recommending to a client to whom investment supervisory, management or consulting services are provided the purchase, sale or exchange of a security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client’s investment objectives, financial situation and needs, and any other information known by the investment adviser or investment adviser representative.

     (ii)   Exercising any discretionary power in placing an order for the purchase or sale of securities for a client without obtaining written discretionary authority from the client within 10 business days after the date of the first transaction placed under oral discretionary authority, unless the discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specified security shall be executed, or both.

     (iii)   Inducing trading in a client’s account that is excessive in size or frequency in view of the financial resources, investment objectives and character of the account.

     (iv)   Placing an order to purchase or sell a security for the account of a client without authority to do so.

     (v)   Placing an order to purchase or sell a security for the account of a client on instruction of a third party without first having obtained a written third-party trading authorization from the client.

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

     (vii)   Loaning money to a client unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the investment adviser.

     (viii)   Misrepresenting to an advisory client, or prospective advisory client, the qualifications of the investment adviser, investment adviser representative or an employee of the investment adviser or misrepresenting the nature of the advisory services being offered or fees to be charged for the service, or to omit 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.

     (ix)   Providing a report or recommendation to an advisory client prepared by someone other than the investment adviser or investment adviser representative without disclosing that fact. This prohibition does not apply to a situation when the investment adviser or investment adviser representative uses published research reports or statistical analyses to give advice or when an investment adviser or investment adviser representative orders the report in the normal course of providing advice.

     (x)   Charging a client an unreasonable advisory fee.

     (xi)   Failing to disclose to a client in writing, before advice is given, a material conflict of interest relating to the investment adviser, the investment adviser representative or an employee of the investment adviser which could reasonably be expected to impair the giving of unbiased and objective advice including:

       (A)   A compensation arrangement connected with advisory services to a client which is in addition to compensation from the client for the services.

       (B)   An advisory fee charged to a client for giving advice when a commission for executing securities transactions under the advice will be received by the investment adviser, the investment adviser representative or an employee or affiliated person of the investment adviser.

     (xii)   Guaranteeing a client that a specific result will be achieved, either a gain or no loss, with advice which will be given.

     (xiii)   Publishing, circulating or distributing an advertisement which does not comply with Rule 206(4)-1 under the Investment Advisers Act of 1940 (15 U.S.C.A. § §  80b-1—80b-21).

     (xiv)   Disclosing the identity, investments or other financial information of a client unless required under law to do so, or unless consented to by the client.

     (xv)   Taking an action, directly or indirectly, with respect to those securities or funds in which a client has a beneficial interest, when the investment adviser has custody or possession of the securities or funds when the adviser’s action is subject to, and does not comply with, the requirements of §  404.014 (relating to custody requirements for investment advisers).

     (xvi)   Entering into, extending or renewing an investment advisory contract unless the 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 a prepaid fee to be returned in the event of contract termination or nonperformance, whether the contract grants discretionary power to the adviser and that no assignment of the contract shall be made by the investment adviser without the consent of the other party to the contract.

     (xvii)   Failing to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information contrary to the provisions of section 204A of the Investment Advisers Act of 1940 (15 U.S.C.A. §  80b-4a) and the rules and regulations of the Securities and Exchange Commission promulgated thereunder.

     (xviii)   Entering into, extending, or renewing any advisory contract contrary to the provisions of section 205 of the Investment Advisers Act of 1940 (15 U.S.C.A. §  80b-5) and the rules and regulations of the Securities and Exchange Commission promulgated thereunder. This applies to all investment advisers and investment adviser representatives registered under section 301 of the act notwithstanding whether the investment adviser is exempt from registration with the Securities and Exchange Commission under section 203(b) of the Investment Advisers Act of 1940 (15 U.S.C.A. §  80b-3(b)).

     (xix)   Indicating, in an advisory contract, any condition, stipulation or provision binding any person to waive compliance with any provision of the act.

     (xx)   Engaging in any act, practice or course of business which is fraudulent, deceptive or manipulative or contrary to the provisions of section 206(4) of the Investment Advisers Act of 1940 (15 U.S.C.A. §  80b-6(4)) and the rules and regulations of the Securities and Exchange Commission promulgated thereunder. This applies to all investment advisers and investment adviser representatives registered under section 301 of the act notwithstanding whether the investment adviser is exempt from registration with the Securities and Exchange Commission under section 203(b) of the Investment Advisers Act of 1940.

     (xxi)   Engaging in conduct or committing any act, directly, indirectly or through or by another person, which would be unlawful for the person to do directly under the act or any rule, regulation or order issued thereunder.

 (d)  In addition to the conduct described in paragraphs (1)—(3), the Department may deny, suspend, condition or revoke a registration or application for registration of a broker-dealer, agent, investment adviser or investment adviser representative for conduct inconsistent with the standards in subsection (a), including any of the following:

   (1)  Forgery.

   (2)  Embezzlement.

   (3)  Nondisclosure, incomplete disclosure or misstatement of material facts.

   (4)  Manipulative or deceptive practices.

   (5)  Taking unfair advantage of a customer or former customer in any aspect of a tender offer.

 (e)  This section does not apply to Federally covered advisers unless the conduct otherwise is actionable under section 401(a) or (c) or 404 of the act (70 P.S. § §  1-401(a) and (c) and 1-404).

Authority

   The provisions of this §  305.019 issued under sections 305(a) and (f) and 609(a) of the Pennsylvania Securities Act of 1972 (70 P.S. § §  1-305(a) and (f) and 1-609(a)); amended under section 202.C of the Department of Banking and Securities Code (71 P.S. §  733-202.C); section 609(a) of the Pennsylvania Securities Act of 1972 (70 P.S. §  1-609(a)); and section 9(b) of the Takeover Disclosure Law (70 P.S. §  79(b)).

Source

   The provisions of this §  305.019 adopted March 9, 1990, effective March 10, 1990, 20 Pa.B. 1408; amended January 17, 1992, effective January 18, 1992, 22 Pa.B. 292; amended September 1, 2000, effective September 2, 2000, 30 Pa.B. 4551; transferred and renumbered from 64 Pa. Code §  305.019, December 14, 2012, effective December 15, 2012, 42 Pa.B. 7533; amended January 12, 2018, effective January 13, 2018, 48 Pa.B. 389. Immediately preceding text appears at serial pages (364772) to (364778).

Notes of Decisions

   Construction with Federal Law

   A statutory fiduciary under state law and this regulation is only considered a fiduciary for purposes of the bankruptcy code, 11 U.S.C.A. §  523, if the statute: (1) defines the trust res; (2) identifies the trustee’s fund management duties and authority; and (3) imposes obligations on the fiduciary prior to the alleged wrongdoing. In this case, the debtor was clearly not a statutory fiduciary for purposes of section 523. The Pennsylvania statutes and regulations did not define the trust res, and in fact precluded registered agents such as the debtor from ‘‘acting as a custodian for money. . . .’’ Thus, the Bankruptcy Court correctly concluded that although the debtor was a statutory fiduciary under Pennsylvania law, the same was not true with respect to section 523(a)(4). In re Librandi, 183 Bankr. 379 (M. D. Pa. 1975).

Cross References

   This section cited in 10 Pa. Code §  102.021 (relating to definitions).



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