230 R.I. Code R. 230-RICR-50-05-2.11

Current through November 7, 2024

Section 230-RICR-50-05-2.11 - Unethical and Dishonest Practices

A. Under authority of R.I. Gen. Laws § 7-11-705(a)(3), the Director hereby defines the term "unethical or dishonest practices", as that term appears in R.I. Gen. Laws § 7-11-212(b)(8) and without limiting the meaning to that set forth below, to mean one or more instances where a person has engaged in the conduct described below:

1. The following are deemed to be unethical or dishonest practices by a broker-dealer:

a. Causing any unreasonable delay 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;

b. 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;

c. Recommending to a customer the purchase, sale or exchange of any securities without reasonable grounds to believe that the recommendation is suitable for the customer after reasonable inquiry concerning the customer's investment objectives, financial situation and needs, and any other information known by the broker-dealer;

d. Executing a transaction on behalf of a customer without authority to do so;

e. Executing a transaction for the account of a customer upon instruction from a third party 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;

f. Exercising any discretionary power in effecting a transaction of 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;

g. Extending, arranging for, or participating in arranging for credit to a customer in violation of the Securities Exchange Act of 1934 or the regulations of the Federal Reserve Board;

h. Executing any transaction in a margin account without obtaining from its customer a written margin agreement not later than fifteen (15) calendar days after the initial transaction in the account;

i. Failing to segregate customers' free securities or securities in safekeeping;

j. Hypothecating a customer's securities without having a lien thereon unless written consent of the customer is first obtained, except as permitted by rules of the SEC;

k. Charging its customer an unreasonable commission or service charge in any transaction executed as agent for the customer;

l. Entering into a transaction for its own account with a customer with an unreasonable mark-up or mark-down;

m. Entering into a transaction for its own account with a customer in which a commission is charged;

n. Entering into a transaction with or for a customer at a price not reasonable related to the current market price;

o. Executing orders for the purchase by a customer of securities not registered or exempted unless the transaction is exempted under RIUSA;

p. Representing itself as a financial or investment planner, consultant, or adviser, when the representation contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; including but not limited to the nature of the services offered, the qualifications of the person offering the services, or the method of compensation for the services;

q. Violating any material rule of SEC, FINRA, any national or regional securities exchange or national securities association of which it is a member with respect to any customer, transaction or business in this state;

r. Failing to furnish to a customer purchasing securities in an offering, not 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 for the in the final prospectus;

s. Introducing customer transactions on "fully disclosed" basis to another broker-dealer that is not licensed under RIUSA; and

t. Recommending to a customer that the customer engage the services of an investment adviser that is not licensed or exempt from licensing under RIUSA.

2. The following are deemed unethical or dishonest practices by a sales representative:

a. Borrowing money or securities from, or lending money or securities to a customer;

b. Acting as a custodian for money, securities or an executed stock power of a customer;

c. Effecting securities transactions with a customer not recorded on the regular books or records of the broker-dealer with which the sales representative is associated, unless the transactions are disclosed to, and authorized in writing by the broker-dealer prior to execution of the transactions;

d. Effecting transactions in securities for an account operating under a fictitious name, unless disclosed to, and permitted in writing by the broker-dealer or issuer with which the sales representative is associated;

e. Sharing directly or indirectly in profits or losses in the account of any customer without first obtaining written authorization of the customer and the broker-dealer with which the sales representative is associated;

f. Dividing or otherwise spitting commissions, profits or other compensation receivable in connection with the purchase or sale of securities in this state with any person not so licensed as a sales representative associated with the same broker-dealer, or with a broker-dealer under direct or indirect common control;

g. Using advertising describing or relating to the sales representative's securities business unless the advertising clearly identifies the name of the broker-dealer or issuer with which the sales representative is associated;

h. Misrepresenting the services of a licensed investment adviser on whose behalf the sales representative is soliciting business or accounts; and

i. Engaging in any of the practices specified in §§ 2.11(A)(1)(a) through (h), (o) through (r), or (t) of this Part.

3. The following are deemed to be unethical or dishonest practices by an investment adviser or investment adviser representative:

a. Recommending to a client to whom investment supervisory, management or consulting services are provided the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client based on 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;

b. 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 ten (10) business days after the date of the first transaction placed pursuant to oral discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specific security shall be executed, or both;

c. 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;

d. Placing an order to purchase or sell a security for the account of a client without authority to do so;

e. 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;

f. Borrowing money or securities from a client unless the client is a broker-dealer, an affiliate of the investment adviser, or a depository institution engaged in the business of loaning funds (for the purpose of this paragraph, the term borrowing does not include the issuance of an obligation that would otherwise be a security under RIUSA);

g. Loaning money to a client unless the investment adviser is a depository institution engaged in the business of loaning funds or the client is an affiliate of the investment adviser;

h. Misrepresenting a material fact to any advisory client, or prospective advisory client with regard to the qualifications of the investment adviser or any person associated with the investment adviser, or the nature of the advisory services being offered or the 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;

i. Providing a report or recommendation to any advisory client prepared by someone other than the adviser without disclosing that fact. (This prohibition 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 services;

j. Failing to disclose to clients in writing before entering into or renewing an advisory agreement with the client any material conflict of interest relating to the adviser or any person associated with the adviser which could reasonably be expected to impair the rendering of unbiased and objective advice including:

(1) Compensation arrangements connected with advisory services to clients which are in addition to compensation from such clients for such services; and

(2) 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;

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

l. Publishing, circulating or distributing any advertisement which does not comply with SEC Rule 17 C.F.R. § 275.206(4)-1 ;

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

n. 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 of funds when the adviser's action is subject to and does not comply with the requirements of SEC Rule 17 C.F.R. § 275.206(4)-2 ; and

o. 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 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.

230 R.I. Code R. 230-RICR-50-05-2.11

Amended effective 11/4/2024