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.). Brokers must disclose available breakpoints and inform clients of rights of accumulation and letters of intent. 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. Constitutes a severe breach of fiduciary duty and misuse of material non-public information. Violates both state and 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). Both elements must be present: information must be material (would affect investment decisions) AND non-public (not available to the general investing public). Violations result in civil penalties (up to 3x profits), disgorgement of profits, and imprisonment 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 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.

Example: A broker recommends five different suitable equity trades to a conservative retiree over two weeks, ...