Current through Register Vol. 50, No. 9, March 1, 2024
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
292.500(3) authorizes the
commissioner of the Department of Financial Institutions to promulgate
administrative regulations necessary to carry out the provisions of KRS Chapter
292. KRS
292.336(7) and (8) authorize
the commissioner to promulgate administrative regulations prohibiting
unreasonable charges, profits, commissions, or other compensation for
broker-dealers and agents and prescribing standards for the conduct of business
by broker-dealers and agents which the commissioner finds appropriate in the
public interest and for the protection of investors. This administrative
regulation establishes requirements concerning dishonest and unethical
practices by broker-dealers and agents and states the consequences of engaging
in unacceptable conduct or practices.
Section
1. Broker-dealers shall observe high standards of commercial honor
and just and equitable principles of trade in their dealings with customers and
the conduct of their business. The following acts and practices shall
constitute violations of those standards and principles and shall be considered
to be dishonest and unethical practices that may result in a fine, suspension,
or revocation in proportion to the seriousness of the offense, pursuant to
KRS
292.337(1):
(1) Engaging in a pattern of unreasonable and
unjustifiable delays in the delivery of securities purchased by any of its
customers or in the payment of free credit balances reflecting completed
transactions of any of its customers;
(2) Failing or refusing to furnish a
customer, upon reasonable request, information to which the customer is
entitled, or to timely respond to a formal written demand or complaint by a
customer;
(3) Attempting to enforce
a condition, stipulation, or provision against a customer in Kentucky if the
result would:
(a) Leave the customer without
the choice of a forum for dispute resolution in the state of Kentucky;
or
(b) Limit the timeliness of an
action to a period less than that established in
KRS
292.480;
(4) Failing to segregate a customer's
securities held in safekeeping;
(5)
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;
(6) Charging unreasonable and inequitable
fees for services performed, including:
(a)
Collection of monies due for principal;
(b) Dividends or transfer of
securities;
(c)
Appraisals;
(d) Safekeeping;
or
(e) Custody of securities and
other services related to its securities business;
(7) Offering to buy from or sell to any
person any security at a stated price unless the broker-dealer is prepared to
purchase or sell at the price and under the conditions as are stated when the
offer is made;
(8) 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 any person for whom the
broker-dealer is acting or with whom the broker-dealer is associated in the
distribution, or any person controlled by, controlling, or under common control
with the broker-dealer;
(9) Failing
to disclose in writing that the broker-dealer is controlled by, controls, is
affiliated with, or is under common control with the issuer of any security,
the existence of this control before entering into any binding contract with or
for a customer for the purchase or sale of the security;
(10) Failing to make a bona fide public
offering of all the securities allotted to the broker-dealer for distribution,
whether acquired directly as an underwriter or a selling group member or
indirectly from an entity participating in the distribution as an underwriter
or selling group member;
(11)
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;
(12) Switching, churning,
overtrading, or reloading of a security in a customer's account for the purpose
of accumulating or increasing a commission;
(13) Recommending to a customer the purchase,
sale, or exchange of any security without reasonable grounds to believe that
the transaction or recommendation is suitable for the customer based upon a
reasonable inquiry concerning the customer's investment objectives, financial
situation and needs, and any other relevant information known by the
broker-dealer;
(14) Failing to
furnish to a customer purchasing securities in an offering, no later than the
due date of confirmation of the transaction, either a formal prospectus or a
preliminary prospectus and an additional document, which together include all
information set forth in the final prospectus;
(15) Participating in the solicitation or
offer for sale of a security without the use of an offering document or
prospectus, if required, or making a statement contrary to or inconsistent with
disclosure contained in the offering document or prospectus;
(16) Making a false, misleading, deceptive,
or exaggerated representation or prediction in the solicitation or sale of a
security, including:
(a) That the security
will be resold or repurchased;
(b)
That the security will be listed or traded on an exchange or established
market;
(c) That the security will
result in an assured, immediate, or material increase in value, future market
price, or return on an investment;
(d) That there is a guarantee against risk of
loss; or
(e) Any statement with
respect to an issuer's financial condition, anticipated earnings, potential
growth, or success not supportable by information in the offering document or
prospectus;
(17) Engaging
or aiding in boiler room operations such as the use of high pressure tactics to
promote a speculative offering or promotion of a security in an intensive
campaign in which the prospective purchaser is encouraged to make a hasty
decision to buy a security irrespective of the purchaser's investment needs,
objectives, or understanding of the security being offered;
(18) Executing a transaction on behalf of a
customer without authorization to do so;
(19) Exercising any discretionary power
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 for the executing of
orders;
(20) Executing any
transaction in a margin account without securing from the customer a properly
executed written margin agreement;
(21) 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;
(22) Effecting any transaction in, or
inducing the purchase or sale of, any security by means of any manipulative,
deceptive, or fraudulent device, practice, plan, program, design or
contrivance, including:
(a) Effecting any
transaction in a security which involves no change in the beneficial
ownership;
(b)
1. Entering an order or orders of
substantially the same size, time, and price, for the sale of any security that
has been or will be entered by or for the same or different parties for the
purpose of creating a false or misleading appearance:
a. Of active trading in the security;
or
b. With respect to the market
for the security.
2. This
subsection shall not prohibit a broker-dealer from entering bona fide agency
cross transactions for its customers; or
(c) Effecting, alone or with one (1) or more
other persons, a series of transactions in any security creating actual or
apparent active trading in the security or raising or depressing the price of
the security, for the purpose of inducing the purchase or sale of the security
by others;
(23)
Guaranteeing a customer against loss in any securities account of the customer
carried by the broker-dealer or in any securities transaction effected by the
broker-dealer;
(24) Publishing or
circulating, or causing the publication or circulation of, any notice,
circular, advertisement, newspaper article, investment service, or
communication of any kind which purports to:
(a) Report any transaction as a purchase or
sale of any security unless the broker-dealer reasonably believes that the
transaction was a bona fide purchase or sale of the security; or
(b) Quote the bid price or asked price for
any security, unless the broker-dealer reasonably believes that the quotation
represents a bona fide bid or offer;
(25) Using any advertising or conducting any
sales practice in a deceptive or misleading manner;
(26) Entering into an agreement for a
concession, discount, commission, or allowance as consideration for a service
in connection with the distribution or sale of a security in Kentucky with a
broker-dealer, agent, investment adviser, or investment adviser representative
who is not either:
(a) Registered in Kentucky;
or
(b) Exempted from the
registration requirements for conducting a securities business in
Kentucky;
(27) Lying to
or otherwise misleading representatives of the Department of Financial
Institutions conducting an authorized examination or investigation;
(28) Failing to make requested records
available to or otherwise impeding a representative of the Department of
Financial Institutions conducting an authorized examination or
investigation;
(29) Failing to
respond within the specified time period to a written request from an
authorized representative of the Department of Financial Institutions for:
(a) Information;
(b) An explanation of practices or
procedures;
(c) A response to a
complaint filed with the Department of Financial Institutions; or
(d) A response to a written statement of
findings from an examination;
(30) Committing any act involving a customer,
a customer's account, or any business records which would constitute a criminal
offense;
(31) Failing to pay and
fully satisfy any final order, final judgment, or arbitration award resulting
from an investment-related, customer-initiated arbitration or court proceeding,
unless:
(a) There is a written agreement for
alternative payment arrangements between the customer and the broker-dealer or
broker-dealer agent; and
(b) The
broker-dealer or broker-dealer agent complies with the terms of the alternative
payment arrangement;
(32)
Attempting to avoid payment of any final order, final judgment, or arbitration
award resulting from an investment-related, customer-initiated arbitration or
court proceeding, unless:
(a) There is a
written agreement for alternative payment arrangements between the customer and
the broker-dealer or broker-dealer agent; and
(b) The broker-dealer or broker-dealer agent
complies with the terms of the alternative payment arrangements;
or
(33) Failing to pay
and fully satisfy any fine, civil penalty, order of restitution, order of
disgorgement, or similar monetary payment obligation imposed upon the
broker-dealer or agent by the Securities and Exchange Commission, the
securities or other financial services regulator of any state or province, or
any self-regulatory organization.
Section 2. Broker-dealer agents shall observe
high standards of commercial honor and just and equitable principles of trade
in their dealings with customers. The following acts and practices shall
constitute violations of those standards and principles and shall be considered
to be dishonest and unethical practices that may result in a fine, suspension,
or revocation in proportion to the seriousness of the offense, pursuant to
KRS
292.337(1):
(1) Sharing 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;
(2) Establishing or maintaining an account
containing fictitious information in order to execute transactions which would
otherwise be prohibited;
(3)
Effecting securities transactions not recorded on the regular books and records
of the broker-dealer which the agent represents, unless the transactions are
authorized in writing by the broker-dealer prior to execution of the
transaction;
(4) Engaging in the
practice of lending to or borrowing from a customer either money or
securities;
(5) Acting as custodian
of a customer's money, securities, or an executed stock power; or
(6) Engaging in conduct specified in Section
1(11) through (33) of this administrative regulation.
STATUTORY AUTHORITY:
KRS
292.336(7), (8),
292.337,
292.500(3)