Study guide
4.2 Prohibited Business Practices
Series 63 Uniform Securities Agent State Law
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1 Introduction
About the Series 63 Exam How to Use This Guide
2 Chapter 1: USA Definitions
1.1 Key Terms Overview 1.2 Definition of Person 1.3 Definition of Security 1.4 Offer and Sale 1.5 Exclusions from Definitions
3 Chapter 2: Registration of Persons
2.1 Broker-Dealer Registration 2.2 Broker-Dealer Exemptions and Exclusions 2.3 Agent Registration 2.4 Agent Exemptions and Exclusions 2.5 Investment Adviser and IAR Registration 2.6 IA and IAR Exemptions
4 Chapter 3: Registration of Securities
3.1 Registration Methods Overview 3.2 Registration by Coordination 3.3 Registration by Qualification 3.4 Registration by Filing (Notice Filing) 3.5 Exempt Securities and Transactions
5 Chapter 4: Fraudulent and Unethical Practices
4.1 Anti-Fraud Provisions 4.2 Prohibited Business Practices 4.3 Churning and Unauthorized Trading 4.4 Misrepresentation and Omissions 4.5 Market Manipulation 4.6 Insider Trading and Front-Running
6 Chapter 5: Administrative Provisions
5.1 State Administrator Powers 5.2 Investigations and Subpoenas 5.3 Administrative Orders 5.4 Cease and Desist and Injunctions 5.5 Criminal and Civil Penalties
4.2 Prohibited Business Practices
Key Takeaways Explain This Topic AI
Blanket recommendations that ignore suitability are prohibited.
Guarantees against loss or returns are never allowed.
Sharing in accounts requires written consent and firm approval.
Borrowing from or lending to customers is generally prohibited.
Hedge clauses that waive liability are void.
Last updated: January 2026
The Uniform Securities Act and NASAA model rules establish specific prohibited business practices that broker-dealers, agents, investment advisers, and investment adviser representatives must avoid. These prohibitions protect investors from unethical conduct and ensure fair dealing in the securities industry.
NASAA Statements of Policy on Dishonest and Unethical Business Practices
NASAA has adopted statements of policy that define what constitutes dishonest or unethical business practices. These apply to all securities professionals operating under state jurisdiction.
Prohibited Practices for Broker-Dealers and Agents
- Category Prohibited Practice
- Recommendations Making blanket recommendations unsuitable for all customers
- Guarantees Guaranteeing a customer against loss
- Sharing Sharing in profits/losses disproportionate to contribution
- Discretion Exercising discretion without written authorization
- Borrowing/Lending Borrowing from or lending to customers
- Compensation Charging unreasonable commissions or markups
- Customer Funds Commingling customer funds with firm funds
- Blanket Recommendations
A blanket recommendation is a recommendation made to all customers regardless of their individual investment objectives, financial situation, or risk tolerance.
- Examples of Blanket Recommendations
- ❌ Prohibited : "Everyone should buy this stock—it's going to double!"
- ❌ Prohibited : Mass mailing recommending the same investment to all clients
- ✅ Permitted : Individual analysis and tailored recommendations based on each client's suitability profile
Exam Tip : Any recommendation that doesn't consider the individual customer's needs, objectives, and financial situation is likely a prohibited blanket recommendation.
Guarantees Against Loss
It is absolutely prohibited to guarantee a customer against loss in their account. This includes:
- Promising to cover any losses
- Guaranteeing a minimum return
- Promising to make the customer whole if an investment declines
- Verbal or written guarantees of any kind
- Why Guarantees Are Prohibited
- All investments carry risk—no legitimate guarantee can eliminate it
- Guarantees may induce customers to take inappropriate risks
- The guarantee may be worthless if the agent cannot pay
- It creates a conflict of interest
Key Point : Even if an agent has good intentions and plans to cover losses personally, making the guarantee is still a violation.
Sharing in Customer Accounts
Agents may share in the profits or losses of a customer account only if ALL of the following conditions are met:
- Requirement Description
- Written authorization Customer must provide written consent
- Broker-dealer approval The employing firm must approve in writing
- Proportionate sharing Sharing must be in proportion to the agent's financial contribution
- Exception for Family Members
An agent may share disproportionately in the profits and losses of a family member's account (such as a spouse, parent, or child), provided the broker-dealer has approved in writing.
Borrowing From or Lending to Customers
Generally, agents are prohibited from borrowing money from or lending money to customers. This rule prevents:
- Conflicts of interest
- Potential for financial abuse
- Inappropriate relationships with customers
- Limited Exceptions
Borrowing or lending may be permitted in limited circumstances:
- The customer is a lending institution in the business of making loans
- The customer is a family member of the agent
- Both parties are registered persons of the same firm
- The arrangement is based on a personal relationship outside the business relationship
Exam Alert : Even when an exception applies, firm approval is typically required.
Commingling Customer Funds
Broker-dealers must never commingle (mix) customer funds or securities with the firm's own assets. Customer assets must be:
- Segregated from firm assets
- Properly identified and accounted for
- Protected in the event of firm insolvency
- Unreasonable Compensation
Charging excessive or unfair commissions, markups, or fees is prohibited. What constitutes "unreasonable" depends on:
- The type of security
- The availability of the security
- The price of the security
- The amount of work involved
- Industry standards for similar transactions
- Prohibited Practices for Investment Advisers
Investment advisers have additional prohibited practices:
- Practice Rule
- Performance fees Generally prohibited for retail clients
- Assignment of contracts Cannot assign without client consent
- Custody of funds Must follow specific custody rules
- Hedge clauses Cannot use clauses to waive compliance
- Principal transactions Must disclose and obtain consent
- Hedge Clauses
A hedge clause is contract language attempting to limit an adviser's liability or waive the client's rights under securities laws. Such clauses are void and unenforceable —they will not protect an adviser who violates the USA.
- Key Takeaways
- Blanket recommendations that ignore individual suitability are prohibited
- Guaranteeing customers against loss is never permitted
Sharing in customer accounts requires written authorization, firm approval, and proportionate contribution (except for family members)
- Borrowing from or lending to customers is generally prohibited
- Customer funds must never be commingled with firm assets
- Hedge clauses attempting to waive liability are void and unenforceable