Study guide
18.2 Prohibited Practices
Series 65 Uniform Investment Adviser Law
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1 Introduction
About the Series 65 How to Use This Guide
2 Chapter 1: Economic Factors & Business Cycles
1.1 Business Cycles 1.2 Monetary Policy 1.3 Fiscal Policy 1.4 Inflation & Deflation 1.5 Interest Rates & Yield Curves 1.6 Global Economic Factors
3 Chapter 2: Financial Reporting & Analytical Methods
2.1 Financial Statements Overview 2.2 Accounting Fundamentals 2.3 SEC Filings & Annual Reports 2.4 Financial Ratios 2.5 Time Value of Money 2.6 IRR and NPV 2.7 Descriptive Statistics
4 Chapter 3: Types of Risk
3.1 Systematic (Market) Risk 3.2 Unsystematic (Company-Specific) Risk 3.3 Interest Rate & Reinvestment Risk 3.4 Inflation & Currency Risk 3.5 Liquidity Risk & Opportunity Cost 3.6 Risk Measurement & Portfolio Theory
5 Chapter 4: Cash Equivalents & Fixed Income Securities
4.1 Cash & Cash Equivalents 4.2 Treasury Securities 4.3 Agency Securities 4.4 Corporate Bonds 4.5 Municipal Bonds 4.6 Bond Pricing & Yields
6 Chapter 5: Equity Securities
5.1 Common Stock 5.2 Preferred Stock 5.3 Shareholder Rights & Corporate Actions 5.4 Equity Valuation Methods 5.5 ADRs, REITs & Other Equity Securities
7 Chapter 6: Pooled Investments
6.1 Mutual Funds 6.2 Mutual Fund Costs & Fees 6.3 Exchange-Traded Funds (ETFs) 6.4 Closed-End Funds & UITs 6.5 Hedge Funds & Private Equity
8 Chapter 7: Derivatives, Alternative Investments & Insurance Products
7.1 Options Basics 7.2 Options Strategies 7.3 Alternative Investments 7.4 Annuities 7.5 Life Insurance Products
9 Chapter 8: Client Types & Profiles
8.1 Individual Clients 8.2 Business Entity Clients 8.3 Trusts & Estates 8.4 Accredited & Qualified Investors 8.5 Suitability & Know Your Customer
10 Chapter 9: Portfolio Theory & Capital Markets
9.1 Modern Portfolio Theory 9.2 Capital Asset Pricing Model (CAPM) 9.3 Efficient Market Hypothesis 9.4 Risk & Performance Measures 9.5 Asset Allocation
11 Chapter 10: Portfolio Management Strategies
10.1 Investment Styles 10.2 Portfolio Management Techniques 10.3 Fixed Income Strategies 10.4 Return Calculations
12 Chapter 11: Tax Considerations & Retirement Planning
11.1 Capital Gains & Investment Taxes 11.2 Retirement Plans Overview 11.3 Individual Retirement Accounts (IRAs) 11.4 Education Savings Plans 11.5 Distributions & RMDs
13 Chapter 12: ERISA, Special Accounts & Performance Measures
12.1 ERISA Requirements 12.2 Special Account Types 12.3 Performance Measures & Reporting 12.4 QDROs & Special Situations
14 Chapter 13: Regulation of Investment Advisers
13.1 Investment Advisers Act of 1940 13.2 Registration Requirements 13.3 Recordkeeping Requirements 13.4 Custody Requirements 13.5 Exempt Reporting Advisers
15 Chapter 14: Regulation of Investment Adviser Representatives
14.1 IAR Definition & Requirements 14.2 Registration & Post-Registration 14.3 IARs of Federal Covered Advisers
16 Chapter 15: Regulation of Broker-Dealers & Agents
15.1 Broker-Dealer Definition 15.2 Agent Registration 15.3 Regulation Best Interest
17 Chapter 16: Securities Registration & Exemptions
16.1 Uniform Securities Act 16.2 Securities Registration Methods 16.3 Exempt Securities 16.4 Exempt Transactions
18 Chapter 17: Communications & Client Relationships
17.1 Advertising Rules 17.2 Social Media & Electronic Communications 17.3 Client Agreements & Disclosure 17.4 Proxy Voting & Other Obligations
19 Chapter 18: Ethics & Fiduciary Obligations
18.1 Fiduciary Duties 18.2 Prohibited Practices 18.3 Senior & Vulnerable Adult Protection 18.4 AML & Compliance Programs
18.2 Prohibited Practices
Key Takeaways Explain This Topic AI
Guaranteeing against loss is prohibited.
Front-running and churning are serious violations.
All compensation must be disclosed.
Borrowing from or lending to clients is generally prohibited.
Insider trading and tipping are federal offenses.
Advisers must adopt a code of ethics with personal trading rules.
Last updated: October 2026
Investment advisers and their representatives are prohibited from engaging in various unethical and illegal practices. NASAA has established model rules that define prohibited conduct, and violations can result in administrative sanctions, civil liability, and criminal penalties.
NASAA Model Rule on Prohibited Conduct
The NASAA Prohibited Conduct Model Rule defines practices that constitute dishonest or unethical conduct for investment advisers and IARs.
Categories of Prohibited Conduct
- Category Examples
- Misrepresentation Guaranteeing against loss, false credentials, misleading performance
- Fraud and Deceit Material misstatements, manipulative devices, false documentation
- Conflicts of Interest Undisclosed compensation, improper borrowing/lending
- Trading Abuses Front-running, churning, unauthorized trading
- Information Misuse Insider trading, breach of confidentiality
- Misrepresentation Violations
- Guarantee Against Loss
Absolutely Prohibited : Advisers cannot guarantee that a client will not lose money.
- Cannot guarantee specific returns
- Cannot promise to make client whole after losses
- Cannot use language implying no risk of loss
- Misrepresenting Qualifications
- Claiming credentials not actually held
- Misrepresenting experience or track record
- Falsely claiming regulatory approvals or licenses
- Misrepresenting registration status (SEC vs. state)
- Performance Claims
- Showing only winning trades (cherry-picking)
- Using hypothetical results without disclosure
- Comparing to inappropriate benchmarks
- Omitting material facts about past performance
- Trading Abuse Violations
- Front-Running
- Element Description
- Definition Trading ahead of client orders based on advance knowledge
- Violation Using knowledge of pending client orders to profit
- Example Buying stock personally before executing client buy order
- Why Prohibited Violates duty of loyalty; takes opportunity from client
- Churning
- Element Description
- Definition Excessive trading to generate commissions
- Elements Required (1) Excessive trading, (2) Control by adviser, (3) Intent or recklessness
- Indicators High turnover ratio, transactions inconsistent with objectives
- Why Prohibited Disregards client's interests for adviser's benefit
- Churning Indicators
- Indicator Description
- Turnover Ratio Annualized trading volume ÷ average account equity
- Cost-to-Equity Ratio Total costs ÷ average equity (if >2% monthly, suspicious)
- In-and-Out Trading Buying and selling same securities frequently
- Unsuitable Trading Active trading in conservative accounts
- Unauthorized Trading
- Trading without client authorization
- Exceeding scope of discretionary authority
- Falsifying client consent
- Trading in accounts without written discretionary authorization
- Compensation and Conflict Violations
- Undisclosed Compensation
All compensation must be disclosed:
- Fees, commissions, markups
- Revenue sharing arrangements
- Soft dollar benefits
- Referral fees
- Any other economic benefit
- Borrowing From/Lending to Clients
Generally Prohibited under the NASAA adviser model rule, with limited exceptions:
Borrowing from a client is allowed only if the client is a broker-dealer, an affiliate of the adviser, or a financial institution in the business of lending money
Lending to a client is allowed only if the adviser is a financial institution in the business of lending money or the client is an affiliate of the adviser
- There is no family-member exception in the adviser rule
- Creates conflicts of interest
- Impairs objectivity
- Sharing in Client Gains (Performance Fees)
An adviser may be paid a share of a client's capital gains or capital appreciation only under SEC Rule 205-3: the client must be a "qualified client" (net worth over $2.7 million, or at least $1.4 million under management with the adviser, since June 29, 2026). The NASAA model rule applies the same Section 205 standard to state-registered advisers and their representatives.
- Information Misuse
- Insider Trading
- Element Description
- Material Information Information a reasonable investor would consider important
- Non-Public Not yet disclosed to the public
- Prohibition Cannot trade or tip others based on MNPI
- Liability Civil and criminal penalties
- Tipping
Passing material non-public information to others who then trade is equally prohibited, whether or not the tipper trades personally.
Selling Away
Definition : Engaging in securities transactions outside the employing firm without firm knowledge or approval.
Elements :
- Private securities transactions
- Not through employing firm
- Without firm supervision
- May constitute fraud
Consequences :
- Disciplinary action
- Termination
- Regulatory sanctions
- Civil and criminal liability
- Personal Trading Policies
- Code of Ethics Requirements
All investment advisers must adopt a written code of ethics including:
- Requirement Description
- Standards of Conduct Ethical standards for advisory personnel
- Compliance Obligation Duty to comply with securities laws
- Personal Trading Rules Restrictions on personal securities transactions
- Reporting Requirements Holdings and transaction reporting
- Violation Reporting Procedures for reporting violations
- Access Person Requirements
"Access persons" (those with access to nonpublic information about client trades or holdings) must:
- Report personal securities holdings initially and annually
- Report personal securities transactions quarterly
- Pre-clear trades in certain securities
- Follow restricted and watch lists
On the Exam : Guaranteeing against loss is ALWAYS prohibited—this is frequently tested. Know the elements of churning (excessive trading + control + intent) and front-running (trading ahead of client orders).
- Key Takeaways
- Guaranteeing against loss is absolutely prohibited
- Front-running and churning are serious violations
- All compensation must be disclosed
- Borrowing from/lending to clients is generally prohibited
- Insider trading and tipping are federal offenses
- Code of ethics with personal trading policies required