A customer's enthusiastic agreement cannot make every arrangement permissible. Loans, shared investment results, repeated trades, and outside securities sales each require a different check.
You recommend investments as an agent, an individual representing a broker-dealer (BD) in securities transactions. Your broker-dealer is the firm responsible for supervising your securities business. A conflict of interest arises when another interest could pull your judgment away from the customer's interests. Earning another commission through excessive trading, repaying a customer loan, sharing in accounts, or promoting your own outside venture through selling away can create that pressure.
The North American Securities Administrators Association (NASAA) develops model rules for state securities regulators. These models bind a jurisdiction only when and as adopted. The Financial Industry Regulatory Authority (FINRA) separately regulates its member broker-dealers and their associated persons. An arrangement permitted under one set of requirements can still fail another applicable requirement.
The NASAA broker-dealer and agent model rule identifies prohibited practices affecting your dealings with customers. For each arrangement, identify the applicable rule, the required written permission, and when that permission must exist.
Common mistakes
- Judging only individual trades. Ten individually reasonable recommendations can still form an excessive series. Under Regulation Best Interest, examine their combined effect on the retail customer's best interest.
- Treating a ratio as a verdict. Turnover of 4 times or costs of 6% provides evidence, not a universal violation threshold. Match the numbers to the account's circumstances.
- Importing the loan exception. A $500 family loan does not create an exception in NASAA paragraph 2.a. Identify the rule named in the question.
Bottom line
- Excessive trading depends on transaction size or frequency relative to the account's resources and character.
- Regulation Best Interest requires a recommended series to serve the retail customer's interests when considered together.
- NASAA's agent model loan prohibition contains no express loan exceptions.
- FINRA customer loans require permissive firm procedures, an eligible relationship, and applicable notice and approval.
Exam shortcut
Mark the governing rule before evaluating an appealing exception. Then underline timing words such as “before,” “already,” “extended,” and “afterward.” For repeated trades, widen your view from the latest purchase to the entire sequence. Reject an answer relying only on customer consent or profitable results. For a loan, identify the relationship category before choosing the paperwork answer. An existing loan can make opening a new account the relevant event.
The full lesson (about 3,555 words, 24 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- H21
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