Unethical Trading Practices
The NASAA outlines a number of unethical practices relating to the purchase or sale of securities through professionals and their firms. Yet again, these prohibited practices are considered taboo because they ultimately create conflicts of interest between a client and his professional, limit a client’s ability to get a fair price for his securities, and prevent him from monitoring his own account.
Broker-dealers and agents are always expected to try to provide a price for a purchase or sale that is as close as possible to the current market price. Substantially under- or over-pricing a security, especially when the firm is selling from its own account (known as acting as a principal), is considered a serious violation. Likewise, front-running, that is, buying or selling a security for your own or your firm’s account prior to doing it on behalf of customers, in order to get a better price for yourself or your firm, is not permitted. Again, customers deserve to get the fairest price possible at the time of their transaction.
Because principal transactions often involve conflicts of interest, an investment adviser must give full disclosure of its role in a principal transaction, describe its conflict of interest, and receive written permission from the client before the completion/settlement of the transaction. In contrast, broker-dealers must simply note their role on the trade confirmation.
Further, broker-dealers are prohibited from using the phrase “at the market” to describe a security’s price, unless they reasonably believe that an active market for that security exists. In other words, if the only firm that buys or sells a security is the client’s firm, it would be unethical for a representative of the firm to say that the security is being sold at the market price.
A related violation occurs when a broker-dealer offers to buy or sell a security at a particular price with no intention of making the purchase