Top NASD Rule Violations
Conduct Rule 2110: Standards of Commercial Honor and Principles of Trade
Business/Bad Faith Misconduct
This rule requires NASD-registered firms to observe high standards of commercial honor and just and equitable principles of trade. The rule prohibits registered firms from making false, misleading, or exaggerated statements or claims or omitting material information in all advertisements and sales literature directed to the public.
Conduct Rule 3010: Supervision
Supervision
This rule requires NASD-registered firms to establish and maintain a system to supervise the activities of their registered representatives, registered principals, and other associated persons expected to comply with applicable securities laws, regulations, and NASD rules. These supervisory systems must include written procedures that designate a registered representative or principal with supervisory responsibilities. They must also include an annual discussion about relevant compliance matters with registered representatives and registered principals. Final responsibility for proper supervision rests with the firm.
Procedural Rule 8210: Provision of Information and Testimony and Inspection and Copying of Books
Request for Information
For the purpose of an investigation, complaint, examination, or authorized proceeding, Procedural Rule 8210 grants an adjudicator or NASD staff the right to require a registered firm, person associated with a registered firm, or person subject to the Association's jurisdiction to provide information (orally, in writing, or electronically), and to testify under oath with respect to any matter involved in the investigation, complaint, examination, or proceeding. An adjudicator or NASD staff also has the right to inspect and copy books, records, and accounts of the registered firm or person with respect to any matter involved in the investigation, complaint, examination, or proceeding. As stated by the rule, no registered firm or person can fail to provide information or testimony, nor can they refuse an inspection or copying of books, records, or accounts.
Conduct Rule 3040: Private Securities Transactions of an Associated Person
Private Securities Transactions
This rule states that, prior to participating in any private securities transaction, an associated person must provide written notice to his firm describing in detail the proposed transaction and his proposed role. The person must state whether he has received or may receive selling compensation in connection with the transaction. If the person is receiving compensation, the firm must approve or disapprove the transaction in writing. If the transaction is approved, the firm will record the transaction on the books and records, and the firm will supervise the person's participation in the transaction as if the transaction was executed on behalf of the firm.
Membership and Registration Rule IM1000-1: Filing of Misleading Information as to Membership or Registration
Filing Misleading Information
This rule concerns the filing of inaccurate or misleading information as a registered representative. It states that filing information with NASD with respect to membership or registration as a Registered Representative that is incomplete or inaccurate so as to be misleading—or the failure to correct such a filing—may be considered conduct that is inconsistent with just and equitable principles of trade. When discovered, such conduct may warrant appropriate disciplinary action.
NASD Conduct Rule 2310: Recommendations to Customers (Suitability)
Suitable Customer Recommendations
This rule permits NASD-registered firms to recommend a securities transaction to a customer only if the recommendation suits the customer's investment portfolio, financial situation and needs. Prior to the execution of a transaction recommended by a retail customer, a firm must make reasonable efforts to obtain the retail customer's financial status, tax status, investment objectives, and any other reasonable information needed to make recommendations to the customer.
NASD Conduct Rule 2120: Use of Manipulative, Deceptive or Other Fraudulent Devices
Manipulative, Deceptive or Fraudulent Devices
This rule prohibits NASD-registered firms from effecting any transaction, purchase or sale of any security by any manipulative, deceptive or other fraudulent means.
NASD Conduct Rule 3030: Outside Business Activities of an Associated Person
Outside Business Activities
This rule prohibits people associated with an NASD-registered firm in any registered capacity from being employed by, or accepting compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the firm.
NASD Conduct Rule 3110: Books and Records
Books & Records
This rule requires registered firms to make and preserve books, accounts, records, memoranda, and correspondence in conformity with all applicable laws, rules, regulations, statements of policy, and with rules of the NASD and the Securities and Exchange Commission. The record keeping format, medium, and retention period must comply with the Securities Exchange Act of 1934.
NASD Marketplace Rule 6955: Order Data Transmission Requirements
Order Data Transmission
This rule requires each NASD-registered firm or a reporting agent to transmit all applicable order information that is required to be recorded under NASD rules to the Order Audit Trail System (OATS). Order information must be transmitted in an electronic form to a receiving location designated by NASD.
NASD Rule 6130: Trade Report Input
Trade Reporting Input
This rule requires firms to report all transactions in eligible securities to the NASDAQ Market Center. Participants must transmit trade reports to the NASDAQ Market Center for transactions in NASDAQ securities within 90 seconds after execution, or a cancelled trade within 20 minutes after execution. The reporting party is responsible for ensuring that the trade reports are accurate and contain all applicable required data for both the reporting party and the identified non-reporting party. The parties must report cancelled trades and comply with the established deadlines for reporting these trades.
NASD Rule 2110H2 (Under NASD Conduct Rule IM-2310-2, Fair Dealing with Customers): Misuse of Customer's Funds or Securities
Misuse/Conversion
This rule requires firms to observe high standards of commercial honor and just and equitable principles of trade. This means that firms are prohibited from unauthorized use or borrowing of a customer's funds or securities, forgery, non-disclosure or misstatement of material facts, and manipulations and various deceptions. These activities are also subject to the civil and criminal laws and sanctions of federal and state governments.
NASD Rule 2330: Customer's Securities or Funds
Customers Securities/Funds
This rule prohibits NASD-registered firms or persons associated with a firm from engaging in the improper use of a customer's securities or funds. It also requires them to adhere to Securities and Exchange Commission rules regarding obtaining possession and control of securities, and the maintenance of cash reserves.
NASD Rule 1120: Continuing Education Requirements
Continuing Education
This rule concerns continuing education requirements. It states that, subsequent to their initial qualification and registration with NASD, registered persons must participate in continuing education in order to remain current on new regulations, amendments to existing rules, and new products. Each registered person must complete the regulatory element of the requirements, which is determined by NASD and will be appropriate to either registered or principal status of the person subject to the rule. If a registered firm has direct contact with customers (in the conduct of the firm's securities sales, trading and investment banking activities), research analysts, and with the immediate supervisor of such persons, the firm shall maintain a continuing and current education program for its registered persons to enhance their securities knowledge, skills, and professionalism. A firm must administer and maintain records documenting the content and completion of the programs by covered registered persons. NASD may require a firm to provide specific training to its covered registered persons in such areas, as NASD deems appropriate.
Conduct Rule 3070: Reporting Requirements
Customer Complaint Report Requirements
According to Conduct Rule 3070, each person associated with a registered firm must promptly report to the firm the existence of any of the conditions set forth below, and the firm must promptly report such conditions to NASD. Each firm must report to NASD statistical and summary information regarding customer complaints in detail specified by NASD.
- Has been found to have violated any provision of any securities law or regulation.
- Is the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery.
- Is named as a defendant or respondent in any proceeding brought by a regulatory or self-regulatory body alleging the violation of any provision of the Securities Exchange Act.
- Is denied registration or is expelled, enjoined, directed to cease and desist, suspended or otherwise disciplined by any securities, insurance or commodities industry regulatory or self-regulatory organization.
- Is indicted, or convicted of, or pleads guilty to, or pleads no contest to, any felony; or any misdemeanor that involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds, or securities, or a conspiracy to commit any of these offenses, or substantially equivalent activity in a domestic, military, or foreign court.
- Is a director, controlling stockholder, partner, officer or sole proprietor of, or an associated person with, a broker, dealer, investment company, investment advisor, underwriter or insurance company which was suspended, expelled or had its registration denied or revoked.
- Is a defendant or respondent in any securities or commodities-related civil litigation or arbitration award or settlement for an amount exceeding $15,000.
- Is the subject of any claim for damages by a customer, broker, or dealer which is settled for an amount exceeding $15,000.
- Is associated in any business or financial activity with any person who is subject to a "statutory disqualification" as that term is defined in the Securities Exchange Act.
- Is the subject of any disciplinary action taken by the firm against any person associated with the firm involving suspension, termination, the withholding of commissions or imposition of fines in excess of $2,500.
Conduct Rule 2210: Communications with the Public
Communications with the Public
This rule requires NASD-registered firms to adhere to NASD's requirements for the approval, record keeping, filing, review, and content of communications with the public. "Communications with the public" consist of advertisement, sales literature, correspondence, institutional sales material, public appearance, and independently prepared reprint.
