R164-1. Fraudulent Practices, R164. Commerce, Securities, Utah Administrative Code

Utah Administrative Code (Current through November 1, 2019)

R164. Commerce, Securities

R164-1. Fraudulent Practices

R164-1-3. Fraudulent Practices of Broker-Dealers, Broker-Dealer Agents, and Issuer-Agents

Latest version.

(A) Authority and purpose.

(1) The Division enacts this rule under authority granted by Subsection 61-1-1(3) and Section 61-1-24.

(2) This rule identifies practices by broker-dealers, broker-dealer agents, or issuer-agents which are generally associated with schemes to manipulate the securities markets.

(3) A broker-dealer, broker-dealer agent, or issuer-agent who engages in one or more of the practices listed below will be deemed to have engaged in an "act, practice or course of business which operates or would operate as a fraud" as used in Subsection 61-1-1(3).

(4) This rule is not intended to be all-inclusive. Thus, acts or practices not listed may also be deemed fraudulent.

(5) This rule does not preclude application of the anti-fraud provisions of Subsection 61-1-1(3) against anyone for practices similar in nature to the practices listed in Subsection (C).

(B) Definitions used in the rule.

(1) "Customer" means potential, current, or past clients.

(2) "Designated security" means any equity security other than a security

(2)(a) listed, or approved for listing upon notice of issuance, on a national securities exchange and makes transaction reports available as required under SEC Rule 11Aa3-1, Dissemination of transaction reports and last sale data with respect to transactions in reported securities, 17 CFR 240.11Aa3-1 (1992), which is adopted and incorporated by reference and available from the SEC;

(2)(b) listed, or approved for listing upon notice of issuance, on the NASDAQ system;

(2)(c) issued by an investment company registered under the Investment Company Act of 1940;

(2)(d) that is a put option or call option issued by The Options Clearing Corporation; or

(2)(e) whose issuer has net tangible assets in excess of $4,000,000 as demonstrated by financial statements, dated less than fifteen months previous to the date of the transaction with the person, that you have reviewed and have a reasonable basis to believe are true and complete, and

(2)(e)(i) in the event the issuer is other than a foreign private issuer, are the most recent financial statements for the issuer that have been audited and reported on by an independent public accountant in accordance with SEC Rule 2-02, Accountant's reports, 17 CFR 210.2-02 (1992), which is adopted and incorporated by reference and available from the SEC; or

(2)(e)(ii) in the event the issuer is a foreign private issuer, are the most recent financial statements for the issuer that have been filed with the Commission; furnished to the Commission pursuant to SEC Rule 12g3-2(b), Exemptions for American depositary receipts and certain foreign securities, 17 CFR 240.12g3-2 (1992), which is adopted and incorporated by reference and available from the SEC; or prepared in accordance with generally accepted accounting principles in the country of incorporation, audited in compliance with the requirements of that jurisdiction, and reported on by an accountant duly registered and in good standing in accordance with the regulations of that jurisdiction.

(3) "Exempt transactions" under subparagraph (C)(1)(h) means:

(3)(a) transactions in which the price of the designated security is five dollars or more, exclusive of costs or charges; provided, however, that if the designated security is a unit composed of one or more securities, the unit price divided by the number of components of the unit other than warrants, options, rights, or similar securities must be five dollars or more, and any component of the unit that is a warrant, option, right, or similar securities, or a convertible security must have an exercise price or conversion price of five dollars or more;

(3)(b) transactions that are not recommended by you or your agent;

(3)(c) transactions by you:

(3)(c)(i) where commissions, commission equivalents, and mark-ups from transactions in designated securities during each of the immediately preceding three months, and during eleven or more of the preceding twelve months, did not exceed five percent of your total commissions, commission-equivalents, and mark-ups from transactions in securities during those months; and

(3)(c)(ii) you have not executed principal transactions in connection with the solicitation to purchase the designated security that is the subject of the transaction in the immediately preceding twelve months.

(3)(d) transactions that, upon prior written request or upon its own motion, the Division conditionally or unconditionally exempts as not encompassed within this definition.

(4) "Division" means the Division of Securities, Utah Department of Commerce.

(5) "Market-maker" means a broker-dealer who, with respect to a particular security,

(5)(a) regularly publishes bona fide, competitive bid and ask quotations in a recognized inter-dealer quotation system, or

(5)(b) regularly furnishes bona fide competitive bid and offer quotations to other broker-dealers upon request; and

(5)(c) is ready, willing and able to effect transactions in reasonable quantities at his quoted price with other broker-dealers on a regular basis.

(6) "NASDAQ" means National Association of Securities Dealers Automatic Quotation System.

(7) "You" means broker-dealers, broker-dealer agents, or issuer-agents as applicable.

(1) If you engage in any of the following acts you will be deemed to be violating the anti-fraud provisions of Subsection 61-1-1(3):

(1)(a) Effecting a transaction with a customer in any security at an unreasonable price or at a price not reasonably related to the current market price of the security.

(1)(b) Receiving an unreasonable commission or profit.

(1)(c) Contradicting or negating the importance of information contained in a prospectus or other offering materials with intent to deceive or mislead.

(1)(d) Using advertising or sales presentations in a deceptive or misleading manner.

(1)(e) Leading a customer to believe that you are in possession of material, non-public information which would impact on the value of a security whether or not you are in possession of the material non-public information.

(1)(f) Making contradictory recommendations to different customers of similar investment objective for some to sell and others to purchase the same security, at or about the same time, when not justified by the particular circumstance of each customer.

(1)(g) Failing to make a bona fide public offering of all the securities allotted to you for distribution by, among other things,

(1)(g)(i) transferring securities to a customer, another broker-dealer or a fictitious account with the understanding that those securities will be returned to you or your nominee, or;

(1)(g)(ii) parking or withholding securities.

(1)(h) in connection with the solicitation of a purchase of a designated security which is not an exempt transaction as defined above:

(1)(h)(i) failing to disclose to your customer the bid and ask price, at which you effect transactions with individual, retail customers, of the designated security as well as its spread in both percentage and dollar amounts at the time of solicitation and on the trade confirmation documents.

(1)(h)(ii) failing to advise your customer, both at the time of solicitation and on the confirmation, of any and all compensation related to a specific securities transaction to be paid to you, including commissions, sales charges, or concessions.

(1)(h)(iii) failing, to disclose, both at the time of solicitation and on the confirmation, your firm's short inventory position of more than 5%, or your firm's long inventory position of more than 10%, of the issued and outstanding shares of that class of securities of the issuer, if:

(1)(h)(iii)(aa) your firm is a market-maker at the time of the solicitation, and

(1)(h)(iii)(bb) the transaction is a principal transaction;

(1)(h)(iv) conducting or participating in sales contests in a particular designated security.

(1)(h)(v) failing to include with the confirmation, in a form satisfactory to the Division, a written explanation of the bid and ask price.

(1)(h)(vi) failing or refusing to execute sell orders from a customer from whom you or your firm solicited the purchase of the designated security in a principal transaction.

(1)(h)(vii) soliciting a secondary market transaction when there has not been a bona fide distribution in the primary market.

(1)(h)(viii) engaging in a pattern of compensating an agent in different amounts for effecting sales and purchases in the same designated security.

(1)(i) effecting transactions in, or inducing the purchase or sale of any security by means of any manipulative, deceptive or other fraudulent device or contrivance, including the use of boiler room tactics or use of fictitious or nominee accounts.