HAR §16-38-7. Denial, suspension, and revocation

(a) A proceeding to deny an application for registration, or to suspend or revoke the effectiveness of a registration may be instituted by the commissioner if the action is in the public interest, reasonable grounds exist that the applicant or registrant has violated or failed to comply with any provision of chapter 485, HRS, or this chapter, or the applicant or registrant has demonstrated its unworthiness to transact the business of a dealer, issuer, or salesperson. (b) Without in any way limiting the generality thereof, for the purposes of section 485-15(11), HRS, any of the following shall demonstrate an applicant's or registrant's unworthiness to transact the business of a dealer, issuer, or salesperson: (1) Causing unreasonable delay or failure to execute orders, liquidate customers' accounts, or in making delivery of securities purchased or remittances (or credit) for securities sold; (2) Selling securities at unfair prices in relation to market value, or with unreasonable or excessive markups or commissions; (3) Effecting transactions in the account of a customer without the customer's knowledge or consent or maintaining discretionary accounts without written authorization; (4) Wilful switching, churning, overtrading, or reloading of securities in a customer's account for the ostensible purpose of accumulating or compounding commissions; §16-38-6.5 38-21 (5) Inducing a customer to invest beyond the customer's known immediate financial resources, or without regard to the nature and character of the account; (6) Engaging or aiding in "boiler room" operations or high-pressure tactics in connection with the promotion of speculative offerings or "hot-issues" by means of an intensive telephone campaign or unsolicited calls to persons not known by, nor having an account with the salesperson or dealer represented by the applicant, whereby the prospective purchaser is encouraged to make a hasty decision to buy, irrespective of the prospective purchaser's investment needs and objectives; (7) Participating in the solicitation or offer for sale of promotional securities without the use and dissemination of a prospectus (where required), or making oral or written statements contrary to or inconsistent with the disclosures contained therein; (8) Making false, misleading, deceptive, exaggerated, or flamboyant representations or predictions in the solicitation or sale of a security. Examples of this include without limitation misrepresenting: (A) That the security shall be resold or repurchased; (B) That the security shall be listed or traded on an exchange or established market; (C) That the security shall result in an assured, immediate or extensive increase in value, future market price, or return on investment; (D) With respect to the issuer's financial condition, anticipated earnings, potential growth, or success; or (E) That there is a guarantee against risk or loss; (9) Failing to disclose a dual agency capacity or effecting transactions upon terms and conditions other than those stated per confirmations; (10) Failing to make a bona fide public offering pursuant to an underwriting agreement or entering into an arrangement which establishes unfair or unreasonable terms and conditions or compensation; (11) Establishing fictitious accounts in order to execute transactions which would otherwise be prohibited; (12) Entering into agreements for selling concessions, discounts, commissions, or allowances as consideration for services in connection with the distribution or sale of a security in Hawaii to any non-licensed dealer or salesperson, unless the person is not required to be registered in order to engage in the securities business in this State; §16-38-7 38-22 (13) Operating a securities business while being unable to meet current liabilities, or violating any rule or order relating to minimum capital, bond, record-keeping and reporting requirements, or provision concerning use, commingling, or hypothecation of customers' funds or securities; (14) Failing or refusing to furnish a customer, upon reasonable request, information to which the customer is entitled, or to respond to a formal written demand or complaint; (15) Failing to comply with any rule of a national securities exchange or self- regulatory organization approved by the SEC; or (16) Failing to cooperate with, or providing false or incomplete information to, the commissioner in connection with any investigation under this chapter or chapter 485, HRS. (c) Without in any way limiting the generality thereof, for the purposes of section 485-15(11), HRS, any of the following shall demonstrate an applicant's or registrant's unworthiness to transact the business of an investment adviser or investment adviser representative: (1) Causing unreasonable delay or failure to execute orders, liquidate customers' accounts, or in making delivery of securities purchased or remittances (or credit) for securities sold; (2) Effecting transactions in the account of a customer without the customer's knowledge or consent or maintaining discretionary accounts without written authorization; (3) Placing an order upon instruction from a third party without client authorization; (4) Wilfully switching, churning, overtrading, or reloading of securities in a customer's account for the ostensible purpose of accumulating or compounding commissions; (5) Inducing a customer to invest beyond the customer's known immediate financial resources, or without regard to the nature and character of the account or the client's investment objectives; (6) Borrowing or lending money or securities except when the investment adviser is a registered broker-dealer providing margin accounts; (7) Failing to provide a client or prospective client written disclosure statements in compliance with the requirements of section 16-38-38; (8) Placing an order through an unlicensed broker or agent which the investment adviser should have known was unlicensed; §16-38-7 38-23 (9) Providing a report or recommendation to a client prepared by someone other than the investment adviser without disclosing that fact; provided this shall not apply to published research or statistical reports, or where an investment adviser orders reports in the normal course of business; (10) Participating in the solicitation or offer for sale of promotional securities without the use and dissemination of a prospectus (where required), or making oral or written statements contrary to or inconsistent with the disclosures contained therein; (11) Making false, misleading, deceptive, exaggerated, or flamboyant representations or predictions in connection with the rendering of investment advice. Examples of such representations or predictions include, but are not limited to: (A) That the security shall result in an assured, immediate or extensive increase in value, future market price, or return on investment; or (B) That there is a guarantee against risk or loss; (12) Violating any of the provisions of section 16-38-42 that prescribe limitations on advertisements; (13) Disclosing the identity, affairs, or investment of any client unless required to do so or unless consented to by the client; (14) Failing to properly supervise the activities of employees to ensure compliance with the law and rules; failing to properly investigate the character, business repute, experience, and qualifications of employees; (15) Misrepresenting to any advisory client, or prospective advisory client, the qualifications of the investment adviser or any employee of the investment adviser, or misrepresenting the nature of the advisory services being offered or fees to be charged for such service, or failing to state a material fact necessary to make the statements made regarding qualifications, services, or fees, in light of the circumstances under which they are made, not misleading; (16) Charging a client an unreasonable advisory fee; (17) Failing to disclose to clients in writing before any advice is rendered any material conflict of interest relating to the adviser or any of its employees which could reasonably be expected to impair the rendering of unbiased and objective advice including, but not limited to: (A) Compensation arrangements connected with advisory services to clients which are in addition to compensation from such clients for such services; and §16-38-7 38-24 (B) Charging a client an advisory fee for rendering advice when a commission for executing securities transactions pursuant to such advice will be received by the adviser or its employees; (18) Guaranteeing a client that a specific result will be achieved (gain or no loss) with advice which will be rendered; (19) Entering into, extending or renewing any investment advisory contract unless such contract is in writing and discloses, in substance, the services to be provided, the term of the contract, the advisory fee, the formula for computing the fee, the amount of prepaid fee to be returned in the event of contract termination or nonperformance, whether the contract grants discretionary power to the adviser and that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract; or (20) Failing or refusing to furnish a client, upon reasonable request, information to which the client is entitled, or to respond to a formal written demand or complaint by the client. [Eff 6/4/70; am and ren §16-38-7, 7/30/81; am and comp 10/12/85; am 4/4/87; am and comp 4/14/03] (Auth: HRS §485-2) (Imp: HRS §485-15) SUBCHAPTER 5 REGISTRATION OF SECURITIES, PROSPECTUS