NASAA Series 63 — All Questions

An agent handles a conservative retiree's account and generates 60 round-trip trades in six months, producing commissions that consume a large share of the account's value. This practice is best described as:

• a.Churning, which is excessive trading in light of the customer's resources, objectives, and account character✓
• b.A permissible active-management style, because the retiree received confirmations of every trade and never objected
• c.Selling away, because the agent handled the retiree's account outside the supervision and approval of the employing firm
• d.Front-running, because the agent traded for his own account ahead of the retiree's orders to profit from the expected price move

Churning is trading that is excessive in size or frequency given the customer's financial resources, investment objectives, and the nature of the account, and it is judged by the pattern rather than by any single trade. The customer's silence is not consent and does not cure the violation. Front-running involves trading ahead of a known block order, and selling away involves transactions outside the employing firm, neither of which is described here.NASAA Model Rule

A customer tells his agent, 'Buy 500 shares of a good technology company sometime this week.' The agent selects the issuer and buys the shares two days later. The agent has:

• a.Committed no violation because the customer approved afterward
• b.Exercised discretion without prior written authorization, because choosing the security and the day requires a signed discretionary agreement✓
• c.Acted properly, because the customer authorized a technology purchase
• d.Acted properly under time and price discretion

Discretion over the security, the number of shares, or whether to buy or sell requires prior written authorization from the customer and acceptance by the firm. Time and price discretion is narrower: the customer must specify the security, the action, and the amount, and that limited authority is generally good only for the day it is given. After-the-fact approval does not retroactively authorize a discretionary trade.NASAA Model Rule

An agent learns that his firm is about to execute a very large buy order for a thinly traded stock and immediately buys shares for his own account before entering the customer's order. This is:

• a.Permissible, provided the agent discloses the personal purchase to the customer after the trade has been executed
• b.Permissible, because the agent's own order was small compared with the customer's order and could not move the price
• c.Front-running, a prohibited practice that misuses knowledge of a pending customer order✓
• d.Merely a suitability issue, because the question is whether the stock fit the customer's objectives and not the order of the trades

Front-running is the use of advance knowledge of a pending block order to trade ahead of it for the agent's own benefit, and it is prohibited regardless of the size of the personal order. Later disclosure does not cure a violation that was complete when the order was entered. The problem is misuse of customer order information and market integrity, not the suitability of the security.NASAA Model Rule

An investment adviser deposits a client's advance advisory fee into the firm's general operating account and uses it to pay office rent. This conduct is:

• a.Acceptable if the client is later refunded
• b.Permitted for any adviser with a surety bond, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• c.Acceptable because the fee had already been earned on paper, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• d.Commingling of client funds with firm assets, a prohibited business practice✓

Client funds and securities must be kept separate from firm assets, and mixing them exposes clients to the firm's creditors and obscures the audit trail. Prepaid fees that have not yet been earned belong to the client and must be handled under the applicable custody and prepayment rules. Neither a later refund nor a surety bond makes commingling permissible.NASAA Model Rule

A hesitant client says she will invest only if she cannot lose money. Her agent replies, 'Don't worry, if the stock drops below your purchase price I'll personally cover the difference.' The agent has:

• a.Merely made a puffing statement, because the promise was an expression of confidence and not a contract
• b.Acted properly, because the promise came from the agent personally and not from the firm, so it is not a firm guarantee
• c.Violated the prohibition on guaranteeing a customer against loss✓
• d.Acted properly if the firm's compliance department approves the arrangement in writing beforehand

Guaranteeing a customer against loss, whether by the firm or personally by the agent, is an unethical practice under the NASAA model rules because it misrepresents the risk of the investment. No firm approval can authorize the guarantee. A statement that removes the client's perception of risk is a misrepresentation of a material fact rather than harmless puffery.NASAA Model Rule

An agent proposes to share in the profits and losses of a customer's account. Under NASAA rules, this arrangement:

• a.Is permitted for an agent only with the written authorization of both the customer and the employing broker-dealer, and generally only in proportion to the agent's own capital contribution✓
• b.Is prohibited under all circumstances for every registered person
• c.Requires only the branch manager's verbal approval
• d.Is permitted whenever the customer requests it orally

Sharing in a customer account is permitted for an agent only where both the customer and the employing broker-dealer give written authorization and the sharing is proportionate to the agent's financial contribution to the account. Oral requests and verbal approvals do not satisfy the rule. Investment adviser representatives face a stricter standard, but the flat 'never for anyone' answer overstates the rule for agents.NASAA Model Rule

An agent is short of cash and asks a wealthy retail client for a $20,000 personal loan, promising repayment with interest. Under NASAA rules this is:

• a.Permitted if the agent discloses the loan at year end
• b.Permitted because the client is wealthy and the loan is documented
• c.Permitted because the loan is unrelated to securities
• d.Prohibited, because borrowing money or securities from a customer is an unethical practice unless the customer is a financial institution in the business of lending or a permitted family relationship and firm policy allows it✓

Borrowing money or securities from a customer, or lending to one, is an unethical business practice because it creates a conflict of interest and a risk of exploitation. Narrow exceptions exist where the customer is in the business of lending, such as a bank, or is an immediate family member, and only where the firm's written procedures permit the arrangement. The client's wealth, the loan's unrelated purpose, and later disclosure do not cure the violation.NASAA Model Rule

An agent arranges private investments in a real estate partnership for several clients, collects a finder's fee directly from the sponsor, and never mentions the activity to his broker-dealer. This is:

• a.Selling away, a prohibited private securities transaction effected without the knowledge and consent of the employing broker-dealer✓
• b.Permitted, because an interest in a real estate partnership is real property and not a security, so the Act does not reach the activity
• c.A suitability violation only
• d.Permitted, because the fee was paid by the sponsor rather than the clients, so the arrangement creates no conflict the firm must supervise

Effecting securities transactions away from the employing firm without providing prior written notice and obtaining the firm's approval is the prohibited practice known as selling away, and it deprives the firm of its supervisory responsibility. A limited partnership interest is a security, so the real estate label does not help. The source of the compensation is irrelevant, and the violation exists even if every investment turned out to be suitable.NASAA Model Rule

An agent tells a prospect, 'My state registration means the Administrator has reviewed my qualifications and approved the investments I recommend.' This statement is:

• a.Accurate, because registration requires an examination
• b.Prohibited, because it is unlawful to represent that registration means the Administrator has approved the registrant's qualifications or the merits of any security✓
• c.Accurate for exempt securities only
• d.Accurate if the firm is also registered

The act expressly makes it unlawful to represent that registration, or the effectiveness of a securities registration, means the Administrator has passed on the merits of a security or the qualifications of the person. Registration is a disclosure and compliance filing, not an endorsement. That is true whether or not an examination was required and regardless of the firm's status or the type of security.Uniform Securities Act

Two traders repeatedly buy and sell the same thinly traded security between themselves at rising prices to attract outside buyers. This conduct is:

• a.Permitted because both traders consented and neither of them was deceived by the other trader
• b.Permitted, provided every trade is reported to the tape, because accurate reporting removes any misleading effect on the market
• c.Legitimate market making, because the traders are providing liquidity in a thinly traded security
• d.Market manipulation through matched orders creating misleading activity, which is prohibited✓

Wash sales and matched orders create the false appearance of trading volume and price movement and are prohibited manipulative practices. Consent between the participants is irrelevant because the deception targets the investing public. Reporting the trades does not legitimize them, and genuine market making involves bona fide two-sided quotations rather than prearranged trades with no change in beneficial ownership.NASAA Broker-Dealer and Agent Dishonest or Unethical Business Practices Model Rule, §1.p(1)-(3)

Before recommending a security to a new customer, an agent must:

• a.Obtain the Administrator's prior approval of the recommendation before presenting it to the customer for consideration
• b.Guarantee that the recommendation will meet the customer's stated return objective over the holding period
• c.Make reasonable inquiry into the customer's financial situation, investment objectives, tax status, and needs, and have a reasonable basis for believing the recommendation is suitable✓
• d.Confirm only that the customer has enough cash or margin capacity to pay for the trade on the settlement date

Recommending securities without reasonable grounds to believe they suit the customer, based on information the agent has actually gathered about the customer's situation and objectives, is an unethical practice. A customer who refuses to provide information limits what the agent may reasonably recommend. Administrators do not pre-approve recommendations, and settlement ability alone says nothing about suitability.NASAA Model Rule

Which statement best distinguishes the duties of an investment adviser from those of a broker-dealer effecting transactions for a customer?

• a.Neither owes any duty beyond executing orders accurately and charging the commissions disclosed on the confirmation
• b.An adviser owes duties only to institutional clients, while a broker-dealer owes duties only to retail customers
• c.A broker-dealer is always a fiduciary to every customer, while an adviser owes only a duty of suitability
• d.An investment adviser is a fiduciary owing duties of loyalty and care, including full disclosure of material conflicts, while a broker-dealer's recommendations must at a minimum be suitable for the customer✓

The advisory relationship rests on a fiduciary standard: the adviser must place the client's interests first, disclose material conflicts such as compensation arrangements and proprietary products, and seek best execution. A broker-dealer making recommendations must have reasonable grounds to believe they are suitable and must disclose material facts about the transaction. Series 63 tests this suitability standard at the uniform-law level; separately, the federal SEC Regulation Best Interest now requires broker-dealers to act in a retail customer's best interest, a heightened federal overlay that does not displace the state suitability framework tested here. Both roles carry duties well beyond accurate order entry, fiduciary status does not depend on the client being institutional, and the roles are not reversed: an adviser is held to more than suitability, while a broker-dealer is not a fiduciary across the board.NASAA Broker-Dealer and Agent Dishonest or Unethical Business Practices Model Rule, §1.c and §1.d

A broker-dealer sells a customer bonds out of the firm's own inventory. Which disclosure obligation applies?

• a.The firm must state on the confirmation that it acted as principal for its own account, not as the customer's agent✓
• b.None, because a principal trade is simply a sale by the firm and the confirmation already shows the price the customer paid
• c.The firm must disclose only the current market price of the bonds and the amount of any accrued interest
• d.The firm must disclose that it acted as an agent for the customer, because a dealer selling from its own inventory is always paid a separate commission

A customer is entitled to know the capacity in which the firm acted, and the confirmation must say whether the firm acted as agent or as principal for its own account. Selling bonds from the firm's own inventory is a principal trade, so describing it as an agency trade, or leaving capacity out because the price is shown, is an unethical practice. Disclosing only market price and accrued interest does not meet the requirement, and no Administrator approval is required to act as principal in an ordinary customer trade.SEC Rule 10b-10(a)(2), 17 CFR 240.10b-10

A broker-dealer decides to raise its account maintenance and transfer fees substantially. Under NASAA rules, the firm:

• a.May charge any amount as long as it appears on the confirmation
• b.Must obtain each customer's written consent to every fee
• c.Must give customers notice of the change and may not charge unreasonable or undisclosed fees✓
• d.May implement the change without notice because fees are a business decision, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere

Charging unreasonable and inequitable fees for services, or failing to disclose a change in the firm's fee schedule, is an unethical business practice. Customers must receive notice so they can decide whether to keep the account. Written consent for every fee is not required, and simply printing an excessive charge on a confirmation does not make it reasonable.NASAA Model Rule

A broker-dealer publishes a market letter recommending a stock in which it holds a substantial proprietary position and for which it makes a market. The letter must:

• a.Disclose the firm's position and its role as a market maker, and present projections as opinions rather than as fact✓
• b.Disclose the proprietary position but omit the market-maker role, because market making is treated as a routine function rather than a conflict of interest
• c.Present the price target as a firm projection, since the firm's own position in the stock gives it superior knowledge of the eventual outcome
• d.Be cleared by the Administrator before it is sent to customers in the state, because all written market commentary is treated as sales literature requiring pre-approval

A market letter on a stock in which the firm holds a position and makes a market must disclose both facts, because they are material conflicts of interest, and must present forecasts as opinion rather than fact. Disclosing the position but leaving out the market-making role still hides a conflict, since a market maker profits from the trading the letter may stimulate. Holding a position gives the firm no special knowledge of a price target, and presenting that target as a firm projection is a misrepresentation. Market letters are not pre-cleared by the Administrator or filed with the SEC for approval.NASAA Model Rule

Regarding advertising and sales literature used to offer securities in a state, the Administrator:

• a.May by rule require the filing of advertising and sales literature, except for federal covered securities and exempt securities and transactions✓
• b.May prohibit only advertising that mentions past performance
• c.Has no authority over advertising of any kind
• d.May require prior approval of advertising for federal covered securities

The act allows the Administrator to require that prospectuses, pamphlets, circulars, letters, and other sales literature used in the state be filed, and material that is false or misleading may be halted. That filing authority does not extend to federal covered securities, where federal law preempts, or to exempt securities and exempt transactions. Antifraud authority over misleading advertising remains in all cases.Uniform Securities Act

A customer receives a margin call and cannot meet it. The agent offers to lend the customer the money personally so the position need not be sold. This is:

• a.Permitted as long as the agent charges no interest, since an interest-free loan is a personal favor rather than a securities-related transaction with the customer
• b.Permitted if the agent lends the customer shares from his own account rather than cash, because the prohibition covers only loans of money to customers
• c.Permitted if the loan is secured by the customer's own securities held in the account, since the position then carries no risk for the agent
• d.Prohibited, because lending money to a customer creates a conflict of interest and is an unethical practice outside narrow exceptions✓

Lending money or securities to a customer, or borrowing from one, is a prohibited practice for an agent. Narrow exceptions exist, such as loans from an immediate family member or arrangements the firm's written procedures permit, but covering a margin call to avoid a forced sale is not one of them. Waiving interest does not turn the loan into a personal favor outside the securities business, the rule covers loans of securities as well as cash, and securing the loan with the customer's own holdings does not remove the conflict of interest.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Section 2.a

A customer instructs her agent to sell her entire position in a stock. The agent, believing the stock will rebound, sells only half. The agent has:

• a.Acted properly if the stock later recovers
• b.Acted within the agent's authority, because discretion over the quantity of shares to sell is covered by the time-and-price exception to written discretionary authority
• c.Committed a prohibited practice by failing to follow the customer's instructions and effectively exercising unauthorized discretion✓
• d.Committed no violation, because a customer's instruction to sell is a preference that the agent may modify when he reasonably believes it harms her

Failing to execute a customer's order as instructed is an unethical practice, and substituting the agent's own judgment for the customer's amounts to unauthorized discretion. The exception to written discretionary authority is limited to the time and price at which an order is executed, not to the quantity or whether to trade. An agent may voice a contrary opinion but cannot treat the instruction as a mere preference. A favorable market outcome does not retroactively excuse the deviation.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Sections 1.f and 1.g

An agent realizes a new account form is missing a signature, so he signs the customer's name himself, reasoning that the customer had already agreed by telephone. This conduct is:

• a.Acceptable, because the customer had already given oral consent by telephone and the agent made a note of that call in the firm's file copy
• b.Acceptable if the customer later ratifies the signature in writing, because ratification cures the missing signature on the account form
• c.Acceptable if the agent initials the signature as entered on the customer's behalf and no customer suffers any financial harm from the account opening
• d.Prohibited, because falsifying or forging records and signatures is an unethical practice regardless of intent✓

Signing a customer's name, backdating documents, or otherwise falsifying firm records is prohibited because it destroys the integrity of the books and records regulators rely on. Telephone consent does not authorize an agent to sign for the customer. Later ratification, or a note or initials beside the signature, does not undo the falsified document, and the absence of financial harm is not a defense; the violation is complete when the record is made.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), closing paragraph (conduct not inclusive: forgery, nondisclosure, misstatement of material facts)

An agent urges a client to buy a mutual fund now because 'the fund pays a big distribution next week and you'll pick up extra income.' This sales tactic is:

• a.Acceptable if the fund is otherwise suitable, because the distribution adds to the client's total return
• b.Selling dividends, a prohibited practice, because the share price drops by the distribution amount and the investor gains nothing while incurring a tax liability✓
• c.Sound advice, because the client collects the distribution as income and still keeps the full value of the shares
• d.Acceptable because the distribution is publicly announced and the agent is only repeating accurate published information

Selling dividends means urging a purchase because of an imminent distribution. The share price (net asset value) drops by the amount of the distribution on the ex-date, so the investor receives back part of the money just invested, gains nothing, and owes tax on the payment. The pitch is therefore misleading. The distribution does not add to the client's total return, receiving cash sooner is not a benefit when the share value falls by the same amount, and public announcement of the distribution does not cure the misleading emphasis.NASAA Model Rule

A client intends to invest $48,000 in a mutual fund whose sales charge drops at a $50,000 breakpoint. The agent processes the order at $48,000 without mentioning the breakpoint. This is:

• a.Acceptable, because a breakpoint discount is available only when the client commits to a letter of intent or accumulates holdings across several purchases
• b.A breakpoint sale, a prohibited practice, because the agent failed to disclose that a slightly larger investment would reduce the sales charge✓
• c.Acceptable so long as the agent charged the sales charge disclosed in the prospectus, since the prospectus schedule satisfies the duty to explain discounts
• d.Acceptable because the client chose the amount

Failing to disclose an available breakpoint, or deliberately keeping an order just below one to preserve a higher sales charge, is an unethical practice. The agent must alert the client to quantity discounts, letters of intent, and rights of accumulation. Breakpoints apply to a single purchase as well as to accumulated holdings, so they are not limited to letters of intent or accumulation. Charging the rate in the prospectus schedule does not discharge the duty to point out a cheaper tier, and the fact that the client named the dollar figure does not relieve the agent of the disclosure duty.NASAA Model Rule

An agent regularly advises clients to redeem shares of one mutual fund family and buy a similar fund in another family, generating a new front-end sales charge each time. Absent a documented benefit to the client, this is:

• a.Acceptable, because every replacement fund is individually suitable for the client and the agent's compensation is disclosed in each prospectus
• b.Proper diversification across fund sponsors, because holding one family's funds concentrates the client's exposure to a single management company
• c.Acceptable because the client signs each order ticket and is shown the new sales charge on the confirmation, so every switch is client-directed
• d.Improper mutual fund switching, because inducing exchanges between fund families without reasonable grounds imposes needless sales charges✓

Recommending that a client move between fund families without reasonable grounds is an unethical practice, since the new sales charge is a real cost with no corresponding benefit when comparable objectives are available within the existing family. Suitability of each individual fund does not justify the repeated charges. Spreading money across sponsors is not a reason when the switch only generates charges, and a signed order ticket or a confirmation showing the charge documents the trade without supplying the required reasonable basis.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Sections 1.b and 1.c

A customer emails an agent complaining that a trade was never authorized. The agent should:

• a.Delete the email since the matter is disputed
• b.Promptly forward the written complaint to the firm so it can be reviewed, acted on, and preserved in the firm's records✓
• c.Wait to see whether the customer follows up, because an email is not a formal complaint and need not be sent to the firm until it is repeated
• d.Resolve it with the customer directly if the amount is small, and tell the firm only if the customer demands compensation or threatens arbitration

Written customer complaints must be routed promptly to the firm and retained, because the firm has supervisory and recordkeeping obligations and regulators may inspect complaint files. An email alleging an unauthorized trade is a written complaint whether or not it is repeated, so waiting is not permitted. Settling a complaint privately, even a small one, without the firm's knowledge is itself an unethical practice, and destroying the record compounds the original problem.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Section 1.v

A state-registered investment adviser takes custody of client securities. Under the NASAA custody rule, the adviser generally must:

• a.Notify the Administrator, hold client assets in an account in the firm's own name alongside its own funds, and send clients a statement once a year
• b.Notify the Administrator that it has custody, segregate client assets with a qualified custodian, send account statements to clients, and arrange for an independent verification of the assets✓
• c.Keep client assets with a qualified custodian, rely on annual account statements from that custodian, and obtain an independent examination every third year
• d.Skip any notice to the Administrator because custody is disclosed only to clients, and have its own compliance officer verify the assets

The NASAA custody rule requires an adviser with custody to notify the Administrator, maintain client funds and securities with a qualified custodian in segregated accounts, have a reasonable basis for believing the custodian sends account statements at least quarterly, and obtain an independent surprise examination every calendar year. Holding assets in the firm's own name defeats segregation, annual statements and an examination only every third year fall short of the quarterly and annual requirements, and an adviser with custody must notify the Administrator rather than disclose it to clients alone. Having custody does not relax the adviser's recordkeeping duties.NASAA Model Rule 102(e)(1)-1 (Custody Requirements for Investment Advisers)

An investment adviser wants to charge a fee based on a share of the capital gains in a client's account. Under NASAA rules, such a performance-based fee is:

• a.Permitted only for clients who meet defined net worth or assets-under-management standards, with the arrangement and its risks disclosed in writing✓
• b.Permitted for any client whose account exceeds the adviser's minimum, as long as the fee is capped at twenty percent of the capital gains the adviser earns for the account
• c.Permitted for any client who signs a written waiver acknowledging that the fee may encourage the adviser to take greater investment risks with the account
• d.Prohibited for every client without exception, because an adviser who shares in capital gains has an unavoidable conflict of interest with the client

Performance-based compensation is limited to clients who satisfy financial thresholds designed to identify investors able to bear the incentive risk, and the arrangement must be disclosed along with the conflicts it creates. An account-size minimum or a percentage cap does not substitute for those eligibility standards, and a client waiver cannot either, because provisions purporting to waive compliance with the act are void. The fee is not banned outright, since eligible clients may agree to it. Guaranteeing against loss is itself prohibited, so it could never be a condition of a permitted fee.NASAA Model Rule

An investment adviser directs client brokerage to a firm that provides research reports and also pays the adviser's office rent. Regarding these soft dollar arrangements, the adviser:

• a.May accept research without telling clients, because the Section 28(e) safe harbor removes any conflict of interest in choosing the broker
• b.May accept research and brokerage services that benefit clients within the recognized safe harbor and must disclose the arrangement, but paying general overhead such as rent falls outside it✓
• c.May use client commissions to pay for research and office rent alike, provided both arrangements are disclosed in its brochure
• d.May accept any product or service the broker offers, provided the commission rate is competitive with other brokers

Section 28(e) of the Exchange Act protects an adviser that pays more than the lowest commission for brokerage and research services that give it lawful and appropriate assistance in making investment decisions, and the arrangement must be disclosed because it creates a conflict in choosing the executing broker. General overhead such as rent, salaries or travel is not brokerage or research and falls outside the safe harbor, even if the rent payment is disclosed. The safe harbor does not extend to anything of value merely because commissions are competitive, and it does not remove the conflict that requires disclosure.Exchange Act §28(e) (15 U.S.C. 78bb(e))

An investment adviser proposes to act as broker for a client on one side of a trade while representing the counterparty on the other. This agency cross transaction:

• a.Is allowed once the adviser tells each client orally about its dual role, and no written consent, confirmation or annual statement is needed so long as the commissions are reasonable
• b.Requires only that the commissions the adviser collects from both clients be reasonable and shown on the trade confirmation
• c.Requires disclosure of the adviser's role and the conflicts involved, and the client's consent, with the adviser never having recommended the trade to both parties✓
• d.Is allowed only when the adviser has recommended the trade to both clients, because each side then relies on the same advice

Advisers Act Rule 206(3)-2 allows an agency cross transaction only if the client has given written consent after written disclosure of the adviser's role and conflicts, the client receives a confirmation and periodic statements, and the adviser has not recommended the transaction to both the buyer and the seller. Oral disclosure does not meet the rule and neither does a showing that commissions were reasonable. A trade that the adviser recommended to both sides is exactly what the rule rules out. The Administrator does not approve individual trades, and the practice is not banned outright.Advisers Act Rule 206(3)-2 (17 CFR 275.206(3)-2)

An investment adviser pays an accountant a fee for every client the accountant refers. Under NASAA rules, this arrangement requires that:

• a.Nothing be disclosed, because the client pays no additional fee, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• b.The arrangement be in writing and disclosed to the client in writing, so the client knows the referral was compensated✓
• c.The solicitor register as an investment adviser in every state, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• d.The referral fee be capped at five percent of the first year's advisory fee, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order

Compensated solicitation arrangements must be documented in a written agreement and disclosed to the prospective client in writing so the client can weigh the referral's independence. Whether the client pays more is beside the point; the conflict itself is the material fact. The rules impose disclosure and documentation requirements rather than a universal percentage cap, and a solicitor is not automatically an investment adviser in every state.NASAA Model Rule

An agent's friend asks about the holdings and balance in a mutual acquaintance's brokerage account. The agent should:

• a.Decline, because customer account information is confidential and may be released only with the customer's consent or under proper legal authority✓
• b.Share the types of securities held but not the dollar amounts, because only account values are protected
• c.Share the information if the friend is also a customer of the firm and gives a written promise to keep it private
• d.Share it once the friend explains that both of them know the customer, since a common acquaintance counts as implied consent and no further authority is needed

Customer account information is confidential, and under the Gramm-Leach-Bliley Act a financial institution may disclose it to a nonaffiliated third party only with the customer's consent or under a recognized exception such as legal process. A friend asking about a mutual acquaintance's holdings fits no exception. Describing the types of securities held discloses protected information even without dollar amounts, being a client of the same firm gives no right to another customer's data, and a shared acquaintance is not customer consent.15 U.S.C. 6802 (Gramm-Leach-Bliley Act privacy provisions)

A client loses money on a trade the agent recommended. To keep the client from complaining, the agent quietly writes a personal check covering the loss and tells no one at the firm. The agent has:

• a.Acted properly because no securities were involved in the payment
• b.Acted properly because the client suffered no net loss
• c.Committed a prohibited practice by settling a complaint without the firm's knowledge and effectively guaranteeing the customer against loss✓
• d.Resolved the matter appropriately at his own expense

Reimbursing a customer for losses out of personal funds both conceals a potential complaint from the firm's supervisory system and operates as a guarantee against loss, each of which is an unethical practice. The firm must be able to review the underlying recommendation and record the complaint. Making the client whole financially does not cure the concealment.NASAA Model Rule

An agent tells a customer that a new corporate bond 'is completely safe because the issuer has never missed a payment,' when the issuer's credit rating was in fact just cut to below investment grade. The agent has:

• a.Made an acceptable statement, because the payment history is factual and the agent made no promise about the issuer's future payments
• b.Committed a suitability violation but not fraud, because the statement concerned the issuer's record rather than the price of the bond
• c.Made a material misrepresentation, which is prohibited whether the security is registered or exempt✓
• d.Done nothing wrong if the customer signs a risk acknowledgment, because the signed form shifts responsibility for the decision to the customer

The antifraud provision makes it unlawful to make an untrue statement of a material fact in connection with the offer or sale of any security, exempt or not. Citing a true payment history while calling the bond 'completely safe' and hiding a recent downgrade renders the whole statement misleading, and calling the bond completely safe is itself a statement about the future. The problem is misrepresentation, not merely suitability. A signed acknowledgment cannot waive the antifraud provisions, because any condition purporting to waive compliance with the act is void.Uniform Securities Act (1956) Section 101

In recommending a stock, an agent accurately describes its strong recent earnings but deliberately omits that the company's auditor resigned last week citing accounting concerns. This omission is:

• a.Permissible, because every figure the agent gave about earnings was true and the antifraud provision reaches only false statements
• b.A prohibited omission of a material fact necessary to make the agent's statements not misleading✓
• c.Permissible if the auditor's resignation was already reported in the financial press, since the information was then publicly available
• d.A violation only if the customer actually loses money on the purchase, because the antifraud provision requires a showing of damages

The antifraud provision reaches the omission of a material fact necessary to make statements made, in light of the circumstances, not misleading, so literally true statements can still violate it. An auditor resignation over accounting concerns is material, so leaving it out taints even literally true earnings talk. Press coverage elsewhere does not cure the agent's own misleading presentation, and no loss need occur because the law reaches the offer and sale.Uniform Securities Act (1956) Section 101

An agent markets GNMA (Ginnie Mae) pass-through securities as 'guaranteed investments with no risk of any kind.' Timely payment of principal and interest is backed by the U.S. government. The characterization is:

• a.A prohibited misrepresentation, because interest-rate and prepayment risk remain even though credit risk is federally backed✓
• b.Accurate, because a federal guarantee covers the principal and interest payments, and a security backed by the government carries no market risk
• c.Acceptable sales puffery, because customers understand that a description of a government-backed security is a general opinion rather than a statement of fact
• d.Permissible only for accredited investors, who are presumed able to evaluate the risks of agency securities without further disclosure

The federal backing on a GNMA covers credit/default risk, not interest-rate risk or prepayment and reinvestment risk. Telling a customer there is 'no risk of any kind' misstates material facts and misrepresents the scope of the guarantee, a prohibited practice. A guarantee of payment does not remove market risk, the claim is a statement of fact rather than puffery, and limiting it to accredited investors does not save a false statement about risk.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Section 1.s

A 70-year-old retiree whose stated objective is preservation of capital and current income is steered by her agent into placing most of her savings in a pre-revenue, highly speculative biotech stock. This recommendation is:

• a.Proper, because the client can always decline
• b.Proper if the biotech stock later performs well, because suitability is judged by how the investment turns out rather than when it was recommended
• c.Unsuitable, and making unsuitable recommendations is a prohibited practice✓
• d.A violation only if the agent exercised discretion, because a recommendation the client chooses to follow is the client's own decision

Recommending securities without reasonable grounds to believe they suit the customer's objectives, situation, and needs is an unethical practice. A speculative equity is squarely at odds with a capital-preservation-and-income objective. Suitability is judged when the recommendation is made, so a later gain does not cure it, and the client's ability to decline or follow the advice does not shift the agent's duty; discretion is not required for the violation.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Section 1.c

An agent's brother, an officer at a public company, tells him in confidence that the company will announce a surprise takeover tomorrow. The agent buys the stock for his own account before the news is public. This is:

• a.Permissible, because the tip came from a family member in a private conversation rather than from a source at a regulated firm
• b.Permissible, because the agent is not an officer or director of the company and so owes no duty to its shareholders
• c.A suitability issue only, because the purchase was made for the agent's own account and was not recommended to any customer
• d.Prohibited trading on material nonpublic information, reached by the act's antifraud provisions✓

Trading on material nonpublic information obtained in breach of a duty of confidence is fraudulent and prohibited under state antifraud law as well as federal insider-trading law. The private setting of the tip is irrelevant, and a person who trades on a tip from an insider is liable even though he is not an officer or director himself. Because the purchase was for the agent's own account, no customer recommendation is involved, yet it is a fraud and market-integrity question rather than a suitability question.Uniform Securities Act (1956) Section 101

To push up the price of a stock he owns, an agent posts on several online forums that the company is 'about to receive a huge government contract,' a claim he invented. This conduct is:

• a.Protected speech unrelated to the securities laws, because opinions posted online by an individual are not made in connection with a sale
• b.A violation only if someone actually trades on the rumor, because the antifraud provision requires proof that a buyer or seller relied on it
• c.Acceptable if he later deletes the posts
• d.Prohibited, because circulating false rumors to affect a security's price is a manipulative and deceptive practice✓

Circulating false or misleading rumors to influence a security's price or induce trading is a prohibited manipulative and deceptive practice. It is not shielded as ordinary speech when used to manipulate a market, and the violation does not depend on proof that a particular person traded or relied on the rumor. Deleting the posts does not undo the manipulation.Uniform Securities Act (1956) Section 101

Without any order from the customer and with no signed discretionary agreement, an agent buys 300 shares of a stock in the customer's cash account because he is confident it will rise. The agent has:

• a.Acted properly, because the money in a cash account belongs to the customer and the agent may invest it in the customer's interest
• b.Acted properly if the trade turns out to be profitable for the customer, because the customer then suffers no harm
• c.Effected an unauthorized transaction, a prohibited practice✓
• d.Committed only a paperwork error, because the customer can cure it by consenting to the purchase after it is made

Entering an order the customer did not authorize, absent prior written discretionary authority, is a prohibited unauthorized transaction. It is the customer's account, but that is precisely why the customer's authorization is required; the agent cannot invest the money on his own judgment. A profitable result does not cure it, and after-the-fact consent does not retroactively authorize the trade, so it is more than a paperwork error.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Sections 1.f and 1.g

An agent wants to pay half of his commissions to a friend who referred several clients. The friend holds no securities registration of any kind. Under the Uniform Securities Act, the agent may:

• a.Not do so, because commissions may be shared only with appropriately registered persons✓
• b.Do so freely, because the money is the agent's own, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• c.Do so if the friend reports the income on his taxes, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Do so up to ten percent of each commission

Splitting transaction-based securities compensation with an unregistered person is effectively paying an unregistered person for securities activity and is prohibited; sharing is generally limited to persons registered with the same broker-dealer or firms under common control. The source of the funds, the friend's tax reporting, and an arbitrary percentage cap do not make it permissible.Uniform Securities Act

Two agents registered with the same broker-dealer agree to split the commission on a joint account they service together. This arrangement is:

• a.Prohibited in all cases, because any division of an agent's commission with another person is a dishonest or unethical practice
• b.Generally permissible, because both are registered agents of the same broker-dealer✓
• c.Permissible only with the Administrator's prior written approval of the split and a notice sent to the customer, since compensation arrangements are regulated
• d.Permissible only if the customer consents in writing to the split, because the commission is charged to the customer's account

Commission sharing among agents registered with the same broker-dealer, or with broker-dealers under common control, is permitted; the prohibited abuse is sharing with a person who is not registered with that firm. The rule is not an all-cases ban. No Administrator approval and no customer consent is needed, and the customer is not charged more because the split is internal to the compensation.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Section 2.e

An agent executes a securities trade for a customer but arranges for it not to appear on the firm's books and records so his manager will not see it. This is:

• a.Acceptable if the customer received the correct shares at the correct price, since the customer suffered no loss and the firm lost no revenue
• b.A minor recordkeeping lapse
• c.A prohibited practice, because effecting transactions not recorded on the employing firm's books without its authorization is unlawful✓
• d.Permissible if the firm approves the trade afterward in writing, because authorization may be given at any time before the next regulatory examination

Effecting a securities transaction that is not recorded on the broker-dealer's regular books and records, unless the firm authorized it in writing before execution, is an unethical practice closely related to selling away; it defeats supervision. Delivering the right shares at the right price does not cure it, it is not minor, and approval given after the fact does not satisfy a rule that requires authorization before execution.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Section 2.b

To make a late trade appear timely, an agent changes the date on the order ticket to the previous business day. This is:

• a.Acceptable because the trade itself was valid, so the date on the ticket is a matter of firm policy rather than a regulatory concern
• b.A clerical correction, because the agent changed only the date and left the price and quantity of the order unchanged
• c.Permissible with the customer's consent, because the customer is the party the order ticket exists to protect
• d.Falsification of records, a prohibited and unethical practice✓

Backdating or otherwise altering firm records falsifies the books and records regulators rely on and is a prohibited practice regardless of whether the underlying trade was otherwise valid. Changing only the date does not make it a clerical fix, and no customer consent can authorize a falsified record. The date on a ticket is a regulatory record, not an internal policy detail.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), closing paragraph (conduct not inclusive)

An agent recommends that clients buy a small company's stock without telling them that he personally owns a large block he hopes to unload at a higher price. The failure to disclose his position is:

• a.A prohibited failure to disclose a material conflict of interest✓
• b.Acceptable, because his personal holdings are private
• c.Acceptable if the stock is otherwise suitable
• d.A violation only if he sells while the recommendation is outstanding

An agent's personal position and intent to sell into his own recommendation is a material conflict of interest (a form of scalping) that must be disclosed; concealing it is fraudulent and unethical. His holdings are not simply 'private' once he recommends the stock, suitability does not cure an undisclosed conflict, and the violation lies in the nondisclosure itself.NASAA Model Rule

A customer hands an agent a check and asks him to 'hold onto it for a few weeks.' Under NASAA rules, the agent must:

• a.Deposit the check into his personal account for safekeeping and return the funds on request, since the customer authorized him to hold it
• b.Cash the check and hold the currency
• c.Promptly transmit customer funds and securities to the firm or proper party, without holding or diverting them✓
• d.Hold the check in a locked drawer at the branch until the customer decides how to invest it, provided the customer gives written permission

Agents must promptly forward customer funds and securities to the broker-dealer or the appropriate party; acting as a custodian for a customer's money or securities, or diverting or commingling them, is prohibited. Depositing the check to a personal account or converting it to cash is commingling and conversion, and even holding it at the branch with the customer's written permission still makes the agent a custodian, which the rule does not allow.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Section 2.a

Under the NASAA brochure rule, a state-registered investment adviser must deliver its written disclosure brochure (or Form ADV Part 2) to a prospective client:

• a.Within thirty days after the contract is signed
• b.No later than entering into the advisory contract; if delivered less than 48 hours beforehand, the client generally gets a five-business-day penalty-free withdrawal right✓
• c.Only upon the client's written request
• d.Once every three years

The brochure rule requires delivery at or before entering into the advisory contract. If the brochure is not delivered at least 48 hours in advance, the client must be given the right to cancel within five business days without penalty. The adviser must also deliver or offer the brochure annually, not merely every three years or on request.NASAA Model Rule

An agent sells a customer shares of a new registered offering but never delivers the required prospectus. This omission is:

• a.A violation, because required prospectus delivery is part of a lawful offer and sale✓
• b.Acceptable, because the prospectus is available on the SEC's website and the customer can read it before the settlement date
• c.Acceptable if the customer is a sophisticated investor who has bought from the issuer before and declines delivery of the document
• d.Curable only by rescinding the trade, since a prospectus not delivered before the sale cannot be furnished afterward

Failing to furnish a customer purchasing in an offering with a final prospectus, or a preliminary prospectus plus an additional document, by the due date of the confirmation is a prohibited practice. Availability of the document online does not satisfy a duty to deliver it, and the customer's sophistication or reluctance to take it does not excuse nondelivery. Rescission is a possible remedy, not the only cure, and timely delivery is what the rule requires.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Section 1.l

An agent tells prospects he is a 'certified investment expert approved by the state,' a credential that does not exist. This is:

• a.A prohibited misrepresentation of the agent's qualifications and of the meaning of registration✓
• b.Acceptable self-promotion
• c.Acceptable, because passing the Series 63 examination entitles an agent to say that the state has approved his qualifications
• d.A violation only if a client later complains or suffers a loss, because the act requires a showing of harm before a misrepresentation is actionable

Misrepresenting one's qualifications and implying that the state has 'approved' the agent violates the act, which makes it unlawful to represent that registration or an exemption means the Administrator has passed on a person's qualifications. Passing an examination is a requirement for registration, not an approval, and it does not create the fictitious credential. No complaint and no loss is required for the violation to exist.Uniform Securities Act (1956) Section 405(b)

An agent describes a mutual fund as 'no-load,' when it in fact charges a 1% 12b-1 distribution fee and a contingent deferred sales charge. Calling it no-load is:

• a.Accurate, because no-load refers only to the absence of a front-end sales charge, and a deferred charge and a 12b-1 fee are not sales loads
• b.A harmless labeling choice, because the fees are described in the prospectus and the agent's description is only a summary of the fund's costs
• c.A misrepresentation, because ongoing distribution fees and a deferred sales charge are inconsistent with a true no-load description✓
• d.Acceptable if the full fee schedule is disclosed in the prospectus, since a written disclosure corrects any misleading oral description of the fund

A fund carrying a meaningful 12b-1 fee and a contingent deferred sales charge cannot fairly be called no-load; the label misrepresents the fund's cost structure, a prohibited practice. The absence of a front-end load is not the whole picture, because deferred charges and ongoing distribution fees are also sales-related costs. Describing the fee schedule in the prospectus does not cure an affirmatively misleading oral statement, and the label is not harmless.NASAA Model Rule

An agent recommends a stock to many clients based solely on an unverified tip he overheard, having done no analysis of the company. This is:

• a.Acceptable, because an agent must investigate a company only when he buys the stock for his own account rather than for clients
• b.A prohibited practice, because recommendations must rest on a reasonable basis, not on rumor✓
• c.Acceptable if at least some clients profit
• d.A violation only in discretionary accounts, because only there does the agent control the trading decision for the customer

A recommendation must have reasonable grounds, meaning a reasonable basis derived from diligence about the security and the customer; a recommendation founded on an unverified rumor with no analysis is unethical. The duty applies to every recommendation to every client, not only to discretionary accounts, it is owed to clients rather than limited to the agent's own purchases, and some clients profiting does not supply the missing reasonable basis.NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended 2025-04-07), 1.c

A broker-dealer sells a customer a security from its own inventory and adds a markup far out of line with the prevailing market and the services rendered. This is:

• a.Permissible, because a firm trading as principal is bound only to disclose its capacity and may otherwise price the security as it chooses
• b.A prohibited practice, because charging unreasonable markups, commissions, or fees is unethical✓
• c.Permissible so long as the markup is shown on the confirmation, because a customer who receives it has effectively agreed to the price
• d.Permissible for securities not listed on an exchange, because the prevailing-market test applies only to listed and Nasdaq-quoted stocks

Entering a transaction with a customer at a price not reasonably related to the current market price, or taking an unreasonable commission or profit, is an unethical practice. Acting as principal does not let a firm choose any price, showing the markup on the confirmation does not turn an excessive price into a fair one, and the rule has no carve-out for unlisted securities.NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended 2025-04-07), 1.k

An agent recommends a leveraged, complex product and describes only its potential upside, saying nothing about how it can lose value rapidly. This is:

• a.Acceptable, because the customer said he wanted growth and the agent may rely on that stated objective to justify a one-sided pitch
• b.Acceptable because the product is registered, and registration with the state removes the agent's duty to explain how it can lose value
• c.Acceptable, because the risks are described in the offering documents and the agent need only present the benefits when he sells
• d.A prohibited failure to disclose material facts, including the product's risks✓

Omitting the material risks needed to make a recommendation not misleading is a prohibited practice; a one-sided pitch that hides how a leveraged product can lose value quickly is misleading. Registration of the product, the customer's growth objective, and the existence of offering documents do not relieve the agent of the duty to disclose material risks himself.NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended 2025-04-07), 1.s and the paragraph on conduct not inclusive (nondisclosure of material facts)