NASAA Series 63 — All Questions

A customer closes her brokerage account. How long must the broker-dealer preserve the account cards or records that relate to the terms and conditions of opening and maintaining the account?

• a.At least three years after the account closes, with two years of ready access
• b.At least three years after the date of the last transaction in the account
• c.At least six years after the date on which the customer's account is closed✓
• d.At least six years after the date on which the account was first opened

Rule 17a-4(c) requires account cards and records on the terms of opening and maintaining a customer account to be kept for at least six years after the account is closed. The clock runs from closing, not from opening or from the last trade, and the shorter three-year period applies to other records such as confirmations and order memoranda.SEC Rule 17a-4(c)

A broker-dealer retires its compliance and supervisory procedures manual on March 1, 2027, and starts using a revised edition. Until when must the retired manual be preserved?

• a.At least until March 1, 2028, which is one year after its use ended
• b.At least until March 1, 2030, which is three years after its use ended✓
• c.At least until March 1, 2033, which is six years after its use ended
• d.At least until the end of the fiscal year in which the new edition was adopted

Compliance, supervisory and procedures manuals, with their updates, must be preserved until three years after the use of the manual ends, so the retired edition is kept until March 1, 2030. The six-year period belongs to other records such as account record information, and the clock does not run from adoption of a replacement edition's fiscal year.SEC Rule 17a-4(e)(7)

A broker-dealer mails customers a letter that relates to its business. For how long, and how accessibly, must it preserve a copy of the letter?

• a.Six years, with ready access required for each of those years
• b.Two years, with only the first of those years readily accessible
• c.Three years, with ready access required for the whole of that period
• d.Three years, with the first two kept in a place that is easily accessible✓

Copies of communications sent relating to the firm's business, along with approvals, fall under Rule 17a-4(b) and are preserved for three years, the first two in an easily accessible place. The six-year period covers records such as blotters and ledgers, and the accessibility requirement covers only the first two years, not the whole period.SEC Rule 17a-4(b)(4)

Which of the following records must a broker-dealer preserve for six years, rather than three?

• a.The originals of all communications received and copies of all communications sent relating to the broker-dealer's business
• b.The copy of the written confirmation of each purchase or sale of securities effected for a customer account
• c.The ledger accounts itemizing separately each customer's cash and margin account✓
• d.The memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of a security

Rule 17a-4(a) requires the records listed in Rule 17a-3(a)(1) through (3), including the ledger accounts itemizing each customer's cash and margin account, to be kept six years, the first two in an easily accessible place. Order memoranda (17a-3(a)(6)) and customer confirmations (17a-3(a)(8)) fall under Rule 17a-4(b)(1) and are kept three years, and the originals of communications received and copies of communications sent fall under Rule 17a-4(b)(4), also three years.SEC Rule 17a-3(a)(3); Rule 17a-4(a), (b)

Under the NASAA model recordkeeping rule, an adviser whose fiscal year ends December 31 makes the last entry on a client ledger on September 15, 2026. Through what date must the ledger be preserved?

• a.September 15, 2031, which is five years from the date of the last entry
• b.December 31, 2028, which is two years from the end of that same fiscal year
• c.December 31, 2031, five years from the end of the fiscal year of the last entry✓
• d.December 31, 2029, which is three years from the end of that same fiscal year

The model rule requires most records to be kept at least five years from the end of the fiscal year in which the last entry was made, so a 2026 entry runs from December 31, 2026 to December 31, 2031. Counting from the entry date understates the period, and three years is the broker-dealer rule, not the adviser rule. The first two years are kept in the adviser's principal office.NASAA Model Rule 203(a)-2(e)(1)

Under the NASAA model recordkeeping rule, how long must an investment adviser preserve its articles of incorporation and minute books?

• a.Until the adviser withdraws its registration with the Administrator
• b.Until at least three years after the adviser's enterprise terminates✓
• c.For five years from the end of the fiscal year of the last entry in them
• d.For six years after the date of the most recent amendment to either document

Organizational documents such as charters, partnership articles and minute books are kept in the principal office until at least three years after termination of the enterprise. The five-year fiscal-year period applies to ordinary books and records, and neither a six-year amendment clock nor withdrawal of registration ends the duty.NASAA Model Rule 203(a)-2(e)(2)

Under the NASAA model recordkeeping rule, where must an adviser keep a current copy of its physical security and cybersecurity policies and procedures?

• a.With the adviser's qualified custodian, who must certify the copy each year in writing
• b.In the principal office alone, where examiners can review the policies on request
• c.In hard copy at a separate location, or on media independent of its own network✓
• d.On the adviser's main file server, with nightly backups to another folder on that network

The model rule asks for a current copy held apart from the adviser's systems, either in hard copy at a separate location or on electronic media independent of its computers and network, so the policies remain available if those systems are compromised. A copy on the same network is exactly what it guards against, and no custodian certification is required.NASAA Model Rule 203(a)-2(a)(23)(A)

A customer asks in writing for the time of execution of a trade that took place 45 days earlier. The confirmation said the time would be furnished on request. Within what period must the broker-dealer respond?

• a.Within 15 business days after it receives the request, because the trade was over 30 days old✓
• b.Within 30 calendar days after it receives the request, matching the 30-day look-back period
• c.Within 5 business days after it receives the request, the standard period for all requests
• d.Within 10 business days after the original trade date, because the confirmation promised it

Information requested under Rule 10b-10 must be sent within 5 business days of the request, but within 15 business days when the transaction was effected more than 30 days before the request. At 45 days this trade qualifies for the longer period, which is counted in business days from receipt of the request, not from the trade date.SEC Rule 10b-10(c)

An advisory representative of a state-registered adviser buys 200 shares of a corporate stock in her personal account on February 14. By when must the adviser record the transaction under the NASAA model rule?

• a.May 15, which is 45 days after the end of the calendar quarter in which she traded
• b.January 10 of the next year, which is 10 days after the end of the calendar year
• c.No later than April 10, which is 10 days after the end of the calendar quarter✓
• d.February 24, which is 10 days after the date on which she bought the shares

The model rule requires a record of an advisory representative's personal securities transactions to be made no later than 10 days after the end of the calendar quarter in which the trade occurred, here the quarter ending March 31. Counting from the trade date or from the year end is wrong, and 45 days belongs to other filings.NASAA Model Rule 203(a)-2(a)(12)

On March 3, a broker-dealer becomes aware that unauthorized access to customer information is reasonably likely to have occurred. Its reasonable investigation does not rule out substantial harm or inconvenience, and no delay applies. By when must it notify affected individuals?

• a.As soon as practicable, and no later than May 2, 60 days after awareness
• b.As soon as practicable, and no later than March 6, 72 hours after awareness
• c.As soon as practicable, and no later than June 1, 90 days after awareness
• d.As soon as practicable, and no later than April 2, 30 days after awareness✓

Regulation S-P requires notice to affected individuals as soon as practicable and no later than 30 days after the firm becomes aware of unauthorized access or likely unauthorized access, unless the Attorney General authorizes a delay. Thirty days from March 3 is April 2. The 72-hour period applies to service providers notifying the firm, and the 60- and 90-day periods are not in the rule.17 CFR 248.30(a)(4)(i) and (iii) (notice to affected individuals as soon as practicable, not later than 30 days after becoming aware)

A cloud service provider hosts a broker-dealer's customer information and learns of a security breach that resulted in unauthorized access to its system. How soon must the provider notify the broker-dealer?

• a.Within 10 business days, after it completes its own forensic investigation
• b.Only if the broker-dealer asks, since the service contract controls the timing
• c.Within 30 days, matching the period that applies to notifying affected individuals
• d.As soon as possible and no later than 72 hours after becoming aware of the breach✓

A covered institution must have its service providers notify it as soon as possible and no later than 72 hours after the provider becomes aware of a breach resulting in unauthorized access to a customer information system. The provider's notice is separate from the firm's own duty to notify affected individuals, and the contract cannot waive the requirement.17 CFR 248.30(a)(5)

Under Regulation S-ID, who must approve the initial written Identity Theft Prevention Program of a broker-dealer that has a board of directors?

• a.The SEC staff, after the firm submits the program for review and comment
• b.The firm's chief compliance officer, acting alone as the designated approver
• c.Its board of directors or an appropriate committee of that board of directors✓
• d.The firm's outside auditor, who must also certify the program each year

A financial institution or creditor with covered accounts must obtain approval of the initial written program from its board of directors or an appropriate committee of the board. Senior management or a designated employee then oversees the program. The rule has no SEC pre-approval or auditor certification.17 CFR 248.201(e)(1)

A state-registered adviser begins sharing clients' non-public personal information with a new affiliate. Its privacy policy was delivered three months earlier and is now inaccurate. What must the adviser do?

• a.Wait, and describe the new sharing in the next annual delivery of the policy to clients
• b.Post the amended policy on its website, without delivering it to individual clients
• c.Promptly update the privacy policy and deliver the amended version to each client✓
• d.Deliver the amended policy only to clients who ask whether sharing occurs

The NASAA rule requires delivery of a privacy policy at engagement and annually after that, and also requires the adviser to promptly update and deliver an amended policy to each client if the policy becomes inaccurate. Waiting for the annual cycle, delivering on request, or merely posting online all fall short of delivering to each client.NASAA Information Security and Privacy Rule, subsection (b)

A state-registered adviser last reviewed its cybersecurity policies and procedures 14 months ago. It has had no security incidents. Under the NASAA model rule, is it compliant?

• a.Yes, because a review is required only after a security incident has actually occurred
• b.Yes, because a review every two years satisfies the rule for a small firm
• c.No, because the policies must be reviewed at the end of every calendar quarter
• d.No, because policies must be reviewed no less than annually and modified as needed✓

The rule requires review at least annually, with changes as needed, to confirm that the security measures are adequate and effectively implemented. An incident is not the trigger, the rule has no biennial allowance for small firms, and its frequency is annual rather than quarterly.NASAA Information Security and Privacy Rule, subsection (a)(3)

After receiving a customer's order to buy 500 shares, a firm that is not a market maker buys 500 shares at $40.00 and immediately sells them to the customer at $44.00. What is the markup, and against what is its percentage measured?

• a.$4,000, which is 10.0% of the cost, counting both legs of the trade
• b.$4.00 in total, which is 10.0% of the firm's $40.00 cost
• c.$2,000, which is 9.1% of the $44.00 price paid by the customer
• d.$2,000, which is 10.0% of the firm's $40.00 purchase cost✓

The markup is $4.00 a share on 500 shares, or $2,000. Supplementary Material .01 measures it over the prevailing market price, and in the absence of other bona fide evidence the member's own contemporaneous cost of $40.00 is the best indication of that price, so the percentage is 4 / 40 = 10.0%. Dividing by the customer's $44.00 price understates it at 9.1%. Quoting only the per-share figure leaves out the 500 shares. Doubling to $4,000 counts a single spread twice, because the firm earns it once, between its cost and the customer's price.FINRA Rule 2121 and Supplementary Material .01(a)(3)

A customer sells 1,000 shares of a stock to a dealer at $18.00. In a contemporaneous trade, the dealer sells the same 1,000 shares at $19.00. How should the dealer's charge on the customer's sale be described?

• a.A $1,000 markdown, about 5.3% of the $19.00 prevailing price✓
• b.A $1,000 markup, which Rule 2121 does not reach on a customer's sale
• c.A $1,000 markdown, about 5.6% of the $18.00 paid to the customer
• d.A $1.00 markdown, which is about 1.0% of the $19.00 market price

When a member buys from a customer, the price paid must be reasonably related to the prevailing market price, and the dealer's contemporaneous sale at $19.00 is the best evidence of that price. The markdown is $1.00 on 1,000 shares, or $1,000, and 1 / 19 is about 5.3%. Using the customer's $18.00 as the base gives 5.6%, which is the wrong denominator. Describing it as 1.0% of $19.00 is wrong arithmetic: $1.00 is about 5.3% of $19.00. Calling it a markup is wrong on both counts: it is a markdown, and Rule 2121 expressly covers purchases from customers.FINRA Rule 2121 and Supplementary Material .01(c)(3)

A broker-dealer acting as agent executes a customer's purchase of 200 shares at $25.00 and charges a $350 commission. The firm discloses the commission before the order. Which statement is correct?

• a.A violation, because no commission above 5% of the trade value is ever permitted
• b.A 7% charge, above the 5% guide, though order size is a factor and 5% is no fixed rule✓
• c.No yardstick applies, because the 5% guide covers principal markups and not commissions
• d.A fair charge, because the customer was told the amount before placing the order

The $350 commission on a $5,000 order is 7%. Supplementary Material .01 calls the 5% policy a guide, not a rule, and lists the amount of money involved among the factors, since a small transaction may warrant a higher percentage. There is no outright 5% ceiling on commissions. Advance disclosure is itself only a factor and does not justify a charge that is unfair on the other facts. The policy also reaches agency trades, where the commission must be fair in light of all relevant circumstances.FINRA Rule 2121 and Supplementary Material .01(a)(1), (b)(4)

A non-market-maker firm buys 300 shares at $30.00 to fill a customer's order it had just received, then sells them to the customer at $30.75. What must the confirmation show about the firm's compensation?

• a.Principal capacity and the $0.75 a share ($225) difference from the firm's own cost✓
• b.A commission of $225, because a trade filled after a customer order is an agency trade
• c.Principal capacity, with the markup furnished only if the customer asks for it in writing
• d.The markup in dollars, but only when it exceeds 5% of the firm's contemporaneous cost

In a riskless principal trade by a non-market-maker, Rule 10b-10(a)(2)(ii)(A) requires the confirmation to state the difference between the customer's price and the dealer's contemporaneous purchase price, here $0.75 a share, or $225 on 300 shares, along with principal capacity. That difference goes on the confirmation itself, not only on request. Principal trades are not recharacterised as agency trades, so no commission is shown. There is no percentage trigger either: the 5% policy is a fairness guide, not a disclosure threshold.SEC Rule 10b-10(a)(2)(ii)(A)

A dual registrant's customer pays a 1.2% annual wrap fee under a written agreement that covers all trading. Trades are executed by the firm as agent. What must the confirmation of each trade show about remuneration?

• a.The commission in dollars, but only on trades larger than $10,000 in value
• b.No commission amount, since remuneration is set by written agreement, not per trade✓
• c.The commission in dollars, since every agency trade must show the amount charged
• d.Nothing at all, because a wrap account sits wholly outside Rule 10b-10 and its duties

Rule 10b-10(a)(2)(i)(B) requires the amount of remuneration received from the customer on an agency trade unless that remuneration is determined by written agreement with the customer otherwise than on a transaction basis, as a flat annual wrap fee is. The confirmation is still required and still carries the other items, such as capacity, price and quantity. There is no dollar-size cutoff in the rule, and wrap accounts are not exempt from it.SEC Rule 10b-10(a)(2)(i)(B)

A dealer sells a corporate bond to a customer at 99.50. Two hours earlier it bought the same bond at 98.00, and interest rates and the issuer's credit have not changed since. Dealers' quotes now sit near 97.60. What is the presumptive prevailing market price for computing the markup?

• a.99.50, the price the customer actually paid
• b.98.00, the dealer's own contemporaneous cost✓
• c.The midpoint of 98.00 and 99.50, which is 98.75
• d.97.60, the current inter-dealer quotation

For debt securities other than municipals, Supplementary Material .02 presumes that the prevailing market price is the dealer's contemporaneous cost, here 98.00, and the markup is 1.50 points over it. Other evidence can be weighed only when the dealer made no contemporaneous purchase or can show that its cost no longer reflects the market, for example after a change in rates, credit quality or news, and none of that happened. Quotes are a fallback in the hierarchy, not the starting point. The customer's price is what is being tested, so it cannot be the benchmark.FINRA Rule 2121 Supplementary Material .02(b)(1)-(2)

A customer sells bonds to a dealer and uses the proceeds to buy different bonds from the same dealer at about the same time. How does Supplementary Material .01 treat the markup on the bonds she buys?

• a.It is not measured at all, because a swap brings no new money from the customer to the dealer
• b.It is computed on the bonds sold, since those proceeds are what fund the whole transaction
• c.It counts only the dealer's spread on the bonds bought, since the sale is a separate trade
• d.It is computed as if she paid cash, adding the dealer's profit or commission on the bonds she sold✓

Supplementary Material .01(c)(5) treats a sale that funds a purchase at about the same time as one transaction. The markup on the purchased bonds is figured as though she had paid cash, and any profit or commission the dealer made on the bonds being liquidated is added in. Ignoring the sale lets the dealer hide part of its take. Swaps are specifically covered, and the policy is not limited to transactions with new cash. The measurement concerns the purchase, not a markup on the bonds sold.FINRA Rule 2121 Supplementary Material .01(c)(5)

A broker-dealer sells newly issued shares to a retail customer at the public offering price stated in the prospectus it delivers. Does the Supplementary Material .01 markup policy apply to that sale?

• a.Yes, but only the underwriter's spread is reviewed, not the selling dealer's spread
• b.No, because the shares are sold at the stated public offering price under a required prospectus✓
• c.Yes, unless the buyer is an institutional investor rather than a retail customer
• d.Yes, and the 5% policy then caps the dealer's spread over the underwriter's own cost of the shares

Supplementary Material .01(d) says the markup policy does not apply to sales where a prospectus or offering circular must be delivered and the securities are sold at the specific public offering price. The price is fixed and disclosed, so there is no dealer-set markup to test. The 5% figure is not a cap in any event. The exclusion does not turn on the customer's status, and it covers the selling dealer, not just the underwriter.FINRA Rule 2121 Supplementary Material .01(d)

A firm's markups on actively traded large-cap stocks, in orders of about $100,000, average 4.8%. The firm says it is safe because it stays under 5%. Is that correct?

• a.Yes, because each customer receives written notice of the markup before trading
• b.Yes, because any average markup below 5% is deemed fair under the published rule text
• c.No, because the rule sets a lower 4% limit on orders of about that dollar size
• d.No, because the 5% policy is a guide and markups of 5% or less can still be unfair✓

Supplementary Material .01(a) states that the 5% policy is a guide, not a rule, and that a markup pattern of 5% or even less may be unfair. On large, liquid transactions a markup near 5% may be well above what the factors support, and the pattern of markups is itself reviewed. Advance notice is only a factor and does not cure an unfair markup. No 4% figure appears anywhere in the rule.FINRA Rule 2121 Supplementary Material .01(a)(1), (a)(4)

A customer buys a corporate bond that the issuer may redeem before maturity. Besides the price and quantity, what must the confirmation say about the call feature?

• a.Nothing about calls, because call terms are given only in the issuer's offering document
• b.The first call date and the call price, with no further statement about any effect on yield
• c.It may be redeemed early, which could affect yield, and more information is available✓
• d.That the bond is callable, but not any yield effect, which is left to the prospectus alone

Rule 10b-10(a)(4) requires a debt security subject to redemption before maturity to carry a statement that it may be redeemed in whole or in part, that a redemption could affect the yield represented, and that additional information is available on request. Giving only dates and prices leaves out the yield warning. Saying the bond is callable without the yield effect is incomplete. The offering document does not replace the confirmation statement.SEC Rule 10b-10(a)(4)

An advisory contract charges $1,500 per 90-day quarter, billed in advance, and refunds the unearned part pro rata on termination. The client terminates on day 30 of the quarter. What is the refund?

• a.$1,000, the 60 unearned days out of 90✓
• b.$500, the 30 days of service already given
• c.$750, half of the quarter's fee returned
• d.$1,500, the whole quarter's fee returned

Thirty of the 90 days are earned, which is $500, and the remaining 60 of 90 days, or 60 / 90 x $1,500 = $1,000, is unearned and must be returned. A $500 refund returns the earned portion instead of the unearned one. $750 assumes the quarter is split in half, which ignores the actual day count. No refund of $1,500 would be due because the adviser did earn fees for the 30 days of service. Rule 102(a)(4)-1(p) requires the contract to state the prepaid amount returned on termination.NASAA Model Rule 102(a)(4)-1(p)

A client prepays an annual advisory fee of $6,000 on January 1 under a contract that returns the unearned fee pro rata by month. She terminates effective August 31. What does the adviser owe her?

• a.$2,000, the four unearned months of twelve✓
• b.$1,500, the four unearned months less a one-month termination charge kept by the adviser
• c.$4,000, the fee for the eight months from January through August
• d.$3,000, half of the annual fee, as if she had terminated at midyear

Eight months (January through August) are earned, which is $4,000, leaving four months unearned: 4 / 12 x $6,000 = $2,000. Returning $4,000 refunds the earned portion instead of the unearned portion. A $3,000 refund would be right only if half the year remained, and a termination charge is not part of the pro rata formula the contract states. Model Rule 102(a)(4)-1(p) requires the contract to disclose the amount of prepaid fee to be returned on termination.NASAA Model Rule 102(a)(4)-1(p)

A fee schedule charges 1.5% a year on the first $250,000 of assets and 1.0% a year on the rest, billed quarterly. For a $400,000 account, what is one quarterly fee?

• a.$1,500.00, the 1.5% rate applied to the entire balance
• b.$1,000.00, the 1.0% rate applied to all of it
• c.$5,250.00, the whole annual fee
• d.$1,312.50, which is one quarter of $5,250✓

The annual fee is 1.5% x $250,000 = $3,750 plus 1.0% x $150,000 = $1,500, a total of $5,250. One quarter is $5,250 / 4 = $1,312.50. Applying 1.5% to the whole account gives $1,500 a quarter, and applying 1.0% to the whole account gives $1,000. $5,250 is the full year, not the quarterly bill. The contract must set out the fee and the formula for computing it.NASAA Model Rule 102(a)(4)-1(p) (advisory contract must state the advisory fee and the formula for computing it)

An adviser registered only with a state requires each client to prepay $800 in fees for services six months or more in the future. What does the brochure requirement mean for this adviser?

• a.It must include a balance sheet only if it also has custody of client funds or securities
• b.It must include an audited balance sheet, since the state threshold is more than $500✓
• c.It need not include a balance sheet, because $800 is not above the $1,200 federal threshold
• d.It must include a balance sheet, but one the adviser prepared itself is sufficient

Item 18.A calls for a balance sheet for the most recent fiscal year when the adviser requires prepayment of more than $1,200 per client six months or more in advance. The note lowers that to more than $500 for advisers registered with state authorities, so $800 is over the line. The balance sheet must be audited by an independent public accountant. Custody is a separate trigger under Item 18.B, not a condition of this one.Form ADV Part 2A, Item 18.A and the note on state registration

An adviser charges a 4% annual fee to manage a client's account that holds only broad index funds. The client signed the contract after reading the fee schedule. How does the model rule view the fee?

• a.It can be unethical if unreasonable, and no fixed percentage applies, so the facts decide✓
• b.It is a violation in itself, because any annual fee above 2% of assets is prohibited by rule
• c.It is not a violation, because the client signed a contract setting out the fee schedule
• d.It falls outside the rule, which regulates only performance-based fees and similar charges

Rule 102(a)(4)-1(j) lists charging a client an unreasonable advisory fee as a dishonest or unethical practice. Reasonableness is judged on the facts, such as the services provided and what comparable advisers charge, and the rule names no percentage cap. A client's signature does not turn an unreasonable fee into a reasonable one. The rule is not confined to performance fees, which are governed by a separate provision.NASAA Model Rule 102(a)(4)-1(j)

An adviser's draft contract omits any statement of the prepaid fee to be returned if the contract ends, and says the adviser may assign the contract to a successor firm at its discretion. Which statement is accurate?

• a.Only the refund is deficient, since the adviser may assign freely if the brochure says so
• b.Both are deficient, since the refund must be stated and assignment needs the client's consent✓
• c.Neither is deficient, since a brochure given to the client can fill gaps in a contract
• d.Only assignment is deficient, since refunds are covered by the brochure given to the client

Rule 102(a)(4)-1(p) says the contract must be in writing and disclose, among other things, the amount of prepaid fee to be returned on termination or non-performance, and that no assignment shall be made by the adviser without the consent of the other party. Both terms in the draft fall short. The brochure is a separate delivery obligation and does not stand in for required contract terms.NASAA Model Rule 102(a)(4)-1(p)

A client's account holds $300,000, of which $100,000 is borrowed on margin. The adviser charges 1% of total assets, $3,000 a year, where 1% of the client's own equity would be $2,000. What is the issue?

• a.Margin accounts may never be charged a percentage-of-assets fee, whatever disclosure is made
• b.The fee grows with the borrowing, a conflict to be disclosed in writing before advice✓
• c.The $1,000 difference must be refunded at once, because it exceeds 1% of the client's own equity
• d.There is no issue, since a 1% fee is within the range most advisers commonly charge

Basing the fee on assets that include borrowed funds gives the adviser a financial reason to encourage margin use. Rule 102(a)(4)-1(k) treats failing to disclose in writing, before advice, a material conflict that could impair objective advice as an unethical practice. No rule bans an asset-based fee on a margin account, and nothing triggers an automatic refund. Falling within a typical fee range does not remove a conflict that the client needs to know about.NASAA Model Rule 102(a)(4)-1(k)

A planner collects $1,000 in advance toward a 10-hour plan at $200 an hour, with the unearned part refundable. The client ends the engagement after the planner has worked 3 hours. How much comes back?

• a.$1,000, the entire retainer given back
• b.$400, the $1,000 retainer less $600 earned✓
• c.$700, the retainer less 3 hours at $100 each
• d.$500, half of the whole retainer returned

Three hours at $200 is $600 earned, so $1,000 less $600 leaves $400 to return. Refunding $700 subtracts only $300, which treats the time as $100 an hour. $500 splits the retainer in half without regard to the work actually done. A full refund ignores the services already delivered. Rule 102(a)(4)-1(p) requires the contract to say how much of a prepaid fee is returned on termination.NASAA Model Rule 102(a)(4)-1(p)

A broker-dealer executes a customer's agency purchase of an NMS stock and routes the order to a venue that pays it for order flow. What must the confirmation say about that payment?

• a.The name of the venue that took the order, but not whether any payment was received
• b.The dollar amount of the payment the firm received on that specific trade, and its source
• c.That it receives payment for order flow, and the details are furnished upon written request✓
• d.Nothing, because these payments are disclosed only in the firm's periodic order-routing reports

Rule 10b-10(a)(2)(i)(C) requires, for NMS stocks, a statement whether payment for order flow is received and that the source and nature of the compensation in the particular transaction will be furnished on written request. The amount is not required on the confirmation. Periodic routing reports are a separate disclosure and do not replace this one. Naming the venue without saying whether a payment was received omits the required statement.SEC Rule 10b-10(a)(2)(i)(C)

A firm buys shares as agent for a customer who is not buying in a distribution, and the firm receives remuneration from a third party in connection with the trade. How may the confirmation handle it?

• a.Whether other remuneration was received, with the source and amount given on written request✓
• b.Nothing, since only remuneration paid by the customer is reportable on a confirmation
• c.The full source and amount of the third-party payment on the face of the confirmation
• d.Nothing on the confirmation, since the annual account statement covers all such payments

Rule 10b-10(a)(2)(i)(D) requires the source and amount of other remuneration the broker receives in connection with the trade. For a purchase that is not part of a distribution, the confirmation may instead say whether any has been or will be received and that the source and amount are available on written request. It is not limited to customer-paid amounts, and it is not deferred to an annual statement.SEC Rule 10b-10(a)(2)(i)(D)

An adviser charges a client 1% a year for advice and, as a licensed agent, also earns a 5% commission when the client buys an annuity the adviser recommends. When must the commission be disclosed?

• a.Not at all, since the annuity prospectus already shows the insurer's commission
• b.In writing, before advice is rendered, as a conflict tied to the advisory relationship✓
• c.Only on the confirmation sent to the client after the annuity purchase is completed
• d.Not at all, since the insurer pays the commission and the client does not bear it

Rule 102(a)(4)-1(k) makes it unethical not to disclose in writing, before advice is given, a material conflict, naming compensation received in addition to the client's fee and charging an advisory fee while also earning commissions on transactions made on that advice. A commission paid by the insurer is exactly such outside compensation. A prospectus is not a substitute for disclosure by the adviser, and a disclosure after the sale comes too late to inform the decision.NASAA Model Rule 102(a)(4)-1(k)(1), (k)(2)

A fund sponsor offers an adviser an all-expense-paid trip if clients place a set amount in its funds. Must the adviser's brochure address this?

• a.Yes, but only if the value of the trip is over $1,000 per representative
• b.No, because the benefit goes to the firm, not to the individual representative
• c.Yes, describing the arrangement, the conflict and how it is addressed✓
• d.No, because a trip is a non-cash award that falls outside this item

Item 14.A applies where someone who is not a client provides an economic benefit for providing advice to clients, and states that economic benefits include sales awards or other prizes. The adviser must describe the arrangement, explain the conflicts and say how it addresses them. The item has no dollar floor, and the non-cash nature or the recipient's identity within the firm does not take it out of the item.Form ADV Part 2A, Item 14.A

A mutual fund has no front-end or deferred sales charge but deducts a 0.35% annual 12b-1 fee from net assets. A firm's brochure calls it a no-load fund. Is that permitted?

• a.Yes, because the 12b-1 fee stays well below the 0.75% annual cap on asset-based sales charges
• b.No, because sales-related charges and service fees above 0.25% bar the no-load description✓
• c.Yes, because the fund imposes no front-end sales charge and no deferred sales charge
• d.No, because any 12b-1 fee at all bars the no-load description, however small the fee is

Rule 2341(d)(4) forbids describing a fund as no load if it has a front-end or deferred sales charge or if its total annual charges against net assets for sales-related expenses and service fees exceed 0.25%. At 0.35% this fund is over the limit. Having no front or back-end charge is not enough on its own. The 0.75% figure caps asset-based sales charges generally and is not the test for the label. A fee of up to 0.25% does not bar the term.FINRA Rule 2341(d)(4)

A customer invests $300 each month in a mutual fund under a written periodic plan, and the firm gave her advance written notice that it will use alternative reporting in place of confirmations. When must the statement of the plan's transactions be sent?

• a.Within five business days after the end of each quarter✓
• b.Within five business days after the end of each year
• c.Within thirty days after the end of each quarterly period
• d.Within five business days after each monthly purchase is made

Rule 10b-10(b) allows periodic-plan and investment company plan purchases to be reported in place of confirmations if the customer is given prior written notice. For investment company plans the statement is due within five business days after each quarter, and it lists each purchase and dividend credited, the shares held and any remuneration received. Monthly statements apply to other transactions, such as money market fund activity. Thirty days and an annual schedule do not appear in the rule.SEC Rule 10b-10(b)

An adviser pays $2,000 a month for an analytics terminal that is about 60% research and 40% billing and client reporting. How much may be paid with client commissions under the Section 28(e) safe harbor?

• a.$2,000, since the terminal is mainly for research
• b.$1,200 paid from commissions, and $800 paid by the adviser✓
• c.$800, which is the eligible research share of it
• d.$0, since mixed use falls outside the safe harbor

SEC guidance on Section 28(e) says mixed-use items must be reasonably allocated between eligible and ineligible uses, and the adviser must keep records of the allocation. The research share, 60% of $2,000 or $1,200, can be paid with commissions, and the administrative 40%, $800, must come from the adviser's own money. Majority use does not make the whole product eligible, and a mixed-use item is not disqualified outright. $800 is the ineligible share, not the eligible one.Exchange Act Section 28(e); SEC Release 34-54165

An adviser pays a broker 6 cents a share, against 2 cents elsewhere, because the broker supplies useful research. When does Section 28(e) protect this from a breach-of-duty claim?

• a.Only when every client whose trades paid the commission is also the client who benefits from it
• b.Never, because paying above the lowest available commission is always a breach of the fiduciary duty
• c.When it determines in good faith the commission is reasonable relative to the value received✓
• d.Whenever any research is received at all, since no separate judgment about its value is needed

Section 28(e)(1) provides that an adviser does not breach a fiduciary duty solely because it paid more than the lowest commission if it determined in good faith that the amount was reasonable in relation to the value of the brokerage and research services provided. The determination is the condition, and the adviser must be able to support it. The safe harbor does not require that research serve only the accounts that generated the commissions, although Form ADV Item 12 requires the adviser to disclose how it allocates the benefits and whether it pays up.Exchange Act Section 28(e)(1)

A member firm agrees to pay an unregistered consultant 20% of the commissions generated by every U.S. customer the consultant introduces and helps open accounts. Is that arrangement permitted?

• a.No, since the payments could make the consultant one who must register as a broker-dealer✓
• b.Yes, if the commission share stays under 5% of the value of each customer's trade
• c.Yes, since the consultant never holds customer funds or securities for the firm at all
• d.Yes, provided the firm's customers are told of the fee in writing before they open accounts

Rule 2040(a) bars a member from paying commissions or other compensation to a person who is not registered as a broker-dealer but who, by reason of the payments and related activities, is required to be. Soliciting U.S. customers for a percentage of the commissions is transaction-based activity of that kind. Not holding funds does not avoid registration, and disclosure to customers does not make the payment lawful. The narrow finder exception is for nonregistered foreign finders with foreign customers and specific conditions, and none applies here.FINRA Rule 2040(a)

An adviser wants to pay a former colleague for referring clients. Six years ago she was convicted of a felony. Does the model advertising rule allow the adviser to pay her?

• a.Yes, because only convictions for offenses involving securities or fraud can disqualify a person
• b.No, because the felony falls within the ten-year look-back and makes her an ineligible person✓
• c.Yes, once the adviser lists the conviction in the written disclosure it gives each client
• d.No, but only if the SEC also barred her, since a state conviction alone does not count

Under Rule 102(a)(4)-1(m)(2)(iv), an adviser may not compensate a person for a testimonial or endorsement if it knows, or in the exercise of reasonable care should know, that the person is ineligible when it is disseminated. A disqualifying event includes a conviction of any felony within the preceding ten years, and six years ago is inside that window. The felony need not involve securities. Disclosure does not cure an ineligible promoter, and the rule is not limited to SEC orders.NASAA Model Rule 102(a)(4)-1(m)(2)(iv), (m)(5)(iv)

A state-registered adviser's brochure states that its published performance figures "have been reviewed and approved by the State Securities Division." Under the model rule, is the statement allowed?

• a.No, but only if the published figures are shown gross of fees without a net figure
• b.No, since an advertisement may not state or imply that the Administrator reviewed performance✓
• c.Yes, if the statement is printed in the same type size as the figures it describes
• d.Yes, if the Division did in fact receive a copy of the figures before they were published

Rule 102(a)(4)-1(m)(4)(iii) prohibits any statement, express or implied, that the calculation or presentation of performance results has been approved or reviewed by the Administrator. Sending the Division a copy does not change that, and the font size of the statement is beside the point. The prohibition does not depend on whether the figures are gross or net.NASAA Model Rule 102(a)(4)-1(m)(4)(iii)

An adviser's website says it was named a top regional adviser in a magazine's ranking. It paid the magazine a fee to license the badge. What must accompany the rating?

• a.Nothing, since a ranking by an independent magazine needs no disclosure from the adviser at all
• b.The date and period, who created it, and that the adviser paid for obtaining or using it✓
• c.Only the name of the magazine, which is enough to identify the source to anyone reading it
• d.The adviser's own net-of-fee performance, shown for the same period that the rating covers

Rule 102(a)(4)-1(m)(3) allows a third-party rating in an advertisement only if the adviser has a reasonable basis to believe the survey was not built to produce a predetermined result, and clearly discloses the date and period the rating covers, the identity of the party that created and tabulated it, and, if applicable, that compensation was paid directly or indirectly in connection with obtaining or using it. The magazine's name alone leaves out the date, period and payment. Net performance is a separate requirement for performance presentations, not a rating condition.NASAA Model Rule 102(a)(4)-1(m)(3)

A current client posts an unpaid, positive review of her adviser, and the adviser features it in an advertisement. Which disclosure still applies?

• a.A statement that the review reflects the average result achieved across all of the adviser's clients
• b.That the client was paid, together with a written agreement describing the payment that was made
• c.None, because an unpaid review sits outside the advertising rule since nothing was paid
• d.That it was given by a current client; no compensation terms or written agreement are needed✓

A testimonial is a statement by a current client, and Rule 102(a)(4)-1(m)(2)(i)(A) requires clear and prominent disclosure that it was given by a current client. Where no compensation was provided, the compensation disclosure and written-agreement conditions do not apply. The feature is still an advertisement, so it is not outside the rule. A statement about average client results is not part of the testimonial conditions.NASAA Model Rule 102(a)(4)-1(m)(2)(i)(A), (m)(2)(v)

A broker-dealer agent in a state that has adopted the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation reviews four client files. Which client is an "eligible adult" under the Act's definition?

• a.A 62-year-old client who has named a trusted contact on the account
• b.A 59-year-old client who recently signed a power of attorney
• c.A 55-year-old client who retired from full-time work early
• d.A 66-year-old client who shows no sign of diminished capacity✓

The Act defines an eligible adult as a person 65 or older, or a person subject to the state's adult protective services statute. Age alone qualifies the 66-year-old, with no showing of impairment. Naming a trusted contact, signing a power of attorney, or retiring early says nothing about age or adult protective services coverage, so none of the younger clients qualifies on that basis.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §2(3)

An investment adviser representative reasonably believes that a 71-year-old client's nephew, who holds a power of attorney, is draining the client's account through unexplained transfers. Under Section 3 of the NASAA Model Act, what must the representative do?

• a.Promptly notify both Adult Protective Services and the state securities commissioner✓
• b.Wait for the client's written complaint, then notify the commissioner of securities only
• c.Notify only the firm's compliance staff, who then decide whether any agency hears of it
• d.Notify law enforcement and the SEC, since state agencies play no role under the Act

Section 3 requires a qualified individual who reasonably believes exploitation may have occurred, been attempted, or is being attempted to promptly notify Adult Protective Services and the commissioner of securities. Keeping the matter inside compliance, waiting for a client complaint, or going to law enforcement and the SEC instead omits the two agencies the Act names, and the duty does not depend on a complaint or on proof.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §3

A qualified individual under the NASAA Model Act suspects that a client is the victim of financial exploitation. According to the Act's commentary, what must be true before the Section 3 duty to notify the Agencies arises?

• a.The individual holds the belief, and it is objectively reasonable✓
• b.The individual can show by a preponderance that the taking was unauthorized
• c.The individual's honest suspicion alone, however thin the facts behind it
• d.A court or Adult Protective Services has already found that exploitation occurred

The commentary describes reasonable belief as both subjective and objective: the person must actually believe exploitation may have occurred, and that belief must be reasonable. A prior finding or a preponderance showing sets the bar far higher than the Act does, while a purely subjective hunch ignores the objective half of the test and would invite unsubstantiated reports.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §3 and commentary

At an investment adviser that serves eligible adults, which of the following people is a "qualified individual" under the NASAA Model Act?

• a.The outside accountant who audits the firm's financial statements
• b.A client's adult child who holds a power of attorney over the account
• c.The firm's chief compliance officer, who never meets clients✓
• d.A bank teller who refers depositors to the firm's advisers

A qualified individual is an agent, an investment adviser representative, or a person serving in a supervisory, compliance, or legal capacity for the broker-dealer or adviser, so the compliance officer counts even without client contact. An attorney-in-fact for a client, an outside auditor, and a referring bank employee are not in any of those roles at the firm.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §2(7)

A broker-dealer agent files a Section 3 report about a client's suspected exploitation, acting in good faith and with reasonable care. The client later threatens to sue over the report. What protection does Section 4 give the agent?

• a.Immunity from administrative, civil and criminal liability arising from the report
• b.Immunity only if Adult Protective Services later substantiates the exploitation
• c.Immunity from civil suits, but not from administrative action by the commissioner
• d.Immunity from administrative or civil liability for the report itself✓

Section 4 immunizes a qualified individual who reports in good faith and with reasonable care from administrative or civil liability, including liability for failing to notify the customer of the report. It gives no protection against criminal liability, does not wait on a later finding by Adult Protective Services, and covers administrative as well as civil exposure.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §4