NASAA Series 63 — All Questions

An agent sells a customer $40,000 of notes issued by a friend's start-up, taking the customer's check directly. The transaction never appears on the broker-dealer's books, and the firm was not told. How does the NASAA policy classify the agent's conduct?

• a.Acceptable, because privately issued notes are not listed on an exchange and the customer paid the issuer
• b.Acceptable, if the agent discloses the sale to the firm on the next quarterly compliance questionnaire
• c.A transaction off the firm's regular books, effected without the firm's prior written authorization✓
• d.Acceptable, if the customer signs a statement that the firm took no part in recommending the notes

The policy lists effecting securities transactions not recorded on the regular books or records of the firm the agent represents as unethical, unless the firm authorized them in writing before execution. Exchange listing, the customer's disclaimer and after-the-fact reporting do not substitute for that authorization.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §2.b

An agent obtains his supervisor's oral approval and then executes a transaction that is not on the firm's books. The firm's written approval arrives a week later. How does the NASAA policy treat the transaction?

• a.It is unethical, because the firm's authorization had to be in writing before the transaction was executed✓
• b.It is acceptable, because a supervisor's oral approval binds the firm and the writing only confirms it
• c.It is unethical, because off-book transactions are barred even when the firm approves them in writing
• d.It is acceptable, because the written approval ratified the trade within a week of its execution

Off-book transactions are excepted only when the broker-dealer authorizes them in writing prior to execution. A supervisor's oral approval and a written approval after execution both fail that timing and form requirement. The exception does exist, so the transaction is not barred even with the firm's written approval.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §2.b

A day trader places visible limit sell orders at several price levels just above the best offer in a thinly traded stock, with no intention of letting them execute. After other participants lower their offers, he buys, then cancels the sell orders within seconds. The SEC has described this pattern as:

• a.Front running a customer's order
• b.Spoofing and layering of sell orders✓
• c.Marking the close with late purchases
• d.Painting the tape with matched trades

The SEC charged this conduct as a spoofing and layering scheme: non-bona fide visible orders meant to create a false appearance of interest, trading on the other side at the induced price, and canceling the orders before execution. Painting the tape and marking the close are other manipulative practices, and front running is trading ahead of a customer's order.SEC Release Nos. 33-10989 and 34-93131 (Sept. 27, 2021), In the Matter of Xuepeng Xie, Admin. Proc. File No. 3-20599

What distinguishes spoofing from an ordinary cancellation of a limit order?

• a.The order was entered with no intention of letting it execute against any counterparty✓
• b.The order was routed to a different broker-dealer than the one used for the later trade
• c.The order was visible to the other participants through the displayed quotation, not hidden
• d.The order was canceled before it executed, whatever the trader's reason for canceling it

Spoofing turns on non-bona fide orders, entered to create a false appearance of interest and then canceled before execution. A trader with a genuine order may cancel it for any reason, and displayed orders are visible by design. Routing through a different broker-dealer is not an element of the practice.SEC Release 33-10989 (In re Xuepeng Xie)

Two accounts controlled by the same trader are used so that one sells 5,000 shares of a thinly traded stock at $12.00 while the other buys 5,000 shares at $12.00, with no change in beneficial ownership. The aim is to make the stock look active. How is this treated?

• a.Prohibited only when a third party actually buys shares in reliance on the volume the trades show
• b.Acceptable, since the trader bore the commission on both sides, so the trades were bona fide executions
• c.Prohibited manipulation, because a trade without any change in beneficial ownership creates false activity✓
• d.Acceptable, since both accounts are carried at one broker-dealer and each order is entered at the prevailing price

The NASAA policy lists effecting a transaction that involves no change in beneficial ownership as a manipulative device, and Exchange Act Section 9(a)(1) reaches wash sales used to create a false appearance of active trading. Using one broker-dealer, paying commissions, or the prevailing price does not make the trade legitimate, and the prohibition does not wait for a third party to be misled.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §1.p(1)

A broker-dealer receives a customer's order to buy 1,000 shares and another customer's order to sell 1,000 shares of the same stock at the same price, and crosses them as agent for both. Under the NASAA policy on matched orders, this is:

• a.Prohibited unless both customers approve the cross in writing before it is executed
• b.Permitted only if the firm takes the other side of each order for its own account
• c.Prohibited, because the two orders match in size, time and price and the firm knew of both
• d.Not prohibited, because bona fide agency crosses for customers are excepted✓

The matched-order provision bars entering orders known to match in size, time and price for the purpose of creating a false appearance of active trading, and it expressly excepts bona fide agency cross transactions for customers. Matching size, time and price is not enough without that purpose, and the exception has no written-consent condition and does not require the firm to trade as principal.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §1.p(2)

Over three days an investor buys a thinly traded stock in small lots, each at a slightly higher price than the last, so that it looks active and rising. He then posts bullish messages about it and sells his shares. How is this treated?

• a.Acceptable, because the investor held no position in the stock before the buying began
• b.Prohibited only if the investor is an officer, director or large shareholder of the issuer
• c.Acceptable, because every trade was executed and reported at the then-prevailing market price
• d.Prohibited, since a series of trades that raises the price to induce others to buy is manipulative✓

Section 9(a)(2) and the NASAA policy prohibit a series of transactions, alone or with others, that creates actual or apparent active trading or raises the price, for the purpose of inducing others to buy or sell. The trades being real and reported does not cure the purpose, prior ownership is irrelevant, and the prohibition reaches any person.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §1.p(3); 15 U.S.C. 78i(a)(2)

A dealer tells a prospect that an issuer has signed a major contract, a statement the dealer has reasonable ground to know is false, in order to induce a purchase. The prospect does not buy. Under Exchange Act Section 9(a)(4), the dealer's statement is:

• a.Lawful, because the statement concerned an issuer's contract rather than the security's price
• b.Unlawful, since it was a false material statement made to induce a purchase✓
• c.Lawful, because the dealer made the statement orally rather than in a written communication
• d.Lawful, because the prospect did not buy, so no one relied on the statement or suffered a loss

Section 9(a)(4) makes it unlawful for a dealer, broker or other person selling or offering a security to make, for the purpose of inducing a purchase or sale, a statement that was false or misleading as to a material fact and that the person knew or had reasonable ground to believe was so. The provision turns on the false statement and its purpose, not on a completed sale, reliance, the form of the statement, or whether it concerns price.15 U.S.C. 78i(a)(4)

Exchange Act Section 9(a)(6) prohibits which of the following?

• a.Any purchase by a member of the underwriting syndicate while a distribution is in progress
• b.Offering a security at the market when the only market is one the dealer itself controls
• c.Publishing a quotation for a security that is not a bona fide bid or offer by the dealer
• d.Transactions to peg, fix or stabilize a security's price contrary to the SEC's rules✓

Section 9(a)(6) bars a series of transactions for the purpose of pegging, fixing or stabilizing a price in contravention of SEC rules, so stabilization that complies with the rules is not barred. Representing an offering as at the market when only a dealer-controlled market exists, and publishing quotations that are not bona fide, are separate provisions of the NASAA policy. A blanket ban on syndicate purchases is not what the section says.15 U.S.C. 78i(a)(6)

A buyer learns on November 18, 2026 that the price he paid was affected by a manipulative series of trades effected on March 4, 2024. Section 9(f) of the Exchange Act requires suit within one year after discovery and within three years after the violation. What is the last date to sue?

• a.March 4, 2027✓
• b.March 4, 2029
• c.November 18, 2027
• d.November 18, 2029

Both limits apply, so the earlier controls. One year after discovery is November 18, 2027, and three years after the violation is March 4, 2027, which comes first. March 4, 2029 uses five years after the violation, and November 18, 2029 uses three years after discovery.15 U.S.C. 78i(f)

What does Section 204A of the Investment Advisers Act require of an investment adviser?

• a.Written policies limited to trades in the adviser's own proprietary accounts, not trades by its personnel
• b.Written policies to prevent the adviser and its associated persons from misusing material nonpublic information✓
• c.A prohibition on every supervised person owning any security the adviser recommends to its clients
• d.Written policies on personal trading that the adviser files with the SEC for approval before using them

Section 204A requires every adviser to establish, maintain and enforce written policies and procedures reasonably designed, considering the nature of its business, to prevent the misuse of material nonpublic information by the adviser or any person associated with it. It does not ban personal trading, require SEC approval of the policies, or limit them to the adviser's own accounts.15 U.S.C. 80b-4a (Advisers Act Section 204A)

An access person of an adviser executed trades during the quarter ending September 30. Under Rule 204A-1, by what date must the quarterly transaction report be submitted?

• a.December 29, 90 days after quarter-end
• b.October 30, 30 days after quarter-end✓
• c.November 14, 45 days after quarter-end
• d.October 10, 10 days after quarter-end

Rule 204A-1(b)(2)(ii) requires each access person to submit a transaction report no later than 30 days after the end of each calendar quarter, covering all transactions in the quarter, so September 30 plus 30 days is October 30. The 10-day and 45-day figures come from the holdings-report timing (due 10 days after becoming an access person, with data current within 45 days), and a 90-day deadline does not appear in the rule.17 CFR 275.204A-1(b)(2)(ii)

Which arrangement is a wrap fee program under the Advisers Act brochure rule?

• a.A program charging a percentage of assets for advice, with each trade billed separately by ticket
• b.A brokerage account charging a commission on each trade with no separate fee for advice
• c.A program charging a fee only if account returns exceed a stated benchmark over the year
• d.A program charging one specified fee, not based on transactions, for advice and execution✓

A wrap fee program charges a specified fee or fees not based directly on transactions in the client's account for investment advisory services and the execution of client transactions, so the one fee covers both. Billing trades separately, charging only for outperformance, or charging commissions with no advisory service describes other fee structures.17 CFR 275.204-3(g)(5)

Two advisers sponsor the same wrap fee program, and sponsor B already delivers to clients a wrap fee program brochure containing everything Part 2A, Appendix 1 of Form ADV requires. What must sponsor A deliver to those clients under the brochure rule?

• a.Its own wrap fee program brochure, because each sponsor must deliver one to the clients it advises
• b.A Part 2B brochure supplement alone, which takes the place of the wrap fee program brochure
• c.No wrap fee program brochure, since another sponsor already delivers one with Appendix 1 information✓
• d.Its ordinary Part 2A brochure, with a section added that describes the wrap fee arrangement

A sponsor need not deliver a wrap fee program brochure if another sponsor of the program delivers one containing all the information in Part 2A, Appendix 1. The rule's note says a wrap fee brochure does not take the place of any required brochure supplements, and a supplement cannot stand in for the wrap brochure either.17 CFR 275.204-3(d)(2)

An adviser tells a client that a recommendation was prepared by an independent research boutique, which is true. Another adviser, who consults a widely published research report while forming his own advice, says nothing about it. Which statement reflects the NASAA model rule?

• a.The rule requires disclosure when a report is prepared by someone else and handed over as part of the service, but not when the adviser merely uses published research to form advice.✓
• b.Both advisers violate the rule, because every use of outside research must be disclosed in writing.
• c.Neither adviser violates the rule, because outside work is never a disclosure issue for advisers.
• d.Only the second adviser violates the rule, because published reports cannot be used for client advice at all.

Model Rule 102(a)(4)-1(i) makes it unethical to provide a client a report or recommendation prepared by someone other than the adviser without disclosing that fact. It carves out an adviser who uses published research reports or statistical analyses to render advice, or who orders a report in the normal course of providing service. Using published research silently is therefore allowed.NASAA Model Rule 102(a)(4)-1(i)

To execute orders that her firm would otherwise block, an agent opens an account in a fictitious name for a friend. What is the consequence under the NASAA model rule?

• a.It is permitted if the friend is the true beneficial owner of the assets and provides all of the funds used to trade in the account, since nothing is hidden.
• b.It is a violation only if the account actually trades in low-priced securities, because the rule is aimed at penny-stock manipulation by agents.
• c.It is a violation only if the agent receives a commission on the trades.
• d.Establishing or maintaining an account containing fictitious information to execute otherwise prohibited transactions is a ground for discipline.✓

Section 2.c identifies establishing or maintaining an account containing fictitious information in order to execute transactions that would otherwise be prohibited as a practice contrary to high standards of commercial honor. Beneficial ownership, the type of security and whether a commission was earned are not part of the test.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended April 7, 2025), Section 2.c

An adviser's assistant signs in to a client's online brokerage account with the client's own username and password to look at holdings before a review meeting. No trade is placed. Under the model rule, how is this conduct treated?

• a.It is allowed for advisers holding discretionary authority over the account, but not for others
• b.It is an unethical business practice, because accessing a client's account with the client's own unique identifying information is listed✓
• c.It is allowed, because the client handed over the credentials willingly and nothing was traded
• d.It is allowed if the assistant records each login in the adviser's books and records

The rule lists accessing a client's account by using the client's own unique identifying information, such as a username and password, as an unethical practice. The client's willingness to share the credentials does not cure it, and viewing without trading is still access. Discretionary authority and logging do not change the result; the only carve-out is the narrow data aggregation arrangement described in the rule.NASAA Model Rule 102(a)(4)-1(v)

An adviser uses data aggregation software that displays clients' outside accounts in one view. Which condition must be true for the software to fall outside the prohibition on using a client's own login credentials?

• a.The adviser has filed a notice with the Administrator
• b.The software company has an agreement with the custodian that permits the access, and the adviser can only view the data✓
• c.The software can place trades for the client whenever the client has signed a written trading authorization with the adviser
• d.The adviser keeps each client's password in encrypted form so that it can reconnect to the account after any outage, with no manual login

The footnote carves out data aggregation only where the adviser neither knows nor has access to the client's passwords, the aggregator and the custodian have an agreement permitting the back-door access, and the data is read-only. Storing the passwords, even encrypted, gives the adviser access, and trade capability defeats the read-only condition. No notice filing is part of the carve-out.NASAA Model Rule 102(a)(4)-1(v) and footnote

An adviser's advertisement shows the results of only the three best-performing holdings taken out of a client's portfolio. What does the model rule require for this presentation?

• a.The client who owns the portfolio must consent in writing
• b.The advertisement must also show a broad market index over the same period
• c.The Administrator must approve the extracted figures in writing at least ten days before the advertisement is first used by the adviser in any mailing
• d.The advertisement must provide, or offer to provide promptly, the performance of the total portfolio from which the holdings were taken✓

Extracted performance is the result of a subset of investments taken from a portfolio. The rule bars it unless the total portfolio's results accompany it or are offered promptly, so the reader can see what the highlighted subset left out. A benchmark, client consent or regulatory approval is not the requirement, and the rule also forbids any statement that the Administrator reviewed performance.NASAA Model Rule 102(a)(4)-1(m)(4)(v)

An adviser plans to publish projected returns for a model portfolio in a mailing to retail prospects. Which step is required before the figures can be used?

• a.Showing the projections only for periods in which markets rose, with a note that downturns are excluded
• b.Submitting the projections to the Administrator at least ten days before the mailing
• c.Adopting policies reasonably designed to ensure the figures are relevant to the likely financial situation and objectives of the intended audience✓
• d.Restricting the mailing to prospects who have signed a discretionary agreement

Hypothetical performance includes model portfolio results, backtested results and targeted or projected returns. The adviser must adopt and implement policies to make it relevant to the audience, explain the criteria and assumptions used, and explain the risks and limitations of relying on it. Pre-filing and discretionary agreements are not conditions, and showing only rising markets would make the presentation unfair and unbalanced.NASAA Model Rule 102(a)(4)-1(m)(4)(vi)

Which presentation in an adviser's advertisement is hypothetical performance under the model rule?

• a.The net results of one real client account over the last five years, after deduction of all advisory fees paid
• b.Results from a predecessor firm's accounts that are shown in compliance with the predecessor performance conditions
• c.Results produced by applying a strategy to past data from periods when the strategy was not actually in use✓
• d.The combined results of all client accounts that were actually managed in the strategy, shown as one composite

Hypothetical performance means results no portfolio of the adviser actually achieved, and the rule lists model portfolios, backtested results and targeted or projected returns. A composite of real accounts and a real account's net results were actually achieved. Predecessor performance shown in compliance with its own conditions is expressly excluded from the hypothetical category.NASAA Model Rule 102(a)(4)-1(m)(5)(ix)-(x)

An adviser's website lets visitors run simulations showing the likelihood of various investment outcomes under different strategies. To avoid treating the tool's output as hypothetical performance, which disclosure is required?

• a.That the outputs have been tested against the adviser's actual client accounts for at least five years
• b.That results may vary with each use and over time, plus a description of the tool's criteria, methodology, limitations and key assumptions✓
• c.That the tool's results are guaranteed to fall within the range displayed
• d.That each visitor must be an accredited investor before running a simulation

An interactive analysis tool is outside the hypothetical performance definition if the adviser describes the criteria, methodology, limitations and key assumptions, explains that results may vary with each use and over time, describes the investment universe and any favoured investments, and discloses that outcomes are hypothetical. Guaranteeing a range would itself be misleading, and neither backtesting against client accounts nor investor status is required.NASAA Model Rule 102(a)(4)-1(m)(5)(x)(A)

An adviser hires a portfolio manager from another firm and wants to advertise the manager's results at the prior firm. Which condition applies to this predecessor performance?

• a.The manager must have left the prior firm at least a year before joining the advertising adviser as an employee
• b.The people primarily responsible for the earlier results must now manage accounts at the advertising adviser✓
• c.The former employer must give written consent to the advertisement before the new adviser may publish the figures
• d.The results must be shown only as gross performance with no fee deduction, to keep them comparable to the prior firm

Predecessor performance may be advertised only if the people primarily responsible for the results manage accounts at the advertising adviser, the earlier accounts are sufficiently similar to the new ones, all substantially similar accounts are included unless leaving some out neither raises results materially nor changes the required time periods, and the advertisement clearly says the results came from another entity. A former employer's consent and a waiting period are not part of the rule, and gross-only figures would violate the net performance requirement.NASAA Model Rule 102(a)(4)-1(m)(4)(vii)

An adviser advertises a composite of its growth strategy accounts but leaves out two accounts that did poorly. When may related performance leave out related portfolios?

• a.Whenever the omitted clients were told in writing
• b.Whenever the omitted accounts have been open for under three years
• c.Only if the advertised results are not materially higher than with all included and the required time periods are not altered✓
• d.Whenever the omitted accounts are footnoted in the advertisement and make up less than ten percent of the strategy's assets under management

Related performance must include all related portfolios, meaning those with substantially similar policies, objectives and strategies. Exclusion is allowed only if the results are not materially higher than if all were included and the exclusion does not change the one-, five- and ten-year presentation. A footnote, an asset-size cutoff or notice to clients does not satisfy that test.NASAA Model Rule 102(a)(4)-1(m)(4)(iv)

An adviser calculates net performance for an advertisement. Which cost may the adviser leave out when calculating net performance under the model rule?

• a.Fees paid to the underlying investment vehicles held in the account, such as fund expense ratios
• b.Advisory fees the adviser charged the account for managing the portfolio over the whole period shown
• c.Fees paid to a bank or other third party for safekeeping funds and securities (custodian fees)✓
• d.Payments the client reimbursed to the adviser for expenses that the adviser paid on the client's behalf

Net performance is the result after deducting all fees and expenses the client paid or would pay for the adviser's services, including advisory fees, fees of underlying investment vehicles and reimbursements to the adviser. The one stated permission is that net performance may exclude custodian fees paid for safekeeping, because those are not charges for the adviser's services.NASAA Model Rule 102(a)(4)-1(m)(5)(xii)(A)

An advertisement uses a model fee to calculate net performance. Which model fee satisfies the model rule?

• a.A fee equal to the highest fee charged to the intended audience, or one that gives performance no higher than the actual fee would✓
• b.A fee equal to the lowest published fee
• c.A fee equal to the average fee paid by all clients
• d.A fee chosen by the adviser as long as the method used to choose it is disclosed in a footnote placed next to the performance table in the advertisement

When a model fee is used, it must either produce figures no higher than deducting the actual fee, or equal the highest fee charged to the audience that will receive the advertisement. An average or lowest fee could overstate net returns for some readers, and disclosure in a footnote does not make an arbitrary fee acceptable.NASAA Model Rule 102(a)(4)-1(m)(5)(xii)(B)

An adviser advertises a portfolio that started three years ago. Which performance periods must appear, with equal prominence, ending no earlier than the most recent calendar year-end?

• a.Whichever periods the adviser chooses to show, as long as the advertisement notes that the portfolio is new
• b.Only the three-year life of the portfolio, since a portfolio this young is too new to show the standard periods
• c.The one-year and three-year periods, with a projection filling the ten-year period so the table looks complete
• d.The one-year period, with the life of the portfolio shown in place of the five- and ten-year periods✓

For portfolios other than private funds, the rule requires one-, five- and ten-year results with equal prominence, ending no earlier than the latest calendar year-end. If the portfolio did not exist for a prescribed period, the life of the portfolio is substituted for that period. A projection would be hypothetical and a free choice of periods would not be fair and balanced.NASAA Model Rule 102(a)(4)-1(m)(4)(ii)

An adviser's brochure says that clients using its tax-aware strategy 'saved an average of $4,000 a year in taxes.' Which model rule requirement does the statement raise?

• a.The statement must be pre-approved by the Administrator because it concerns money saved
• b.The statement may be used only if each client named in the substantiation has consented in writing
• c.The statement is allowed without support if the brochure says the figures are an estimate
• d.The adviser must have a reasonable basis for believing it can substantiate the material statement of fact on demand by the Administrator✓

An advertisement may not include a material statement of fact that the adviser lacks a reasonable basis to believe it can substantiate if the Administrator asks. Labelling the number an estimate does not remove the duty, and the rule does not require pre-approval or client consent as a substitute for having a basis.NASAA Model Rule 102(a)(4)-1(m)(1)(ii)

An adviser's flyer describes the income and growth a client might receive from its strategy but says nothing about the strategy's risks or limits. What is the problem under the model advertising rule?

• a.Potential benefits may not be discussed without fair and balanced treatment of the material risks and limitations tied to those benefits✓
• b.The flyer is a violation only if a client actually loses money
• c.The flyer needed a client's signed acknowledgment before it could be mailed
• d.The flyer should have named each security the strategy might hold

An advertisement may not discuss potential benefits of the adviser's services or methods without also giving fair and balanced treatment to the material risks or limitations of those benefits. The violation is in the communication itself; it does not depend on a client loss, and no list of holdings or client acknowledgment is required.NASAA Model Rule 102(a)(4)-1(m)(1)(iv)

At a public seminar, an adviser answers questions from the audience live, and none of it is recorded or scripted. Is this an advertisement under the model rule's definition?

• a.No, but only if the seminar is free of charge and the adviser sells nothing to attendees there
• b.Yes, because the adviser is speaking to more than one person about advisory services at the seminar
• c.Yes, unless every member of the audience is already a client of the adviser at the time of the talk
• d.No, because extemporaneous, live, oral communications are excluded from the definition✓

The definition of advertisement covers communications to more than one person that offer advisory services, but it expressly excludes extemporaneous, live, oral communications. A recording or script would be treated differently, and whether the seminar is free or the audience are clients does not change the exclusion.NASAA Model Rule 102(a)(4)-1(m)(5)(i)(A)

A prospect emails an adviser, unprompted, and asks what a model portfolio would have returned. The adviser replies only to that prospect with the projection. Is the reply an advertisement under the model rule?

• a.Yes, because any communication that contains hypothetical performance is always treated as an advertisement, even if sent in reply to a request
• b.No, but only if the prospect is an institutional investor
• c.No, because a communication with hypothetical performance given in response to an unsolicited request is excluded✓
• d.Yes, because the reply promotes the adviser's services to a prospective client who may become a paying customer, whether or not the prospect asked

Communications to a single person are normally outside the definition, but hypothetical performance brings even a one-person communication in. The rule then excludes hypothetical performance provided in response to an unsolicited request from a prospective or current client. The prospect's institutional status is not a condition.NASAA Model Rule 102(a)(4)-1(m)(5)(i)(C)

An adviser mails one prospect, who never asked for anything, a letter offering its services that includes backtested returns for a strategy. Is the letter an advertisement under the model rule?

• a.No, because the letter went to a single person and the definition requires more than one recipient
• b.Yes, because a communication to even one person is an advertisement when it includes hypothetical performance and offers advisory services✓
• c.No, because backtested returns are research and not performance
• d.Yes, but only if the letter is also posted on the adviser's website

An advertisement is ordinarily a communication to more than one person, but the definition reaches one or more persons when the communication includes hypothetical performance and offers advisory services to a prospect. Backtested returns are hypothetical performance, and the exclusion for unsolicited requests does not help because the prospect asked for nothing.NASAA Model Rule 102(a)(4)-1(m)(5)(i)

An adviser's own employee appears in a company video recommending the firm to the public. Which requirement still applies to this testimonial or endorsement?

• a.The employee must disclose that cash or non-cash compensation was provided by the adviser for appearing in the video statement about the firm
• b.The employee's affiliation must be readily apparent or disclosed at the time, and the adviser must document the person's status✓
• c.The employee must state that he or she is a current client
• d.A signed statement of no disciplinary history

The rule excuses partners, officers, directors, employees and controlling or controlled persons from the standard client and compensation disclosures, provided the affiliation is readily apparent or disclosed when the statement is disseminated and the adviser documents the person's status. An employee is not a client, so a current-client statement would be wrong in any case.NASAA Model Rule 102(a)(4)-1(m)(2)(vi)

A man who has never been the adviser's client posts a glowing review of the adviser online. The adviser gives him a small gift card for it. How does the model rule classify the review?

• a.Neither one, because a review of the adviser's services is not a statement about the adviser
• b.A third-party rating, because it was posted by a person independent of the adviser's business
• c.An endorsement, because the statement comes from a person other than a current client✓
• d.A testimonial, because the adviser paid for it and the statement praises the adviser's services

A testimonial is a statement by a current client; an endorsement is a statement by anyone else that approves of, recommends or describes experience with the adviser or refers clients to it. A third-party rating is a rating or ranking by an unrelated person in the ordinary course of business, not an individual's compensated review. Payment does not change the category.NASAA Model Rule 102(a)(4)-1(m)(5)(vi) and (xix)

An adviser wants to cite a third-party rating in its advertisement. Besides the required disclosures, what must the adviser have a reasonable basis to believe about the questionnaire or survey behind the rating?

• a.That it is structured to make favorable and unfavorable responses equally easy and is not designed to produce a predetermined result✓
• b.That the survey covered at least five years of performance
• c.That at least half of the participants surveyed were current clients of the advisers that were rated in that year's survey, as published
• d.That the survey was run by a regulator or an exchange

Before using a third-party rating, the adviser must reasonably believe that the questionnaire or survey is structured so favorable and unfavorable responses are equally easy to give and is not designed to produce a predetermined result. The rating must also disclose its date and period, who created it and any compensation. Nothing requires a regulator to run the survey or a particular number of years.NASAA Model Rule 102(a)(4)-1(m)(3)(i)

A person who gives an endorsement for an adviser is subject to a regulator's order that is not a disqualifying action, and the person is fully complying with the order's terms. What must the advertisement containing the endorsement include?

• a.A statement that the person is permanently barred
• b.The person's full disciplinary history back to the date the person first registered, whether or not the matter is still in effect
• c.Nothing, because compliance removes every disclosure duty
• d.For ten years after the order, a statement that the person is subject to a disciplinary order, with the order or a link to it✓

A matter that would otherwise be a disqualifying event does not make the person ineligible if the person complies with the order's terms, but the advertisement must then, for ten years after the order, state that the person is subject to an order about disciplinary action and include the order or a link to the regulator's website. A lifetime bar statement would be inaccurate, and a full history is not required.NASAA Model Rule 102(a)(4)-1(m)(5)(v)

A small state-registered adviser is exempt from federal registration. It proposes a contract with a fee arrangement that Section 205 of the Investment Advisers Act would prohibit. Under the model rule, does Section 205 reach the contract?

• a.No, because a state may not borrow a federal provision
• b.Yes, the rule applies to all advisers registered or required to be registered under the state act, even those exempt from federal registration✓
• c.Yes, but only if the adviser has more than fifteen clients
• d.No, because Section 205 binds only advisers registered with the SEC

The rule bars entering into, extending or renewing an advisory contract contrary to Section 205 of the federal Act and states that the bar applies to all advisers and representatives registered or required to be registered under the state act, regardless of any federal exemption. The fifteen-client figure has no role in this provision.NASAA Model Rule 102(a)(4)-1(r)

An adviser that is neither registered nor required to be registered with the SEC under Section 203 engages in a deceptive course of business. Does the model rule's reference to Section 206(4) of the Advisers Act apply?

• a.Yes, the rule applies whether or not the adviser is registered or required to be registered under Section 203✓
• b.No, because Section 206(4) reaches only advisers that are registered with the SEC under Section 203 of the federal act
• c.No, since deceptive conduct is purely a federal matter
• d.Yes, but only after the SEC has first brought an enforcement action against the adviser for the same course of business

The rule treats fraudulent, deceptive or manipulative conduct contrary to Section 206(4) of the Advisers Act as unethical, notwithstanding that the adviser is not registered or required to be registered under Section 203. A state need not wait for the SEC to act.NASAA Model Rule 102(a)(4)-1(t)

A state-registered adviser tells an unregistered friend to approach investors and sell advisory services, because the adviser itself may not do so under the act. Which model rule provision does this conduct most directly implicate?

• a.The ban on providing a report prepared by someone else without disclosing that fact to the client
• b.The ban on charging an unreasonable advisory fee that is out of line with the services provided
• c.The ban on borrowing money or securities from a client who is not a broker-dealer or an affiliate
• d.The ban on doing indirectly, or through another person, what would be unlawful to do directly✓

The rule lists engaging in conduct or any act, indirectly or through or by any other person, which would be unlawful for that person to do directly under the act. Using an intermediary does not move the conduct outside the rule. The other provisions concern different practices.NASAA Model Rule 102(a)(4)-1(u)

An adviser's compliance manual contains a policy that regulations require the adviser to have, but the adviser never follows or enforces it. How does the model rule treat this?

• a.As acceptable, because a written manual satisfies the rule even if the adviser never follows or enforces the policies in it in practice
• b.As an unethical business practice, because it lists failing to establish, maintain and enforce a required policy or procedure✓
• c.As an issue only for federal covered advisers, not state-registered advisers
• d.As a recordkeeping matter only, with no ethics consequence unless a client sues

The rule's last listed practice is failing to establish, maintain and enforce a required policy or procedure. Having the written manual is not enough if it is not enforced, and no client complaint or lawsuit is needed.NASAA Model Rule 102(a)(4)-1(w)

A broker-dealer's employment agreement forbids employees from telling anyone outside the firm about internal matters, and a manager reminds an employee of it after she mentions a possible securities violation to SEC staff. What does SEC Rule 21F-17 say about this?

• a.No person may impede an individual from communicating directly with SEC staff about a possible violation, including by enforcing or threatening to enforce a confidentiality agreement✓
• b.The agreement controls, because contracts take priority over voluntary reports to the SEC
• c.The agreement may be enforced if the firm first notifies its compliance department
• d.The agreement may be enforced as long as the firm pays the employee for her silence

Rule 21F-17(a) says no person may take any action to impede an individual from communicating directly with Commission staff about a possible securities law violation, including enforcing or threatening to enforce a confidentiality agreement. Payment or internal notification does not cure that, and the narrow exception covers information from legal representation, not ordinary workplace matters.17 CFR 240.21F-17(a)

Under Regulation S-P, what is 'sensitive customer information'?

• a.Any component of customer information whose compromise could create a reasonably likely risk of substantial harm or inconvenience to the individual identified✓
• b.Only account numbers and passwords, and nothing else
• c.Any information the firm has chosen to classify as sensitive in its own policies
• d.Only information a customer has marked confidential in writing

Regulation S-P defines sensitive customer information as any component of customer information, alone or with other information, whose compromise could create a reasonably likely risk of substantial harm or inconvenience to an individual identified with it. The test turns on the risk to the person, not on a customer's label or the firm's own labels.17 CFR 248.30(d)(9)(i)

A broker-dealer's cloud vendor suffers a breach, and the firm has a written agreement under which the vendor will send notices to affected customers. Who remains responsible under Regulation S-P for making sure the customers are notified?

• a.The customers' custodian, which must notify the SEC
• b.The responsibility is shared equally between the two, with each liable only for its own half of the affected customers, as agreed
• c.The vendor alone, once the written agreement is signed
• d.The broker-dealer, because the notification obligation rests with the covered institution despite its use of a service provider✓

A covered institution may enter into a written agreement with a service provider to notify affected individuals on its behalf, but the obligation to ensure that they are notified rests with the covered institution. The agreement lets the vendor do the work; it does not shift legal responsibility.17 CFR 248.30(a)(5)(iii)

Which firm is excepted from the Regulation S-P standard on properly disposing of consumer information and customer information?

• a.A notice-registered broker-dealer✓
• b.A broker-dealer that has never had a data breach
• c.A broker-dealer that has fewer than ten employees
• d.A registered investment adviser that keeps all records electronically

The disposal standard applies to every covered institution other than notice-registered broker-dealers, which are firms registered by notice with the SEC under section 15(b)(11) of the Exchange Act. Size, electronic recordkeeping and breach history are not exceptions.17 CFR 248.30(b)(1)

Under Regulation S-ID, which account is a 'covered account' that a broker-dealer must address in its identity theft program?

• a.A consumer brokerage account that permits multiple payments or transactions, such as wire transfers to third parties✓
• b.Only an account that has already been the target of identity theft at least once during the previous twelve months, even if it permits multiple payments
• c.Any account with a balance below $500
• d.Only a business account that was opened by a corporation, partnership or other entity rather than by a person, and not a personal account of any kind

A covered account includes an account offered primarily for personal, family or household purposes that involves or permits multiple payments or transactions, such as a brokerage account that allows wire transfers or payments to third parties, and any other account with a reasonably foreseeable identity theft risk. Past theft, entity type or balance does not decide it.17 CFR 248.201(b)(3)

A registered broker-dealer makes a recommendation that is subject to Regulation Best Interest and that also endorses an investment adviser's services. Under the model advertising rule, which requirement does it not have to meet?

• a.The requirement that the advertisement discuss benefits and risks in a fair and balanced manner for all readers alike, for every reader of the page
• b.The ban on a compensated endorsement from an ineligible person
• c.The disclosures about client status, compensation and material conflicts that the rule requires with other endorsements✓
• d.The ban on untrue or misleading statements of material fact anywhere in the advertisement that carries the endorsement, not merely the endorsement

The rule excuses a registered broker-dealer from the endorsement disclosure requirements when the endorsement is a recommendation subject to Regulation Best Interest, since that regulation brings its own disclosure and conflict duties. The general prohibitions on misleading content and the fair-and-balanced standard still apply to the advertisement, and the ineligible-person ban is not waived by this provision.NASAA Model Rule 102(a)(4)-1(m)(2)(vii)(A)

An adviser plans to pay a blogger $200 a month for posts recommending the adviser. Besides disclosures, what must the adviser have in place before the posts run?

• a.Registration of the blogger as a representative
• b.An opinion letter from the adviser's outside counsel approving each post before it is published, kept in the compliance file
• c.A written agreement with the blogger describing the scope of the agreed activities and the terms of compensation✓
• d.A signed statement from each reader of the blog that no investment decision will rest on the posts by themselves alone

For a compensated testimonial or endorsement, the adviser must have a reasonable basis to believe it complies with the rule and a written agreement with the person describing the scope of the activities and the terms of compensation. Reader statements, counsel opinions and representative registration are not part of the requirement.NASAA Model Rule 102(a)(4)-1(m)(2)(iii)(B)

An adviser's referral firm has a partner with a disqualifying event that is still within the look-back period. A junior employee of that firm, who has a clean record, offers an endorsement for pay. How does the model rule treat the junior employee?

• a.As ineligible only if earning over $1,000 from the adviser
• b.As eligible, as long as the junior employee discloses the partner's record and the firm's history in the endorsement itself in writing
• c.As eligible, because only the individual with the event is ineligible
• d.As an ineligible person too, because employees of an ineligible person are included, so the adviser may not pay for the endorsement✓

An ineligible person is one who is subject to a disqualifying event plus any employee, officer or director of that person and others with similar status or functions. The adviser may not compensate such persons for endorsements. Disclosure does not cure ineligibility, and the dollar amount is irrelevant to the definition.NASAA Model Rule 102(a)(4)-1(m)(5)(xi)

Which order makes a person's involvement a 'disqualifying action' for purposes of the model advertising rule's endorsement provisions?

• a.A customer complaint filed with a broker-dealer about a representative
• b.An order of a foreign regulator suspending the person from a local exchange
• c.An order of a state administrator, the SEC or a self-regulatory organization, entered after notice and opportunity for hearing, barring or revoking the person's registration or barring the person from the industry✓
• d.A warning letter from a state administrator that mentions a late filing

A disqualifying action is an order of the Administrator, another state's administrator, the SEC or an SRO barring, denying, suspending or revoking registration, or barring the person from associating with the industry, entered after notice and opportunity for hearing. A mere warning letter, complaint or foreign order is not described in the definition.NASAA Model Rule 102(a)(4)-1(m)(5)(iii)

An adviser wants to advertise the results of a proprietary account it manages for its own money. Under the model rule's definition, can that account be a 'portfolio' for performance advertising?

• a.Yes, a portfolio can be an account or private fund, including one for the adviser itself or its advisory affiliates✓
• b.No, since an adviser's own money is not managed for anyone else
• c.Yes, but only if the proprietary account has held at least five different securities throughout the entire period shown
• d.No, because only accounts that belong to clients of the adviser can be treated as portfolios under the rule's own definition

The rule defines a portfolio as a group of investments managed by an adviser, which may be an account or a private fund and includes accounts of the adviser or its advisory affiliates. Mislabelling real results as hypothetical would not make sense, and no minimum number of securities is stated.NASAA Model Rule 102(a)(4)-1(m)(5)(xiii)