NASAA Series 63 — All Questions

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

• a.Churning, which is excessive trading in light of the customer's resources, objectives, and account character✓
• b.A permissible active management style since the customer never objected, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• c.Selling away, because the trades were placed outside the firm, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Front-running, because the agent traded ahead of the customer, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order

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

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

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

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

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

• a.Permissible if the agent later discloses it
• b.Permissible, because the agent's order was small, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.Front-running, a prohibited practice that misuses knowledge of a pending customer order✓
• d.Merely a suitability issue

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

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

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

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

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

• a.Merely made a puffing statement with no regulatory consequence, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• b.Acted properly because the promise was voluntary and personal
• c.Violated the prohibition on guaranteeing a customer against loss✓
• d.Acted properly if the firm approves the arrangement in writing

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

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

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

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

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

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

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

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

• a.Selling away, a prohibited private securities transaction effected without the knowledge and consent of the employing broker-dealer✓
• b.Permitted because real estate is not a security, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• c.A suitability violation only
• d.Permitted because the fee came from the sponsor rather than the clients, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

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

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

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

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

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

• a.Permitted because both parties consented
• b.Permitted if the trades are reported to the tape, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Legitimate market making
• d.Market manipulation through matched orders creating misleading activity, which is prohibited✓

Wash sales and matched orders create the false appearance of trading volume and price movement and are prohibited manipulative practices. Consent between the participants is irrelevant because the deception targets the investing public. Reporting the trades does not legitimize them, and genuine market making involves bona fide two-sided quotations rather than prearranged trades with no change in beneficial ownership.Uniform Securities Act

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

• a.Obtain the Administrator's prior approval of the recommendation
• b.Guarantee that the recommendation will meet the customer's return objective
• c.Make reasonable inquiry into the customer's financial situation, investment objectives, tax status, and needs, and have a reasonable basis for believing the recommendation is suitable✓
• d.Confirm only that the customer has enough cash to pay for the trade

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

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

• a.Neither owes any duty beyond executing orders accurately
• b.An adviser owes duties only to institutional clients
• c.A broker-dealer is always a fiduciary and an adviser is not
• d.An investment adviser is a fiduciary owing duties of loyalty and care, including full disclosure of material conflicts, while a broker-dealer's recommendations must at a minimum be suitable for the customer✓

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

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

• a.The firm must disclose that it acted as a principal, and its compensation is a markup rather than a commission✓
• b.None, because the customer received a confirmation of the trade price, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.The firm must disclose only the current market price of the bonds
• d.The firm must obtain the Administrator's approval before acting as principal, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order

A customer is entitled to know the capacity in which the firm acted, because a principal trade produces a markup embedded in the price while an agency trade produces a disclosed commission. Failing to state capacity or disguising a markup as something else is an unethical practice. No Administrator approval is required to act as principal in an ordinary customer trade.NASAA Model Rule

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

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

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

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

• a.Disclose the firm's position and its role as a market maker, and present projections as opinions rather than as fact✓
• b.Say nothing about the firm's position, to avoid influencing readers, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• c.Guarantee the accuracy of the price target, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• d.Be filed with the SEC before publication, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

Publishing research or a market letter without disclosing that the firm makes a market in or holds a position in the security conceals a material conflict of interest. Forecasts must be identified as opinion, since presenting a projection as an assured fact is a misrepresentation. No firm can guarantee a price target, and routine market letters are not filed with the SEC for approval.NASAA Model Rule

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

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

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

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

• a.Permitted with oral disclosure to the branch manager
• b.Permitted because it protects the customer from a forced sale, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• c.Permitted if the customer signs a promissory note
• d.Prohibited, because lending money to a customer creates a conflict of interest and is an unethical practice outside narrow exceptions✓

Lending money or securities to a customer, like borrowing from one, is prohibited except in narrow circumstances such as a lending relationship through the firm or an immediate family member, and only where the firm's written procedures permit it. Good intentions do not create an exception. Documentation such as a promissory note or an oral notification to a manager does not make the loan permissible.NASAA Model Rule

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

• a.Acted properly if the stock later recovers
• b.Acted properly because a partial sale is less risky, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Committed a prohibited practice by failing to follow the customer's instructions and effectively exercising unauthorized discretion✓
• d.Acted prudently in the customer's best interest, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order

Failing to execute a customer's order as instructed is an unethical practice, and substituting the agent's own judgment for the customer's amounts to unauthorized discretion. The agent may voice a contrary opinion but must ultimately follow the instruction or decline the account. A favorable market outcome does not retroactively excuse the deviation.NASAA Model Rule

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

• a.Acceptable because the customer consented orally
• b.Acceptable if the customer later ratifies the signature, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.Acceptable if no customer is harmed
• d.Prohibited, because falsifying or forging records and signatures is an unethical practice regardless of intent✓

Signing a customer's name, backdating documents, or otherwise falsifying firm records is prohibited because it destroys the integrity of the books and records regulators rely on. Neither an oral agreement nor a later ratification cures the falsified document. The absence of financial harm is not a defense; the recordkeeping violation is complete when the record is made.NASAA Model Rule

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

• a.Acceptable if the fund is otherwise suitable
• b.Selling dividends, a prohibited practice, because the share price drops by the distribution amount and the investor gains nothing while incurring a tax liability✓
• c.Sound advice, because the client receives cash sooner
• d.Acceptable because the distribution is publicly announced

Selling dividends is prohibited because the net asset value falls by the amount of the distribution on the ex-date, so the investor simply converts principal into a taxable payment. Framing an imminent distribution as a reason to buy misrepresents the economics of the transaction. Public disclosure of the distribution and general suitability of the fund do not make the pitch acceptable.NASAA Model Rule

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

• a.Acceptable because breakpoints apply only to accumulation over several years, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.A breakpoint sale, a prohibited practice, because the agent failed to disclose that a slightly larger investment would reduce the sales charge✓
• c.Acceptable if the agent's commission was standard, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.Acceptable because the client chose the amount

Failing to disclose an available breakpoint, or deliberately keeping an order just below one to preserve a higher sales charge, is an unethical practice. The agent must alert the client to quantity discounts, letters of intent, and rights of accumulation. The fact that the client named the dollar figure does not relieve the agent of the disclosure duty, and breakpoints apply to single purchases as well as to accumulated holdings.NASAA Model Rule

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

• a.Acceptable because each fund is individually suitable, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• b.Proper diversification across fund sponsors
• c.Acceptable because the client signs each order ticket
• d.Improper mutual fund switching, because inducing exchanges between fund families without reasonable grounds imposes needless sales charges✓

Recommending that a client move between fund families without reasonable grounds is an unethical practice, since the new sales charge is a real cost with no corresponding benefit when comparable objectives are available within the existing family. Suitability of each individual fund does not justify the repeated charges. Signed order tickets document the trade but do not supply the required reasonable basis.NASAA Model Rule

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

• a.Delete the email since the matter is disputed
• b.Promptly forward the written complaint to the firm so it can be reviewed, acted on, and preserved in the firm's records✓
• c.Wait to see whether the customer follows up before reporting it, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• d.Resolve it privately with the customer and say nothing to the firm, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

Written customer complaints must be routed promptly to the firm and retained, because the firm has supervisory and recordkeeping obligations and regulators may inspect complaint files. Handling a complaint privately or settling it without the firm's knowledge is itself an unethical practice. Destroying or delaying the record compounds the original problem.NASAA Model Rule

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

• a.Avoid any recordkeeping beyond a summary ledger
• b.Notify the Administrator that it has custody, segregate client assets with a qualified custodian, send account statements to clients, and arrange for an independent verification of the assets✓
• c.Send statements only upon client request
• d.Hold the securities in the firm's own name to simplify administration

The custody rule requires notice to the Administrator, use of a qualified custodian, segregation of client assets from firm assets, periodic account statements sent directly to clients, and an independent surprise verification of the funds and securities. Registering client assets in the firm's name defeats the segregation requirement. Custody also raises the adviser's recordkeeping and financial requirements rather than lowering them.NASAA Model Rule

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

• a.Permitted only for clients who meet defined net worth or assets-under-management standards, with the arrangement and its risks disclosed in writing✓
• b.Permitted only if the adviser also guarantees against loss, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Permitted for any client who signs a waiver
• d.Prohibited for every client without exception

Performance-based compensation is limited to clients who satisfy financial thresholds designed to identify investors able to bear the incentive risk, and the arrangement must be disclosed along with the conflicts it creates. A client waiver cannot substitute for the eligibility standards, and provisions purporting to waive compliance with the act are void. Guaranteeing against loss is itself prohibited, so it could never be a condition of a permitted fee.NASAA Model Rule

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

• a.May accept overhead payments if the client's returns are positive
• b.May accept research and brokerage services that benefit clients within the recognized safe harbor and must disclose the arrangement, but paying general overhead such as rent falls outside it✓
• c.May accept anything of value so long as commissions are competitive
• d.Need not disclose soft dollar arrangements because they cost the client nothing extra

Soft dollar benefits are acceptable only when they consist of research or brokerage services that assist the adviser's investment decision-making for clients, and the arrangement must be disclosed because it creates a conflict in the choice of executing broker. Payments for ordinary business overhead such as rent, salaries, or travel are outside the safe harbor and amount to using client commissions for the adviser's benefit. Client commissions are a real cost, so the claim that nothing extra is paid is false.NASAA Model Rule

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

• a.Is flatly prohibited in every circumstance
• b.Requires only that commissions be reasonable
• c.Requires disclosure of the adviser's role and the conflicts involved, and the client's consent, with the adviser never having recommended the trade to both parties✓
• d.Requires approval from the Administrator before each trade

An agency cross transaction is permitted only with disclosure of the capacity in which the adviser acts, the compensation it will receive, and the conflict inherent in serving both sides, together with the client's consent and periodic reporting. The adviser may not have recommended the transaction to both the buyer and the seller. Reasonable commissions alone do not satisfy the rule, and there is no requirement of trade-by-trade approval by the Administrator.NASAA Model Rule

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

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

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

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

• a.Decline, because customer account information is confidential and may be released only with the customer's consent or under proper legal authority✓
• b.Share general information as long as no dollar figures are given
• c.Share the information if the friend is also a client of the firm
• d.Share the information because account data is not confidential

Disclosing confidential customer information without the customer's consent is an unethical business practice; the recognized exceptions are limited to responses to subpoenas, court orders, and legitimate regulatory demands. Being a client of the same firm gives the friend no right to another customer's data. Withholding dollar amounts does not make the disclosure permissible, since holdings themselves are confidential.NASAA Model Rule

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

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

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

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

• a.Made an acceptable statement, because the payment history is factual
• b.Committed a suitability violation but not fraud
• c.Made a material misrepresentation, which is prohibited whether the security is registered or exempt✓
• d.Done nothing wrong, provided the customer signs a risk acknowledgment, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary

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

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

• a.Permissible, because the earnings figures the agent gave were true, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• b.A prohibited omission of a material fact necessary to make the agent's statements not misleading✓
• c.Permissible if the auditor's resignation was reported in a newspaper, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• d.A violation only if the customer actually loses money, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules

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

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

• a.A prohibited misrepresentation, because interest-rate and prepayment risk remain even though credit risk is federally backed✓
• b.Accurate, because a federal guarantee eliminates every risk, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• c.Acceptable sales puffery
• d.Permissible only for accredited investors

The federal backing on a GNMA covers credit/default risk, not interest-rate risk or prepayment and reinvestment risk. Telling a customer there is 'no risk of any kind' misstates material facts and misrepresents the scope of the guarantee, a prohibited practice. Framing it as puffery or limiting it to accredited investors does not save a false statement about risk.NASAA Model Rule

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

• a.Proper, because the client can always decline
• b.Proper if the biotech stock later performs well, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• c.Unsuitable, and making unsuitable recommendations is a prohibited practice✓
• d.A violation only if the agent exercised discretion, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

Recommending securities without reasonable grounds to believe they suit the customer's objectives, situation, and needs is an unethical practice. A speculative equity is squarely at odds with a capital-preservation-and-income objective. Suitability is judged when the recommendation is made, so a later gain does not cure it, and the client's ability to decline does not shift the agent's duty; discretion is not required for the violation.NASAA Model Rule

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

• a.Permissible, because family conversations are private
• b.Permissible if the agent also buys the stock for clients, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• c.A suitability issue only
• d.Prohibited trading on material nonpublic information, reached by the act's antifraud provisions✓

Trading on material nonpublic information obtained in breach of a duty of confidence is fraudulent and prohibited under state antifraud law as well as federal insider-trading law. The private setting of the tip is irrelevant, and buying for clients as well would compound the misconduct. It is not a suitability question; it is a fraud and market-integrity question.Uniform Securities Act

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

• a.Protected speech unrelated to the securities laws, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.A violation only if someone actually trades on the rumor, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• c.Acceptable if he later deletes the posts
• d.Prohibited, because circulating false rumors to affect a security's price is a manipulative and deceptive practice✓

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

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

• a.Acted properly, because it is the customer's own money, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• b.Acted properly if the trade is profitable
• c.Effected an unauthorized transaction, a prohibited practice✓
• d.Committed a paperwork error curable by later consent

Entering an order the customer did not authorize, absent prior written discretionary authority, is a prohibited unauthorized transaction. It is the customer's account, but that is precisely why the customer's authorization is required. A profitable result does not cure it, and after-the-fact consent does not retroactively authorize the trade.NASAA Model Rule

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

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

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

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

• a.Prohibited in all cases
• b.Generally permissible, because both are registered agents of the same broker-dealer✓
• c.Permissible only with the Administrator's prior approval
• d.Permissible only if the customer pays a higher commission, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

Commission sharing among agents registered with the same broker-dealer, or affiliated firms under common control, is permitted; the prohibited abuse is sharing with an unregistered person. No Administrator approval is needed, and the customer is not charged more because the split is internal to the compensation.Uniform Securities Act

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

• a.Acceptable if the customer received the correct shares, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.A minor recordkeeping lapse
• c.A prohibited practice, because effecting transactions not recorded on the employing firm's books without its authorization is unlawful✓
• d.Permissible if disclosed to the customer, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain

Effecting a securities transaction that is not recorded on the broker-dealer's regular books and records, without the firm's written authorization, is an unethical practice closely related to selling away; it defeats supervision. Delivering the right shares does not cure it, it is not minor, and disclosing to the customer does not substitute for the firm's authorization and recordkeeping.NASAA Model Rule

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

• a.Acceptable because the trade itself was valid, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• b.A clerical correction
• c.Permissible with the customer's consent
• d.Falsification of records, a prohibited and unethical practice✓

Backdating or otherwise altering firm records falsifies the books and records regulators rely on and is a prohibited practice regardless of whether the underlying trade was otherwise valid. It is not a clerical fix, and no customer consent can authorize a falsified record.NASAA Model Rule

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

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

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

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

• a.Deposit the check into his personal account for safekeeping, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.Cash the check and hold the currency
• c.Promptly transmit customer funds and securities to the firm or proper party, without holding or diverting them✓
• d.Return the check only after thirty days, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

Agents must promptly forward customer funds and securities to the broker-dealer or the appropriate party; holding, diverting, or commingling them is prohibited. Depositing the check to a personal account or converting it to cash to hold would be commingling and conversion, and there is no thirty-day holding rule.NASAA Model Rule

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

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

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

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

• a.A violation, because required prospectus delivery is part of a lawful offer and sale✓
• b.Acceptable, because the customer can find the prospectus online, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Acceptable if the customer is sophisticated
• d.Curable only by rescinding the trade

Failing to deliver a prospectus where one is required is a prohibited practice and a violation of the disclosure obligations attached to the offer and sale. The document's availability online and the customer's sophistication do not excuse nondelivery, and rescission is a possible remedy, not the sole way to address the failure.Uniform Securities Act

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

• a.A prohibited misrepresentation of the agent's qualifications and of the meaning of registration✓
• b.Acceptable self-promotion
• c.Acceptable because he has passed the Series 63, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.A violation only if a client later complains, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

Misrepresenting one's qualifications and implying that the state has 'approved' the agent violates the act, which makes it unlawful to represent that registration means the Administrator has approved the registrant's qualifications. Passing an examination does not create the fictitious credential, and no complaint is required for the violation to exist.Uniform Securities Act

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

• a.Accurate, because there is no front-end sales charge, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.A harmless labeling choice
• c.A misrepresentation, because ongoing distribution fees and a deferred sales charge are inconsistent with a true no-load description✓
• d.Acceptable if disclosed only in the prospectus

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

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

• a.Acceptable, because acting on tips is part of the business, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• b.A prohibited practice, because recommendations must rest on a reasonable basis, not on rumor✓
• c.Acceptable if at least some clients profit
• d.A violation only for discretionary accounts, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary

A recommendation must have reasonable grounds, meaning a reasonable basis derived from diligence about the security; a recommendation founded on an unverified rumor with no analysis is unethical. The duty applies to all accounts, not only discretionary ones, and some clients profiting does not supply the missing reasonable basis.NASAA Model Rule

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

• a.Permissible, because principals may set any price they wish
• b.A prohibited practice, because charging unreasonable markups, commissions, or fees is unethical✓
• c.Permissible so long as the markup appears on the confirmation, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• d.Permissible for securities not listed on an exchange

Charging unreasonable or excessive markups, commissions, or service fees, judged against the prevailing market price and the services provided, is an unethical business practice. Acting as principal does not license any price, printing an excessive markup on the confirmation does not make it fair, and there is no exemption for unlisted securities.NASAA Model Rule

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

• a.Acceptable, because the customer wanted growth, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• b.Acceptable because the product is registered, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.A minor omission with no consequence, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.A prohibited failure to disclose material facts, including the product's risks✓

Omitting the material risks needed to make a recommendation not misleading is a prohibited practice; a one-sided pitch that hides how a leveraged product can lose value quickly is misleading. Registration of the product and the customer's growth objective do not relieve the agent of the duty to disclose material risks.NASAA Model Rule

A customer instructs, 'Buy 1,000 shares of XYZ today, but you choose the best time and price.' The agent executes later that afternoon without a signed discretionary agreement. The agent has:

• a.Acted properly, because the customer specified the security, the action, and the amount, leaving only time and price✓
• b.Exercised prohibited discretion that required prior written authorization, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.Violated the act, because all discretion requires a signed agreement
• d.Acted improperly unless a manager approved the order in writing

Time-and-price discretion, where the customer names the security, the action, and the quantity and leaves only the timing and execution price, does not require a written discretionary agreement and is generally good only for the day given. Discretion over the security, the amount, or whether to buy or sell would require prior written authorization; a manager's sign-off is not the trigger.NASAA Model Rule

A state-registered investment adviser is granted discretion over a client's account. Under NASAA rules, the adviser may generally:

• a.Never exercise discretion without SEC approval
• b.Exercise discretion indefinitely on a purely oral understanding
• c.Rely on oral discretionary authority for a limited initial period, provided written authorization is obtained within a short time (commonly ten business days) after the first discretionary trade✓
• d.Exercise discretion only over institutional accounts

Unlike a broker-dealer agent, who needs prior written authorization before any discretionary trade, an investment adviser may act on oral discretion during a brief initial window but must obtain written authorization within roughly ten business days of the first discretionary transaction. It is not indefinite, not limited to institutional accounts, and needs no SEC sign-off. Note this is a heavily tested BD-versus-IA distinction.NASAA Model Rule

Several traders enter a rapid series of prearranged buy and sell orders in a stock just before the close to create the appearance of heavy demand and a rising price. This is:

• a.Legitimate closing-price discovery, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• b.Market manipulation, sometimes called painting the tape or marking the close, a prohibited practice✓
• c.Permissible so long as all the orders are reported, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• d.Permissible market making

Prearranged trades designed to create misleading activity or move the closing price (painting the tape, marking the close) are manipulative and prohibited. Reporting the orders does not legitimize the deception, and genuine market making involves bona fide two-sided quotations rather than staged trades intended to mislead other investors.Uniform Securities Act

Regarding written customer complaints, a broker-dealer is generally required to:

• a.Discard complaints once they are resolved
• b.Keep complaints only if litigation is filed
• c.Record, retain, and make available for inspection written customer complaints and the firm's responses✓
• d.Forward every complaint to the SEC within 24 hours, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary

Firms must record and retain written customer complaints, and the dispositions of those complaints, for the prescribed retention period and produce them on examination. Complaints are not discarded when resolved, retention does not depend on litigation, and ordinary complaints are not automatically filed with the SEC on a 24-hour clock.NASAA Model Rule

An agent conducts securities business with customers through his personal email account, bypassing the firm's servers. This is:

• a.A violation, because business communications must go through the firm's supervised and retained systems✓
• b.Acceptable, because email is not a firm record
• c.Acceptable if he copies himself on each message, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• d.A concern only for investment advisers, not broker-dealers, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures

Securities-related communications with customers must be conducted through channels the firm can supervise and retain; using an unmonitored personal account defeats the firm's supervisory and recordkeeping obligations. Business email is a firm record, self-copying does not satisfy supervision, and the requirement applies to broker-dealers as well as advisers.NASAA Model Rule

A product sponsor offers an agent an expensive vacation as a reward for selling a large amount of its mutual fund. Accepting this undisclosed compensation:

• a.Is always permissible between professionals
• b.Is permissible if the fund was suitable for the buyers, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• c.Creates an undisclosed conflict of interest and may be a prohibited sales-incentive practice✓
• d.Is a concern only if it exceeds one hundred dollars

Non-cash sales incentives that reward the sale of a particular product create a material conflict of interest that biases recommendations; accepting them without disclosure can be a prohibited practice. Suitability of the fund does not cure the undisclosed conflict, and the hundred-dollar figure confuses this with a separate SRO gift limit.NASAA Model Rule

A state-registered investment adviser is acquired and wants to transfer its existing client contracts to the buyer. Under NASAA rules, the adviser must:

• a.Do nothing, because advisory contracts transfer automatically, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• b.Obtain the clients' consent to the assignment of their advisory contracts✓
• c.Only notify the Administrator of the sale
• d.Refund all prepaid fees before transferring the contracts, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

An investment advisory contract may not be assigned without the client's consent, and a change of control that produces an assignment triggers that requirement. Contracts do not transfer automatically, notifying the Administrator is not a substitute for client consent, and a fee refund is not the mechanism for a valid assignment.NASAA Model Rule

An investment adviser organized as a partnership must, under NASAA rules, ensure its advisory contracts provide that:

• a.Fees will never increase for the life of the contract, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.The adviser guarantees a minimum rate of return
• c.The adviser will notify clients of any change in the membership of the partnership within a reasonable time✓
• d.Clients waive their right to sue the adviser

A partnership adviser's contracts must require that clients be notified of any change in the membership of the partnership within a reasonable time after the change. A fee freeze and a guaranteed return are not required, and a clause purporting to waive a client's rights under the act would itself be void.NASAA Model Rule

Which provision in a state-registered investment adviser's contract would violate NASAA rules?

• a.A clause charging a fee based on a share of capital gains to a client who does not meet the net-worth or assets thresholds✓
• b.A clause stating the advisory fee is $2,000 per year
• c.A clause describing the services the adviser will provide, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.A clause stating the contract's term and renewal date, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary

Performance-based fees measured by a share of capital gains or appreciation are prohibited except for qualified clients who meet defined net-worth or assets-under-management thresholds; charging one to an ineligible client violates the rule. A flat annual fee, a description of services, and a term clause are all ordinary, permitted contract provisions.NASAA Model Rule

A state-registered investment adviser collects advisory fees well in advance. Under NASAA rules, if it collects substantial prepaid fees six or more months ahead, it generally must:

• a.Do nothing special
• b.Register with the SEC instead of the state
• c.Include a current balance sheet in its brochure, because collecting more than $500 per client, six or more months in advance, is treated like custody✓
• d.Post a one-million-dollar surety bond

Collecting prepaid fees of more than $500 per client six or more months in advance is treated as a form of custody and triggers the requirement to disclose the adviser's financial condition through a balance sheet in the brochure. It is not an SEC-registration trigger, and the million-dollar bond figure is invented.NASAA Model Rule

A firm offers a 'wrap' program charging one asset-based fee that covers advice and all transaction costs. With respect to this program, the firm must:

• a.Charge separate commissions on each trade in addition to the wrap fee
• b.Disclose the wrap-fee arrangement, because bundling advice and execution into one fee generally brings the program within the advisory rules✓
• c.Do nothing, because a single fee needs no explanation
• d.Obtain the Administrator's approval of the fee amount

Wrap-fee programs bundle advice and execution into a single asset-based fee and generally implicate investment adviser disclosure obligations, including a specialized wrap-fee brochure. Charging separate commissions on top would be double-charging, a single fee still requires disclosure, and the Administrator does not set the fee amount.NASAA Model Rule

A customer sells securities and is owed the proceeds. The agent delays sending the funds and briefly uses them for the firm's short-term needs. This is:

• a.Acceptable if the customer is eventually paid in full
• b.Acceptable because the firm has custody of the account, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• c.A minor timing issue of no regulatory concern
• d.A prohibited failure to promptly pay funds owed and an improper use of customer money✓

Failing to pay or deliver promptly the funds or securities owed to a customer, and using customer money for the firm's own purposes, are prohibited practices. Eventual payment does not cure the misuse, and holding an account does not authorize borrowing customer funds without permission.NASAA Model Rule

An agent tells a client that a low-priced speculative stock 'cannot lose money because it has nowhere to go but up.' This statement is:

• a.A violation only if the customer actually loses money
• b.Acceptable sales enthusiasm with no regulatory consequence, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• c.Acceptable if the stock is registered in the state
• d.A prohibited misrepresentation of the risk of the investment✓

Telling a customer a speculative security 'cannot lose' misstates a material fact about risk; it is not mere puffery, does not depend on registration, and the violation is complete at the offer regardless of any later loss (USA §101 antifraud; NASAA unethical practices).

An agent assures a prospect that a mutual fund 'will earn at least 12% per year, just like it did last year.' This is:

• a.Acceptable, because last year's return is a fact
• b.Acceptable if the prospectus shows the prior year's return, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• c.Acceptable for accredited investors only
• d.A prohibited practice, because it guarantees or predicts specific future investment results✓

Guaranteeing or predicting specific future returns, or implying past performance assures future results, misrepresents the investment; a true prior-year figure does not license a promise of future performance (NASAA unethical practices; USA §101).

To close a sale, an agent tells a customer 'this stock is certain to be listed on the New York Stock Exchange next month,' although no listing has been approved. This is:

• a.Acceptable if the issuer hopes to list eventually
• b.Acceptable because listing decisions are public
• c.A concern only if the stock is never actually listed, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.A prohibited misrepresentation, because it states an uncertain future event as a certainty✓

Representing that a security will be listed or approved when that is not assured is a prohibited misrepresentation of a material fact; the violation does not depend on whether listing later occurs (NASAA unethical practices; USA §101).

An agent tells clients that because his firm and its securities are registered in the state, 'the state stands behind these investments.' This is:

• a.Accurate for exempt securities
• b.Unlawful, because it is prohibited to represent that registration means the Administrator has approved or guaranteed the securities✓
• c.Accurate, because registration is a form of approval, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.Acceptable if disclosed in small print

It is unlawful to represent that registration of a person or the effectiveness of a securities registration means the Administrator has approved or passed on the merits; the state guarantees nothing (USA §404/§101).

An agent recommends the same speculative stock to every client in his book, regardless of their differing objectives and finances. This practice is:

• a.Acceptable because each client can decline
• b.Prohibited, because a blanket recommendation disregards individual suitability✓
• c.Acceptable as long as the stock is registered, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• d.Efficient and therefore encouraged

Recommending the same security to all customers without regard to their individual situations is an unethical practice because it disregards suitability; the ability to decline does not shift the agent's duty (NASAA unethical practices – suitability).

An agent recommends an unregistered stock to a customer, then marks the order ticket 'unsolicited' so the trade appears exempt. This is:

• a.Acceptable, because the customer agreed to buy, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• b.A minor clerical matter
• c.A prohibited falsification that both misstates records and improperly claims a transaction exemption✓
• d.Acceptable if the customer signs the ticket

Marking a solicited order 'unsolicited' falsifies the firm's records and fraudulently manufactures an unsolicited-transaction exemption; it is a prohibited practice regardless of the customer's agreement (NASAA unethical practices; USA §101).

In selling a bond, an agent omits that it is callable at par next year even though it is trading at a premium. The omission is:

• a.Acceptable, because call features appear in the indenture, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.A prohibited omission of a material fact, because a near-term call materially affects yield and return✓
• c.A violation only if the bond is actually called
• d.Acceptable if the customer does not ask

A near-term call on a premium bond is material to yield and return; failing to disclose it renders the presentation misleading, a prohibited omission (USA §101 antifraud; NASAA).

An adviser with discretion over a moderate-growth account trades it so frequently that commissions and costs consume much of the return, out of proportion to the client's objectives. This is:

• a.Churning, an excessive-trading violation judged against the client's objectives and resources✓
• b.Acceptable because the client granted discretion in writing
• c.A violation only in a commission account, never a fee account
• d.Acceptable active management because the adviser has discretion, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

Excessive trading relative to the customer's resources and objectives is churning; discretionary authority does not authorize trading that primarily generates costs (NASAA unethical practices – churning).

Knowing his firm is about to publish a strong buy recommendation on a stock, an agent first buys call options on it for his own account. This is:

• a.A suitability issue only
• b.Acceptable, because options are not the underlying stock, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• c.Acceptable if the position is small
• d.Front-running, a prohibited misuse of knowledge of an imminent firm action✓

Trading ahead of an imminent firm recommendation or block order to exploit the expected price move is front-running, prohibited regardless of the instrument or size (NASAA unethical practices; USA §101).

An agent sells promissory notes of a friend's business to several firm customers without notifying his broker-dealer, keeping the commissions. This is:

• a.Permitted because promissory notes are never securities, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.Permitted because the customers were satisfied
• c.A recordkeeping issue only
• d.Selling away, a prohibited private securities transaction outside the firm's supervision✓

Effecting securities transactions (notes can be securities) away from the firm without prior written notice and approval is selling away, which deprives the firm of supervision (NASAA unethical practices – private securities transactions).

A customer gives an agent a check payable to the firm; the agent deposits it into his own bank account, intending to forward the money later. This is:

• a.Acceptable if forwarded within 30 days
• b.Prohibited commingling and improper handling of customer funds✓
• c.Acceptable because the agent intends to pay it over, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.A minor timing issue

Customer funds must be promptly transmitted to the firm and never deposited into an agent's personal account; doing so is commingling and conversion, a prohibited practice (NASAA unethical practices – custody/commingling).

An agent borrows $5,000 from a customer who is also his mother, and the firm's written procedures permit borrowing from immediate family. This is:

• a.Prohibited under all circumstances
• b.Permitted only if the loan exceeds $10,000
• c.Permitted only with the Administrator's approval, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.Generally permissible, because borrowing from an immediate family member is a recognized exception when firm procedures allow it✓

Borrowing from customers is prohibited except in narrow cases—the customer is in the lending business or is an immediate family member—and only where firm procedures permit; a parent qualifies here (NASAA unethical practices – borrowing/lending).

An agent lends his own money to an unrelated retail customer so the customer can buy more securities. This is:

• a.Prohibited, because lending to a customer creates a conflict of interest outside the narrow exceptions✓
• b.Permitted if the customer repays with interest, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• c.Permitted if a promissory note is signed
• d.Permitted because it is the agent's own money

Lending money to a customer is prohibited except in limited situations (the firm's lending arrangements or an immediate family member with firm approval); documentation and repayment terms do not cure it (NASAA unethical practices – borrowing/lending).

An investment adviser representative wants to share directly in the profits and losses of a client's account. Under NASAA rules for advisers, this is generally:

• a.Restricted to performance-fee arrangements meeting the qualified-client thresholds, not the proportionate sharing allowed to broker-dealer agents✓
• b.Permitted like any agent's proportionate sharing
• c.Freely permitted with only the client's oral consent, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.Permitted for any client who signs a waiver

Unlike a broker-dealer agent, who may share proportionately with written consent of the customer and firm, an adviser's compensation from account performance is governed by the performance-fee rules and limited to qualified clients meeting net-worth or AUM thresholds (NASAA – performance fees; sharing in accounts).

A broker-dealer agent pays a flat cash referral fee to an unregistered acquaintance for each new brokerage customer sent to him. This is:

• a.Permitted up to $100 per referral
• b.Permitted because it is a flat fee rather than a commission, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• c.Prohibited, because transaction-related compensation for securities business may not be paid to an unregistered person✓
• d.Permitted if the acquaintance reports it as income

Paying securities-related compensation to an unregistered person for soliciting or referring brokerage business is prohibited; the flat-fee label and tax reporting do not save it (USA §201; NASAA).

A state-registered investment adviser pays cash referral fees to a third-party solicitor. Under NASAA rules, permissible conditions include all of the following EXCEPT:

• a.The solicitation must be approved in advance by the Administrator for each client✓
• b.Written disclosure to the client of the solicitor's compensation, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• c.A written agreement between the adviser and the solicitor
• d.The solicitor is not subject to a statutory disqualification

Cash solicitation requires a written agreement, written disclosure of the arrangement to the client, and that the solicitor not be disqualified—but not case-by-case Administrator pre-approval (NASAA/Advisers Act solicitor rule).

Under the NASAA custody rule, an adviser with custody must arrange for client funds and securities to be verified by:

• a.The client's personal accountant only
• b.The adviser's own internal staff each quarter, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• c.The Administrator on a monthly basis
• d.An independent public accountant through a surprise examination at least annually✓

The custody rule requires an annual surprise verification of client assets by an independent accountant, in addition to using a qualified custodian, notifying the Administrator, and sending account statements (NASAA custody rule).

A state-registered adviser with custody must ensure account statements are sent to clients:

• a.At least quarterly, identifying the funds and securities in custody and the account activity✓
• b.Never, in order to protect confidentiality, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• c.Only when the client requests them
• d.Only once a year

Under the custody rule, a qualified custodian (or the adviser) must send account statements to clients at least quarterly, identifying the assets held and the transactions in the account (NASAA custody rule).

A client terminates an advisory contract midway through a prepaid annual period. Under NASAA rules, the adviser's contract should provide that:

• a.Refunds require the Administrator's approval
• b.The client owes the full year regardless
• c.Any prepaid but unearned fee will be refunded to the client on a pro-rata basis✓
• d.All prepaid fees are forfeited on termination, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules

Keeping unearned prepaid fees on termination is inequitable; the contract should provide for a pro-rata refund of unearned fees, and advisers collecting large prepayments face added disclosure requirements (NASAA unethical practices – fees).

Under NASAA rules, a performance-based advisory fee may generally be charged only to a client meeting net-worth or assets-under-management thresholds. This restriction exists because performance fees:

• a.Create an incentive for the adviser to take greater risk, so eligibility is limited to clients able to bear it✓
• b.Are illegal for every client without exception, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• c.Reduce the adviser's total compensation
• d.Guarantee the client a profit

Performance (incentive) fees may bias an adviser toward excessive risk, so they are limited to qualified clients meeting net-worth or AUM thresholds, with the conflict disclosed (NASAA/Advisers Act Rule 205-3).

Which soft-dollar benefit would fall OUTSIDE the recognized research safe harbor and be improper without more?

• a.Research reports used in making investment decisions for clients, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose
• b.Payment of the adviser's office rent and staff salaries out of client brokerage commissions✓
• c.Seminars on investment research techniques
• d.Software that analyzes client securities portfolios

The safe harbor covers research and brokerage services that aid investment decisions; using client commissions to pay overhead such as rent and salaries falls outside it and benefits the adviser rather than clients (Exchange Act §28(e); NASAA).

In an agency cross transaction, a state-registered adviser may act for both buyer and seller only if, among other conditions:

• a.The adviser recommends the trade to both sides
• b.The Administrator approves each cross trade in advance, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• c.No disclosure is needed because the interests offset
• d.The adviser did not recommend the transaction to both parties and obtains client consent after disclosing its role and compensation✓

Agency cross transactions require disclosure of capacity and compensation, client consent, periodic reporting, and that the adviser not have recommended the trade to both the buyer and the seller (Advisers Act Rule 206(3)-2; NASAA).

Under the Advisers Act framework adopted at the state level, which event is treated as an 'assignment' of an advisory contract requiring client consent?

• a.Hiring a new junior analyst
• b.Moving the office to a new city, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• c.A transfer of a controlling block of the adviser, or for a partnership a change in a majority of the partnership interests✓
• d.Raising the advisory fee

An assignment includes a direct or indirect transfer of the advisory contract, including a change in control such as transfer of a controlling block or a change in a majority of a partnership's interests; assignment requires client consent (Advisers Act §205; NASAA).

A minority partner leaves a partnership that is a state-registered investment adviser. Under NASAA rules, the adviser must:

• a.Obtain each client's consent, because any partner change is an assignment, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category
• b.Notify clients of the change in partnership membership within a reasonable time, because a minority change is not an assignment✓
• c.Do nothing at all
• d.Dissolve all client contracts

A change in a minority of partnership interests is not an assignment, but the adviser must notify clients of the change in membership within a reasonable time; a majority change would be an assignment requiring consent (Advisers Act §205; NASAA).

Under the brochure rule, after the initial delivery a state-registered adviser must deliver to each client annually:

• a.The current brochure, or a summary of material changes with an offer to provide the full brochure, free of charge✓
• b.A brochure only if the fee changes
• c.Nothing further once the contract is signed, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• d.A brand-new signed advisory contract

Beyond delivery at or before contracting, advisers must annually deliver the current brochure or a summary of material changes with an offer to provide the full brochure, without charge (Advisers Act Rule 204-3; NASAA).

Under NASAA model rules, an investment advisory contract must:

• a.Contain a clause waiving the client's legal rights, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• b.Guarantee the client a minimum return
• c.Be oral so it remains flexible
• d.Be in writing and describe the services, term, and fee, and provide that it will not be assigned without the client's consent✓

NASAA requires advisory contracts to be in writing and to state the services, term, and fee or formula, prohibit assignment without consent, and (for partnerships) require notice of membership changes; waiver clauses are void (NASAA model rule on advisory contracts).

An advisory contract contains a clause stating that the client waives any right of action against the adviser for the adviser's conduct. Under the Uniform Securities Act and NASAA rules, this clause is:

• a.Enforceable if the client initials it
• b.Enforceable for sophisticated clients
• c.Enforceable if disclosed in the brochure, an interpretation that several states incorporated when they enacted the later revisions to the uniform act and its accompanying rules
• d.Void, because any condition purporting to waive compliance with the Act is unenforceable✓

Provisions binding a client to waive compliance with the Act or its rules are void, and misleading hedge clauses suggesting clients give up legal rights are prohibited (USA §411/§509 nonwaiver; NASAA).

A firm sponsoring a wrap-fee program must provide clients with:

• a.Only a trade confirmation
• b.The Administrator's written approval of the fee amount
• c.No disclosure, because a single fee is self-explanatory, on the view that the relevant exemption stays available to the party unless and until the Administrator revokes it by a formal order
• d.A specialized wrap-fee brochure disclosing the single bundled fee and the services and conflicts involved✓

Wrap-fee programs require a specialized wrap-fee program brochure (Appendix 1 to Form ADV Part 2) disclosing the bundled asset-based fee, the services, and the conflicts (Advisers Act; NASAA).

An investment adviser directs all client trades to a broker charging higher commissions than comparable brokers, with no offsetting benefit to clients. The adviser has likely violated its duty of:

• a.Registration
• b.Advertising
• c.Best execution, which requires seeking the most favorable terms reasonably available for client transactions✓
• d.Confidentiality, assuming the applicant has satisfied the net worth, surety bonding, and qualification-examination conditions the Administrator may impose

An adviser owes a fiduciary duty to seek best execution—the most favorable terms reasonably available under the circumstances; routing trades to a costlier broker without client benefit breaches it (Advisers Act §206; NASAA).

An adviser consistently allocates profitable trades to its own account and its favored clients, giving losing trades to smaller clients. This is:

• a.A prohibited breach of the duty of fair and equitable trade allocation✓
• b.Acceptable portfolio management
• c.Acceptable if disclosed only to the large clients, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain
• d.A concern only for broker-dealers

Advisers must allocate trades fairly among clients; cherry-picking favorable trades for the adviser or favored clients breaches the fiduciary duties of loyalty and fair dealing (Advisers Act §206; NASAA).

A state-registered adviser with discretionary authority learns of a net-worth deficiency that could impair its ability to meet commitments to clients. Under NASAA rules it must:

• a.Keep it confidential to avoid alarming clients, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.Disclose only at the next annual amendment
• c.Promptly disclose the financial condition to clients and notify the Administrator, because it is material to the advisory relationship✓
• d.Disclose only to new clients

An adviser must disclose a financial condition reasonably likely to impair its ability to meet contractual commitments to clients, and must promptly notify the Administrator of net-worth deficiencies (NASAA financial-disclosure rules; Form ADV).

An agent learns material nonpublic information about a pending merger and tells his brother, who then buys the stock. The agent has:

• a.Done nothing wrong because he did not trade himself
• b.Committed only a suitability violation
• c.Engaged in prohibited tipping of material nonpublic information✓
• d.Acted properly because family conversations are private, so long as written notice describing the arrangement is delivered to the Administrator within the time fixed by rule for that category

Passing material nonpublic information to another who then trades (tipping) is prohibited under the antifraud provisions even if the tipper does not trade personally (USA §101; federal insider-trading law).

A trader repeatedly places sell orders to hold a stock's price down while quietly accumulating shares cheaply, creating a false impression of supply. This practice is:

• a.Permitted if disclosed after the fact
• b.Permitted for registered market makers, provided the firm files the required consent to service of process and the Administrator does not enter an order to the contrary
• c.Legitimate price stabilization
• d.Prohibited, because artificially capping or pegging a price through deceptive orders is market manipulation✓

Deceptive orders intended to peg, cap, or fix a price and create a false impression of market activity are prohibited manipulation (USA §101; anti-manipulation principles).

A customer instructs an agent to sell a stock immediately, but the agent waits two days hoping for a rebound, and the price falls. The agent has:

• a.Committed a prohibited practice by failing to follow the customer's instructions✓
• b.Acted prudently in the customer's best interest
• c.Acted properly because timing is the agent's discretion, since the Administrator generally treats this as a routine matter resolved through the state's ordinary coordination procedures
• d.Committed no violation because the loss was small

Failing to execute a customer's order as instructed substitutes the agent's judgment for the customer's and is a prohibited practice; the size of the resulting loss is irrelevant (NASAA unethical practices).

A customer authorizes the purchase of 100 shares; the agent buys 500 shares because he is confident in the stock. As to the extra 400 shares, the agent has:

• a.Effected an unauthorized transaction, a prohibited practice✓
• b.Acted properly if the price later rose
• c.Made a curable clerical error
• d.Acted properly because the customer wanted the stock

Buying more than the customer authorized, without prior written discretionary authority, is an unauthorized transaction; a favorable outcome does not cure it (NASAA unethical practices).

Which customer instruction gives an agent discretion that requires prior written authorization?

• a.'Invest $50,000 in whatever stocks you think are best.'✓
• b.'Buy 300 shares of DEF at the market right now.'
• c.'Buy 200 shares of XYZ; you pick the best price today.'
• d.'Sell 100 shares of ABC sometime this morning.'

Discretion over the security, the amount, or the action requires prior written authorization; choosing only time or price (with security, action, and amount specified) is time/price discretion, which does not (NASAA; USA).

Which statement correctly contrasts discretionary authority for a broker-dealer agent versus an investment adviser?

• a.A broker-dealer agent needs prior written authorization before any discretionary trade, while an adviser may rely on oral discretion for a limited period if written authorization is obtained within about 10 business days✓
• b.A broker-dealer agent may use oral discretion, but an adviser may not
• c.Neither may ever exercise discretion
• d.Both may rely on oral discretion indefinitely

This heavily tested distinction: a broker-dealer agent requires written authorization before the first discretionary trade; an adviser may act on oral discretion initially but must obtain written authorization within roughly 10 business days (NASAA; Advisers Act).

To make an unsuitable trade appear appropriate, an agent inflates the customer's net worth and risk tolerance on the new-account form. This is:

• a.Acceptable if the customer approves the trade
• b.Acceptable if the trade turns out profitable
• c.Prohibited falsification of firm records✓
• d.A harmless estimate

Falsifying customer information on firm records to disguise unsuitability is a prohibited practice that corrupts the books regulators rely on (NASAA unethical practices – falsification).

An agent receives a written customer complaint and personally negotiates a settlement, never telling the firm. This is:

• a.A prohibited practice, because complaints must be reported to the firm, which has supervisory and recordkeeping duties✓
• b.Acceptable because the agent used his own money
• c.Required, in order to protect customer privacy
• d.Acceptable if the customer ends up satisfied

Settling a complaint privately conceals it from the firm's supervisory system; written complaints must be forwarded, recorded, and retained (NASAA unethical practices; recordkeeping).

A broker-dealer buys bonds from a customer as principal and applies a markdown far larger than justified by market conditions and services. This is:

• a.A prohibited practice, because unreasonable markdowns are as improper as unreasonable markups✓
• b.Permitted because principals set their own prices
• c.Permitted for unlisted bonds
• d.Permitted if the markdown appears on the confirmation

Charging an unreasonable markdown when buying from a customer as principal is an unethical practice, judged against the prevailing market and the services rendered (NASAA unethical practices – fair prices).

A broker-dealer recommends and sells a security issued by the firm's own parent company without disclosing the affiliation. This nondisclosure is:

• a.A concern only for investment advisers
• b.Acceptable because the price charged was fair
• c.Required to be kept secret from customers
• d.A prohibited failure to disclose a material control or affiliate relationship✓

A firm must disclose a control relationship with the issuer of a recommended security; concealing that the issuer is an affiliate is a material omission and a prohibited practice (USA §101; NASAA).

When a broker-dealer publishes a research report recommending a stock in which it makes a market, it must disclose:

• a.Only the security's current price
• b.That it makes a market in the security, a material conflict of interest✓
• c.The names of its customers who hold the stock
• d.Nothing, to avoid influencing readers

A firm publishing research on a security it makes a market in or holds a position in must disclose that conflict; concealing it is a prohibited practice (NASAA unethical practices – conflicts disclosure).

A broker-dealer receives a valid court subpoena for a customer's account records. The firm:

• a.Must first obtain the customer's consent despite the subpoena
• b.May never release customer records for any reason
• c.May release the records in response to the lawful subpoena, a recognized exception to the confidentiality rule✓
• d.Must release the records to anyone who asks

Customer information is confidential and released only with consent or under proper legal authority such as a subpoena, court order, or regulatory demand; a valid subpoena is a recognized exception (NASAA – confidentiality).

A customer delivers a stock certificate to an agent to sell. The agent must:

• a.Sell it through his own personal account
• b.Store it in his personal safe-deposit box indefinitely
• c.Keep it in his desk until the price improves
• d.Promptly forward the certificate to the firm for handling, not hold or divert it✓

Agents must promptly transmit customer funds and securities to the firm or proper party; holding or diverting them is prohibited (NASAA unethical practices – prompt transmittal).

A mutual fund wholesaler gives an agent expensive sporting-event tickets as a reward for sales. Under prohibited-practice principles, the concern is that:

• a.Undisclosed sales incentives create a conflict of interest that can bias recommendations✓
• b.There is no concern because the customer pays nothing extra
• c.Only cash gifts raise any concern
• d.Gifts are always illegal regardless of value or disclosure

Sales-contest prizes and gifts tied to selling a product create conflicts that may bias recommendations; such compensation must be disclosed and is subject to gift limits and firm supervision (NASAA unethical practices; SRO gift rules).

An agent conducts securities business with customers through a personal messaging app the firm cannot monitor or archive. This is:

• a.A concern only for investment advisers
• b.Acceptable if he screenshots the messages
• c.A violation, because business communications must occur through the firm's supervised, retained channels✓
• d.Acceptable because messaging is informal

Securities communications must run through channels the firm can supervise and retain; using an unmonitored app defeats supervision and recordkeeping (NASAA; recordkeeping rules).

A broker-dealer must send a customer a written confirmation of a securities transaction:

• a.Only for purchases, never for sales
• b.Only if the customer requests it
• c.At or before completion (settlement) of the transaction, disclosing required trade details and the firm's capacity✓
• d.Once a year in a summary statement

Firms must send trade confirmations at or before completion of the transaction, disclosing details such as price, quantity, capacity (agent or principal), and compensation; failure is a recordkeeping and disclosure violation (NASAA; SEC Rule 10b-10).

To reassure a nervous client, a firm promises in writing to repurchase a bond at the client's original cost anytime in the next year. This is:

• a.Permitted because the firm, not the agent, made the promise
• b.Permitted for investment-grade bonds
• c.Permitted because it is in writing
• d.A prohibited guarantee against loss✓

Guaranteeing a customer against loss—including a promise to repurchase at cost—misrepresents investment risk and is prohibited whether made by the agent or the firm (NASAA unethical practices; USA §101).

An agent urges a client to buy a mutual fund in a taxable account right before its year-end capital-gains distribution 'to capture the payout.' This is:

• a.Selling dividends, a prohibited practice, because the price drops by the distribution and the client incurs an immediate tax liability with no economic gain✓
• b.Sound advice, because the client receives cash sooner
• c.Acceptable as long as the fund is suitable
• d.Acceptable because the distribution is publicly announced

Enticing a purchase just before a distribution ('selling dividends') is prohibited: the share price falls by the distribution amount and the investor merely converts principal into a taxable payment (NASAA unethical practices – selling dividends).

A client's mutual fund purchase would reach a reduced sales-charge breakpoint if a letter of intent were used, but the agent never mentions it. This omission is:

• a.Acceptable if the client did not ask about discounts
• b.A prohibited breakpoint-related practice, because the agent must disclose letters of intent and rights of accumulation that reduce sales charges✓
• c.A concern only for purchases over $1 million
• d.Acceptable, because a letter of intent is optional

Agents must inform clients of breakpoints, letters of intent, and rights of accumulation that lower sales charges; steering a client past an available discount is a prohibited breakpoint practice (NASAA unethical practices).

An agent repeatedly recommends replacing one variable annuity with another, generating new sales and surrender charges without a documented client benefit. This is:

• a.An improper switching or replacement practice, because inducing exchanges without reasonable grounds imposes needless charges✓
• b.Proper diversification
• c.Acceptable because each contract is individually suitable
• d.Acceptable if the client signs each form

Recommending replacements that trigger new sales and surrender charges without reasonable grounds is an unethical practice, mirroring improper mutual fund switching (NASAA unethical practices – switching/replacement).

An agent recommends that a conservative client open a margin account to buy more stock but does not explain that losses and required deposits can exceed the original investment. This is:

• a.Acceptable because margin increases buying power
• b.Acceptable if the client is over 21
• c.A prohibited failure to disclose the material risks of margin✓
• d.A concern only if the client actually loses money

Recommending margin without disclosing its material risks—losses exceeding the deposit and maintenance calls—is a prohibited omission and a suitability concern (NASAA unethical practices; USA §101).

A broker-dealer's advertisement highlights only its most successful past stock picks and omits comparable picks that lost money. The advertisement is:

• a.Acceptable because past performance is factual
• b.Acceptable because the winning picks are real
• c.Acceptable if a disclaimer appears somewhere
• d.Misleading, because selectively presenting only favorable past recommendations is deceptive✓

Cherry-picking only profitable past recommendations while omitting losers creates a misleading impression of skill and is a prohibited deceptive practice (NASAA unethical practices; USA §101).

Which advertising practice by a state-registered investment adviser is prohibited?

• a.Stating the adviser's fee schedule
• b.Presenting a chart or formula as able, by itself, to determine which securities to buy or sell without disclosing its limitations✓
• c.Disclosing that advisory services involve risk
• d.Describing the adviser's investment philosophy

Advertising that a graph, chart, or formula can by itself determine what or when to buy or sell, without disclosing its limitations, is a prohibited advertising practice for advisers (NASAA model advertising rule; Advisers Act Rule 206(4)-1 tradition).

An adviser recommends a proprietary product from which it earns extra compensation. To satisfy its fiduciary duty, the adviser must:

• a.Say nothing, because the product is suitable
• b.Disclose the conflict of interest, including the additional compensation, so the client can evaluate the recommendation✓
• c.Avoid all proprietary products entirely
• d.Obtain the Administrator's approval first

An adviser's fiduciary duty of loyalty requires full and fair disclosure of material conflicts, including extra compensation from proprietary products, so the client can give informed consent (Advisers Act §206; NASAA).

A state-registered adviser deposits client funds it holds into the firm's general operating account for convenience. This is:

• a.Prohibited commingling of client assets with firm assets✓
• b.Acceptable if the balance is tracked on a spreadsheet
• c.Acceptable because the adviser is bonded
• d.Acceptable if the funds are refunded later

Client funds must be segregated from firm assets with a qualified custodian; depositing them into the firm's operating account is prohibited commingling and triggers custody violations (NASAA custody rule; unethical practices).

A state-registered investment adviser advertises that its registration means it is 'recommended by' and 'approved by' the state securities regulator. This is:

• a.Acceptable for firms with a clean disciplinary record
• b.Acceptable if placed only in the brochure
• c.Acceptable because the firm is in fact registered
• d.Prohibited, because it misrepresents the meaning of registration✓

Implying that registration is an approval, recommendation, or endorsement by the Administrator is prohibited; registration is not a seal of approval (USA §404; NASAA advertising rule).

An investment adviser borrows money from an advisory client who is not a lending institution or a family member. This is:

• a.Permitted for clients with large accounts
• b.Permitted as long as interest is paid
• c.Permitted if disclosed after the fact
• d.Prohibited, because borrowing from a client outside narrow exceptions breaches the adviser's fiduciary duty✓

An adviser generally may not borrow from a client unless the client is a broker-dealer, an affiliate, or a financial institution in the lending business; borrowing from an ordinary advisory client is a prohibited conflict (NASAA unethical practices for advisers).

A state-registered adviser wants to increase advisory fees for existing clients. It must:

• a.Notify only the Administrator, not the clients
• b.Impose the increase without any notice
• c.Disclose the change and generally obtain the clients' agreement, because the fee is a material term of the advisory contract✓
• d.Do nothing, because fees are purely the adviser's business decision

Fees are a material term of the advisory contract; an adviser must disclose and agree changes with clients rather than impose them unilaterally, and must not charge unreasonable or undisclosed fees (NASAA unethical practices – fees).

An agent begins selling fixed insurance products for an outside insurer for compensation without notifying his broker-dealer. Regarding this outside business activity, the agent:

• a.Must provide prior written notice to his broker-dealer, because undisclosed outside business activity is a supervisory and prohibited-practice concern✓
• b.Must register the insurer with the Administrator
• c.Need not tell the firm because insurance is not securities
• d.May proceed freely because it is on his own time

Engaging in outside business activity for compensation without prior written notice to the employing firm is a prohibited practice; the firm must be able to supervise potential conflicts (NASAA/SRO outside-business-activity rules).