NASAA Series 63 — All Questions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.Violated the act, because discretion over timing and price is still discretion and requires the customer's signed authorization before the order is entered
• c.Acted properly only because the account was a cash account; the same instruction in a margin account would have required a signed discretionary agreement
• d.Acted improperly unless a principal of the firm approved the order in writing before execution, since only management can accept a time-and-price instruction

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. The rule itself exempts discretion that relates solely to time and price, so signed authorization is not needed. A margin agreement is a separate requirement that has nothing to do with discretion, and a principal's sign-off is not the trigger. Discretion over the security, the amount, or whether to buy or sell would require prior written authorization.NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended 2025-04-07), 1.g

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, because heavy late-day activity is the ordinary way a closing price is established
• 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 to the tape, because reported trades are treated as bona fide market activity
• 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. Heavy trading is not a legitimate means of discovering a price when the orders are staged, 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.NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended 2025-04-07), 1.p(2)-(3)

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

• a.Discard complaints once they are resolved, because only complaints that remain open need to be kept in the firm's records
• b.Keep complaints only if litigation is filed or a regulator asks for them, because other complaints are treated as ordinary correspondence
• c.Record, retain, and make available for inspection written customer complaints and the firm's responses✓
• d.Forward every written complaint to the SEC within 24 hours of receipt, with the firm's own record limited to the date it was forwarded

Firms must record and retain written customer complaints, with the disposition of each, for the prescribed retention period and produce them on examination. Complaints are not discarded when resolved, retention does not depend on litigation or on a regulator's request, and ordinary complaints are not automatically sent to the SEC on a 24-hour clock in place of the firm's own record.SEC Rule 17a-3(a)(18) (17 CFR 240.17a-3); retention under SEC Rule 17a-4

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 forwards a copy of each message to the firm at month-end, because retention is then satisfied after the fact
• d.A concern only for investment advisers, because broker-dealer recordkeeping rules cover trade tickets and statements but not correspondence

Business 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, a belated forward does not give the firm the supervision or complete retention it is required to have, and the duty to keep communications relating to the business applies to broker-dealers as well as advisers.SEC Rule 17a-4(b)(4) (17 CFR 240.17a-4); NASAA BD model rule on conduct not inclusive

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, because the sponsor and the agent are both registered and understand the arrangement
• b.Is permissible if the fund was suitable for the buyers, because suitability is the only test applied to a recommendation of a fund
• c.Creates an undisclosed conflict of interest and may be a prohibited sales-incentive practice✓
• d.Is a concern only when its value exceeds the annual per-person gift limit, because that limit is the only rule restricting what sponsors may give

Non-cash rewards tied to selling a particular product create a material conflict of interest that biases recommendations; accepting them is restricted for investment company shares and, undisclosed, can be a prohibited practice. Suitability of the fund does not cure the undisclosed conflict, being registered professionals does not make such rewards acceptable, and the annual gift limit applies to ordinary gifts, not to rewards for selling a specific product.FINRA Rule 2341(l)(5) (non-cash compensation); NASAA Model Rule on Dishonest or Unethical Business Practices

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 pass automatically to a buyer that acquires the adviser's business
• 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, because a new adviser may not hold fees clients paid to the old one

An investment advisory contract may not be assigned without the client's consent, and a transfer of a controlling block of the adviser, which counts as an assignment, triggers that requirement. Contracts do not pass automatically to an acquirer, notifying the Administrator is not a substitute for client consent, and a refund of prepaid fees is not the mechanism for a valid assignment.Uniform Securities Act (1956, as amended) 102(c)(2) and 102(d)

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

• a.Each client must give prior written consent before a new partner is admitted, failing which the contract terminates automatically
• b.The adviser will notify the Administrator, rather than the clients, whenever the membership of the partnership changes
• c.The adviser will notify clients of any change in the membership of the partnership within a reasonable time✓
• d.The adviser will notify clients only when a partner with a majority interest withdraws; admitting a new partner requires no notice

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. The duty runs to the clients, not to the Administrator, it is a notice duty rather than a consent requirement, and it covers any change in membership, not just a majority partner's withdrawal. The Act does not require fee freezes, guaranteed returns or waivers of client rights.Uniform Securities Act (1956, as amended) 102(c)(3)

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 setting the fee as a percentage of the total value of the client's account, measured as of a definite date each quarter
• d.A clause stating that the adviser may not assign the contract without the client's consent and will tell clients of any change in the partnership's membership

Performance-based fees measured by a share of capital gains or appreciation are prohibited except where the Administrator permits them, such as for clients who meet defined net-worth or assets thresholds; charging one to an ineligible client violates the rule. A flat annual fee is an ordinary provision, a fee computed on the total value of the account as of definite dates is expressly not treated as a share of gains, and a no-assignment-without-consent clause is itself a required provision.Uniform Securities Act (1956, as amended) 102(c)(1) and 102(d)

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 a separate commission on each trade on top of the wrap fee, because the wrap fee covers only the advice
• b.Disclose the wrap-fee arrangement, because bundling advice and execution into one fee generally brings the program within the advisory rules✓
• c.Deliver only its general Part 2A firm brochure, because a wrap program needs no separate brochure of its own
• d.File the fee schedule with the Administrator for approval before offering the program to any client

A wrap-fee sponsor must deliver a wrap fee program brochure, prepared under Part 2A Appendix 1 of Form ADV, to its wrap fee clients, and Rule 204-3 governs delivery of the brochure. A single fee that covers advice and execution does not remove the disclosure duty. Charging separate commissions on top of the wrap fee would contradict the program's design, delivering only the general firm brochure leaves out the wrap-specific disclosure, and the Administrator does not approve fee amounts before a program is offered.Form ADV Part 2 General Instructions and Part 2A Appendix 1 (wrap fee program brochure); 17 CFR 275.204-3

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, because no customer is harmed by a short delay in receiving funds
• b.Acceptable because the firm has custody of the account, and the customer is taken to have allowed the firm to hold the funds when the account was opened
• c.A permitted practice if the firm credits the customer with interest for the days the funds were held back
• 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, holding an account does not authorize borrowing customer funds without permission, and paying interest afterward does not make the delay or the use proper.NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents (amended 2025-04-07), 1.a and the conduct-not-inclusive paragraph

Under the Uniform Securities Act, a person is an investment adviser only if all three parts of a defining test are met. Those three elements are:

• a.Advice, custody, and discretion
• b.Advice about securities, custody of client assets, and a written advisory contract signed by each client
• c.Giving advice about securities, doing so as a business, and receiving compensation for it✓
• d.Advice about securities, discretionary authority over client accounts, and a registration as a federal covered adviser

The definition turns on three elements: a person who gives advice about securities, does so as a business, and receives compensation for it. All three must be present. Custody, discretion, a written contract, registration status, examinations and bonding are not the definitional elements.Uniform Securities Act (1956, as amended) 401(f)

A broker-dealer that gives investment advice will generally avoid the definition of investment adviser only if the advice is:

• a.Solely incidental to its brokerage business and the firm receives no special compensation for the advice✓
• b.Given only to institutional clients, because the definition reaches only advisers who serve individual retail investors
• c.Delivered in writing together with a disclosure statement saying the firm is not acting as an investment adviser to the client
• d.Limited to exempt securities

The broker-dealer exclusion from the investment adviser definition requires both that the advice be solely incidental to the conduct of brokerage and that the firm receive no special compensation for that advice. Charging a separate advisory fee is special compensation and destroys the exclusion. Client type, security type, a written disclaimer and Administrator approval are not the test.Uniform Securities Act (1956, as amended) 401(f)(4)

A broker-dealer begins charging some customers a separate, stand-alone fee specifically for financial-planning advice. With respect to those services, the firm:

• a.Remains excluded from the definition of investment adviser
• b.Is exempt because it is already a registered broker-dealer
• c.Loses the broker-dealer exclusion and must consider investment adviser registration, because it now receives special compensation for advice✓
• d.Need only notify its customers of the new fee

Receiving special compensation, a separate fee, for advice removes the broker-dealer exclusion, so the firm must analyze investment adviser registration for that activity. Being a registered broker-dealer does not exempt a firm from the advisory framework once it charges specifically for advice, and mere customer notice does not resolve the registration question.Uniform Securities Act

The publisher of a general-circulation financial newspaper that offers regular market commentary and non-personalized stock suggestions is:

• a.An investment adviser that must register, because regular market commentary combined with specific stock suggestions is advice given for compensation
• b.Excluded from the definition of investment adviser, because bona fide publications of general and regular circulation are excepted✓
• c.An investment adviser representative who must register, because the individual writers who prepare the stock suggestions are the ones giving the advice
• d.A broker-dealer that must register, because publishing recommendations to the general public is a form of dealing in securities for others

A bona fide newspaper, news magazine, or business or financial publication of general and regular circulation is excluded from the investment adviser definition so long as its content is not advice based on the specific investment situation of each client. The publisher is therefore not an adviser, its writers are not adviser representatives, and publishing commentary is not effecting transactions, so it is not a broker-dealer. The exclusion can be lost if the publication begins giving individualized, tailored advice.Uniform Securities Act (1956, as amended) 401(f)(5)

An investment adviser managing $60 million in client assets, and not otherwise required to register with the SEC, is generally:

• a.A federal covered adviser barred from state registration, because the Act channels every adviser that manages more than fifty million dollars into exclusive federal oversight under NSMIA
• b.Exempt from all registration
• c.A state-registered adviser, because advisers below the $100 million threshold generally register with the states✓
• d.Required to register with both the SEC and every state in which it operates, a dual-filing obligation the statute imposes on mid-sized advisers until their assets fall back below the reporting threshold

Advisers below the $100 million assets-under-management threshold, in the mid-sized band above $25 million, generally register at the state level rather than with the SEC; federal (covered) registration is generally required at $100 million and above, with a buffer for crossing the line. Such an adviser is neither exempt nor routinely dual-registered.Investment Advisers Act / NSMIA

An individual's only function for a state-registered adviser is to solicit prospective clients to sign advisory agreements, for which he is paid. He is:

• a.An investment adviser representative who must register, because soliciting advisory clients is a covered function✓
• b.Exempt from registration, because he renders no investment advice and neither manages client accounts nor supervises other employees
• c.A broker-dealer agent
• d.Exempt, because the registration of the adviser he works for already covers every individual employed by that firm

The investment adviser representative definition includes persons associated with a registered adviser who solicit, offer or negotiate for the sale of, or sell, advisory services, not only those who give advice. Solicitation is not clerical, so it triggers registration even though the individual renders no securities advice himself, and the firm's registration does not cover its individual representatives. He does not sell securities, so he is not a broker-dealer agent.Uniform Securities Act (1956, as amended) 401(g)(4)

An individual wishes to act as an agent for two unaffiliated broker-dealers at the same time. Under the Uniform Securities Act, this is:

• a.Automatically prohibited in every state
• b.Permitted without anyone else's knowledge
• c.Generally allowed only if the individual is registered as an agent of each firm and both firms consent, subject to state variation✓
• d.Permitted only for agents serving institutional clients, provided the customer is furnished the required written confirmation and the details are recorded on the books the firm must maintain

An agent must be separately registered for each employing broker-dealer, so acting for two firms requires a registration with each and generally each firm's consent; several states restrict or discourage dual registration with unaffiliated firms, so the answer carries a state-by-state caveat. It is neither automatically barred nor something done secretly, and it is not limited to institutional agents.Uniform Securities Act

With respect to examinations, the Uniform Securities Act provides that the Administrator:

• a.May never require an examination as a condition of registration, because qualification is judged only from the applicant's record
• b.May require an examination only of investment advisers
• c.Must require every applicant, whatever the registration category, to pass the same national examination administered by FINRA
• d.May by rule require applicants to pass a written or oral examination as a condition of registration✓

The Administrator may by rule provide for an examination, written or oral or both, to be taken by any class of or all applicants, and may by rule or order waive it where it is not necessary for the protection of clients. The authority is discretionary, is not limited to advisers, and does not mandate a single uniform national test for every category.Uniform Securities Act (1956, as amended) 204(b)(6)

The Administrator may require a state-registered broker-dealer or investment adviser that has custody of, or discretion over, client assets to:

• a.Guarantee clients against investment loss on the securities held in custody, up to a limit the Administrator sets by rule
• b.Do nothing beyond filing the initial application, because custody and discretion are regulated only by the federal agencies
• c.Maintain a minimum net capital or net worth and post a surety bond, within limits tied to federal standards✓
• d.Insure client accounts through a private carrier for the full value of the assets held, as the condition for keeping its registration

The Administrator may set minimum net capital or net worth requirements and require surety bonds, particularly where a firm has custody or discretionary authority, though the state may not exceed the limits set by the federal net-capital and bonding provisions, and a deposit may be accepted in place of a bond. No firm may be required to guarantee accounts against market loss, to privately insure them, or to stop at the initial application.Uniform Securities Act (1956, as amended) 202(e)-(f)

Regarding the books and records of registered broker-dealers, the Administrator may:

• a.Prohibit any recordkeeping at all
• b.Require records but never set a retention period
• c.Impose requirements that exceed the federal standards for firms also registered with the SEC
• d.Require registrants to make and preserve specified records for prescribed periods, not exceeding the federal requirements for firms also registered with the SEC✓

The Administrator prescribes recordkeeping and retention requirements, but for firms also registered with the SEC, state requirements may not exceed the corresponding federal ones, a coordination Congress imposed through NSMIA. Records are mandatory and time-limited, so prohibiting records or refusing to set a retention period misstates the law.Uniform Securities Act

A broker-dealer organized as a partnership has one of its several partners withdraw from the firm. Under the Uniform Securities Act, the firm's registration:

• a.Remains effective, but the firm must promptly notify the Administrator of the change in membership✓
• b.Automatically terminates and must be refiled from scratch, because a partnership is a new legal entity whenever any partner leaves
• c.Is unaffected and requires no notice, because the registration belongs to the firm's name rather than to its individual partners
• d.Is suspended until the Administrator approves the new partnership roster, and the firm may not transact business in the meantime

A change in the partners of a partnership registrant does not automatically void the firm's registration, but the firm must promptly file a correcting amendment reporting the material change in its membership. It neither terminates automatically nor requires no notice, it is not suspended pending approval of a roster, and some states treat a change in membership as creating a new partnership under local law, so state variation exists.Uniform Securities Act (1956, as amended) 203(d)

A state-registered investment adviser must keep its Form ADV current by:

• a.Refiling a brand-new Form ADV every year within 30 days of its registration anniversary date
• b.Filing a quarterly amendment, whether or not any information has changed, within 30 days of each quarter end
• c.Filing an annual updating amendment within 90 days of its fiscal year end and promptly amending any materially inaccurate information✓
• d.Filing an annual updating amendment within 120 days of its fiscal year end and delaying any interim changes until that annual filing is due

An adviser keeps Form ADV current through an annual updating amendment filed within 90 days of its fiscal year end and through prompt amendments whenever required information becomes inaccurate or, for some items, materially inaccurate (Rule 204-1 is the SEC rule, and state-registered advisers follow the same Form ADV amendment instructions). An adviser does not refile a brand-new form each year or amend quarterly regardless of changes, the annual deadline is 90 days rather than 120, and interim changes cannot wait for the next annual filing.Advisers Act Rule 204-1 (17 CFR 275.204-1); Form ADV General Instructions

A retired engineer gives securities advice to friends a few times a year and never charges for it. Under the Uniform Securities Act, he is:

• a.An investment adviser who must register
• b.Not an investment adviser, because he is neither in the business of advising nor compensated for it✓
• c.An investment adviser representative
• d.A broker-dealer

He fails two prongs of the three-part test: occasional advice to friends is not being in the business of advising, and he receives no compensation. Either failure alone keeps him outside the investment adviser definition, so registration is not required.Uniform Securities Act

An individual will both sell securities for a broker-dealer and provide advisory services for the firm's affiliated state-registered investment adviser. This individual must:

• a.Register only once, in whichever capacity occupies more of his time
• b.Register only as an agent, because that is the higher standard
• c.Register separately as an agent of the broker-dealer and as an investment adviser representative of the adviser✓
• d.Not register at all, because the two firms are affiliated

Agent and investment adviser representative are distinct registration categories tied to distinct functions and distinct firms; performing both roles requires registration in each capacity. Affiliation between the broker-dealer and the adviser does not merge the two registrations, and neither one is a mere subset of the other.Uniform Securities Act

Under the Uniform Securities Act, a civil action to recover for an unlawful sale of securities must generally be brought within:

• a.One year of the sale, with no discovery extension, a conclusion the NASAA model rules are commonly understood to support for a person already registered and in good standing elsewhere
• b.Ten years of the sale under all circumstances
• c.Six years after discovery only
• d.The earlier of three years after the sale (or contract of sale) or two years after discovery of the violation✓

The civil statute of limitations under the act is the earlier of three years after the sale or contract of sale, or two years after the plaintiff discovered the facts constituting the violation. It should not be confused with the five-year limitation for beginning a criminal prosecution. Some states that adopted later versions vary the exact periods.Uniform Securities Act

When a broker-dealer is civilly liable to a purchaser under the act, which other persons may also be held jointly and severally liable?

• a.Only the issuer of the security and any underwriter that participated in the offering, because liability follows the distribution rather than the sale
• b.Persons who directly or indirectly control the firm, its partners, officers, and directors, and employees or agents who materially aided the sale✓
• c.Only the employees who personally dealt with the purchaser, because liability is limited to the individuals who actually handled the transaction itself
• d.Only the Administrator

Civil liability extends beyond the seller to persons who directly or indirectly control the seller, and to partners, officers, directors, and materially aiding employees, broker-dealers or agents, who are jointly and severally liable unless they can sustain the burden of showing they did not know, and in the exercise of reasonable care could not have known, of the facts giving rise to liability. It is not confined to the issuer and underwriters, not confined to the employees who handled the sale, and not a matter for the Administrator.Uniform Securities Act (1956, as amended) 410(c)

The term 'fraud' as used in the antifraud provisions of the Uniform Securities Act:

• a.Is limited to common-law deceit and requires proof that the defendant intended to defraud and that the victim relied on the statement
• b.Applies only to registered securities, because exempt securities and exempt transactions are outside the antifraud provisions
• c.Is broader than common-law fraud and is not confined to the elements of common-law deceit✓
• d.Requires proof that the victim actually lost money, because a claim needs both a misrepresentation and a resulting financial injury

The act's concept of fraud, deceit, or manipulation is deliberately not limited to common-law deceit, so it does not require every common-law element such as proven intent and reliance. The antifraud provisions reach any security, exempt or not, and apply to offers as well as sales, so proof of a completed loss is not always required.Uniform Securities Act (1956, as amended) 401(d)

Under the Uniform Securities Act, no provision imposing liability applies to a person who:

• a.Acted in good-faith conformity with a rule, form, or order of the Administrator, even if it is later amended or rescinded✓
• b.Claims he was simply unaware of the law
• c.Relied on the informal advice of a member of the Administrator's staff, because staff guidance has the same effect as a rule or order
• d.Sincerely believed the security was a good investment, because an honest belief in its merits negates any liability under the act

The act protects a person who acts in good-faith conformity with a rule, form, or order of the Administrator, notwithstanding a later amendment or rescission. Ignorance of the law, informal staff advice that is not a rule, form or order, and honest optimism about a security's merits are not defenses to liability.Uniform Securities Act