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Series 63 Prohibited Communications Practice Questions

Official outline
NASAA Series 63 Exam Content Outline
Questions on this page
8
Updated
Nov 3, 2026

  1. Question 1, medium

    An investment adviser's advertisement features a testimonial from a satisfied client describing exceptional investment results, with no additional context provided. Under standards governing adviser advertising, the most significant compliance concern is:

    • A.Testimonials may be used only if the adviser first obtains written regulatory approval of the specific advertisement, because the standards treat every client testimonial as presumptively misleading
    • B.The main concern is whether the client's statement is accurate; if the adviser verifies that the quoted results are genuine, the testimonial is generally acceptable without further disclosures
    • C.Anonymous testimonials are generally treated differently from named ones, and withholding the client's identity typically removes the advertisement from the testimonial requirements
    • D.The testimonial may create a misleading impression of typical results and generally requires clear disclosures (e.g., that the experience may not be representative, and any compensation involved) to avoid being false or misleading
    Show answer and explanationHide answer

    Correct answer: D. The testimonial may create a misleading impression of typical results and generally requires clear disclosures (e.g., that the experience may not be representative, and any compensation involved) to avoid being false or misleading

    Adviser advertising rules permit testimonials under specific conditions (disclosures about non-representativeness, any compensation, and other required elements), rather than banning them outright. The compliance risk with an undisclosed, uncontextualized testimonial is that it implies typical or guaranteed results, which is misleading even if the client's statement is factually true.

    • A. Incorrect. Current advertising standards do not require pre-approval and do not treat testimonials as presumptively misleading. They permit testimonials when required disclosures are made and the advertisement is not false or misleading.
    • B. Incorrect. Verifying that the statement is genuine does not cure the problem. A true testimonial can still imply that atypical results are typical, and the standards call for clear disclosures such as whether the client was compensated and whether the experience is representative.
    • C. Incorrect. The advertising standards apply to a testimonial whether or not the client is named. Anonymity does not remove the disclosure requirements or address the risk of a misleading impression of typical results.
    • D. Correct. The real concern is that a lone, unqualified testimonial can create a misleading impression of typical results. The remedy is clear disclosure, such as that the experience may not be representative and whether compensation was involved.

  2. Question 2, medium

    An investment salesperson claims that an investment doubled in a year without disclosing that the observed period was selected from a much longer history of losses. What is the concern?

    • A.Securities advertising is exempt from antifraud standards when it is directed to the general public
    • B.A numerically accurate one-year return is acceptable because the period reported is clearly identified
    • C.The claim becomes acceptable if a general risk legend appears in smaller type at the bottom of the page
    • D.Misleading performance presentation through selective time-period disclosure and omission of the losing years
    Show answer and explanationHide answer

    Correct answer: D. Misleading performance presentation through selective time-period disclosure and omission of the losing years

    Showing a single best year while omitting a much longer record of losses creates a misleading impression even if the figure is accurate. Material omissions about performance violate antifraud and communications standards.

    • A. Advertising is subject to antifraud standards whatever the audience.
    • B. An accurate figure can still mislead when the period was chosen to hide the broader record.
    • C. A generic risk legend does not cure the omission of the losing years.
    • D. Cherry-picking the time period and omitting the losses distorts the picture investors receive.

  3. Question 3, medium

    An agent posts on her personal social media account a client's unsolicited comment stating, 'Thanks to [Agent], my portfolio has doubled in two years. Best decision I ever made!' and encourages followers to contact her for similar results. Under the Uniform Securities Act's prohibitions on testimonials and communications with the public, this post is:

    • A.Generally prohibited/restricted. Using a client testimonial referencing specific investment results to solicit new business is an unethical practice, and implying similar results are achievable for new clients compounds the violation
    • B.Permissible because the client volunteered the comment and the agent did not write it herself; an unsolicited testimonial is treated as the client's own speech rather than the agent's communication
    • C.Permissible as long as the agent adds a general disclaimer such as 'results may vary' anywhere on her profile, since a disclaimer cures any misleading impression created by the testimonial
    • D.A violation if the agent paid or otherwise compensated the client for the testimonial; an unsolicited testimonial the agent did not pay for and merely reposted is not a prohibited communication
    Show answer and explanationHide answer

    Correct answer: A. Generally prohibited/restricted. Using a client testimonial referencing specific investment results to solicit new business is an unethical practice, and implying similar results are achievable for new clients compounds the violation

    Testimonials that reference or imply investment performance results are treated as misleading communications, particularly because they suggest atypical or unrepresentative outcomes are the norm and imply future clients will achieve similar results. It does not matter that the client volunteered the comment unprompted. The agent's choice to post and promote it is the affirmative act at issue. A generic disclaimer does not cure a specific-results testimonial.

    • A. Correct. Using a specific-results testimonial to solicit business, with an implication of repeatable results, is prohibited/unethical.
    • B. Incorrect. The agent's choice to post and promote the testimonial is the act at issue; it isn't treated as the client's speech just because the client volunteered it.
    • C. Incorrect. A generic disclaimer doesn't neutralize a specific-performance testimonial or the implication of repeatable results.
    • D. Incorrect. Payment to the client isn't a required element, and reposting an unpaid testimonial to solicit business can still be a prohibited communication.

  4. Question 4, hard

    A mutual fund advertising brochure contains only factually accurate statements about the fund's historical returns and strategy but omits any mention of the fund's sales load and liquidity restrictions. Is this brochure permitted under the antifraud provisions governing advertising?

    • A.Permitted, because every statement made in the brochure is factually true and the antifraud provisions reach affirmative misstatements, not omissions
    • B.Prohibited when a client can prove reliance on the brochure and resulting damages, as in a common-law fraud action; absent such proof the Administrator generally may not act
    • C.Permitted, as long as the fund's full prospectus is available online, because information disclosed elsewhere cures any omission in advertising material
    • D.Prohibited, because omitting material facts necessary to make a communication not misleading is itself a violation, even where all statements made are literally true
    Show answer and explanationHide answer

    Correct answer: D. Prohibited, because omitting material facts necessary to make a communication not misleading is itself a violation, even where all statements made are literally true

    A communication can be misleading. And thus prohibited. Even if every individual statement is literally true, if it omits material facts (like sales loads or liquidity restrictions) necessary to make the overall impression not misleading. This omission-based standard is central to anti-fraud provisions covering advertising and sales literature.

    • A. Literal truth of each statement doesn't save the brochure; the antifraud rules reach misleading omissions of material facts, not only affirmative misstatements.
    • B. Antifraud violations for misleading communications don't depend on a client proving reliance and damages as a common-law fraud claim would, and the Administrator can act without such proof.
    • C. A prospectus being available elsewhere doesn't cure a misleading advertisement; the ad itself must not omit material facts.
    • D. Correct. Omitting material facts (like the sales load and liquidity restrictions) necessary to make the communication not misleading is itself a violation, regardless of whether every included statement is true.

  5. Question 5, medium

    Which of the following statements in an investment adviser's marketing materials would most likely violate the Uniform Securities Act's antifraud/communications standards?

    • A.The composite returns shown are net of advisory fees and include every account managed in this strategy since inception.
    • B.No investment strategy can eliminate the risk of loss, and diversification does not ensure a profit.
    • C.All of our fees and expenses are described in detail in our brochure, which clients receive before signing an advisory contract.
    • D.'This strategy is guaranteed to outperform the S&P 500 with no risk of loss.'
    Show answer and explanationHide answer

    Correct answer: D. 'This strategy is guaranteed to outperform the S&P 500 with no risk of loss.'

    Guaranteeing performance or claiming 'no risk of loss' is a fraudulent and prohibited communication. No legitimate securities strategy can be truthfully guaranteed, and such claims mislead investors about fundamental investment risk.

    • A. Not a violation. Net-of-fee performance covering all accounts since inception is the opposite of cherry-picking, so it is fair, complete and not misleading under the antifraud provisions, provided it is accurate.
    • B. Not a violation. It accurately says that risk of loss cannot be eliminated and that diversification gives no assurance of profit. It makes no promise, so it does not mislead.
    • C. Not a violation. Referring clients to a brochure that fully describes fees is a truthful disclosure statement and is consistent with the delivery and disclosure obligations of an adviser, so it creates no misleading impression.
    • D. Violation. Promising that a strategy will outperform an index with no risk of loss is a false and misleading statement of material fact. No adviser can guarantee returns or rule out loss, so the claim is deceptive under the Uniform Securities Act's prohibition on fraudulent or misleading conduct by advisers (Section 502).

  6. Question 6, hard

    An agent sends clients a written communication stating that a specific stock is guaranteed to reach $50 per share by a certain date. Which prohibited practice does this communication reflect?

    • A.Churning, meaning excessive trading in a client's account to generate commissions
    • B.Unauthorized trading, meaning executing transactions without client approval or discretion
    • C.Making a guaranteed, definitive prediction of specific future investment results
    • D.Selling away, meaning selling securities not approved by the agent's firm
    Show answer and explanationHide answer

    Correct answer: C. Making a guaranteed, definitive prediction of specific future investment results

    Predicting a specific future price or guaranteeing a specific investment outcome is a prohibited communications practice because it misrepresents the inherent uncertainty of securities markets and implies a certainty that cannot honestly be given.

    • A. Churning concerns excessive trading to generate commissions, which is not what is described in this communication.
    • B. No trade is described in this scenario at all; the issue is the content of the written communication, not unauthorized trading.
    • C. Correct. Guaranteeing a specific stock will reach a specific price by a certain date is a prohibited, definitive prediction of future investment results.
    • D. Selling away involves an agent selling securities outside the firm's approval, which is unrelated to a written price prediction.

  7. Question 7, hard

    An investment adviser's marketing piece presents net performance results only for the three best-performing accounts out of the firm's twenty discretionary accounts during the period, without disclosing that these were a hand-picked subset or providing composite results for all comparable accounts. This is best characterized as:

    • A.Permitted, since the performance figures shown are accurate for those three accounts and the firm is not required to include results for accounts that were not selected
    • B.A violation if the three accounts shown underperformed their disclosed benchmarks, but permitted if they outperformed those benchmarks over the same measurement period
    • C.Permitted, as long as a footnote states 'past performance does not guarantee future results' and the figures are net of all advisory fees and expenses for the period shown
    • D.A misleading communication because selectively presenting only favorable results ('cherry-picking') without disclosing the basis for selection creates a materially misleading impression of overall performance
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    Correct answer: D. A misleading communication because selectively presenting only favorable results ('cherry-picking') without disclosing the basis for selection creates a materially misleading impression of overall performance

    Presenting hand-selected favorable results without disclosing the selection methodology (cherry-picking) is a materially misleading communication even though the individual figures are factually accurate. The antifraud standard reaches misleading impressions created by selective, unrepresentative disclosure, not just outright false statements.

    • A. Incorrect - accuracy of the individual numbers doesn't cure the misleading overall impression created by selective presentation, and omitting the other accounts is the problem.
    • B. Incorrect - the violation is about selective, unrepresentative presentation, not about whether the selected accounts beat or trailed a benchmark.
    • C. Incorrect - a generic disclaimer and net-of-fee figures don't address the specific cherry-picking problem.
    • D. Correct.

  8. Question 8, medium

    An investment adviser's advertisement highlights only its five best-performing stock recommendations from the past year, omitting the recommendations that performed poorly. Is this advertisement permitted?

    • A.Permitted, provided the ad also states that these are not all the recommendations made during the year and that the selected recommendations were chosen based on their performance
    • B.Prohibited, unless the communication includes or offers to furnish a list of all recommendations made within the preceding period, along with required cautionary disclosures
    • C.Permitted, because a firm must provide a list of its losing recommendations to a client who specifically requests it and has no obligation to offer that list in the advertisement itself
    • D.Prohibited, unless the adviser first files the advertisement with the state regulator and receives written approval before using it
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    Correct answer: B. Prohibited, unless the communication includes or offers to furnish a list of all recommendations made within the preceding period, along with required cautionary disclosures

    NASAA's Statement of Policy on advertising requires that if a firm references specific past recommendations, it must offer or include a list of all recommendations made within the preceding period (typically one year) along with cautionary language that past performance doesn't guarantee future results. Cherry-picking only winners misrepresents the firm's actual track record.

    • A. A mere disclaimer that the ad doesn't show all recommendations isn't sufficient by itself; the specific requirement is offering or including the full list along with required cautionary disclosures.
    • B. Correct. Cherry-picking only the best-performing recommendations is prohibited unless the communication includes, or offers to furnish, a list of all recommendations made during the relevant period along with the required cautionary disclosures, so as not to mislead about overall performance.
    • C. The obligation to include or offer the full list isn't conditioned on a client specifically asking; it's a proactive requirement built into how such advertisements must be structured.
    • D. Incorrect. Advisers generally do not need regulator pre-approval to advertise, and approval would not cure a cherry-picked presentation anyway. What cures it is including, or offering to furnish, a list of all recommendations for the period along with the required cautionary disclosures.

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