An agent repeatedly buys and sells securities in an account over which the agent exercises control, generating commissions but little client benefit. What element is most relevant in evaluating churning?

Control, excessive activity relative to the client's objectives, and scienter or deceptive intent as applicable.

A registered agent shares a portion of his commission on a securities transaction with a friend who referred the client but who is not registered as an agent. Is this arrangement permissible?

An unethical practice, because compensation for effecting securities transactions may not be shared with an unregistered person

An agent tells a customer, 'Buy this stock now -- next quarter's dividend increase will push the price up before the ex-dividend date,' even though no such increase has been announced or approved by the issuer. This practice is best described as:

'Selling dividends' -- an unethical and fraudulent practice of using an unannounced or speculative future distribution as an inducement to purchase

An agent sells $200,000 of promissory notes issued by a company owned by his brother-in-law to several of his brokerage clients, without providing prior written notice to, or receiving prior approval from, his broker-dealer. Three months later, after a client complains, the agent informs his branch manager about the sales for the first time. Does the after-the-fact disclosure cure the violation?

No, selling away occurs at the time of the unauthorized, undisclosed sales; disclosing after the fact does not retroactively cure the violation, though it may be a mitigating factor

A client tells his agent over the phone, 'Just use your judgment on timing and price for my account going forward, I trust you.' The agent begins exercising ongoing discretion in the account without any written authorization and without the firm having accepted the account as discretionary. Is this permissible?

No, ongoing discretionary authority requires written authorization from the client and acceptance of the account as discretionary by the firm

An agent deposits a client's margin account proceeds into his own personal bank account temporarily, intending to transfer the correct amount to the client later, and keeps an informal handwritten ledger to track what is owed. No client funds are ultimately lost. Is this acceptable because the agent kept accurate personal records?

No, commingling client funds with the agent's personal funds is a prohibited practice regardless of the agent's intent or record-keeping, and independent of whether any funds are ultimately lost

A client's margin account has a $20,000 debit balance and holds securities worth $90,000. Without the client's written consent, the agent's firm pledges the entire holding to secure the firm's general bank loan. How should this be characterized?

Improper hypothecation, since customer securities may be pledged only with written consent and not beyond the client's debit.

A broker-dealer, acting as principal, sells a client a corporate bond that is actively traded with ample liquidity in the market, marking the price up 6% over the prevailing market price at the time, with no unusual service, risk, or effort involved in the transaction. Which best describes this conduct?

It is a potential violation of fair-pricing/markup standards, since the markup is not reasonably related to the current market price and no additional service or risk justifies it

Series 63 Unethical Practices: Broker-Dealers and Agents Practice Questions

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

Question 1, medium
An agent repeatedly buys and sells securities in an account over which the agent exercises control, generating commissions but little client benefit. What element is most relevant in evaluating churning?
- A.Total commissions generated, the firm's commission schedule, and whether the client signed the order tickets.
- B.Account size, the representative's licensing history, and whether each recommended security was suitable on its own.
- C.Trading authority over the account, the securities' dividend yield, and whether the client complained in writing.
- D.Control, excessive activity relative to the client's objectives, and scienter or deceptive intent as applicable.
Show answer and explanationHide answer
Correct answer: D. Control, excessive activity relative to the client's objectives, and scienter or deceptive intent as applicable.
Churning requires control over the account, trading excessive in light of the client's objectives, and intent to benefit the representative through commissions.
- A. Commission totals are evidence of cost, but they do not show control or excessiveness relative to the client's objectives. A signed order ticket also does not rule out churning when the representative effectively directs the account. The commission schedule is not an element of the claim.
- B. Account size and licensing history are not elements of churning. Trade-by-trade suitability does not answer the question either, because churning looks at the overall pattern of activity. Individually suitable trades can still be excessive in total.
- C. Trading authority overlaps with the control element, but dividend yield is irrelevant to excessiveness, and a written complaint is not required to establish churning. This choice leaves out excessive activity and deceptive intent, which are core elements.
- D. Churning is evaluated by whether the representative controlled the account, whether the trading was excessive for the client's objectives (often measured by turnover rate and cost-to-equity), and whether there was deceptive intent. These are the core elements.
- Source: NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, accessed October 2026
Question 2, medium
A registered agent shares a portion of his commission on a securities transaction with a friend who referred the client but who is not registered as an agent. Is this arrangement permissible?
- A.Permissible, as long as the unregistered individual's share of the commission is less than 25%
- B.Permissible, as long as the arrangement is disclosed to the client in advance
- C.An unethical practice, because compensation for effecting securities transactions may not be shared with an unregistered person
- D.An unethical practice only if the unregistered individual resides outside the state where the transaction occurs
Show answer and explanationHide answer
Correct answer: C. An unethical practice, because compensation for effecting securities transactions may not be shared with an unregistered person
Sharing commissions or other transaction-based compensation with a person who is not registered as an agent is a dishonest and unethical business practice under the NASAA model rule. The prohibition is not scaled by the percentage shared, cured by client disclosure, or affected by the referring individual's state of residence; the defect is the unregistered person's receipt of transaction-based compensation at all.
- A. There's no percentage safe harbor. Sharing any portion of transaction-based compensation with an unregistered person is prohibited outright.
- B. Disclosing the arrangement to the client doesn't cure the problem; the issue is that an unregistered person cannot receive compensation tied to effecting securities transactions.
- C. Sharing commissions with someone who isn't registered as an agent is an unethical practice because only registered persons may be compensated for effecting securities transactions.
- D. The unregistered friend's state of residence is irrelevant. The violation is sharing transaction-based compensation with an unregistered person, period.
- Source: Exam outline: NASAA Series 63 Exam Content Outline, accessed October 2026
Question 3, medium
An agent tells a customer, 'Buy this stock now. Next quarter's dividend increase will push the price up before the ex-dividend date,' even though no such increase has been announced or approved by the issuer. This practice is best described as:
- A.'Selling dividends'. An unethical and fraudulent practice of using an unannounced or speculative future distribution as an inducement to purchase
- B.A permissible market forecast. Agents may predict how an expected corporate action will affect a stock's price without any support
- C.Permitted, because the agent sincerely believes the increase is likely and is only sharing a personal opinion with the customer
- D.Permitted only if the agent later records the speculative nature of the statement on the trade confirmation sent after the sale
Show answer and explanationHide answer
Correct answer: A. 'Selling dividends'. An unethical and fraudulent practice of using an unannounced or speculative future distribution as an inducement to purchase
'Selling dividends' refers to inducing a purchase by emphasizing an upcoming (often unannounced, unconfirmed, or purely speculative) dividend or distribution, misleading the customer about the certainty of that benefit. It is a recognized unethical/fraudulent sales practice regardless of the agent's personal belief in the likelihood of the increase.
- A. Correct. This is the textbook description of the 'selling dividends' unethical practice.
- B. Incorrect. A forecast needs a reasonable basis and cannot be built on a corporate action that has not been announced or approved. Presenting an invented dividend increase as the reason to buy is a misrepresentation, not a permissible prediction.
- C. Incorrect. Sincere belief does not make an unannounced, unapproved dividend increase a fact. Using it as a firm reason to buy is still a misleading statement and a dishonest sales practice under the Uniform Securities Act.
- D. Incorrect. The misleading statement was made to induce the purchase, and a note on the confirmation sent afterward cannot undo it. The customer has already relied on the claim, so the violation stands.
- Source: FINRA Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices), accessed October 2026
Question 4, medium
An agent sells $200,000 of promissory notes issued by a company owned by his brother-in-law to several of his brokerage clients, without providing prior written notice to, or receiving prior approval from, his broker-dealer. Three months later, after a client complains, the agent informs his branch manager about the sales for the first time. Does the after-the-fact disclosure cure the violation?
- A.No, selling away occurs at the time of the unauthorized, undisclosed sales; disclosing after the fact does not retroactively cure the violation, though it may be a mitigating factor
- B.Yes, disclosure to the firm at any point, including after the sales were made, remedies a selling-away violation by allowing the firm to ratify the transactions retroactively and avoid a regulatory sanction
- C.Yes, because the notes were sold to existing brokerage clients rather than to the general public, so the prior notice and approval requirement did not apply to the transactions
- D.No, because the client complaint triggered a regulatory inquiry; had the agent disclosed to the firm before any complaint, the earlier disclosure would have cured the violation
Show answer and explanationHide answer
Correct answer: A. No, selling away occurs at the time of the unauthorized, undisclosed sales; disclosing after the fact does not retroactively cure the violation, though it may be a mitigating factor
Selling away is defined by engaging in securities transactions outside the scope of one's employment without prior written notice to and approval from the broker-dealer; the violation is complete once the sales occur without that prior notice/approval. Coming forward later may be considered in any disciplinary response but does not undo the fact that unauthorized, unsupervised sales already took place. Supervision exists precisely to catch problems before they harm clients, not after.
- A. Correct. Selling away occurs at the moment of the unauthorized, undisclosed sales; disclosing it after the fact doesn't cure the violation, though it may mitigate the resulting sanction.
- B. Disclosure at any later point doesn't retroactively cure a violation that already occurred at the time of the unauthorized sales, and firm ratification does not prevent regulatory sanction.
- C. Selling to existing brokerage clients rather than the general public doesn't exempt the transactions from the prior-notice requirement.
- D. The violation exists independent of any complaint or regulatory inquiry, and later disclosure. Whenever made. Cannot cure a sale that already occurred without prior notice and approval.
- Source: FINRA Rule 3280, accessed October 2026
Question 5, easy
A client tells his agent over the phone, 'Just use your judgment on timing and price for my account going forward, I trust you.' The agent begins exercising ongoing discretion in the account without any written authorization and without the firm having accepted the account as discretionary. Is this permissible?
- A.Yes, verbal authorization from the client is legally sufficient for ongoing discretionary trading by a registered agent with an established relationship
- B.No, ongoing discretionary authority requires written authorization from the client and acceptance of the account as discretionary by the firm
- C.Yes, as long as the agent documents the client's verbal statement in his own notes afterward and the firm's supervisor later reviews the notes
- D.No, because the client's wording was too informal; had he said 'discretion' rather than 'trust', his verbal instruction alone would have been enough
Show answer and explanationHide answer
Correct answer: B. No, ongoing discretionary authority requires written authorization from the client and acceptance of the account as discretionary by the firm
Exercising discretion beyond narrow time-and-price discretion on a specific order requires written authorization from the customer and the broker-dealer's acceptance of the account as discretionary; a verbal green light does not satisfy this requirement, and trading without it is unauthorized/unethical. C is wrong because the agent's own after-the-fact notes are not a substitute for the client's written authorization.
- A. Wrong. Verbal authorization alone is not legally sufficient for ongoing discretionary trading, even for an established relationship; written client authorization and firm acceptance are both required.
- B. Correct. Ongoing discretionary authority requires written authorization from the client and acceptance of the account as discretionary by the firm. Neither occurred here.
- C. The agent's own after-the-fact notes, even if later reviewed by a supervisor, do not substitute for the client's written authorization required by rule.
- D. The defect is the absence of written authorization and firm acceptance, not the particular word the client used; saying 'discretion' verbally would not have fixed it.
- Source: NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, accessed October 2026
Question 6, medium
An agent deposits a client's margin account proceeds into his own personal bank account temporarily, intending to transfer the correct amount to the client later, and keeps an informal handwritten ledger to track what is owed. No client funds are ultimately lost. Is this acceptable because the agent kept accurate personal records?
- A.Yes, since no client funds were actually lost, the agent tracked the amounts owed in a contemporaneous handwritten ledger, and the money was held for only a short time
- B.No, but only because the ledger was informal; the same deposit would be acceptable if the agent kept formal, computerized records of each amount owed and transferred it promptly
- C.Yes, as long as the client is informed after the transfer occurs and the funds are then returned to the client within a reasonable period of time
- D.No, commingling client funds with the agent's personal funds is a prohibited practice regardless of the agent's intent or record-keeping, and independent of whether any funds are ultimately lost
Show answer and explanationHide answer
Correct answer: D. No, commingling client funds with the agent's personal funds is a prohibited practice regardless of the agent's intent or record-keeping, and independent of whether any funds are ultimately lost
Commingling client funds with an agent's own personal or firm funds is prohibited outright because it creates the exact risk the rule exists to prevent. Loss, misuse, or inability to account for client assets. Regardless of whether the agent's intentions were good, kept careful notes, or ultimately avoided any loss.
- A. The absence of client losses and the existence of a ledger don't excuse commingling. The prohibition applies regardless of outcome.
- B. This misplaces the problem. The violation is depositing client proceeds into the agent's personal account, which is commingling. Better record-keeping or a prompt transfer does not make that deposit permissible.
- C. After-the-fact client notification and prompt return of funds don't retroactively cure the improper commingling that already occurred.
- D. Correct. Commingling client funds with an agent's personal funds is prohibited outright, independent of the agent's intent, record-keeping, or whether any funds are ultimately lost.
- Source: Exam outline: NASAA Series 63 Exam Content Outline, accessed October 2026
Question 7, medium
A client's margin account has a $20,000 debit balance and holds securities worth $90,000. Without the client's written consent, the agent's firm pledges the entire holding to secure the firm's general bank loan. How should this be characterized?
- A.Permissible, because securities held in a margin account belong to the firm once a debit exists.
- B.Improper hypothecation, since customer securities may be pledged only with written consent and not beyond the client's debit.
- C.Permissible if the firm mails the client a notice of the pledge within 30 days afterward.
- D.Improper because margin securities must be pledged to a bank that is located in the client's home state.
Show answer and explanationHide answer
Correct answer: B. Improper hypothecation, since customer securities may be pledged only with written consent and not beyond the client's debit.
A firm may hypothecate customer securities only as the customer has agreed in writing and only to the extent of the customer's debit. Pledging the full holding for the firm's own borrowing, without written consent, is an unethical practice under the NASAA statement of policy.
- A. Customers remain the owners of margin securities; the firm holds only a lien to the extent of the debit.
- B. Correct. Written consent and a limit tied to the debit balance are both required.
- C. Notice after the fact does not replace written consent given beforehand.
- D. No home-state bank requirement exists; the problem is the lack of consent and the excess pledge.
- Source: NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, accessed October 2026
Question 8, hard
A broker-dealer, acting as principal, sells a client a corporate bond that is actively traded with ample liquidity in the market, marking the price up 6% over the prevailing market price at the time, with no unusual service, risk, or effort involved in the transaction. Which best describes this conduct?
- A.It is permissible because principal trades are not subject to fair-pricing standards the way agency trades are, so the dealer may set its own markup without regard to the prevailing market price
- B.It is a potential violation of fair-pricing/markup standards, since the markup is not reasonably related to the current market price and no additional service or risk justifies it
- C.It is permissible as long as the markup is disclosed on the trade confirmation, because disclosure at settlement satisfies the dealer's fair-pricing obligations on a principal trade
- D.It is not a violation by itself; it becomes one when the client specifically asks what the prevailing market price was and the firm declines to disclose it to the client
Show answer and explanationHide answer
Correct answer: B. It is a potential violation of fair-pricing/markup standards, since the markup is not reasonably related to the current market price and no additional service or risk justifies it
Fair-pricing obligations apply to principal transactions too. A markup must bear a reasonable relationship to the prevailing market price, considering factors like the security's liquidity, the effort and risk involved, and the amount of the transaction; an excessive markup on a liquid, low-effort trade is not justified. Confirmation disclosure of the markup (C) is a separate requirement and does not, by itself, make an excessive markup fair.
- A. This is incorrect - principal (markup) transactions are subject to fair-pricing standards just as agency (commission) transactions are, so the dealer cannot set a markup without regard to the prevailing market price.
- B. Correct. A 6% markup on an actively traded, liquid bond with no unusual service, risk, or effort involved is well outside what's reasonably related to the prevailing market price, making this a potential violation of fair-pricing/markup standards.
- C. Disclosure on the confirmation doesn't make an excessive, unjustified markup permissible; fair pricing is assessed independent of confirmation disclosure.
- D. The violation exists based on the excessive, unjustified markup itself; it doesn't arise only when the client happens to ask about the prevailing market price.
- Source: NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, accessed October 2026

Sources

NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, checked October 2026
FINRA Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices), checked October 2026
FINRA Rule 3280, checked October 2026

Questions are drafted with help from AI and published only after a person reviews and approves them. How these questions are made

More Unethical Practices: Broker-Dealers and Agents questions

Practice Unethical Practices: Broker-Dealers and Agents Customize

Series 63 Unethical Practices: Broker-Dealers and Agents Practice Questions

Sources

More Unethical Practices: Broker-Dealers and Agents questions

Keep going

The same subject on other exams

More Series 63 topics