An investment adviser enters into a written arrangement to pay a cash referral fee to an independent third party who is not employed by the firm, in exchange for referring prospective clients. Under NASAA's cash solicitor rule, what must happen before a referred client enters into an advisory contract with the adviser?

The client must receive the adviser's disclosure brochure along with a separate written disclosure document describing the solicitation arrangement and the compensation paid, and must acknowledge receiving both before or at the time the advisory contract is entered into

Which of the following is an unethical business practice for an investment adviser under NASAA's Model Rules?

Borrowing money from a client who is not in the business of lending money

An IAR regularly refers advisory clients who need estate-planning help to a particular attorney. In exchange, the attorney pays the IAR a modest $150 referral fee per client referred, which the IAR does not disclose to the clients being referred. The IAR considers this immaterial because the amount is small. Is non-disclosure acceptable because the fee is modest?

No, an undisclosed referral fee arrangement creates a conflict of interest that must be disclosed to the affected clients regardless of the dollar amount involved

An adviser's Form ADV states the firm 'does not have any conflicts of interest.' In fact, the firm receives revenue sharing from a fund company whose funds it frequently recommends, and several IARs receive additional compensation for selling proprietary in-house model portfolios over comparable third-party alternatives. Which best describes this ADV statement?

It is a materially false and misleading statement in a regulatory filing, since it fails to disclose known, existing conflicts of interest

An investment adviser's advisory contracts are assigned to another firm as part of an acquisition. Clients are notified of the assignment within 30 days after the transaction closes, but their consent was not obtained beforehand. How is this assignment treated under the Uniform Securities Act?

An unethical practice — an investment adviser may not assign a client's advisory contract to another party without the client's consent

An IAR who is entitled to vote in a state treasurer election contributes $500 to that treasurer's re-election campaign. The treasurer's office has influence over the selection of investment advisers for the state's public pension fund, which the IAR's firm currently manages assets for. The de minimis exception for such contributions is $350 for contributors entitled to vote for the official. What is the consequence of this contribution?

Because the contribution exceeds the $350 de minimis threshold for a contributor entitled to vote for the official, it triggers the pay-to-play rule's two-year prohibition on the firm receiving compensation for advisory services to that government client

A client who is a corporate director tells her adviser that a merger will be announced next week. The adviser buys the target's stock in other client accounts and his own. The firm has no written insider-trading policies. How should this be viewed?

A violation, since trading on material nonpublic information is fraud and the firm must keep written policies to prevent its misuse.

An investment adviser charges a client a performance-based fee (a percentage of account gains) under an advisory agreement that clearly discloses the fee structure. The client has a net worth of $600,000 and only $400,000 under management with the firm, well below the thresholds required for a client to be a 'qualified client' eligible for performance fees. Does clear disclosure of the fee in the agreement cure the problem?

No, performance fees generally may only be charged to clients meeting specific net worth or assets-under-management thresholds (qualified clients); disclosure does not cure charging such a fee to an ineligible client

Series 63 Unethical Practices: Investment Advisers Practice Questions

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

Question 1, hard
An investment adviser enters into a written arrangement to pay a cash referral fee to an independent third party who is not employed by the firm, in exchange for referring prospective clients. Under NASAA's cash solicitor rule, what must happen before a referred client enters into an advisory contract with the adviser?
- A.The solicitor must be a registered investment adviser representative employed by the same firm, because cash referral fees may be paid solely to persons associated with the adviser and not to outside parties
- B.The client must receive the adviser's disclosure brochure along with a separate written disclosure document describing the solicitation arrangement and the compensation paid, and must acknowledge receiving both before or at the time the advisory contract is entered into
- C.The referral fee may not exceed 10% of the client's first-year advisory fee, and the solicitor must disclose that cap to the client in writing before any advisory contract is signed
- D.The Administrator must pre-approve the arrangement in writing before the first referral is made, and the client must receive written notice of that approval before entering into the advisory contract
Show answer and explanationHide answer
Correct answer: B. The client must receive the adviser's disclosure brochure along with a separate written disclosure document describing the solicitation arrangement and the compensation paid, and must acknowledge receiving both before or at the time the advisory contract is entered into
Cash referral/solicitor arrangements are permissible only with proper disclosure: the client must receive the adviser's brochure plus a separate solicitor's disclosure document describing the relationship between adviser and solicitor and the nature/amount of compensation, and the client must acknowledge that disclosure before or when entering into the advisory agreement. There is no requirement that the solicitor be an employee/IAR of the firm, no percentage cap under this rule, and no requirement of Administrator pre-approval.
- A. The cash solicitor rule specifically contemplates independent third-party solicitors who are not employed by the firm. That's the very scenario it governs.
- B. Correct. The client must receive the adviser's disclosure brochure plus a separate written disclosure describing the solicitation arrangement and compensation, and must acknowledge receiving both before or at the time the advisory contract is entered into.
- C. There's no fixed cap limiting the referral fee to 10% of the client's first-year advisory fee under the rule, so no cap needs to be disclosed.
- D. The rule doesn't require advance Administrator pre-approval of the solicitation arrangement, so there is no approval notice to give the client.
- Source: Exam outline: NASAA Series 63 Exam Content Outline, accessed October 2026
Question 2, medium
Which of the following is an unethical business practice for an investment adviser under NASAA's Model Rules?
- A.Borrowing money from a client who is not in the business of lending money
- B.Charging an advisory fee that is fully disclosed in the client's advisory contract
- C.Conducting reasonable due diligence before recommending a security
- D.Disclosing conflicts of interest in the adviser's brochure (Form ADV Part 2)
Show answer and explanationHide answer
Correct answer: A. Borrowing money from a client who is not in the business of lending money
Borrowing money from a client is generally prohibited unless the client is a financial institution in the business of lending, or is an affiliate of the adviser. Borrowing from an ordinary retail client raises serious conflict-of-interest and abuse concerns.
- A. Correct.
- B. Incorrect. Fully disclosed fees are standard, compliant practice.
- C. Incorrect. Reasonable due diligence is expected, not unethical.
- D. Incorrect. Brochure disclosure of conflicts is required, compliant practice.
- Source: NASAA Model Rule 102(a)(4)-1 (Unethical Business Practices of Investment Advisers, IARs and Federal Covered Advisers), accessed October 2026
Question 3, medium
An IAR regularly refers advisory clients who need estate-planning help to a particular attorney. In exchange, the attorney pays the IAR a modest $150 referral fee per client referred, which the IAR does not disclose to the clients being referred. The IAR considers this immaterial because the amount is small. Is non-disclosure acceptable because the fee is modest?
- A.Yes, referral fees below a certain small dollar amount are automatically exempt from disclosure requirements
- B.No, an undisclosed referral fee arrangement creates a conflict of interest that must be disclosed to the affected clients regardless of the dollar amount involved
- C.Yes, because referral arrangements between an IAR and outside professionals are never subject to disclosure obligations
- D.No, but only if the attorney turns out to overcharge the referred clients
Show answer and explanationHide answer
Correct answer: B. No, an undisclosed referral fee arrangement creates a conflict of interest that must be disclosed to the affected clients regardless of the dollar amount involved
A referral fee creates a conflict of interest because it may bias the IAR's recommendation of a particular professional; disclosure obligations for such compensation arrangements are not conditioned on the amount being 'large enough to matter'. Clients need the information to evaluate whether the referral was made in their own interest. C mischaracterizes referral arrangements as categorically exempt from disclosure, which is incorrect.
- A. There's no automatic small-dollar exemption from disclosure. Any compensation arrangement creating a conflict of interest must be disclosed regardless of size.
- B. Receiving referral fees from the attorney creates a financial incentive that could bias the IAR's referrals, and this conflict must be disclosed to affected clients no matter how modest the amount.
- C. Referral arrangements between an IAR and outside professionals are absolutely subject to disclosure obligations when compensation changes hands. This isn't an exempt category.
- D. Disclosure is required because of the conflict of interest inherent in the referral fee itself, not contingent on whether the attorney later overcharges the client.
- Source: NASAA Model Rule 102(a)(4)-1 (Unethical Business Practices of Investment Advisers, IARs and Federal Covered Advisers), accessed October 2026
- Source: NASAA Model Rule 502(b) (Prohibited Conduct of Investment Advisers, IARs and Federal Covered Investment Advisers), accessed October 2026
Question 4, medium
An adviser's Form ADV states the firm 'does not have any conflicts of interest.' In fact, the firm receives revenue sharing from a fund company whose funds it frequently recommends, and several IARs receive additional compensation for selling proprietary in-house model portfolios over comparable third-party alternatives. Which best describes this ADV statement?
- A.It is accurate as long as no client has been actually harmed by the arrangements, since a statement is judged by its results rather than its content
- B.It is a materially false and misleading statement in a regulatory filing, since it fails to disclose known, existing conflicts of interest
- C.It is accurate because the duty to disclose conflicts of interest extends to written contractual arrangements, and the compensation incentives here are informal
- D.It is accurate provided the firm discloses the arrangements to state regulators upon request
Show answer and explanationHide answer
Correct answer: B. It is a materially false and misleading statement in a regulatory filing, since it fails to disclose known, existing conflicts of interest
Form ADV is a regulatory disclosure document, and affirmatively stating there are 'no conflicts of interest' while revenue sharing and proprietary-product incentive compensation actually exist is a materially false statement. Clients rely on the brochure precisely to learn about such conflicts before deciding whether to engage the firm. A is wrong because the falsity of the filing is the violation, independent of whether specific harm can later be shown; D is wrong because disclosure only 'upon request' to regulators does not satisfy the obligation to proactively disclose to clients in the brochure.
- A. Whether clients are actually harmed doesn't determine whether a regulatory filing is materially false. The misstatement itself is the violation.
- B. Correct. Claiming to have no conflicts of interest while receiving revenue sharing and paying IARs more to favor proprietary products is a materially false and misleading statement in a regulatory filing.
- C. Conflicts of interest must be disclosed whether or not they arise from a formal written contract. Informal compensation incentives still count.
- D. Disclosing arrangements to regulators only upon request doesn't make the ADV's blanket "no conflicts" statement accurate for clients.
- Source: NASAA Model Rule 102(a)(4)-1 (Unethical Business Practices of Investment Advisers, IARs and Federal Covered Advisers), accessed October 2026
- Source: Investment Advisers Act Section 206, 15 U.S.C. 80b-6 (prohibited transactions by investment advisers), accessed October 2026
Question 5, medium
An investment adviser's advisory contracts are assigned to another firm as part of an acquisition. Clients are notified of the assignment within 30 days after the transaction closes, but their consent was not obtained beforehand. How is this assignment treated under the Uniform Securities Act?
- A.Permitted, since the acquiring firm is also a registered investment adviser and takes over the clients' existing contract terms
- B.An unethical practice. An investment adviser may not assign a client's advisory contract to another party without the client's consent
- C.Permitted, provided the Administrator is notified within 30 days of the transaction and the clients receive written notice of the assignment
- D.Permitted for non-discretionary accounts, where the client approves each trade, though consent would be required for discretionary accounts
Show answer and explanationHide answer
Correct answer: B. An unethical practice. An investment adviser may not assign a client's advisory contract to another party without the client's consent
Advisory contracts may not be assigned without the client's consent. This is both a contractual requirement under the Uniform Securities Act/Investment Advisers Act framework and an enumerated unethical practice if violated. After-the-fact notice is not a substitute for obtaining the client's affirmative consent before the assignment takes effect.
- A. The acquiring firm's registered status and its adoption of the existing terms don't substitute for the client's required consent to the assignment.
- B. Correct. An investment adviser may not assign a client's advisory contract to another party without that client's consent; after-the-fact notice within 30 days doesn't satisfy the consent requirement.
- C. Notifying the Administrator and the clients after the fact addresses different obligations and doesn't substitute for obtaining the client's consent to the assignment.
- D. There's no carve-out limiting the consent requirement to discretionary accounts. It applies to advisory contract assignments generally.
- Source: Investment Advisers Act Section 205, 15 U.S.C. 80b-5 (investment advisory contracts), accessed October 2026
Question 6, hard
An IAR who is entitled to vote in a state treasurer election contributes $500 to that treasurer's re-election campaign. The treasurer's office has influence over the selection of investment advisers for the state's public pension fund, which the IAR's firm currently manages assets for. The de minimis exception for such contributions is $350 for contributors entitled to vote for the official. What is the consequence of this contribution?
- A.No consequence, since $500 is a modest amount for a political campaign and the pay-to-play rule applies to contributions made to federal candidates rather than to state officials
- B.Because the contribution exceeds the $350 de minimis threshold for a contributor entitled to vote for the official, it triggers the pay-to-play rule's two-year prohibition on the firm receiving compensation for advisory services to that government client
- C.No consequence, because the contribution was made by the IAR from personal funds rather than by the firm itself, and the rule applies to firm contributions to government officials
- D.The two-year ban applies when the treasurer is re-elected following the contribution, but the contribution is disregarded if the treasurer loses the election or leaves office
Show answer and explanationHide answer
Correct answer: B. Because the contribution exceeds the $350 de minimis threshold for a contributor entitled to vote for the official, it triggers the pay-to-play rule's two-year prohibition on the firm receiving compensation for advisory services to that government client
Pay-to-play rules generally trigger a two-year compensation timeout for the adviser when a covered associate (including an IAR) makes a contribution exceeding the applicable de minimis threshold. $350 if entitled to vote for the official, $150 if not. To an official who can influence the award of government advisory business. Here, $500 exceeds the $350 threshold applicable to a voter-eligible contributor, triggering the ban. C is wrong because contributions by covered individuals (not just the firm) are what the rule targets in the first place; D is wrong because the trigger is the contribution itself, not the election outcome.
- A. The rule applies a bright-line dollar threshold, not a subjective judgment about what counts as 'modest,' and it covers contributions to state and local officials, not just federal candidates - $500 exceeds the stated $350 de minimis limit.
- B. Because the IAR is entitled to vote for the official and contributed above the $350 de minimis limit, the contribution triggers the pay-to-play rule's two-year timeout on compensated advisory business with that government client.
- C. The rule covers contributions by covered associates of the firm, including IARs personally - it isn't limited to contributions made directly by the firm.
- D. The two-year prohibition is triggered by the contribution itself, not contingent on whether the official wins re-election or remains in office.
- Source: Exam outline: NASAA Series 63 Exam Content Outline, accessed October 2026
Question 7, hard
A client who is a corporate director tells her adviser that a merger will be announced next week. The adviser buys the target's stock in other client accounts and his own. The firm has no written insider-trading policies. How should this be viewed?
- A.Acceptable, since the information came from a client who is a director rather than from the company itself, so it is not treated as inside information.
- B.Acceptable, since the adviser also bought the stock for clients and so did not benefit at their expense, and trading for clients alongside himself is not misuse.
- C.Acceptable if the adviser discloses the tip to the affected clients afterward, since later disclosure of the conflict cures any improper use of the information.
- D.A violation, since trading on material nonpublic information is fraud and the firm must keep written policies to prevent its misuse.
Show answer and explanationHide answer
Correct answer: D. A violation, since trading on material nonpublic information is fraud and the firm must keep written policies to prevent its misuse.
Trading on material nonpublic information is fraudulent however the adviser obtained it, and advisers must establish, maintain, and enforce written policies designed to prevent misuse of such information. The firm's lack of policies is a separate deficiency.
- A. Material nonpublic information is inside information whatever its source, and a director's tip about an unannounced merger is exactly that, so trading on it is improper.
- B. Buying for clients alongside his own account does not legitimize the trades. Trading on material nonpublic information is improper whoever benefits, and trading in client accounts on a tip is itself a misuse of that information.
- C. Disclosure after the fact does not cure trades already made on material nonpublic information. Disclosure can address a conflict of interest, but it cannot make trading on inside information lawful, and the clients' accounts were already exposed to the violation.
- D. Correct. The trades are fraudulent and the firm lacks the required policies.
- Source: 15 U.S.C. § 80b-4a, accessed October 2026
Question 8, medium
An investment adviser charges a client a performance-based fee (a percentage of account gains) under an advisory agreement that clearly discloses the fee structure. The client has a net worth of $600,000 and only $400,000 under management with the firm, well below the thresholds required for a client to be a 'qualified client' eligible for performance fees. Does clear disclosure of the fee in the agreement cure the problem?
- A.Yes, clear disclosure of the fee structure in the advisory agreement satisfies the requirements for charging performance fees, provided the client signs the agreement and receives a written fee schedule and the Form ADV brochure beforehand
- B.No, performance fees generally may only be charged to clients meeting specific net worth or assets-under-management thresholds (qualified clients); disclosure does not cure charging such a fee to an ineligible client
- C.Yes, because a registered adviser acting as a fiduciary may charge a performance fee to any client as long as the fee is fair and reasonable in amount
- D.No, because performance fees are prohibited for retail advisory clients of any size; the qualified-client thresholds apply only to institutional accounts
Show answer and explanationHide answer
Correct answer: B. No, performance fees generally may only be charged to clients meeting specific net worth or assets-under-management thresholds (qualified clients); disclosure does not cure charging such a fee to an ineligible client
Performance-based compensation is restricted to clients meeting defined eligibility thresholds (net worth or assets under management with the adviser) precisely because such fees can incentivize excessive risk-taking; clearly disclosing an otherwise impermissible fee arrangement to an ineligible client does not make the arrangement lawful. Fiduciary status and a fair, reasonable fee amount do not override the eligibility requirement either, and the qualified-client thresholds are not limited to institutional accounts.
- A. Clear disclosure, a signed agreement, and delivery of a fee schedule and brochure don't satisfy the requirement; the client must actually meet the qualified-client eligibility thresholds.
- B. Correct. Performance fees generally may only be charged to qualified clients meeting net worth or assets-under-management thresholds; disclosure alone does not cure charging such a fee to an ineligible client like this one, whose net worth and AUM both fall short.
- C. Fiduciary duty and a reasonable fee amount do not replace the eligibility requirement. Under the qualified-client rule, the client must meet the net worth or assets-under-management thresholds, and this client meets neither.
- D. Performance fees are not banned for non-institutional clients. They are allowed when the client is a qualified client, including an individual who meets the net worth or AUM thresholds. The problem here is that this client does not meet them, not that individuals are excluded as a class.
- Source: Uniform Securities Act (1956) Section 102 (advisory activities), accessed October 2026