Free NASAA Series 63 (Uniform Securities Agent State Law Examination) Ethical Practices and Obligations Practice Questions
Ethical practices and obligations on the NASAA Series 63 exam cover fiduciary duty, suitability, conflicts of interest, insider trading prohibitions, privacy regulations, and the duty to act in the best interest of clients.
Sample Questions
Question 1
Easy
Which of the following best describes the prohibited practice of front-running?
Solution
A is correct. Front-running is the practice of trading ahead of a known pending customer order (typically a large block) in order to profit from the price impact that order is expected to cause. It is prohibited because it exploits non-public information about customer order flow and breaches the firm's duty to its clients.
Question 2
Medium
An investment advisory contract between an investment adviser and a client must include which of the following to be in compliance with the Uniform Securities Act?
Solution
Choice A is correct because the Uniform Securities Act requires investment advisory contracts to specify: (1) the services to be provided, (2) the basis for compensation (fee structure), (3) the term or duration of the contract, and (4) the procedures for termination by either party. These elements ensure the client understands the scope of the engagement and their rights under the agreement.
Question 3
Hard
A registered investment adviser has recently filed for Chapter 11 bankruptcy reorganization. The adviser currently has discretionary authority over 35 client accounts. Which of the following actions is required under the Uniform Securities Act and investment adviser ethical standards?
Solution
Choice A is correct because investment advisers are required under SEC rules (and corresponding state standards) to disclose promptly any material financial condition that could impair their ability to meet contractual obligations to clients. A bankruptcy filing is among the clearest examples of a material financial condition. This obligation is heightened when the adviser holds discretionary authority, because clients have entrusted the adviser with independent control over their assets and have a particular need to reassess that relationship in light of the adviser's financial instability.