Series 63: Broker-Dealer Regulations

Series 63 Broker-Dealer Regulations questions help you isolate one part of the NASAA outline before returning to a mixed practice test. The questions below are original Securities Prep practice items aligned to this topic and are not copied from any exam sponsor.

Topic snapshot

Sample questions

Question 1

All amounts are in USD. A firm executes two customer trades in the same stock.

• Trade 1: A customer places an order to buy 200 shares. The firm routes the order to the market at $50.00 per share and charges a 2% commission based on the total purchase amount.
• Trade 2: A different customer buys 200 shares from the firm’s inventory at $50.50 per share when the prevailing market price is $50.00. No commission is charged.

Which statement best describes the firm’s role under the Uniform Securities Act?

• A. Dealer on both trades; markups are $200 and $100
• B. Broker on order ($100 commission); dealer on sale ($200 markup)
• C. Broker on order ($200 commission); dealer on sale ($100 markup)
• D. Broker on both trades; commissions are $200 and $100

Best answer: C

Explanation: The firm effects a transaction for others for a $200 commission and sells from its own account with a $100 markup, meeting the broker-dealer concept.

A broker effects securities transactions for others and is typically compensated by commission, while a dealer effects transactions for its own account and is typically compensated by a markup/markdown. Here, the routed order has a commission of 2% of $10,000 ($200). The inventory sale is a principal transaction with a $0.50 per-share markup, or $100 total.

Under the Uniform Securities Act, a broker-dealer is a person engaged in the business of effecting securities transactions either for others (broker activity) or for its own account (dealer activity). In Trade 1, the firm routes a customer order to the market and charges a commission based on the transaction value, which is broker activity.

In Trade 2, the firm sells securities out of its own inventory to the customer (acting as principal). The customer pays $50.50 when the prevailing market is $50.00, so the firm earns a markup, which is characteristic of dealer activity.

The key takeaway is to link compensation to role: commission suggests agency (broker), while markup/markdown suggests principal trading (dealer).

• Treating the inventory price difference as a commission misclassifies a principal sale as agency.
• Calling the routed customer order a dealer transaction ignores that the firm effected the trade for the customer in the market.
• The $100/$200 figures are common arithmetic reversals: 2% of $10,000 is $200, and $0.50 \(\times\) 200 is $100.

Question 2

A broker-dealer wants to pay a “referral bonus” to a local marketing consultant who is not registered in the state. The bonus is paid only when a referred prospect opens an account and completes a securities purchase. Under state securities law, which compliance outcome best matches this arrangement?

• A. Prohibited unless the consultant is properly registered
• B. Permitted because the consultant is not handling customer funds or securities
• C. Permitted if the broker-dealer files a notice with the Administrator
• D. Permitted if the consultant discloses the fee to each prospect

Best answer: A

Explanation: Transaction-based compensation for securities activity generally requires registration; paying it to an unregistered person is unlawful.

State law generally treats transaction-based referral compensation as activity that requires registration (typically as an agent or broker-dealer, depending on the facts). Paying commissions or “success-based” fees to an unregistered person for causing securities transactions is therefore prohibited. The restriction matters because it prevents unregistered persons from being economically incentivized to solicit or recommend securities without regulatory oversight.

The core issue is transaction-based compensation tied to a securities purchase. Under the Uniform Securities Act framework, receiving compensation that is contingent on effecting or inducing securities transactions is a hallmark of acting as a broker-dealer/agent-type intermediary, which generally requires registration in the state. A firm cannot “paper over” the problem by calling it marketing or a referral bonus when the payment is triggered by a completed securities trade. Disclosure to the customer may be required for conflicts in other contexts, but it does not cure unregistered, commission-based securities activity. The key takeaway is that success-based referral fees create a registration problem and can constitute an unlawful practice.

• The option relying on customer disclosure misses that disclosure does not legalize paying transaction-based compensation to an unregistered person.
• The option focusing on not handling funds/securities confuses custody with solicitation/compensation-based broker activity.
• The option suggesting a notice filing misapplies notice concepts; the issue is registration (or not paying the fee), not a simple filing.

Question 3

A broker-dealer is registered with the SEC and in its home state but has no office in State B. The firm begins soliciting State B residents through targeted online ads and registered agents in the home office open several retail customer accounts and accept trade orders from those State B residents.

As the firm’s compliance officer, what is the best next step to address State B broker-dealer registration requirements?

• A. Apply for broker-dealer registration in State B before continuing the activity
• B. Continue operating and register in State B only after the first trade settles
• C. Register the individual agents in State B, but the broker-dealer itself need not register
• D. Make a state “notice filing” in State B because the firm is SEC-registered

Best answer: A

Explanation: Effecting transactions and soliciting multiple State B retail clients constitutes doing business in State B, triggering state broker-dealer registration.

A broker-dealer is generally considered to be doing business in a state if it has a place of business there or if it solicits and effects securities transactions with that state’s residents. Here, the firm is targeting State B residents and accepting trade orders for multiple retail customers, so State B broker-dealer registration should be pursued before continuing the activity.

Under the Uniform Securities Act framework, state broker-dealer registration is triggered when a firm is “doing business” in the state—commonly by having a place of business in the state or by soliciting and effecting transactions with the state’s residents. In this scenario, even without an office in State B, the firm is directing solicitations to State B residents and opening retail accounts and taking orders from them. That ongoing, resident-facing securities business activity is enough to require the firm to register as a broker-dealer in State B (and, separately, ensure the individuals acting for it are properly registered as agents as required). The key takeaway is that “no office” does not eliminate state registration when the firm is actively soliciting and transacting with residents.

• The option to “notice file” is associated with certain securities/offerings or adviser notice filings, not a substitute for broker-dealer registration.
• The option to wait until after trades occur is the wrong sequence; registration is generally required before soliciting or effecting transactions.
• The option to register only the individuals misses that states generally require both the broker-dealer and its agents to be properly registered when doing business with residents.

Question 4

A broker-dealer’s compliance team is reviewing whether the firm is doing business in State K for broker-dealer registration purposes.

Exhibit: Account summary (excerpt)

Based on the exhibit, which interpretation is supported under the Uniform Securities Act?

• A. The firm is not doing business in State K because it has no office there
• B. The firm is not doing business in State K because the customer is not an institutional client
• C. The firm is doing business in State K and must register there
• D. The firm is not doing business in State K because the customer’s orders are placed online

Best answer: C

Explanation: Effecting commission transactions for a State K resident constitutes doing business in that state absent an applicable exemption.

A broker-dealer is generally considered to be doing business in a state when it effects securities transactions for that state’s residents. The exhibit shows the firm accepts and executes trades for a State K resident for commissions, which is a registration trigger even without a physical office in the state.

Under the Uniform Securities Act, broker-dealer registration is generally triggered when a firm effects securities transactions with residents of a state. A physical office in the state is not required; accepting and executing customer orders for a resident (especially for commission compensation) is enough to be viewed as doing business there unless a specific exemption applies (for example, certain limited institutional-only situations).

Here, the exhibit shows an individual resident of State K, and the firm accepts orders online and executes them for a commission. Those facts support the conclusion that the firm is transacting business in State K and would need State K registration before continuing that activity.

• The “no office” idea is a common misconception; transaction activity with residents can trigger registration without a local branch.
• Online order entry does not avoid state jurisdiction when the customer is a resident of the state.
• Being a non-institutional (retail) client does not create an exemption; it removes the possibility of relying on an institutional-only rationale.

Question 5

A broker-dealer headquartered in State A has no offices outside State A. To grow revenue, it runs online ads and webinars aimed specifically at residents of State B, opens accounts for State B residents, and regularly effects securities transactions for those clients. A sales manager tells agents they do not need to worry about State B registration because “we have no place of business there and all trades clear through our home office.”

Which is the primary compliance risk that must be addressed?

• A. Transacting business with State B residents without State B registration
• B. Failing to provide SIPC coverage disclosures to webinar attendees
• C. Implying the State B Administrator has approved the firm’s ads
• D. Creating an incentive to churn accounts because commissions are discounted

Best answer: A

Explanation: Broker-dealer registration is triggered by doing business with the state’s residents (or having a place of business there), not by where trades clear or where the home office is located.

State broker-dealer registration is tied to investor protection within the state. If a firm solicits and effects transactions for residents of State B, it is considered to be doing business in that state even without a physical office there. Clearing trades through a home office does not eliminate the state registration obligation.

Under the Uniform Securities Act, a broker-dealer generally must register in a state if it has a place of business in the state or if it transacts business with residents of the state. In the scenario, the firm targets State B residents, opens their accounts, and effects transactions for them, so the firm is doing business in State B and faces the risk of unregistered broker-dealer (and potentially agent) activity there.

Key point: the registration trigger is the presence of State B customers and transactional activity with them, not where the firm’s headquarters is located or where trades are processed.

• The “state approved” advertising issue is real under state law, but the scenario does not indicate any claim of Administrator approval.
• Churning is an unethical practice, but discounted commissions alone do not establish excessive trading.
• SIPC relates to broker-dealer customer protection, but there is no state-law requirement to give SIPC disclosures to webinar attendees as the primary issue here.

Question 6

A broker-dealer is properly registered in State A. It plans to close its only office in the state and stop doing securities business with State A residents. The firm’s CCO suggests “we can just let the registration die and, once we’re gone, the Administrator can’t do anything about past conduct anyway.”

Which statement best complies with state broker-dealer registration principles regarding effectiveness, renewal, and termination?

• A. After closing the office, the broker-dealer may continue servicing existing State A customers without registration if it makes no new solicitations
• B. Registration stays effective until it is withdrawn, revoked, or not renewed; withdrawing does not eliminate liability for prior acts
• C. Once registration becomes effective, renewal is not required unless the broker-dealer opens a new branch office
• D. Registration terminates automatically when the last in-state office closes, and the Administrator loses jurisdiction over past conduct

Best answer: B

Explanation: Broker-dealer registration is ongoing (subject to renewal) and a withdrawal ends current effectiveness without cutting off the Administrator’s authority for past conduct.

Broker-dealer registration is not a one-time event; it remains effective only while maintained, typically through renewal, and it can be ended by withdrawal or regulatory action. If the firm is ceasing business in the state, it should formally withdraw rather than assume registration ends automatically. Ending registration does not erase responsibility for prior violations or limit the Administrator’s authority over past conduct.

Under state law, a broker-dealer’s registration becomes effective when the Administrator grants effectiveness (or allows it to become effective) and then continues in effect as long as it is maintained (generally through periodic renewal) and not suspended or revoked. If a firm is leaving the state or ceasing business with state residents, the compliant approach is to file a withdrawal (termination) request rather than assuming registration ends automatically.

Termination of registration is not a “clean slate.” The Administrator may still investigate and bring enforcement actions for conduct that occurred while the firm was registered (or otherwise subject to the state’s jurisdiction). The key takeaway is that renewal/withdrawal affects the firm’s current authority to do business, not whether it can be held accountable for past acts.

• The claim that registration ends automatically when an office closes is incorrect; closing a location does not itself terminate registration.
• The idea that renewal is unnecessary after effectiveness conflicts with the ongoing nature of broker-dealer registration.
• Continuing to service resident accounts still constitutes doing business and generally requires an effective registration unless an exclusion applies.

Question 7

A new broker-dealer is applying to register in a state and is preparing its initial filing package. During a meeting, the firm’s principal makes several statements about what must be filed and how disclosures are handled. Which statement is INCORRECT under the Uniform Securities Act?

• A. Disciplinary history and other material facts must be disclosed fully because omissions can be grounds for denial or enforcement action.
• B. The application generally includes Form BD filed through CRD and the state filing fee.
• C. The firm typically must provide an irrevocable consent to service of process with the application.
• D. After registration is granted, Form BD does not need to be amended unless the Administrator asks.

Best answer: D

Explanation: Broker-dealers must promptly amend Form BD to keep it current when material information changes, not only upon request.

Broker-dealer registration is an ongoing obligation, not a one-time filing. A broker-dealer must keep Form BD current by filing amendments when material information changes. Complete, accurate disclosure matters because misleading statements or omissions can support administrative action and other liability.

A broker-dealer typically registers by filing Form BD (commonly through CRD) and paying the required state fees, and the Administrator can also require a consent to service of process so the firm can be served in the state. Once registered, the broker-dealer must maintain accurate, current information by amending Form BD when material facts change (for example, disciplinary events, control/ownership changes, or other significant business changes). Incomplete or misleading disclosures are not “paperwork errors”; they can be treated as fraudulent or dishonest conduct and can justify denial, suspension, or revocation of registration, as well as enforcement actions. The key takeaway is that Form BD is both an initial application and a continuing disclosure document.

• Filing Form BD with the state fee is a common core component of broker-dealer registration.
• An irrevocable consent to service of process is commonly required so legal papers can be served in-state.
• Full disclosure of material disciplinary and business information is essential because omissions can trigger administrative remedies.

Question 8

During a routine examination, a state securities Administrator asks a registered broker-dealer to produce its supervisory system and written supervisory procedures (WSPs). The broker-dealer explains that supervision is handled “by experience,” with verbal instructions from the branch manager, and it has no written procedures or documented review of agent communications.

Which statement correctly applies the post-registration requirement under state law?

• A. Written procedures are required only for retail advertising approvals.
• B. The broker-dealer must maintain and enforce written WSPs.
• C. Verbal supervision is sufficient if no complaints have occurred.
• D. Only the agents, not the broker-dealer, need written procedures.

Best answer: B

Explanation: State law expects broker-dealers to have a supervisory system supported by written procedures reasonably designed to ensure compliance.

Broker-dealers are expected to establish and maintain a supervisory system supported by written supervisory procedures that are reasonably designed to achieve compliance with securities laws. Examiners review these controls because supervision is a core safeguard against fraudulent, dishonest, and unethical practices. A reliance on informal, undocumented “experience-based” oversight does not satisfy the written-procedures expectation.

A broker-dealer’s post-registration obligations include having an effective supervisory system and written supervisory procedures (WSPs) that are reasonably designed to ensure compliance with securities laws and to prevent and detect violations. Regulators focus on supervision because many sales-practice and communications problems are control failures (unclear responsibilities, no review, no escalation, poor recordkeeping).

In practice, an examiner expects the firm to be able to:

• Produce written procedures describing how supervision is done
• Identify who reviews what (e.g., correspondence/communications)
• Demonstrate that supervision is actually performed (evidence of review)

Informal verbal guidance, even by an experienced manager, does not substitute for written, enforceable procedures.

• The option claiming verbal supervision is enough confuses good outcomes with required controls; regulators assess the system, not just complaint history.
• The option shifting the duty to agents is incorrect because supervision is a firm obligation of the broker-dealer.
• The option limiting WSPs to retail advertising is too narrow; procedures should cover the firm’s supervised activities and communications broadly.

Question 9

Which statement is most accurate regarding a broker-dealer’s registration under the Uniform Securities Act?

• A. Registration guarantees the firm’s representatives are qualified and ethical.
• B. Registration means the firm met filing requirements, not that the state endorses it.
• C. State registration implies the administrator has approved the firm’s recommendations.
• D. A broker-dealer may advertise that it is “state approved” once registered.

Best answer: B

Explanation: Registration indicates compliance with registration provisions, and implying state approval or endorsement is prohibited.

Under the Uniform Securities Act, registration is a regulatory status showing that required documents and fees have been filed and the firm is permitted to do business in the state. It is not a merit-based endorsement of the broker-dealer, its personnel, or its recommendations. Therefore, representations implying “state approval” are misleading and restricted.

The core concept is that state registration is a permission to operate, not a seal of approval. A broker-dealer registers by meeting the state’s filing and qualification requirements (for example, submitting forms, paying fees, and consenting to service of process). The administrator does not “vouch for” the firm’s investment merits or guarantee ethical conduct simply because the firm is registered.

Because investors may misinterpret registration as an endorsement, the Uniform Securities Act and related policies treat statements like “state approved” or “state endorsed” as misleading. A broker-dealer can truthfully state it is registered, but it must not suggest the state has approved its recommendations or validated its quality.

The key takeaway: registration is compliance with a process, not proof of merit.

• The option claiming the state has approved the firm’s recommendations confuses registration with merit review.
• The option permitting “state approved” advertising is misleading because registration cannot be presented as an endorsement.
• The option suggesting registration guarantees representative ethics overstates what registration means and implies government assurance.

Question 10

A state-registered broker-dealer advertises a “Retirement Portfolio Management” program in which representatives provide ongoing asset-allocation recommendations and charge clients a separate annual advisory fee based on assets in the account, in addition to any transaction commissions.

What is the most likely regulatory consequence if the state Administrator determines the firm has been providing this service without being registered as an investment adviser?

• A. No additional registration is required because advice is incidental to brokerage
• B. Only the representatives must register as agents; the firm remains solely a broker-dealer
• C. The Administrator’s only remedy is to place a stop order on the firm’s advisory program
• D. The Administrator may order the firm to cease and desist for acting as an unregistered investment adviser

Best answer: D

Explanation: Charging a separate advisory fee makes the advice non-incidental and “for compensation,” so the Administrator can take administrative action for unregistered IA activity.

A broker-dealer is excluded from the investment adviser definition only when advice is solely incidental to brokerage and there is no special compensation. Here, the separate asset-based advisory fee is special compensation, so the firm is functioning as an investment adviser. Providing advisory services while unregistered exposes the firm to state administrative remedies such as a cease and desist order.

Under the Uniform Securities Act, broker-dealers are generally excluded from the definition of “investment adviser” only when any advice is incidental to the brokerage business and the broker-dealer receives no special compensation for that advice. A separate advisory fee (such as an asset-based management fee) is special compensation, so the activity is treated as investment adviser business rather than incidental brokerage.

When a firm provides investment advisory services in a state without the required registration, the Administrator has authority to take administrative action, including issuing an order to cease and desist the unlawful conduct and conditioning continued activity on proper registration (and potentially imposing administrative penalties under state law). The key takeaway is that separate compensation for advice typically defeats the broker-dealer exclusion.

• The option claiming advice is incidental ignores the separate advisory fee, which is special compensation.
• The option focusing only on agent registration misses that the firm’s business activity is advisory and can require adviser-level registration.
• A stop order is associated with securities/issuer registration, not the primary remedy for unregistered advisory activity.

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Related focused pages

• Investment Adviser Regulations
• IAR Regulations
• Agent Regulations
• Securities and Issuers
• Remedies and Administration
• Customer Communications
• Ethical Practices
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