Introduction
Welcome to Compensation and Fee Structures: the foundation of ethical practices on the Series 63 exam.
Exam Weight: 25% (15 questions, shared across Units 14-17)
What You'll Learn
In this unit, you'll cover:
- Broker-Dealer Compensation Methods: Commissions, markups/markdowns, and non-transaction fees, plus the critical distinction between agency and principal transactions
- The 5% Markup Policy (FINRA Rule 2121): Why 5% is a guideline, not a ceiling, and the seven factors that determine fairness
- NASAA Dishonest Practices: State-level rules against unfair pricing, excessive fees, churning, and improper commission splitting
- Investment Company Compensation: Sales load disclosure, breakpoint obligations, share class suitability, and mutual fund switching violations
- Investment Adviser (IA) Compensation Restrictions: The performance-fee prohibition, permitted fee structures, fulcrum fees, and the qualified client exception
- Wrap Fee Programs: How bundled fees work, why they create the opposite conflict from commissions, and suitability considerations
- Soft Dollar Arrangements: The Section 28(e) safe harbor, qualifying vs. non-qualifying expenses, and fiduciary duty implications
- Regulation Best Interest (Reg BI): The four component obligations and NASAA's adoption at the state level
- Disclosure of Compensation: Trade confirmation requirements, affiliation disclosure, and the principle that disclosure does not cure unfair pricing
Why This Matters
Compensation rules are among the most heavily tested topics on the Series 63. The exam expects you to understand not just what types of compensation exist, but when each type is appropriate, how fairness is evaluated, and what disclosures are required. Compensation-related violations (from excessive markups to breakpoint selling to soft dollar abuse) appear repeatedly in exam scenarios.
Understanding who gets paid, how they get paid, and what rules govern that payment is core knowledge for anyone working in the securities industry.
Let's start with the different ways broker-dealers earn compensation.