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, non-transaction fees, and wrap fee programs, plus the critical distinction between agency and principal transactions
- The 5% Markup Policy: Why 5% is a guideline, not a ceiling, and how fairness is evaluated
- 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
- Soft Dollar Arrangements: The safe harbor that protects an investment manager who pays above-market commissions for qualifying research and brokerage services
- Regulation Best Interest (Reg BI): NASAA's adoption of Reg BI at the state level, making non-compliance a dishonest practice the Administrator can enforce
- IA Compensation Restrictions: The Uniform Securities Act's limits on performance-based advisory fees and the qualified-client exception
- 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 undisclosed compensation) 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.