FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 1:

  Which of the following orders can an Administrator issue without providing prior notice?

  A. license suspension

  B. license revocation

  C. cease and desist

  D. license denial

  Correct Answer: C

  The Administrator can issue an order to cease and desist without providing the party concerned with prior notice. In the cases involving the denial, suspension, or revocation of a license, the Administrator will provide prior notice, along with the opportunity for a hearing, and a written statement of the facts and the legal consequences involved.

• Question 2:

  When selling shares of an investment company to a client, an agent must provide the client with

  I. the fund's prospectus, which provides information on any loads or other fees as well as historical return information.

  II. information about any breakpoints if it is a load fund along with an explanation of a letter of intent

  III.

  information regarding the investment adviser used by the fund IV. an explanation of the various loads and fees outlined in the fund's prospectus

  A.

  I, II, III, and IV

  B.

  I, II, and III only

  C.

  I and II only

  D.

  I, II, and IV only

  Correct Answer: D

  When selling shares of an investment company to a client, the agent must provide the client with the fund's prospectus and provide the client with an explanation of the various loads and fees and any breakpoints that, if reached, will result in a lower load charge for the client, along with information on a letter of intent, which the client can execute. The agent need not provide any information regarding the investment adviser used by the fund although that information is contained in the prospectus as well.

• Question 3:

  Sam Shade had his agent's license revoked by the state of Washington for repeatedly making misleading claims about various investment to investors. He had had it with all the rain anyway and decided to move to the sunshine state of Florida. His brother-in-law was a computer whiz who made money on the side (more than his day job provided, in fact) by supplying illegal immigrants with official-looking documentation, including social security numbers. Sam Shade became Ian Creed in a few clicks of the mouse. As Ian Creed, Sam was hired by Sunny Investment Advisers, an investment adviser firm located in the Florida Keys, in a clerical role. As such, Sam/Ian had access to the confidential information of the firm's clients, which he and his brother-in-law utilized for the purpose of identity theft. Under the Uniform Securities Act guidelines, when Sam and his brother-in-law are caught in their illegal activities.

  A. Sunny Investment Advisers will not be held liable if it can prove that there was no way it could have or should have known of the revocation of Sam Shade's (aka Ian Creed) license.

  B. Sunny Investment Advisers will be subject to criminal prosecution for employing an individual whose license had been revoked by the Administrator of another state since it obviously did not use due diligence in hiring Ian Creed, aka Sam Shade.

  C. Sunny Investment Advisers will be subject to civil penalties for employing an individual whose license had been revoked by the Administrator of another state.

  D. Sunny Investment Advisers will be subject to both criminal prosecution and civil penalties for employing an individual whose license had been revoked by the Administrator of another state since it obviously did not use due diligence in hiring Ian Creed, aka Sam Shade.

  Correct Answer: A

  When Sam and his brother-in-law are caught, Sunny Investment Advisers will not be held liable if it can prove that there was no way it could have or should have known of Sam Shade/Ian Creed's license revocation. The drafters of the Uniform Securities Act were cognizant of the fact that employees can be remarkably deceptive when applying for a position, and because of this the Act indicates that the investment adviser must either "have known or should have known" of the Administrator's adverse decision against the employee in order to itself be deemed liable.

• Question 4:

  Mr. Bigwig, CEO of HiGrowth Corporation, meets with the president of BigFee Investment Bankers and arranges for BigFee to underwrite an Initial Public Offering (IPO) for the firm. When the IPO comes to market, GetErDone Broker-Dealers is part of the selling group, which handles the sale of the stock to the public.

  In this scenario, which party is the broker?

  A. HiGrowth Corporation

  B. Mr. Bigwig

  C. BigFee Investment Bankers

  D. GetErDone Broker-Dealers

  Correct Answer: D

  GetErDone Broker-Dealers is the broker in this scenario. GetErDone is simply finding buyers for the securities and receives a commission for doing so. GetErDone is not itself purchasing the securities in the scenario described. It would be considered unethical for the broker-dealer to do so since they are required to make a bona fide public offering of all of the securities allotted to them for distribution under NASAA Model Rules.

• Question 5:

  Don is a state-registered agent with GetErDone Broker-Dealers. He has three other friends who are licensed agents-Huey, Dewey, and Louie. Huey is also an agent with GetErDone Broker-Dealers. Dewey is an agent with a different firm in the same city, CanDo Broker- Dealers. Louie works for a Broker-Dealer with an office just across the state line.

  Don can enter a commission-splitting agreement with:

  A. Huey only

  B. either Huey or Dewey or both

  C. Dewey only

  D. Either Huey, Dewey, or Louie or any combination of the three

  Correct Answer: A

  Don can enter a commission-splitting agreement with Huey only since he is the only one who is also working for GetErDone Broker-Dealers. It is considered unethical to split "commissions, profits or other compensation. . .with any person not also registered as an agent for the same broker-dealer," under NASAA Model Rules.

• Question 6:

  Alice Wonder called her broker on Tuesday, August 10th, with a market order to buy 10 calls on the stock of Abbott Laboratories. Under normal conditions, Alice will have to pay for the calls on:

  A. Wednesday, August 11th.

  B. Tuesday, August 10th.

  C. Friday, August 13th.

  D. Monday, August 16th.

  Correct Answer: A

  If Alice places a market order to buy call options on Tuesday, August 10th, she will have to pay for them on Wednesday, August 11th, the next business day. Options and U.S. government bonds settle on the day after the trade date, or T + 1.

• Question 7:

  In its prospectus, the YourMoney Mutual Fund provides charts and tables of its average annual return over the past year, three years, five years, and ten years. The fund's return has indeed been phenomenal over this time period, beating the SandP 500 Index by at least 15%. The prospectus states that this is because the fund invests in securities that are riskier and that, therefore, an investor can expect the fund to continue earning a return higher than the SandP 500 Index.

  Is YourMoney guilty of any security violations?

  A. No. YourMoney properly revealed to prospective investors the fact that its higher than average returns are the result of its investment in riskier securities.

  B. Yes. There is no way the fund could have beaten the SandP 500 Index by at least 15% over the past ten years. The fund is obviously misstating its returns.

  C. Yes. YourMoney is guilty of fraud in claiming that "an investor can expect the fund to continue earning a return higher than the SandP 500 Index." Past performance is no indication of future performance.

  D. No. Regulations require only that the mutual fund provide charts and tables of its average annual returns, with a statement comparing the fund performance with a relevant market index. YourMoney has done this and more.

  Correct Answer: C

  Yes. YourMoney is guilty of fraud in its claim that "an investor can expect the fund to continue earning a return higher than the SandP 500 Index." Past performance is no indication of future performance, and this statement is clearly a misstatement of a material fact. In fact, because the securities the fund invests in are riskier than average, the fund returns can be expected to fall harder than the SandP 500 Index in a market downturn.

• Question 8:

  Constance is an investment adviser representative. She told one of her clients that he should put at least 15% of his investment monies in a U.S. government bond mutual fund.

  She explained that she believed that he required this percentage to meet his liquidity needs, and U.S. government bond funds are risk-free. A few months later, the client needed to sell some of his fund shares in order to pay some medical

  bills and was surprised to discover that he lost money on the sale because the net asset value of the fund had dropped.

  Was Constance guilty of any securities violations?

  A. Yes. Constance is guilty of fraud. She misled the client into thinking he couldn't lose any money if he invested the money in a U.S. government bond mutual fund.

  B. Yes. Constance should never recommend that a client invest such a high percentage of his investment monies in a U.S. government bond mutual fund.

  C. No. U.S. government bonds are often referred to as risk-free investments, so Constance made no misstatement of fact in telling her client this.

  D. It depends. If Constance realized that the client could lose money in a U.S. government bond fund, then she is guilty of fraud, but if she did not herself realize that, then she is merely misinformed.

  Correct Answer: A

  Yes. Constance is guilty of fraud. She misled her client into thinking he couldn't lose money if he invested the money in a U.S. government bond fund. Although U.S. government bonds are referred to as risk-free, this just means they are considered free from default risk. The value of the bonds-and, therefore, the U.S. government bond funds-will change with changes in interest rates. As an investment adviser representative, Constance should know this. Regardless of whether or not she does, she is guilty of fraud simply by providing the misleading information. If she knew it and deliberately misled the client, she is guilty of criminal fraud.

• Question 9:

  Ari Gaunt is employed by a small state-registered broker-dealer and has recently received notification that his application to be a registered agent of the state has been accepted. Now that he is licensed to execute transactions for the firm's clients, Ari has a batch of business cards printed up, with a picture of himself on the right-hand side of the card. Underneath the picture is the caption, "State-Approved Agent."

  Will Ari be violating any securities laws if he distributes these business cards?

  A. No. However, he may be violating company policy of the broker-dealer he works for by designing his own cards.

  B. No. His registration with the Administrator of the state has been accepted, so he is entitled to call himself a "State-Approved Agent."

  C. Yes. Agents are not permitted to include a picture of themselves on their business cards.

  D. Yes. It is a violation of a securities law to suggest that he has been approved by the state Administrator.

  Correct Answer: D

  Yes, Ari will be violating a securities law if he distributes the business cards because the cards suggest he has been approved by the state Administrator. The Uniform Securities Act specifically states that the effective registration of a person does not mean that the Administrator has "given approval to" that person. Any statement to this effect is considered an unlawful representation.

• Question 10:

  promissory note that promised to pay interest at the rate of 8% a quarter, with a repayment of principal at the end of two years. The money would be used by Mr. Smooth to rehab a few beach condo units that had been severely hurricane-

  damaged and that Mr. Smooth had been able to purchase for "pennies on the dollar," or so he said. The first units would be completed within a month, and the rents would be used to make the interest payments. The investment was almost

  as risk-free as U.S. government bonds, Mr. Smooth claimed.

  the promised interest payments.

  Have there been any violation of securities laws in this instance?

  A. No. This was simply a loan transacted between two parties.

  B. Yes. Mr. Smooth was required to register the promissory note before he offered it for sale.

  C. Both B and C are true statements.

  Correct Answer:

  Yes, there have been violations of securities laws in this instance; the promissory note considered to be securities as defined by the Uniform Securities Act and, as such, must be registered with the state before they can be offered for sale. Furthermore, a promissory note is a promise to repay, and Mr. Smooth has defaulted on this promise after telling Ms. money under false pretenses when he sold her the note, and that is the definition of fraud.