FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 101:

  Which of the following does not describe a prohibited practice for broker-dealers under the NASAA Model Rules?

  I. SecureMoney Broker-Dealers has received a request from a client who wants SecureMoney to "identify a few solid firms in the Asian market and invest up to $20,000 in them." SecureMoney executes the purchases and receives the requisite signed discretionary authorization from the client before the settlement date.

  II. CanDo Broker-Dealers executes a margin transaction for a client, promptly receiving a signed, written margin agreement from the client after the transaction takes place.

  III.

  GetErDone Broker-Dealers receives a call from a client who wants to purchase some securities on margin. GetErDone has the client come into the office to sign a properly executed margin agreement prior to effecting the transaction.

  A.

  None of the selections are prohibited practices.

  B.

  I and III only

  C.

  II and III only

  D.

  III only

  Correct Answer: C

  Neither Selection II nor Selection III describes a prohibited practice for broker-dealers under the NASAA Model Rules. Broker-dealers are permitted to execute margin transactions for clients as long as they receive a signed, written margin agreement promptly after the initial margin transaction takes place. The agreement need not be signed beforehand. Discretionary authorizations do need to be signed before the broker-dealer executes any discretionary transactions for a client, so Selection I describes a prohibited practice.

• Question 102:

  A broker-dealer will be found guilty of churning an account if the account has a turnover ratio of

  A. four.

  B. five.

  C. eight.

  D. There is no specified turnover ratio assigned to the prohibited practice of churning.

  Correct Answer: D

  There is no specified turnover ratio assigned to the prohibited practice of churning since some investors are simply more frequent traders than others.

• Question 103:

  When a customer files a complaint with a broker-dealer,

  I. the broker-dealer must submit the complaint to the firm's compliance department.

  II. the broker-dealer must provide a prompt written response to the complainant.

  III.

  the broker-dealer must temporarily suspend the activities of any agent named in the complaint.

  A.

  I, II and III

  B.

  I and II only

  C.

  I and III only

  D.

  II and III only

  Correct Answer: B

  Only Selections I and II are true. When a customer files a complaint with a broker-dealer, the broker-dealer is required to submit the complaint to the firm's compliance department, if any, and to provide the complainant with a prompt written response. It is not necessary to suspend the activities of an agent named in the complaint.

• Question 104:

  Which of the following would not be a prohibited activity for a broker-dealer?

  I. A broker-dealer tells a client that a municipal revenue bond offered by the city of Boston, Massachusetts is almost risk-free because it is backed by the taxes paid to the city, and the city generates a lot of tax dollars.

  II. A broker-dealer sells a client some bonds that the broker-dealer has in its portfolio, after informing the client that it is acting as a seller in the transaction.

  III. A broker-dealer purchases some stock that a client is selling for its own portfolio, after informing the client that it is acting as a buyer in the transaction.

  IV.

  A broker-dealer purchases 1,000 shares of Southwest Airlines for a client who calls and asks the broker-dealer to buy some shares of a domestic airline stock at a good price for him and receives written discretionary authority from the client two days later, prior to the settlement date.

  A.

  I only

  B.

  II and III only

  C.

  I and IV only

  D.

  II, III and IV only

  Correct Answer: B

  Only Selections II and III describe activities that are not prohibited for a broker-dealer. A broker-dealer can act as a dealer and either sell securities that it owns to a client, as described in Selection II, or buy securities from a client, as described in Selection III, to hold in its own portfolio as long as it discloses to the client that it is doing so. A broker- dealer cannot tell a client that a revenue bond issued by the city of Boston, Massachusetts is almost risk-free since there is a risk of default, especially in the case of a revenue bond, which is not backed by the full taxing power of the city, but only by the revenues generated by a specific project. Moreover, there are other risks involved in bond investments, such as interest rate risk, so Selection I is a prohibited activity. A broker-dealer cannot make a discretionary trade for a client that involves more than just price and time within receiving written authorization prior to executing the trade, so Selection IV also describes a prohibited activity.

• Question 105:

  Which of the following scenarios describes activities that are disallowed under the NASAA Model Rules?

  I. Broker-dealer Anon observes that a client placed a stop loss order to sell her 1,500 shares of Amazon.com stock for $131 when the stock was selling for $134. Anon sold the stock for $133 when it started to fall during the day and credited the client's account with $131 per share when stock dropped further to $129 a share.

  II. Penny is an agent with Broker-dealer Anon. She recently recommended that a client buy a stock that Penny thought would do well. As it turned out, Penny was wrong, and she offers to refund the commission that the client paid her.

  III.

  Broker-dealer Anon is part of the selling group of a hot new IPO. As such, the firm purchases 50% of the shares for its own portfolio and sells the remainder to the public.

  A.

  I only

  B.

  I and II only

  C.

  I and III only

  D.

  I, II, and III

  Correct Answer: D

  Selections I, II, and III are all disallowed under the NASAA Model Rules. In Selection I, Broker-dealer Anon has made an unauthorized transaction and has also stolen from his client. The stop order indicated that the client's Amazon.com order should be effected only if the stock dropped to $131 a share or less. Anon jumped the gun and sold it for $133, but only gave the client the specified price of $131 a share. In the scenario described in Selection II, Penny's intentions might have been good, but an agent is not allowed to refund commissions. Anon is also in violation in Selection III's scenario. A member of the selling group is expected to make "bona fide" public offerings of the securities allotted him. To purchase some of the securities for itself is prohibited.

• Question 106:

  Iggy recently started his own company. He soon discovered it required more cash to keep it going than he had anticipated. He ran an ad in the local paper for investors and got a response. He found a template for a promissory note on the internet, filled in the requisite information specific to the agreement he and the investor had worked out, and printed it out. On it, he promised to make monthly interest payments of 2% on the loan and to repay the principal amount at the end of 18 months. A few months after the arrangement, Iggy read an article in a small business publication that indicated that promissory notes had to be registered with the state unless they were sold in an exempt transaction, such as one enacted with a financial institution, prior to being offered for sale. The article indicated that a seller who had sold an unregistered note in error could remedy the situation by sending the buyer a formal offer to buy the security back, with interest. Iggy turned to the computer once again, found a form that could be used for a formal offer of rescission, filled it out, and sent it to the investor. Having done this,

  A. Iggy cannot be sued for civil damages if the investor fails to respond to the offer within 30 days.

  B. Iggy must follow up with a second notice sent via registered mail if he has not heard from the investor within 30 days.

  C. Iggy must wait 6 months for a response from the investor. If no response is received by the end of 6 months, Iggy is off the hook.

  D. Iggy will not be assessed any penalties by the Administrator of the state, but the investor can still sue for damages in civil court.

  Correct Answer: A

  Since Iggy realized the promissory note he had sold to the investor required state registration and sent a formal offer of rescission to the investor, he cannot be sued for civil damages if the investor has not responded to the offer within 30 days. The investor has 30 days to accept or reject the offer. If he either rejects it or fails to accept it by not responding to the offer at all, the investor has lost the right to sue for damages.

• Question 107:

  Shady Corporation's executives are concerned over the firm's steadily declining stock price and decide to do something about it. They each decide to make significantly large purchases of their firm's stock in order to stabilize and hopefully even to drive up its price, reasoning that they can sell the stock for the higher price down the road and profit from the transaction. You are a broker-dealer for the firm's executives.

  Are Shady's executives planning to do anything illegal?

  A. No. It's a win-win. They are using their own money to buy stock of their firm, and this can help drive the stock price up and put profits in their pockets.

  B. Yes. To purchase shares of their own company is considered to be illegal insider trading.

  C. No. As long as they follow the rules and report their purchases to the SEC, it is not illegal for them to purchase shares of their firm's stock.

  D. Yes. Although it is not illegal for them to purchase shares of their firm's stock, they cannot do so in order to try to manipulate the price of the stock.

  Correct Answer: D

  Yes. Although it is not illegal for Shady's executives to purchase shares of their firm's stock, in this case they are planning to do something illegal in deciding to make significantly large purchases of their firm's stock in order to manipulate the price. This is an example of price pegging.

• Question 108:

  In order to maintain its registration with a state, a broker-dealer may be required to:

  I. take a written or oral exam.

  II. pay an annual filing fee.

  III. maintain a minimum net capital.

  IV.

  file all advertising material with the Administrator.

  A.

  I and II only

  B.

  II and III only

  C.

  II, III, and IV only

  D.

  I, II, III, and IV

  Correct Answer: D

  In order to maintain its registration with a state, a broker-dealer may be required to take a written or oral exam, pay an annual filing fee, maintain a minimum net capital, and file all advertising material with the state's Administrator. The Administrator of each state has the authority to determine the specific requirements for the state. All of the selections are within the realm of the Administrator's jurisdiction.

• Question 109:

  Blue Sky Laws are designed to:

  A. protect investors from fraud in their securities market transactions.

  B. protect agents, broker-dealers, and investment advisers and their representatives from spurious allegations of fraudulent activity.

  C. enhance the tourism industry within a state.

  D. favor investment in companies that engage in environmentally friendly practices.

  Correct Answer: A

  The main purpose of Blue Sky Laws is to protect individual investors from fraud in their securities market transactions. Requiring the registration of new security issues and theregistration of those persons who advise individual investors as well as those involved in the purchase and sale of securities to the public are just some of the regulations designed to do this. There are no provisions designed to protect agents, broker-dealers, or investment advisers and their representatives in any regard.

• Question 110:

  You are a registered agent with a broker-dealer. One of your clients visits you and wants you to sell some of the U.S. government bonds she owns and purchase shares of a specific aggressive growth mutual fund for her with the proceeds. Your client is a mentally- competent, 84-year-old woman but, based on your other knowledge of her situation, you believe it to be an unwise move. You should

  A. advise her that you don't believe this is in her best interest, but execute the required transactions if she insists.

  B. call the mutual fund and tell them that they must convince this client that an investment in their fund is not in her best interest, under penalty of law.

  C. nod politely, but not execute the transactions since they are not in her best interest.

  D. turn the matter over to your supervisor.

  Correct Answer: A

  If, as a registered agent with a broker-dealer, you receive an order from a client that you don't believe is in her best interests, you should tell her that, but you must still execute the transactions if she insists. You may not legally ignore her instructions, nor should you bother either the mutual fund or your supervisor with this, given the facts as provided; you should deal with it yourself.