FINRA FINRA-SERIES-63 Online Practice Questions and Exam Preparation

FINRA FINRA-SERIES-63 Online Questions & Answers

• Question 101:

  In an arrangement between MoeMoney Investment Advisers and one of the firm's clients, the YourMoney mutual fund, part of MoeMoney's compensation is based how the fund performs compared to the SandP 500 Index. If the return on the

  fund exceeds the return on the index, MoeMoney gets a bonus. The SandP 500 had a return of negative 8% this year, and the fund returned a negative 2%, so MoeMoney invoiced the client for the bonus.

  Has MoeMoney violated any securities laws?

  A. No. The fund beat the return on the SandP 500 Index, so MoeMoney is entitled to the bonus, based on its agreement with YourMoney.
  B. Yes. It is a violation of the Uniform Securities Act for an investment adviser to earn a bonus if a portfolio it manages loses money.
  C. Yes. Under no circumstances can a bonus be part of an investment adviser's compensation package according to the Uniform Securities Act.
  D. Yes. An investment adviser's compensation cannot be based on the capital appreciation of the portfolio.
  A. No. The fund beat the return on the SandP 500 Index, so MoeMoney is entitled to the bonus, based on its agreement with YourMoney.

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  Explanation/Reference:

  No. MoeMoney has not violated any securities laws. Even though the fund's return was negative, it still beat the return on the SandP 500 Index, and MoeMoney is entitled to the bonus. The Uniform Securities Act does not prohibit compensation agreements like this one as long as the client is a sophisticated investor, such as a mutual fund. This would not be permitted if the client were your average individual investor.

• Question 102:

  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 acting as a dealer?

  A. HiGrowth Corporation
  B. Mr. Bigwig
  C. BigFee Investment Bankers
  D. GetErDone Broker-Dealers
  C. BigFee Investment Bankers

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  Explanation/Reference:

  BigFee Investment Bankers is acting as a dealer. In underwriting the securities, the firm is purchasing them from HiGrowth and selling the securities to the public. If the securities don't sell for the amount that BigFee thinks they can, BigFee takes the loss as owner of the securities.

• Question 103:

  Which of the following is not a security, as defined by the Uniform Securities Act?

  I. an option contract

  II. a futures contract on gold

  III. a 401K plan

  IV.

  a variable annuity

  A. None of the selections listed are securities.
  B. Only Selection III is not a security.
  C. Only Selections II and III are not securities.
  D. Selections II, III and IV are not securities.
  I. an option contract II. a futures contract on gold III. a 401K plan IV. a variable annuity
  C. Only Selections II and III are not securities.

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  Explanation/Reference:

  Only Selections II and III are not securities. Neither retirement plans nor commodity futures contracts are deemed to be securities by the Uniform Securities Act. A 401K plan may be invested in securities, but it is not a security itself. A gold futures contract is a contract between two parties for the delivery of the underlying asset, gold. The profits (or losses) are not dependent on the performance of an outside party, which is a critical element, based on a 1946 U.S. Supreme Court decision, which defines a security as "an investment of money. . . with profits to come solely from the efforts of others."

• Question 104:

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

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  Explanation/Reference:

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

• Question 105:

  While on vacation in Colorado, Mr. Moneybags became interested in the stock of a company called SafeAway, which designs and installs customized high-tech security systems in the multimillion dollar mansions located in Colorado's pricier ski resort areas, such as Vail and Aspen. Upon returning to his home in Boston, he calls his broker-dealer with an order to purchase 10,000 shares of the stock, which he learned trades in the over- the-counter market. Fast Eddie, a registered agent with his broker-dealer, discovers that SafeAway's stock is registered only in the states of Colorado and Wyoming. Neither Fast Eddie nor his broker-dealer are registered to do business in either of those states. Under these circumstances,

  A. Fast Eddie cannot effect Mr. Moneybags purchase of SafeAway stock since neither he nor his broker are registered to do business in Colorado or Wyoming, and SafeAway stock is not registered for sale in the state of Massachusetts.
  B. Fast Eddie can execute the trade for Mr. Moneybags since this would be considered an exempt transaction because it is a private placement.
  C. Fast Eddie should contact a broker-dealer that is registered in either Colorado or Wyoming and negotiate a finder's fee for referring Mr. Moneybags to them.
  D. Fast Eddie can execute the trade for Mr. Moneybags since this would be considered an exempt transaction because it is an unsolicited transaction.
  D. Fast Eddie can execute the trade for Mr. Moneybags since this would be considered an exempt transaction because it is an unsolicited transaction.

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  Explanation/Reference:

  Under the circumstances described, Fast Eddie can execute the trade for Mr. Moneybags even though SafeAway stock is registered for sale only in the states of Colorado and Wyoming since neither Fast Eddie nor the broker-dealer solicited the transaction, making this an exempt transaction. However, the Massachusetts Administrator may demand that Fast Eddie and his broker-dealer provide proof that the trade was indeed unsolicited.

• Question 106:

  Moe is a registered investment adviser doing business under the name of MoeMoney Investment Advisers, LLC. Larry, Curly, and Mary all hold positions with the firm. Larry is on the board of directors; Mary is a sales representative for the firm; and Curly is an administrative assistant, who performs clerical duties.

  Given that Moe is already a registered investment adviser, which of the other three are automatically registered as investment adviser representatives?

  A. Larry only
  B. Larry and Mary only
  C. Larry, Mary and Curly
  D. Mary and Curly only
  A. Larry only

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  Explanation/Reference:

  As a director of the firm, Larry would automatically be registered as an investment adviser representative of MoeMoney Investment Advisers. Although directors and officers of the firm are automatically registered as investment adviser representatives, Mary, as a salesrepresentative, would have to apply for her own registration. Curly does not need to be registered since he performs only clerical duties.

• Question 107:

  Which of the following statements best explains the difference between an agent and a broker-dealer?

  A. An agent is an individual who represents a broker-dealer or an issuer and buys and sells securities he does not own in return for a commission on the transactions he executes. A broker-dealer may also buy and sell securities for his own portfolio, in which case the broker-dealer enjoys any price appreciation on those securities.
  B. A broker-dealer must be licensed in the state in which he conducts business, but there are no separate licensing requirements for agents.
  C. Agents are engaged exclusively in the purchase and sale of stocks whereas broker- dealers also buy and sell bonds and option contracts.
  D. Agents conduct their business exclusively in the secondary market, while broker-dealers also operate in the primary market.
  A. An agent is an individual who represents a broker-dealer or an issuer and buys and sells securities he does not own in return for a commission on the transactions he executes. A broker-dealer may also buy and sell securities for his own portfolio, in which case the broker-dealer enjoys any price appreciation on those securities.

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  Explanation/Reference:

  The main difference between an agent and a broker-dealer is that an agent represents either a broker-dealer or an issuer and buys and sells securities he doesn't own, receiving a commission for the trades he executes. A broker-dealer, when functioning as a dealer, is buying and selling for his own portfolio, thereby profiting from any price appreciation in the assets in his portfolio. Both agents and broker-dealers must meet state licensing requirements; both engage in the purchase and sale of stocks, bonds, and option contracts; and both operate in both the primary and secondary markets.

• Question 108:

  A margin transaction refers to a transaction

  A. that is illegal under the guidelines of the Uniform Securities Act.
  B. in which the client borrows some of the money that he is investing.
  C. in which a registered agent makes trades on a customer's account without that customer's knowledge.
  D. Both A and C are true statements.
  B. in which the client borrows some of the money that he is investing.

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  Explanation/Reference:

  A margin transaction refers to a transaction in which the client borrows some of the money that he is investing. It is a recognized practice.

• Question 109:

  John Ketchum is an investment adviser representative with Load Investment Advisers, which has a family of load funds that it encourages its representatives to promote. Representatives of the firm that sell shares in these funds to their clients receive a greater share of the load than they do if they sell load funds offered by other firms.

  Based on these facts, which of the following statements is true?

  A. John is obligated to try to sell his clients the funds offered by Load first since he is affiliated with them and has a fiduciary responsibility to them.
  B. John must provide his clients with a written disclosure that he will receive a greater remuneration for selling shares in the Load family of funds than if he sells them shares in other funds before he provides his clients with any investment advice.
  C. If, after reviewing the information form a client has filled out, John believes that one of Load's funds is an appropriate investment, John can recommend that the client invest in that fund. There is no disclosure requirement necessary if the recommendation is a sound one that can be proved to be based on the client's specific situation.
  D. Both A and B are true.
  B. John must provide his clients with a written disclosure that he will receive a greater remuneration for selling shares in the Load family of funds than if he sells them shares in other funds before he provides his clients with any investment advice.

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  Explanation/Reference:

  As a representative for a family of load funds who receives greater remuneration for selling those funds, John must provide his clients with a written disclosure of this fact before providing any advice, according to NASAA Model Rules. This constitutes a material conflict of interest that must be disclosed "to clients in writing before any advice is rendered." John is not obligated to try to sell his clients the funds offered by Load first. His fiduciary responsibility is to his clients, not his employer.

• Question 110:

  Which of the following entities is subject to be accused of churning?

  I. investment advisers

  II. investment adviser representatives

  III. broker-dealers

  IV.

  agents

  A. II and IV only
  B. I and III only
  C. II, III, and IV only
  D. I, II, III, and IV
  I. investment advisers II. investment adviser representatives III. broker-dealers IV. agents
  D. I, II, III, and IV

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  Explanation/Reference:

  Selections I, II, III, and IV-investment advisers, their representatives, and broker-dealers and their agents-are subject to accusations of churning. Any activity on the part of any of these parties that suggests that they are engaged in encouraging excessive trading on the accounts of their clients makes them subject to allegations of churning their customers' accounts.