FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 111:

  Which of the following constitutes a non-punitive order?

  A. summary license suspension

  B. registration cancellation

  C. registration denial

  D. All of the above are punitive orders.

  Correct Answer: B

  Registration cancellation is a non-punitive order. The Administrator issues a cancellation order if a registered person dies, becomes mentally incompetent, is no longer in business, or is unable to be located.

• Question 112:

  Registered agent Ina Scent has had her license suspended by the state Administrator prior to an administrative hearing on the order.

  Which of the following statements is true regarding Ina's situation?

  A. Ina can sue the Administrator because she was not afforded a hearing before the suspension took place.

  B. Ina can make a written request that a hearing on the issue be scheduled within ten business days of her request and may continue working with clients while waiting for her day in court.

  C. Ina can make a written request that a hearing on the issue be scheduled within fifteen business days of her request and may not continue working with clients unless the Administrator vacates the order until final determination.

  D. Ina can immediately file an appeal of the suspension in a court of law.

  Correct Answer: C

  When Ina receives notice of her license suspension, she can make a written request that a hearing on the issue be scheduled within fifteen business days of her request. She cannot continue working with clients unless the Administrator vacates the order until final determination because her license is still suspended pending final determination. If, after the hearing, the order still stands, Ina can file an appeal of the suspension with a court of law if she does so within 60 days.

• Question 113:

  For how long after the effective date is a security's registration valid?

  A. three months

  B. six months

  C. one year

  D. two years

  Correct Answer: C

  A security's registration is valid for one year after the effective date, which is the date the Administrator approves the registration. If the entire issue has not been sold in this time frame, the offering may be renewed.

• Question 114:

  The Administrator of a state will deny the registration of a security if

  I. the mandated filing fee has not been paid.

  II. the compensation of the underwriters is excessive.

  III. the registration statement is incomplete.

  IV.

  the issuer is registering the security through the registration by coordination process and has not complied with all the stipulated requirements.

  A.

  I, II, III, or IV

  B.

  I or III only

  C.

  III or IV only

  D.

  I, III or IV only

  Correct Answer: A

  The Administrator of a state will deny the registration of a security under any of the situations described in Selections I, II, III, and IV-if the mandated filing fee has not been paid; if the compensation of the underwriters is excessive; if the registration statement is incomplete; or if the issuer is attempting to use registration by coordination and has not complied with all the stipulated requirements of that process.

• Question 115:

  If an issuer registers securities with the state, how long can the documentation supplied in the registration statement for those securities be incorporated by reference only into a registration statement for future securities the issuer wants to offer for sale?

  A. one year

  B. two years

  C. five years

  D. seven years

  Correct Answer: C

  Once an issuer has registered securities with the state, the documentation supplied in that registration statement can be incorporated into the registration statement for future securities the issuer wants to offer for sale by reference only for a period of five years.

• Question 116:

  Which of the following practices would be prohibited in connection with the sale of investment company shares?

  I. selling a client shares of a load stock fund when a no load stock fund with the same investment objective exists

  II. selling the client shares of five SandP 500 Index mutual funds, offered by different fund families

  III.

  encouraging a client to swap his money between two funds in the same family without informing him that this creates a taxable event

  A.

  I, II, and III

  B.

  I and II only

  C.

  I and III only

  D.

  II and III only

  Correct Answer: D

  The scenarios described in Selections II and III only would be prohibited. Five SandP 500 Index mutual funds, even if offered by different fund families, all have the same investment objective-duplicating the returns earned on the SandP 500 Index, and they will be invested in very similar stocks. Therefore, the client is getting little or no more diversification of risk by investing in five funds over investing in just one. The agent is just getting richer from more commissions. Encouraging a client to swap his money between two funds in the same family without informing the client that this creates a taxable event is not providing the client with "full and fair disclosure." It may well be in the client's best interest to make the switch, but he needs to be made aware of the tax consequences. It is not necessarily prohibited to sell a client shares of a load stock fund when a no load stock fund with the same investment objective exists as long as the agent believes that the load stock fund is a better investment for his client.

• Question 117:

  Jeremy Sly considered himself somewhat of an inventor. The only problem was that his day job interfered with his opportunity to exercise his creativity. He came up with a plan to get outside investors to support his inventive activities. To this end, he produced and distributed a brochure advertising partnership interests with a guaranteed return on investment of at least 15% after the first 12 months, based on what he had allegedly generated from his other (non-existent) inventions.

  Given these facts, is Jeremy guilty of any security violations under the Uniform Securities Act (USA)?

  A. No. The facts don't indicate whether any partnership interests were actually sold, and there can be no violation unless there is a sale.

  B. No. An interest in a partnership is not considered a security.

  C. No. It is not against the law to believe in oneself and promote one's ideas.

  D. Yes. Even an "offer" to sell securities must not contain any untruths.

  Correct Answer: D

  Yes. Jeremy is guilty of security violations under the Uniform Securities Act when he provides misleading information when offering securities for sale, even if no securities are actually sold. Partnership interests fall under the definition of securities, and Jeremy's claim to have generated a return of at least 15% on other inventions that he never created is an absolute falsehood.

• Question 118:

  An individual who represents a broker-dealer in the buying and selling of securities is called a(n):

  A. underwriter

  B. issuer

  C. agent

  D. administrator

  Correct Answer: C

  An individual who represents a broker-dealer in buying and selling securities is called an agent or a registered representative. An agent may also work for an issuer, which refers to the entity that is selling securities to raise money for itself. An underwriter is the entity that aids the issuer in bringing the new securities to market. Administrator is the title many states use to refer to the official in charge of enforcing the state's securities regulations.

• Question 119:

  Cassie Clueless has recommended that a client purchase shares of a mutual fund prior to its ex-dividend date, so that the client will receive the dividends when they are distributed.

  In which of the following situations might this recommendation be justifiable and not in violation of NASAA rules?

  I. The investor has refused to provide Cassie any information regarding his investment goals.

  II. The investor is a young professional with an investment goal of long-term capital appreciation.

  III.

  The investor is a retiree in a low tax bracket and needs current income to augment her social security check.

  A.

  I only

  B.

  I and II only

  C.

  III only

  D.

  It is always in violation of NASAA rules to recommend that a client purchase shares of a mutual fund prior to its ex-dividend date.

  Correct Answer: C

  If Cassie makes her recommendation based on the scenario described in Selection III, she is not violating any NASAA rules. It is advantageous for an investor who is a retiree in a low tax bracket and needs current income to augment her social security check to buy shares of a mutual fund before its ex-dividend date in order to receive the dividend income. The NASAA rule states only that an agent cannot indicate that the purchase of shares of a mutual fund prior to the ex-dividend date would be advantageous to the client "unless there are specific, clearly described tax or other advantages to the customer." It would be unethical for Cassie to recommend this strategy to an investor whose investment goals were unknown to her, as in Selection I, or to an investor who is looking for long-term capital appreciation and has no need for the dividend income--which will be taxable--as in Selection II.

• Question 120:

  Which of the following does not describe a prohibited activity by investment advisers and their representatives, according to NASAA Model Rules?

  A. A new client comes to Simon LaGree for investment advice. The client has $25,000 to invest. Simon tells the client that it will cost the client $5,000 to have a customized financial plan developed for him, but after that the client needs to pay only 5% of the total value of the assets under management each quarter.

  B. A 72-year-old retired social worker comes to Simon LaGree for investment advice. She has $50,000 to invest. Simon recommends she invest half of it in an international growth mutual fund and half in a variable annuity.

  C. The agreement that Simon LaGree has his clients sign indicates that LaGree uses SecureMoney Broker-Dealers in executing trades for his clients and that, in return, LaGree receives software from the broker-dealer that allows LaGree to perform some fundamental and technical analysis.

  D. All of the above describe prohibited practices.

  Correct Answer: C

  It is not prohibited for LaGree to receive the software from SecureMoney in return for executing trades through that broker-dealer since LaGree has disclosed this to his clients. An investment adviser is permitted to receive soft dollars from broker-dealers in return for executing trades through them, as long as the client is informed of the arrangement and the soft dollars will benefit both the client and the adviser, which is the case in this instance since the software gives LaGree the ability to do research in order to better advise his client. Choice A is clearly prohibited since it constitutes an "unreasonable advisory fee." In Choice B, LaGree is making unsuitable recommendations to his client. A 72-year-old retired social worker is likely to have a greater-than-average need for liquidity to pay for unexpected items, such as medical bills. Variable annuities are designed to be long-term investments, not short-term investments, so they would not meet this need. They typically have high surrender penalties that the client would be subject to if she needed to make withdrawals within, say, the next 10 years. Likewise, international growth funds are not liquid investments. International growth mutual funds are invested in foreign stocks and are riskier than average, and are, thus, not suitable investment vehicles for the typical 72-year- old retired social worker.