FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 131:

  Switch Advisory is a small investment adviser partnership registered in a single state. A larger investment adviser firm, Bait Investment Adviser, is registered in the same state as well as two other states. Bait has offered to buy out three of Switch's partners who want to retire. This will give Bait a 60% ownership in Switch Advisory.

  Which of the following statements are true?

  I. Switch Advisory must obtain the approval of its clients before the partners can sell their interests to Bait.

  II. Switch Advisory must notify the state Administrator of this event.

  III. Switch Advisory must notify their clients of this event, but does not need the clients' approval.

  IV.

  Switch Advisory must notify the SEC of this event.

  A.

  I only

  B.

  I and II only

  C.

  II, III, and IV only

  D.

  I, II, and IV only

  Correct Answer: B

  Only Selections I and II are true. Switch must obtain the approval of its clients before the partners can sell their interests, and Switch must notify the state Administrator of this event. Whenever a change in partnership will result in new ownership of the business, which is the case when an external entity acquires a 60% interest, an investment adviser must get its clients' approval. As a state-registered investment adviser, switch also needs to notify the state Administrator. The SEC does not require notification since Switch is not a federal covered investment adviser.

• Question 132:

  The Administrator may require a firm to supply it with any prospectus, pamphlet, advertisement, or other sales literature intended for prospective investors unless the security

  I. will be sold only through an investment advisory firm.

  II. is a federal covered security.

  III.

  is issued by a state credit union.

  A.

  I, II and III

  B.

  I only

  C.

  II only

  D.

  II and III only

  Correct Answer: D

  Only Selections II and III are correct. The Administrator may require a firm to supply it with any prospectus, pamphlet, advertisement, or other sales literature intended for prospective investors unless the security is a federal covered security or is issued by a state credit union, both of which are on a longer list of exempted securities. It doesn't matter whether or not the securities will be sold to clients of an investment advisory firm.

• Question 133:

  Ms. Muffet is employed by Spyder Broker-Dealers. Her job duties include providing price quotes and executing purchases and sales for the firm's clients. She is paid a salary plus commission. Ms. Muffet is

  A. a broker-dealer.

  B. an agent.

  C. an investment adviser.

  D. an investment adviser representative.

  Correct Answer: B

  As an employee of Spyder Broker-Dealers who executes trades for clients, Ms. Muffet is an agent who works for the broker-dealer Spyder. She does not provide investment advice for a fee, so she is neither an investment adviser nor an investment adviser representative.

• Question 134:

  Which of the following statements would not be in violation of NASAA rules regarding the sale of investment company shares?

  I. "Investing your money in shares of this money market mutual fund is identical to putting your money in a savings account at a bank, except the money market fund provides a higher return."

  II. "Our U.S. government bond fund is invested only in government bonds issued by the S. government and is, therefore, a risk-free investment."

  III.

  "You are investing $22,000 in this fund today. The fund has a 5% load at this investment level, but if you sign a letter of intent to invest another $3,000 within the next 13 months, your load will be reduced to 4%. If something comes up and you can't invest the extra $3,000 within 13 months, you will only need to pay the difference in the two loads."

  A.

  I only

  B.

  I and II only

  C.

  III only

  D.

  I, II, and III

  Correct Answer: C

  Only Selection III would not violate NASAA rules regarding the sale of investment company shares because it is the only true statement. If a fund has a breakpoint at $25,000 that triggers a reduced front-end load and allows an investor to receive the reduced load charge if the investor signs a letter of intent stipulating that the additional investment will be made within 13 months, the only penalty to the investor who doesn't meet the breakpoint is payment of the difference in the two loads. Investing in shares of a money market mutual fund is not identical to putting money in a savings account at a bank. The bank account is insured by the FDIC in most cases; the money market mutual fund is not insured by the FDIC, and the investor can lose money (although, to date, money market mutual funds have covered any losses that they've experienced and not passed those losses onto their investors.) A U.S. government bond fund that is invested only in U.S. government bonds is free from default-risk, but it is still subject to interest rate risk. If interest rates increase, the value of the bonds in these funds-and therefore the fund itself-will decrease.

• Question 135:

  Which of the following are examples of the prohibited practice of manipulation in the securities markets?

  I. Broker-Dealer Joker is unhappy with its investment in the stock of a speculative firm and engages another broker-dealer to purchase a large number of shares from it, with the unofficial agreement to buy back those shares, offer more shares which the second broker- dealer will purchase, and so on.

  II. Broker-Dealer Joker has a large short position in the stock of a certain corporation. Joker offers a bonus to its agents who effect sale transactions in the stock.

  III.

  A client calls Broker-Dealer Joker with a request to purchase 20 bonds issued by Massachusetts Institute of Technology (MIT.) The bonds are currently selling for their par value of $1,000. Knowing this, Joker offers to sells the client the bonds for $120 per $100 of par, or $1,200 per $1,000 bond.

  A.

  I, II, and III

  B.

  I and II only

  C.

  I and III only

  D.

  I only

  Correct Answer: B

  Only Selections I and II are examples of manipulation in the securities market. It is considered to be manipulation if one firm engages another firm to make a series of purchases and sales that will make it appear that there is very active trading in the security; it is also considered manipulation if a broker-dealer encourages its agents to solicit sales of a security in which it has a short position since that broker-dealer is hoping that the sales will drive the price of the security down, thereby making the firm's position profitable. Although the offer to sell a client bonds at a much higher price than their market price is illegal, it is not an example of price manipulation.

• Question 136:

  You execute a stock transaction for a client on Thursday, September 23rd. The settlement date on the order ticket will be

  A. Thursday, September 23rd.

  B. Monday, September 27th.

  C. Friday, September 24th.

  D. Tuesday, September 28th.

  Correct Answer: D

  If you execute a stock transaction for a client on Thursday, September 23rd, the settlement date for that trade will be Tuesday, September 28th, which is T + 3, meaning three business days after the trade date.

• Question 137:

  Which of the following statements regarding an investment adviser representative who has an office in the state is true?

  A. If the investment adviser is registered with the SEC, then neither the investment adviser nor any of its affiliated investment adviser representative needs to be registered with the state.

  B. Regardless of whether the investment adviser is registered with the SEC or is registered with the state, all investment adviser representatives of the firm must be registered with the state if they have offices in the state.

  C. If the investment adviser that the investment adviser representative is affiliated with is itself registered with the state, then the investment adviser representative does not need to apply for a separate registration, regardless of whether the investment adviser representative has an office in the state.

  D. If an investment adviser representative is registered with the SEC, he or she need not obtain state registration, regardless of whether the investment adviser representative has an office in the state.

  Correct Answer: B

  Regardless of whether the investment adviser is register with the SEC or is itself registered with the state, all of its investment adviser representatives (IARs) are required to register with the state if they operate a place of business in the state.

• Question 138:

  According to the NASAA Model Rules, which of the following institutions would not be considered a qualified custodian?

  A. a broker-dealer that is registered with the state

  B. a bank that is insured by a private, state-sponsored insurance company

  C. a foreign financial institution

  D. a savings institution that is insured by the FDIC

  Correct Answer: B

  According to the NASAA Model Rules, a bank that is insured by a private, state-licensed insurance company would not be considered a qualified custodian. Registered broker- dealers, foreign financial institutions, and banks and savings institutions that are insured by the FDIC are on the list of qualified custodians.

• Question 139:

  You are an investment adviser representative. Your client, Mr. I. M. Pulse, calls you with what he thinks is exciting news. He just passed a restaurant and saw Microsoft's Bill Gates having lunch with a local entrepreneur who owns a small firm in the computer software industry that trades on the OTC pink sheets. He is sure that this means Microsoft is negotiating a purchase of the smaller company and instructs you to take the cash balance in his account and buy shares of the local company. You should

  A. tell Mr. I.M. Pulse that this would be an illegal insider trade and that you are unable to fulfill his request.

  B. call your supervisor and alert him immediately of Mr. Pulse's attempt to have you place an illegal order on his behalf in case Mr. Pulse decides to place the order elsewhere.

  C. advise Mr. Pulse that he may be jumping the gun, but place the order if he insists.

  D. do both A and B.

  Correct Answer: C

  If Mr. Pulse wants you to place an order to buy a firm that he thinks will become a target of Microsoft based on seeing Bill Gates and the owner of the firm dining together, you should, as his adviser, inform him that he may be jumping the gun and drawing a false conclusion, but you should place the order if he continues to insist. It is a legitimate order, and you are obligated to follow his instructions. It does not constitute illegal insider trading because Mr. Pulse has no way of knowing what the two men were talking about. They may just be old high school buddies catching up on the news.

• Question 140:

  Broker-dealer Nebulous opted to withdraw its registration with the state. Six months later, the Administrator finds that Nebulous had been engaged in fraudulent securities transactions.

  Which of the following statements is true?

  A. The Administrator is unable to take disciplinary action against Nebulous because the self-initiated withdrawal became effective 30 days after the application was filed.

  B. The Administrator is only able to take disciplinary action if the misdeeds are discovered within three months of the effective date of the withdrawal, so Nebulous slipped by this time.

  C. The Administrator has five years from the discovery of the misdeed to take disciplinary action, so Nebulous will have to be on the lookout for a long time to come.

  D. The Administrator can take disciplinary action against Nebulous for up to one year, so Nebulous is in trouble.

  Correct Answer: D

  Even though Nebulous withdrew its registration from the state, the Administrator has up to a year to take disciplinary action against the broker-dealer if he discovers that Nebulous has been engaged in fraudulent securities transactions after the fact. The Administrator can retroactively begin a revocation or suspension proceeding. Criminal courts can initiate proceedings anytime within five years of the alleged misdeeds.