FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 141:

  You are an agent with a broker-dealer and have learned of limited partnership interests being sold by a small company that is planning to come out with a product that you think is going to "wow" the market. You would like to get in on the action, but the minimum investment needed is $10,000, and you don't have that kind of dough lying around. You talk to your brother, who is also one of your clients, and get him interested in investing in the firm, too. The two of you decide to pull your money together, each putting in $5,000, and you agree to split any profits or losses.

  Is this permitted?

  A. Yes. This is permitted since the agreement is between you and a family member.

  B. Maybe. But it will require written consent from both your brother and your firm.

  C. Yes, as long as your brother provides your firm with his written consent.

  Correct Answer: C

  It may be permissible for you and your brother to open a joint account to invest in this partnership since he is a family member, but it will require the written consent of both your brother and your firm, and your firm is under no obligation to give its consent.

• Question 142:

  An investment adviser may act as a custodian for a client's securities if

  I. the Administrator of the state doesn't have a rule prohibiting custodial arrangements.

  II. he informs the state Administrator in writing that he will be acting as a custodian for the client.

  III.

  he arranges to pay an independent certified public accountant to perform an unannounced audit of his books each year so that the accountant can report his findings to the state Administrator.

  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 true statements. In order for an investment adviser to act as a custodian for a client's securities, he must first make certain that the Administrator of the state in which he's registered does not prohibit it. Then he must inform the Administrator in writing that he will be acting as a custodian for the client, and he has to pay for an independent CPA to audit his books once a year to make certain that everything is copasetic, upon which the CPA reports his findings to the state Administrator. There are also other requirements that must be met.

• Question 143:

  An arrangement wherein a terminally ill person sells a second party his life insurance policy at a discount from its face value, giving the buyer the right to the policy's face value when the seller dies is called a:

  A. death warrant.

  B. viatical settlement.

  C. deceased option.

  D. life straddle.

  Correct Answer: B

  A viatical settlement is an arrangement under which a terminally ill person sells a second party his life insurance policy at a discount from its face value. When the terminally ill person dies, the buyer of the policy receives its face value. Some states consider viatical settlements to be securities, and they have come under the scrutiny of the NASAA since there is a significant potential for fraud in the writing of these contracts.

• Question 144:

  Kevin has a pair of season tickets to the Boston Red Sox games. He and his wife can't attend all the games themselves, so Kevin has created "packages" of eight games each that he is listing for sale on Craig's List.

  Do these "packages" meet the definition of securities, and, if so, does Kevin need to register them with the state before offering them for sale?

  A. If Kevin will be profiting from the sale of the packages, the packages are defined to be securities, but since he's selling the packages to only a few people, he will not have to register them with the state. (Kevin may, however, be guilty of violating ticket scalping laws.)

  B. Only if Kevin will be selling the packages at or below cost are the packages not considered to be securities, in which case Kevin will not have to register them with the state.

  C. The packages are not considered to be securities since each package is merely a purchase and sale agreement between Kevin and another person. There is no third party involved. Because they do not meet the definition of securities, Kevin does not need to register them with the state.

  D. Statements A and B are both true statements.

  Correct Answer: C

  The packages are not considered to be securities since each package is simply a purchase and sale agreement between Kevin and another person, with no third party involvement; and since they are not securities, Kevin need not register them with the state. A buyer of one of the packages is not expecting to earn a profit on this investment "solely through the efforts of others," which is one of the defining characteristics of a security, as ruled by the U.S. Supreme Court in 1946.

• Question 145:

  Broker-Dealer Wheeler has no offices in the state. Wheeler does, however, sell corporate bonds from his portfolio to banks and insurance companies located in the state that purchase the bonds for their investment portfolios. He executes about twelve of these transactions a year. Wheeler profits from the price appreciation of the bonds during the time he held them, but receives no other form of compensation. Based on these facts,

  A. Wheeler must register as a broker-dealer in the state, but the securities do not need to be registered.

  B. Wheeler need not register in the state, and the securities are also exempt from registration.

  C. Wheeler must register as a broker-dealer in the state, and the securities must also be registered before they can be sold to in-state investors.

  D. Wheeler need not register in the state, but the securities must be registered before they can be sold to in-state investors.

  Correct Answer: B

  Since Wheeler has no offices in the state and is selling bonds from his portfolio to institutional investors, Wheeler need not register in the state, and the securities are exempt from registration. Broker-dealers with no physical location in a state that are doing business with other broker-dealers or with institutional investors such as banks and insurance companies that do have offices in that state are exempted from registering in the state. Securities sales to institutional investors are exempt transactions, and securities sold in exempt transactions are themselves exempt from state registration requirements.

• Question 146:

  Cal Turner calls his client and recommends that the client sell his shares in the Alpha High Quality Bond Fund and use the proceeds to buy shares in the Omega High Quality Bond Fund. Cal has done nothing unethical if his recommendation is based on the fact that

  A. the Alpha Fund has a back-end load.

  B. the Omega Fund has a front-end load.

  C. the Alpha Fund has been performing poorly relative to other funds in the same category.

  D. It would always be unethical for Cal to recommend that a client sell shares in one fund in order to buy shares of another fund that has the same investment objective.

  Correct Answer: C

  Cal has done nothing unethical if his recommendation that a client sell his shares in the Alpha Fund and buy shares of the Omega Fund is due to the fact that the Alpha Fund has been performing poorly relative to other funds in the same category. While past performance is no guarantee of future performance, a client may not want to hang on to a fund that isn't returning as much as its competition.

• Question 147:

  Carrie is a registered agent employed by CanDo Broker-Dealers. Her uncle is a minister who regularly refers his parishioners to Carrie, in return for which Carrie has agreed to donate a quarter of her commissions from these transactions to the parish.

  Is Carrie doing anything illegal?

  A. No. Carrie is just donating some of her commissions back to the church, and transactions with

  B. Yes. Carrie is splitting her commissions with an entity that is not affiliated with her broker-dealer

  C. It depends. As long as the church parishioners are aware of the arrangement between Carrie and

  D. It depends. If the church itself is a client of CanDo's, then it is considered to be affiliated with

  Correct Answer: B

  Yes. Carrie is violating NASAA's Model Rules in splitting her commissions with an entity that is not a registered agent affiliated with her firm. It doesn't matter that the entity is a church, even if that church is itself a client of the broker-dealer.

• Question 148:

  Which of the following is not a prohibited practice for a broker-dealer?

  A. waiting 36 hours before mailing a check after receiving a request for a cash withdrawal from a client if the client has that much cash available in his account

  B. requiring that a client who is engaged in margin transactions leave the securities with the broker-dealer in "street name"

  C. recommending a security to a new client without first ascertaining that client's level of risk tolerance

  D. executing a trade for an account holder based on instructions from the account holder's spouse

  Correct Answer: B

  It is not prohibited for a broker-dealer to require that a client who is engaging in margin transactions to leave the securities with the broker in "street name." This is the normal business practice. A margin transaction means that the client is borrowing part of the funds he's investing, and the securities are serving as collateral for the loan. It is illegal to delay sending a check upon receiving a request for a cash withdrawal, assuming the client has the cash available in his account; to recommend a security to a client without knowing anything about him, including his tolerance for risk; and to execute a trade on instructions from anyone other than the account holder unless that party has at least limited power of attorney.

• Question 149:

  Ms. Connie Fused sent her investment adviser a check, payable to a mutual fund that he had recommended to her.

  What must the adviser do in order to avoid being considered the custodian of this account and, thereby, subject to some strict requirements, including a higher minimum net capital?

  A. He needs to forward the check to the mutual fund within 3 days.

  B. He needs to forward the check to the mutual fund within 24 hours.

  C. He needs to get a written statement from Ms. Fused, addressed to the state Administrator, indicating it was her mistake.

  D. He needs both to forward the check within 24 hours and to obtain a written statement from Ms. Fused.

  Correct Answer: B

  As long as the adviser forwards the check to the mutual fund within 24 hours, he will not be deemed to have taken custody of Ms. Fused funds. This assumes the mutual fund is in no way affiliated with the investment adviser.

• Question 150:

  Which of the following laws deals with identity theft protection?

  A. the Bank Secrecy Act (BSA)

  B. the USA Patriot Act

  C. ERISA

  D. Regulation S-P

  Correct Answer: D

  Regulation S-P was enacted by the SEC to deal with identity theft. The law requires financial institutions to provide their clients with a statement of its privacy policies and practices and prohibits the disclosure of nonpublic personal information about even a prospective client to a nonaffiliated third party unless certain conditions are met, including giving the client or prospective client the right to opt out of the disclosure.