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

FINRA FINRA-SERIES-63 Online Questions & Answers

• Question 171:

  Which of the following orders can an Administrator issue without providing prior notice?

  A. license suspension
  B. license revocation
  C. cease and desist
  D. license denial
  C. cease and desist

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  Explanation/Reference:

  The Administrator can issue an order to cease and desist without providing the party concerned with prior notice. In the cases involving the denial, suspension, or revocation of a license, the Administrator will provide prior notice, along with the opportunity for a hearing, and a written statement of the facts and the legal consequences involved.

• Question 172:

  The Administrator of a state can deny an application if

  A. the application is missing information.
  B. the registrant has been enjoined from engaging in activities involving securities in another state.
  C. the Administrator determines the applicant is not financially solvent.
  D. any of the above is true.
  D. any of the above is true.

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  Explanation/Reference:

  The Administrator of a state can deny an application if the application is missing information, if the registrant has been enjoined from engaging in activities involving securities in another state, or if the Administrator determines the applicant is not financially solvent.

• Question 173:

  Stu Pede is an agent with broker-dealer Cavalier. A customer calls with a request to establish a classic IRA and asks for Stu's advice regarding where the money in the IRA should be invested. Stu suggests a municipal bond fund, explaining to his client that the interest income earned on it will be tax-free at the federal level, and some of it may even be tax-free at the state and local levels.

  Has Stu engaged in any prohibited practices?

  A. Yes. Stu is an agent with a broker-dealer. He is not an investment adviser representative and is not allowed to make recommendations regarding investments to the firm's clients.
  B. No. Although Stu has given investment advice, it was solicited by the client, and Stu received no additional compensation for the advice.
  C. Yes. Municipal bonds are not suitable investments for a classic IRA, and Stu can have his license revoked or suspended.
  D. No. Although municipal bonds are not suitable investments for a classic IRA, Stu obviously didn't know this and is merely guilty of stupidity.
  C. Yes. Municipal bonds are not suitable investments for a classic IRA, and Stu can have his license revoked or suspended.

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  Explanation/Reference:

  Yes. When Stu recommends an investment in municipal bonds for a classic IRA account, he has made an unsuitable recommendation, which is a prohibited practice, and he can have his license revoked or suspended. Municipal bonds are not suitable investments for a classic IRA because municipal bonds pay interest that is at least free from federal taxation, so they offer a lower yield than fully taxable bonds of similar risk. The money in a classic IRA grows tax-free anyway, so the client is getting a lower yield with no benefit.

• Question 174:

  In which of the following cases is an investment adviser allowed to be compensated with a share of the capital gains of the client's portfolio?

  I. The client is a mutual fund.

  II. The client is a credit union.

  III. The client is a private client whose minimum net worth is $1 million or more.

  IV.

  The client is a private client who has at least $750,000 invested through the investment adviser.

  A. I and II only
  B. I, II, and III only
  C. I, II, and IV only
  D. none of the above. An investment adviser is never allowed to share in the capital gains earned on
  I. The client is a mutual fund. II. The client is a credit union. III. The client is a private client whose minimum net worth is $1 million or more. IV. The client is a private client who has at least $750,000 invested through the investment adviser.
  C. I, II, and IV only

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  Explanation/Reference:

  Selections I, II, and IV are correct. An investment adviser is permitted to be compensated with a share of the capital gains of the client's portfolio if the client is a mutual fund, a credit union, or a private client with at least $750,000 invested through the investment adviser. More generally, the adviser can charge a fee based on the capital appreciation of the portfolio if the client is an institutional investor, a private client with a net worth of at least $1.5 million, or a private client with at least $750,000 invested with the investment adviser.

• Question 175:

  A broker-dealer is required to keep his records for how long?

  A. at least three years
  B. at least five years
  C. at least seven years
  D. broker-dealer is required to keep his records for as long as he is registered in the state.
  A. at least three years

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  Explanation/Reference:

  A broker dealer is required to keep his records at least three years.

• Question 176:

  Mr. and Mrs. Cleaver are nearing retirement and have made an appointment with Mr. Eddie, an investment adviser representative who works for Haskell Investment Advisers, to get advice on how they can better structure their investments to meet their retirement goals. Their son, Theodore, who has recently graduated college and has a great job as a software writer for a video game company, accompanies them. Mr. Eddie explains that the main goal of any plan is diversification and recommends that Mr. and Mrs. Cleaver spread their investment monies equally among six load mutual funds that Mr. Eddie can sell them. He suggests that Theodore follow suit and invest any monies he has equally among the same ten funds.

  Has Mr. Eddie done anything wrong?

  A. Yes. Mr. Eddie has advised his clients to invest in load funds when no load funds are clearly better investments.
  B. No. Diversification should, in fact, be the goal, and he has advised a well-diversified plan for his clients.
  C. Yes. Clients who are ready to retire have different investment needs than a client who is just entering the work force. The recommendation that both Theodore and his parents have the same asset allocation is clearly unsuitable.
  D. Yes. Mr. Eddie is guilty of misappropriation, a prohibited practice.
  C. Yes. Clients who are ready to retire have different investment needs than a client who is just entering the work force. The recommendation that both Theodore and his parents have the same asset allocation is clearly unsuitable.

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  Explanation/Reference:

  Yes. In recommending that Mr. and Mrs. Cleaver and their son allocate their assets in identical fashions, Mr. Eddie has made an unsuitable recommendation since investors with different investment time horizons have different investment needs. Making unsuitable recommendations is a prohibited practice, and Mr. Eddie could have his license suspended or revoked.

• Question 177:

  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
  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.
  B. I and II only

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  Explanation/Reference:

  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 178:

  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
  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.
  D. I, II and III

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  Explanation/Reference:

  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 179:

  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 the broker?

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

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  Explanation/Reference:

  GetErDone Broker-Dealers is the broker in this scenario. GetErDone is simply finding buyers for the securities and receives a commission for doing so. GetErDone is not itself purchasing the securities in the scenario described. It would be considered unethical for the broker-dealer to do so since they are required to make a bona fide public offering of all of the securities allotted to them for distribution under NASAA Model Rules.

• Question 180:

  You had the misfortune of working as a registered agent for an unscrupulous broker-dealer. You weren't privy to any of it, but apparently, your broker-dealer was guilty of some fraudulent activities and has had his license revoked. In this instance,

  A. you can simply find another broker-dealer to hire you and have your license transferred to him.
  B. you are no longer a licensed agent with the state and must reapply for a license in order to work for another broker-dealer.
  C. the state Administrator will assign you and any other affected agents to work for other broker-dealers registered with the state.
  D. you must wait until the broker-dealer's day in court before you can work in the securities industry again because the Administrator will want to be certain that you knew nothing of it.
  B. you are no longer a licensed agent with the state and must reapply for a license in order to work for another broker-dealer.

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  Explanation/Reference:

  If you were employed as an agent for a broker-dealer who has had his license revoked, you are no longer a licensed agent with the state and you will have to reapply for a license and pay the requisite filing fees in order to work for another broker-dealer. Your license terminated when your affiliation with the unscrupulous broker ended, even though it was through no fault of your own. Since you have done nothing for which to be penalized, however, your registration becomes effective upon your filing and paying your fees.