FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 181:

  Which of the following statements regarding the registration of broker-dealers and investment advisers is true?

  A. Investment advisers are required to register with both the state and the SEC, while broker-dealers may be registered with only one or the other.

  B. Investment advisers must always be registered with the SEC to conduct business; broker-dealers may be registered with either an individual state or the SEC or both.

  C. Investment advisers are required either to be registered with a state or with the SEC, while broker-dealers must be registered both with the SEC and the state.

  D. Both investment advisers and broker-dealers must be registered with the SEC and with the states in which they have offices.

  Correct Answer: C

  The true statement is C: Investment advisers are required either to be registered with a state or with the SEC, but broker-dealers must be registered with both the SEC and the state. Investment advisers who are federal covered do not need to be registered with the state as well, but they do have to execute a notice filing with the Administrator of any state in which they have an office.

• Question 182:

  Which of the following securities would not necessarily be exempt from state registration?

  A. a stock listed on the Tokyo Stock Exchange

  B. a bond guaranteed by the Canadian government

  C. a bond issued by another state's employees' credit union

  D. a stock listed as a NASDAQ National Market Issue.

  Correct Answer: A

  Stocks listed on the Tokyo Stock Exchange would not necessarily be exempt from state registration. Stocks that are registered with the SEC, such as NASDAQ National Market Issue stocks, securities issued or guaranteed by the Canadian government, and securities issued or guaranteed by banks or credit unions are all exempt.

• Question 183:

  A broker-dealer of commodity futures contracts has been profiting by trading for its own account either before or after executing a client's trade on the same commodity, depending on which will be most advantageous. Under the Uniform Securities Act, the broker-dealer is guilty of

  A. fraud.

  B. churning.

  C. unauthorized transactions.

  D. nothing. The Uniform Securities Act (USA) deals only with securities, and a commodity futures contract is not a security.

  Correct Answer: D

  A broker-dealer of commodity futures contracts is guilty of nothing under the Uniform Securities Act since a commodity futures contract is not a security as defined by the USA. The broker-dealer may, however, find himself in trouble with the Commodity Futures Trading Commission, which is the regulatory agency of the futures market.

• Question 184:

  Goldie Locks is an agent with Bear Broker-Dealers. One of her clients is a single woman, Annie Spinster, who is retired and needs income from her investment portfolio to meet her current needs for liquidity. In addition to investing in mutual funds, Annie likes the thrill of investing in single stocks and asks Goldie for recommendations. Goldie recommends Annie invest some of her money in Alcon (ACL), a medical instrument and supplies company selling on the NYSE, based on the fact that it has a high dividend yield and is paying a dividend of $2.21 a share, which is guaranteed to continue or even increase, Goldie assures Annie.

  Has Goldie violated any laws or engaged in any prohibited practices?

  A. Yes. At the very least, Goldie has committed fraud since she cannot guarantee that a firm's dividend will continue or increase.

  B. Yes. As the agent of a broker-dealer, Goldie is not permitted to make recommendations for specific investments. Only investment adviser representatives and investment advisers can do that.

  C. No. Goldie merely responded to a recommendation request from a client, and the recommendation is suitable since the client has a need for current income and the recommended stock pays a high dividend.

  D. Both A and B are true.

  Correct Answer: A

  In recommending that Annie buy stock in Alcon because its stock is guaranteed to pay a dividend of $2.21 a share or higher, Goldie has committed fraud. The company itself could not even make such a guarantee legitimately. Goldie may also be guilty of an unsuitable recommendation since factors other than dividend yield-such as the risk of the investment-- should have been considered. That being said, Goldie is permitted to make recommendations for specific investments as an agent of a broker-dealer, as long as she doesn't receive special compensation for it.

• Question 185:

  Which of the following is a security as defined by the Uniform Securities Act (USA)?

  A. a debenture

  B. a futures option contract on wheat

  C. a term life insurance policy

  D. Both A and B are securities as defined by the Uniform Securities Act.

  Correct Answer: D

  Both a debenture and a futures option contract on wheat are securities as defined by the USA. A debenture is a long-term, unsecured debt instrument and is specifically listed as a security in the Act. Although commodity futures contracts are not considered to be securities as defined by the Act, options on commodity futures contracts are.

• Question 186:

  Ms. Ding is an administrative assistant to the manager of a mutual fund. Most of her day is spent entering data onto a spreadsheet for her boss and answering phone calls. Some of the calls require her to provide information about the some of the fund's financial aspects, such as its closing net asset value on the previous day.

  What type of registration does Ms. Ding require in order to perform her duties?

  A. Ms. Ding needs to apply for registration as an agent since she is providing financial information.

  B. Ms. Ding needs to apply for registration as an investment adviser representative since she is providing information about a specific mutual fund.

  C. Ms. Ding will need to apply for registration as both an agent and an investment adviser representative in this case since she is providing information about a mutual fund.

  D. Ms. Ding does not need to apply for any type of registration. She is merely supplying information and is not engaged in the purchase or sale of the fund shares.

  Correct Answer: D

  Since Ms. Ding is an administrative assistant who is merely providing some information about the fund and is not engaging in the purchase or sale of the fund shares, she does not need to apply for any type of registration. An employee who simply provides price and/or some other pertinent information to the public, but who does not engage in the purchase or sale of securities to the public and does not receive a commission based on the sale of securities is not considered to be an agent or an investment adviser.

• Question 187:

  MoeMoney Investment Advisers, LLC is registered in the state of Texas, and its three offices are all located in the greater Dallas-Fort Worth area. Five of its clients-all individuals-have relocated to Colorado and all have indicated a desire to retain the services of MoeMoney. In order for this to be possible,

  A. MoeMoney will need to apply for and be granted registration as an investment adviser in the state of Colorado.

  B. each client will have to write a letter to the Administrator of the state of Colorado on MoeMoney's behalf.

  C. MoeMoney will need to apply for and be granted registration as an investment adviser representative in the state of Colorado.

  D. Neither MoeMoney nor its clients need do anything.

  Correct Answer: D

  In order for MoeMoney to continue servicing its five individual clients who have relocated to Colorado, neither MoeMoney nor its clients need to do anything. The National Securities Markets Improvement Act of 1996 (NSMIA) established a "deminimis" exemption for investment advisers if they have no office in a state and do business with "no more than five non-institutional clients" during a one-year time frame.

• Question 188:

  As an agent, which of the following statements about the Securities Investor Protection Corporation (SIPC) can you legitimately make to your client?

  A. The SIPC is the FDIC of the stock and bond markets."

  B. "The SIPC was established to restore funds to investors when the brokerage firm they have been using is bankrupt or in financial distress."

  C. "The SIPC is a government agency created by an Act of Congress to combat fraud."

  D. "The SIPC is a government agency that was created by an Act of Congress to protect investors against losses in the stock and bond market."

  Correct Answer: B

  The statement that you can legitimately make about the SIPC to your client is that it was established to restore funds to investors when the brokerage firm they have been using is bankrupt or in financial distress. The SIPC does not insure investors against losses in the stock and bond markets like the FDIC does bank deposits, and it does not combat fraud.

• Question 189:

  Which of the following trades is illegal?

  A. a short sale

  B. a margin transaction

  C. a market-not-held order

  D. the sale of a mutual fund if the purchaser hasn't received a prospectus

  Correct Answer: D

  It is illegal to sell a mutual fund if the purchaser hasn't received a prospectus. The purchaser must receive this no later than the date on which the trade confirmation is due. Short sales, margin transactions, and market-not-held orders are all legitimate.

• Question 190:

  Which of the following funds can an agent indicate is "no load?"

  A. a fund with no front-end or back-end load that has 12b-1 fees equal to 0.30% of the average net assets of the fund.

  B. a fund with no front-end load that has 12b-1 fees equal to 0.10% of the average net assets of the fund and a rear-end load that varies depending on how long the investor has held the shares.

  C. a fund with no front-end or back-end load that has 12b-1 fees equal to 0.25% of the average net assets of the fund.

  D. Both A and C can be advertised as "no load" funds.

  Correct Answer: C

  A fund with no front-end or back-end load that has 12b-1 fees equal to 0.25% or less of the average net assets of the fund is considered a no load fund. In Choice A, the 12b-1 fees exceed 0.25%, and in Choice B, there is a rear-end load.