FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 11:

  Mr. Noah Scruples is a registered representative with CanDo Broker-Dealers. A client calls and wants Noah to purchase shares of a mutual fund the client has read about. CanDo is not authorized by this particular fund to effect purchases or sales of the fund shares.

  Can Noah execute the order anyway?

  A. No. This would be considered money laundering, which is highly illegal.

  B. No. This is a prohibited practice known as selling away.

  C. No. This is a prohibited practice known as front running.

  D. Yes. Since this is an unsolicited trade, Noah can execute the transaction on behalf of his client.

  Correct Answer: B

  No. If CanDo is not authorized to effect purchases and sales of the fund, Noah would be engaged in the prohibited practice known as selling away if he were to execute the order. If his broker-dealer is not authorized to trade a security, Noah can't either.

• Question 12:

  Which of the following scenarios does not meet the definition of "custody" under NASAA Model Rules?

  A. An investment adviser is mistakenly sent a client's securities, but returns them to the sender within three business days of receipt.

  B. An investment adviser has general power of attorney for a client and is authorized to withdraw client funds or securities that are on deposit with a registered broker-dealer upon the investment adviser's request.

  C. An investment adviser receives a check from a client that is written to a mutual fund and forwards the check to the mutual fund within three business days of receipt.

  D. An investment adviser keeps a client's securities in its safety deposit box.

  Correct Answer: A

  If an investment adviser is mistakenly sent a client's securities, but returns them to the sender within three business days of receipt, he is not deemed to have taken custody of the securities under NASAA Model Rules. Custody is defined by the NASAA as "holding directly or indirectly, client funds or securities, or having any authority to obtain possession of them." Therefore, an investment adviser who has general power of attorney to withdraw a client's funds or securities from a broker-dealer is acting as a custodian, as is an investment adviser who keeps a client's securities in its safety deposit box. If an investment adviser receives a check from a client that is written to a third party, such as a mutual, that check must be forwarded within 24 hours of receipt, or the investment adviser is deemed to be a custodian.

• Question 13:

  Desi Genuos is an agent with Broker-Dealer CanDo. A client has asked Desi to recommend a mutual fund that does not have a sales charge. Desi recommends a fund that has no front-end load although it does have a deferred sales load if the investor redeems his shares within the first three years of ownership, but the client has informed Desi that he is looking at this as a long-term investment. Based on these facts, Desi:

  A. is in violation of NASAA rules regarding investment company shares.

  B. is not in violation of any rules since the fund has no front-end load and the deferred sales load will not apply to this client, given his indication that this is meant to be a long- term investment.

  C. will not be in violation of any NASAA rules as long as he has his client sign a "letter of intent."

  D. is not in violation of any rules because he is an agent of a broker-dealer and is not affiliated with the fund he has recommended in any manner.

  Correct Answer: A

  If Desi recommends a mutual fund that has a deferred sales load to a client who requests a mutual fund with no sales charge, he is in violation of NASAA rules regarding investment company shares. The NASAA rules specify that it is prohibited for an agent to state or imply that the investment has no sales charge if there is a deferred sales load involved. It doesn't matter if, in fact, the deferred load may never have to be paid by the client. A letter of intent involves a statement of intent by the investor to invest an amount that will meet a breakpoint that will entitle him to a lower load charge. This is not pertinent to this specific question.

• Question 14:

  Penny Swyne, an agent employed by Bear Broker-Dealers, has received a written complaint via e-mail from Mr. Wolf regarding her performance as his agent. What are Ms. Swyne's legitimate options?

  A. Ms. Swyne can call Mr. Wolf and offer to meet him for a romantic dinner and try to convince him to revoke the complaint.

  B. As illegal as it may sound, since the complaint was via e-mail, Ms. Swyne can hit the delete button and make it all go away.

  C. Ms. Swyne must forward the complaint to the state Administrator.

  D. Ms. Swyne must provide Bear Broker-Dealers with a copy of the complaint.

  Correct Answer: D

  Ms. Swyne must provide Bear Broker-Dealers with a copy of the complaint sent by Mr. Wolf. Bear Broker-Dealers is required to respond to this complaint in writing and keep a record of it. E-mails are treated the same as snail-mails.

• Question 15:

  John Ketchum is an investment adviser representative with Load Investment Advisers, which has a family of load funds that it encourages its representatives to promote. Representatives of the firm that sell shares in these funds to their clients receive a greater share of the load than they do if they sell load funds offered by other firms.

  Based on these facts, which of the following statements is true?

  A. John is obligated to try to sell his clients the funds offered by Load first since he is affiliated with them and has a fiduciary responsibility to them.

  B. John must provide his clients with a written disclosure that he will receive a greater remuneration for selling shares in the Load family of funds than if he sells them shares in other funds before he provides his clients with any investment advice.

  C. If, after reviewing the information form a client has filled out, John believes that one of Load's funds is an appropriate investment, John can recommend that the client invest in that fund. There is no disclosure requirement necessary if the recommendation is a sound one that can be proved to be based on the client's specific situation.

  D. Both A and B are true.

  Correct Answer: B

  As a representative for a family of load funds who receives greater remuneration for selling those funds, John must provide his clients with a written disclosure of this fact before providing any advice, according to NASAA Model Rules. This constitutes a material conflict of interest that must be disclosed "to clients in writing before any advice is rendered." John is not obligated to try to sell his clients the funds offered by Load first. His fiduciary responsibility is to his clients, not his employer.

• Question 16:

  While on vacation in Colorado, Mr. Moneybags became interested in the stock of a company called SafeAway, which designs and installs customized high-tech security systems in the multimillion dollar mansions located in Colorado's pricier ski resort areas, such as Vail and Aspen. Upon returning to his home in Boston, he calls his broker-dealer with an order to purchase 10,000 shares of the stock, which he learned trades in the over- the-counter market. Fast Eddie, a registered agent with his broker-dealer, discovers that SafeAway's stock is registered only in the states of Colorado and Wyoming. Neither Fast Eddie nor his broker-dealer are registered to do business in either of those states. Under these circumstances,

  A. Fast Eddie cannot effect Mr. Moneybags purchase of SafeAway stock since neither he nor his broker are registered to do business in Colorado or Wyoming, and SafeAway stock is not registered for sale in the state of Massachusetts.

  B. Fast Eddie can execute the trade for Mr. Moneybags since this would be considered an exempt transaction because it is a private placement.

  C. Fast Eddie should contact a broker-dealer that is registered in either Colorado or Wyoming and negotiate a finder's fee for referring Mr. Moneybags to them.

  D. Fast Eddie can execute the trade for Mr. Moneybags since this would be considered an exempt transaction because it is an unsolicited transaction.

  Correct Answer: D

  Under the circumstances described, Fast Eddie can execute the trade for Mr. Moneybags even though SafeAway stock is registered for sale only in the states of Colorado and Wyoming since neither Fast Eddie nor the broker-dealer solicited the transaction, making this an exempt transaction. However, the Massachusetts Administrator may demand that Fast Eddie and his broker-dealer provide proof that the trade was indeed unsolicited.

• Question 17:

  The state of Massachusetts has issued a general obligation (G.O.) bond that pays 3% interest. As an agent selling this bond, you can legitimately tell the investor that

  A. the bond is guaranteed by the state of Massachusetts and is, therefore, a risk-free investment.

  B. the interest income the investor receives from the bond will be free from federal taxation.

  C. all state general obligation bonds are also guaranteed by the federal government.

  D. all of the above statements are true.

  Correct Answer: B

  An agent selling a Massachusetts general obligation bond can legitimately tell the investor that the interest income he receives from the bond will be free from federal taxation. It is not, however, a risk-free investment. States may default on their bond issues, and bonds issued by states are not guaranteed by the federal government.

• Question 18:

  A hypothecation agreement refers to

  A. an agreement wherein a client gives his broker-dealer discretion to purchase securities that the broker-dealer deems appropriate in whatever quantity the broker-dealer feels appropriate and at a time and price the broker-dealer believes is a good deal.

  B. an agreement that a client must sign prior to executing any short sales with the broker- dealer.

  C. an agreement signed by a client who is executing a margin transaction that allows the broker to hold the margined securities in street name as collateral for the loan.

  D. a document signed by a client indicating that he or she understands that some of the charts and examples presented in a broker-dealer's advertising literature are based on hypothetical trades.

  Correct Answer: C

  A hypothecation agreement refers to an agreement signed by a client who is executing a margin transaction that allows the broker to hold the margined securities in street name as collateral for the loan.

• Question 19:

  The net worth of a broker-dealer has fallen below the minimum net capital requirement specified by the state in which the broker-dealer is registered. This broker-dealer must notify the Administrator of this fact

  A. before the beginning of the next quarter.

  B. before the end of the month.

  C. by the close of business on the next business day.

  D. within a week's time.

  Correct Answer: C

  When the net worth of a broker-dealer falls below the minimum net capital requirement specified by the state, the broker-dealer must notify the Administrator of this fact by the close of business on the next business day according to the Uniform Securities Act.

• Question 20:

  Noah Scruples, an agent with CanDo Broker-Dealers, just got a copy of the most recent report on a certain stock. The report was generated by CanDo's analyst department and is hot off the presses. It has not yet even been put on the firm's website for the firm's clients.

  The analyst department has just changed its recommendation on the stock from "Hold" to "Strong Buy" based on new information that it has obtained on the company.

  Can Noah rush to his office to buy shares of the stock before the analysts release their reports to CanDo's clients?

  A. Yes. The firm's analysts used publicly available information to assess the stock and make its recommendation, so Noah can buy the stock now on his own account.

  B. No. It is unethical for him to trade based on this information before the firm's clients have received the information.

  C. No. This is a prohibited activity referred to as "painting the tape."

  D. Both B and C are true statements.

  Correct Answer: B

  No. It is unethical for him to trade based on the information that just came from the analysts before the firm's clients have the information. This is a prohibited practice called "front running."