FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 201:

  Under the Uniform Securities Act (USA), which of the following statements would be disallowed?

  A. The government of the U.S. guarantees a 3% interest rate, to be paid semiannually, on a new 5-year Treasury note.

  B. A sales representative of GetErDone Broker-Dealers guarantees that a client can expect an average annual rate of return of 2% on a mutual fund investment the sales representative is selling, pointing to the fact that the fund has returned an average annual rate of return of 6% over the past ten years.

  C. An insurance company guarantees a fixed payment of $300 a month for life on an annuity it is selling.

  D. Neither the statements in Selections B or C would be allowed under the guidelines of the Uniform Securities Act.

  Correct Answer: B

  A sales representative (aka an agent) of a broker-dealer may not make any guarantees. Only three entities are allowed to make guarantees under the Act: Parent companies, which may guarantee the securities of one of its subsidiaries, the

  U.S. government, and insurance companies.

• Question 202:

  The discretionary powers over a clients' accounts differ between broker-dealers and investment advisers in that

  A. An investment adviser can execute a discretionary transaction for a client upon receiving only verbal authority initially, followed up by written authority to be received within 10 days of the order, whereas a broker-dealer must require that written authority for the transaction is in the mail before proceeding with the transaction.

  B. An investment adviser can execute a discretionary transaction for a client upon receiving only verbal authority initially, followed up by written authority to be received within 10 days of the order, whereas a broker-dealer must require that written authority for the transaction is provided before the transaction even takes place.

  C. A broker-dealer can execute a discretionary transaction for a client upon receiving only verbal authority initially, followed up by written authority to be received within 10 days of the order, whereas an investment adviser must require that written authority for the transaction is in the mail before proceeding with the transaction.

  D. A broker-dealer can execute a discretionary transaction for a client upon receiving only verbal authority initially, followed up by written authority to be received within 10 days of the order, whereas an investment adviser must require that written authority for the transaction is provided before the transaction even takes place.

  Correct Answer: B

  The discretionary powers of a broker-dealer and an investment banker differ in that an investment adviser is allowed to execute a discretionary transaction for a client upon receiving verbal authority only, as long as it is followed up with a written authorization within 10 days, whereas a broker-dealer is prohibited from executing a discretionary transaction unless it has already received written authority for that transaction.

• Question 203:

  MoeMoney Investment Advisers uses the services of two broker-dealers exclusively when it executes trades for its clients' accounts. The larger of the two broker-dealers provides MoeMoney with research from its analyst department in return for the business and also serves as the custodian for some of MoeMoney's clients' accounts. The smaller of the two broker-dealers picks up the utility bill for MoeMoney. MoeMoney is careful to disclose this form of "soft dollar" compensation to its clients.

  Is it in violation of any securities laws?

  A. Yes. Investment advisers are prohibited from receiving any soft dollar compensation whatsoever.

  B. No. Investment advisers are entitled to receive soft dollar compensation from broker- dealers with which it has a relationship as long as they disclose this to their clients.

  C. Yes. Although investment advisers are permitted to receive some forms of soft dollar compensation from broker-dealers with which it has a relationship, such as research or custodial services, other forms of soft dollar compensation, including the payment of overhead expenses,are prohibited.

  D. Yes. Investment advisers are required to use more than two broker-dealers when executing trades on its clients' accounts.

  Correct Answer: C

  Yes. MoeMoney is in violation of securities laws in accepting payment of its utility bills for directing business to the smaller broker-dealer because this form of soft dollar compensation is prohibited. Some forms of soft dollar compensation are permitted, such as the research and custodial services MoeMoney receives from the larger broker-dealer, but the payment of any office overhead expense is not. Allowed soft dollar compensation is deemed to benefit both the investment adviser and its clients; soft dollars that seem to benefit only the adviser are not allowed.

• Question 204:

  If a person has had its license revoked by the Administrator of the state and has appealed the decision to a court of law, that person

  A. can continue business as usual pending the resolution of the appeal.

  B. must notify the Administrator of the state that it has appealed the decision.

  C. is considered to have a revoked license until the courts rule otherwise.

  D. Both B and C are true statements.

  Correct Answer: D

  If a person has had its license revoked by the Administrator of the state and has appealed the decision to a court of law, that person must notify the Administrator of the state that it has appealed the decision, but that person is considered to have a revoked license until the courts rule otherwise and may not continue "business as usual."

• Question 205:

  Which of the following would not appear on a trade confirmation?

  A. the client's account number

  B. the commission

  C. the settlement date

  D. All of the above items appear on a trade confirmation.

  Correct Answer: D

  All of the items listed appear on a trade confirmation-the client's account number, the commission, and the settlement date-as well as a lot of additional information.

• Question 206:

  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 issuer?

  A. HiGrowth Corporation

  B. Mr. Bigwig

  C. BigFee Investment Bankers

  D. GetErDone Broker-Dealers

  Correct Answer: A

  HiGrowth Corporation is the issuer in this instance. Its stock will be sold, and HiGrowth will receive the proceeds from the sale-less BigFee's underwriting spread. Mr. Bigwig is merely HiGrowth's representative in this instance.

• Question 207:

  Which of the following would not fall under the classification of "institutional investor"?

  A. Prudential Insurance

  B. Chase Bank

  C. Neuring Investment Advisers

  D. Franklin Templeton Mutual Funds

  Correct Answer: C

  Nuering Investment Advisers would not fall under the classification of "institutional investor." Institutional investors are defined as banks, insurance companies, mutual funds, some pension plans, and broker-dealers registered under the Securities Exchange Act of 1934. Investment advisers are not part of this group.

• Question 208:

  Nat Smart was employed as an investment adviser representative and sold many of his clients on a municipal bond fund of which he was fond, telling his clients that the returns earned on it were completely free from federal taxation. Unfortunately, he had some unhappy clients when, at the end of the year, they discovered that they had to pay federal tax on the capital gains earned by the fund when it sold some of the bonds it held. Nat was as surprised as they were.

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

  I. Because Nat was as surprised as they were, he is guiltless.

  II. Nat is subject to civil liability payments.

  III.

  Nat will be subject to the criminal penalties for fraud and may spend time in prison.

  A.

  I only

  B.

  II only

  C.

  II and III only

  D.

  III only

  Correct Answer: B

  Only Selection II is an accurate statement. In telling his clients that the returns earned on a municipal bond fund were totally tax-free, Nat misled the clients, whether intentionally or not. This constitutes fraud, and Nat is, at a minimum subject

  to civil liability payments, so this is "necessarily" true.

  Whether or not Nat will be subject to criminal penalties for fraud and spend time in prison depends on his ability to prove that he had no knowledge that he was misleading his clients.

• Question 209:

  The 2003 NASAA Model Rule requires that investment advisers that are not federal covered maintain their records for at least

  A. three years.

  B. five years.

  C. seven years.

  D. Investment advisers must maintain their records for as long as they remain registered with the state.

  Correct Answer: B

  Investment advisers are required to maintain their records for at least five years.

• Question 210:

  Which of the following statements about agents is (are) false?

  A. If an agent files for bankruptcy, the Administrator may elect to terminate that agent's registration if the Administrator believes it is "in the public interest" to do so.

  B. When an agent has a change of address, both he and his broker-dealer affiliate must inform the Administrator.

  C. An agent must demonstrate a specific minimum level of financial stability for his registration application to be accepted.

  D. All of the above are false statements.

  Correct Answer: C

  The statement that an agent must demonstrate a specific minimum level of financial stability for his registration application to be accepted is false. The Administrator may require an agent to post a bond, but there are no specific minimum financial requisites that must be met. The Administrator also has the right to terminate an agent's registration if the agent becomes bankrupt. Both the agent and his broker-dealer affiliate are required to inform the Administrator whenever there is a change in the agent's personal information, such as a name change or a change of address.