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

FINRA FINRA-SERIES-63 Online Questions & Answers

• Question 221:

  A variable annuity is:

  A. not a security and, therefore, does not have to be registered with the state.
  B. not a security, but is still required to be registered with the state before it can be offered for sale.
  C. a security and, therefore, has to be registered with the state before it can be offered for sale.
  D. a security, but is exempt from state registration.
  D. a security, but is exempt from state registration.

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  Explanation/Reference:

  A variable annuity is defined as a security, but is exempt from state registration in the opinion of the North American Securities Administrators Association (NASAA.) The Supreme Court of the U.S. passed a ruling that deemed a variable annuity to be a security. The National Securities Market Improvement Act of 1996 (NSMIA) established variable annuities to be federal covered securities, however, since they are, for all intents and purposes, mutual funds. Federal covered securities are exempt from state registration.

• Question 222:

  Bootstraps, Inc. is a family-owned business that has experienced enormous growth in the last couple of years. The business needs more cash to support this growth and has decided to issue some promissory notes, each with a face value of $5,000, for sale to the general public. The firm plans to hire three individuals to help them sell these notes. These individuals will earn a commission based on the notes they sell.

  Given these facts, which of the following is true?

  A. The notes must be registered with the state, and the three individuals hired to sell the notes must be registered as agents with the state.
  B. The notes must be registered with the state, but the individuals hired to sell them are not required to be registered.
  C. Neither the notes nor the individuals selling the notes need to be registered with the state.
  D. Either the firm must register the notes with the state, or the individuals that are hired to sell the notes must be registered as agents with the state, but not both.
  A. The notes must be registered with the state, and the three individuals hired to sell the notes must be registered as agents with the state.

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  Explanation/Reference:

  If Bootstraps hires three individuals to sell promissory notes to the public, both the notes and the three individuals hired to sell the notes must be registered with the state. The promissory notes are securities and, therefore, are required to be registered with the state before they can be offered for sale. The three individuals are working for the issuer, Bootstraps, to sell its securities to the public. This makes them agents, according to the Uniform Securities Act, and they must be registered as agents with the state.

• Question 223:

  Mr. L. Ranger is an agent for a broker-dealer and has overheard "talk" that a merger between two well-known high-tech companies is about to take place. Mr. Ranger knows that, on average, in these instances the target firm's price spikes. He calls his client and good friend, Mr. Tonto, and tells him of the rumor, suggesting that Tonto might want to buy shares in the target firm. He tells Mr. Tonto that if the rumor isn't true, the target firm's price may not spike at all and may, in fact, decline, and suggests that Mr. Tonto not invest any money he isn't willing to lose. Mr. Ranger knows that his friend likes to gamble, and decided he wouldn't be much of a friend if he didn't inform Tonto of this potential opportunity.

  Has Mr. L. Ranger violated any laws or engaged in any prohibited practices?

  A. No. Mr. Ranger and Mr. Tonto are friends, so there can be no violations of any laws or practices because of their non-business relationship.
  B. Yes. Mr. Ranger has engaged in fraud in telling Mr. Tonto about the rumor, given that the merger hasn't been officially announced by the two companies.
  C. No. Mr. Ranger has informed Mr. Tonto that the merger is just a rumor and has informed him of the risk involved. Mr. Ranger is knowledgeable about his friend's risk tolerance level as well and recognizes this investment as one his good friend might want to take.
  D. Yes. Mr. Ranger is privy to knowledge that is not available to the general public and both he and Mr. Tonto will be guilty of illegal insider trading if Mr. Tonto trades on Mr. Ranger's information.
  C. No. Mr. Ranger has informed Mr. Tonto that the merger is just a rumor and has informed him of the risk involved. Mr. Ranger is knowledgeable about his friend's risk tolerance level as well and recognizes this investment as one his good friend might want to take.

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  Explanation/Reference:

  No, Mr. Ranger has not violated any laws or engaged in any prohibited practices in his recommendation to Mr. Tonto. He has simply informed Mr. Tonto of the rumor and has told him of the risk involved, and he has not lied or misled Mr. Tonto about the investment. He is also well aware of his friend's risk tolerance level, so he is not making an unsuitable recommendation. This is not considered insider trading since there is no way Mr. Ranger can know whether or not the rumor is true. Selection A is not true because there can be violations of laws or practices, even if the agent and client are friends.

• Question 224:

  Layered Corporation wants to issue a bond that will have warrants attached. Each warrant gives the holder the right to buy 5 shares of Layered's common stock at a price stipulated on the warrant.

  In this instance, Layered must file to register which of the following securities with the state?

  I. the bonds

  II. the warrants

  III.

  the common stock

  A. I only
  B. I and III only
  C. I and II only
  D. I, II, and III
  I. the bonds II. the warrants III. the common stock
  D. I, II, and III

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  Explanation/Reference:

  If Layered issues a bond with warrants attached that give the holder the right to buy shares of its common stock, Layered must register all three securities. The bond is being offered for sale with the warrants attached, so both the bond and

  the warrant are being offered for sale and must be registered.

  Furthermore, the Uniform Securities Act stipulates that the "sale or offer for sale of the right" to buy another security "is considered to include an offer of the other security." Therefore, offering the warrant for sale is effectively an offer to sell the

  stock as well, so the stock must be registered.

• Question 225:

  You are an investment adviser to Mr. Crochety, an elderly man who lives solely on his social security income although he managed to accumulate an investment portfolio worth about $100,000 over the years. Mr. Crochety recently got his hands on a business publication and read about the tax-free interest paid by municipal bonds. He calls you and instructs you to sell his other investments and invest all his money in a municipal bond portfolio, so that "the government doesn't get any more of my hard-earned money." You tell Mr. Crochety that you don't believe this is a wise move because he's in such a low tax bracket that municipal bonds are not a good investment for him, but he is insistent. Based on these facts, you should

  A. ignore Mr. Crochety's instruction since it is not in his best interest.
  B. require Mr. Crochety to sign an affidavit of liability waiver, indicating that you will not be held responsible for any adverse consequences of this decision.
  C. have Mr. Crochety sign a statement of investment policy that indicates that this transaction is being executed on the client's instructions and that you have advised the client against it.
  D. call Mr. Crochety's relatives and suggest they have him examined for mental instability.
  C. have Mr. Crochety sign a statement of investment policy that indicates that this transaction is being executed on the client's instructions and that you have advised the client against it.

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  Explanation/Reference:

  Given that you have advised Mr. Crochety that this is not a wise move and he still insists on it, you should protect yourself by getting it in writing. In no case, however, can you require a client to sign an affidavit of liability waver, nor can you refuse to follow his adamant instructions.

• Question 226:

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

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  Explanation/Reference:

  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 227:

  You are employed as an agent with CanDo Broker-Dealers. Your brother is software engineer with VideoMagic. When you were talking to him on the phone the other day, he told you that he overheard a conversation by some of the firm's executives that indicated that VideoMagic was about to take over another software company.

  Which of the following would violate insider trading rules?

  I. The next day, you get an unsolicited call from a client requesting that you sell his shares in Video Magic, and you execute the trade.

  II. You buy stock in Video Magic's target firm in anticipation that its stock price will rise when the information becomes public.

  III.

  You recommend the stock of Video Magic's target firm to investors based on the fact that, on average, the stock price of target firms increases.

  A. I, II and III
  B. I and II only
  C. I and III only
  D. II and III only
  I. The next day, you get an unsolicited call from a client requesting that you sell his shares in Video Magic, and you execute the trade. II. You buy stock in Video Magic's target firm in anticipation that its stock price will rise when the information becomes public. III. You recommend the stock of Video Magic's target firm to investors based on the fact that, on average, the stock price of target firms increases.
  D. II and III only

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  Explanation/Reference:

  Only selections II and III are violations of insider trading rules. If you receive an unsolicited call from a client requesting a sale (or purchase) of that firm's stock, it is not considered to be an insider transaction. If you have insider information from you brother about the merger of VideoMagic with another firm, you cannot buy stock yourself in the target firm in anticipation of a rise in price, nor can you recommend the stock to customers based on your expectation of a stock price increase.

• Question 228:

  Barring no irregularities (such as a license revocation by another state last year), after you have filed for registration as an agent, your license will be granted within

  A. 10 business days.
  B. 14 business days.
  C. 30 days.
  D. 45 days.
  C. 30 days.

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  Explanation/Reference:

  Barring no irregularities, after you have filed for registration as an agent, you should receive your license within 30 days. More specifically, your license will be approved "no later than noon of the 30th day after filing."

• Question 229:

  Most individual state securities laws today are based on:

  A. the Uniform Securities Act of 1956.
  B. the Uniform Securities Act of 2002.
  C. the National Securities Markets Improvement Act of 1996.
  D. the Gramm-Leach-Bliley Act of 1999.
  A. the Uniform Securities Act of 1956.

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  Explanation/Reference:

  Most individual state securities laws continue to be based on the 1956 Uniform Securities Act. Although the Uniform Securities Act was revised in 1985, 1988, and 2002, none of these revisions have been widely incorporated by the individual states. The National Securities Markets Improvement Act of 1996 dealt mainly with the definition of federal covered securities and more efficient management of mutual funds. The focus of the Gramm-Leach-Bliley Act of 1999 was on financial institutions.

• Question 230:

  Which of the following does not necessarily have to be included in the contract between an investment adviser and an individual client, according to the Uniform Securities Act (USA)?

  A. the compensation agreement, which cannot be a percentage of the capital gains or capital appreciation earned on the portfolio for all but the wealthiest of individual clients.
  B. a statement stipulating that the contract cannot be assigned to another party without the client's consent
  C. if the investment adviser is a partnership, a statement indicating that the client will be notified
  D. if there is any change in the partners within a reasonable time perioda statement of the investment policy that has been agreed upon between the adviser and the client
  D. if there is any change in the partners within a reasonable time perioda statement of the investment policy that has been agreed upon between the adviser and the client

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  Explanation/Reference:

  A statement of the investment policy does not have to be included in the contract between an investment adviser and an individual client. The statement of investment policy is generally developed after the contract is signed.