FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 241:

  Broker-dealer Small and Associates has received a complaint about one of its agents, Mr. Ari Gaunt. Small and Associates is required to

  A. keep the complaint in Mr. Gaunt's employee file as long as Mr. Gaunt remains employed with the firm.

  B. immediately forward the complaint to the Administrator of any state in which Mr. Gaunt is a registered agent.

  C. call the client who complained and inform him of the disciplinary action that will be taken against Mr. Gaunt.

  D. provide the client with a written response to the complaint.

  Correct Answer: D

  Small and Associates must provide the client a written response to the complaint about Mr. Ari Gaunt. The broker-dealer does not need to forward the complaint immediately to the state Administrator, nor is it required to keep the complaint in Mr. Gaunt's employee file indefinitely.

• Question 242:

  Rich Quick is a broker-dealer registered in the state of Massachusetts. He occasionally trades on abnormalities he observes in bond yield spreads for his own account, short selling a bond that appears to be overpriced based on its yield and buying a bond that is identical in almost every respect except for the price, which is less than that of the other bond. He has been able to earn arbitrage profits 95% of the time when he does this. Rich Quick

  A. is in violation of securities laws. Arbitrage is a prohibited activity.

  B. is skilled if he is able to earn profits 95% of the time using this strategy.

  C. is trading on insider information, which is a violation of securities laws.

  D. engaged in a fraudulent activity.

  Correct Answer: B

  If Rich Quick is able to earn profits 95% of the time by trading on abnormalities he observes in bond yield spreads, he is skilled. There is nothing illegal in what he is doing. Arbitrageurs attempt to earn profits when they observe what they believe to be mispriced securities, and this is an accepted activity. Rich is not using insider information; bond yields are publicly available information.

• Question 243:

  Once a broker-dealer has applied for and been granted state registration, the registration remains valid

  A. until December 31st.

  B. for twelve months.

  C. for three years.

  D. for five years.

  Correct Answer: A

  Once a broker-dealer has been granted state registration, that registration is valid until December 31st of that year. Registration automatically terminates annually on December 31st although an Administrator may elect to revoke or suspend a broker-dealer's registration at any time if the Administrator finds just cause.

• Question 244:

  The state official who has regulatory authority over the securities industry within the state is known as the

  A. attorney-general.

  B. administrator.

  C. investor-protection officer.

  D. secretary of state.

  Correct Answer: B

  The state official who has regulatory authority over the securities industry within the state is the administrator.

• Question 245:

  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

  Correct Answer: C

  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 246:

  Painting the tape refers to

  A. the practice of buying large amounts of a security to drive its price up artificially.

  B. the illegal activity of a group of investors who buy and sell a security among themselves to create an artificially high volume of trading in hopes of luring investors to buy the security.

  C. the prohibited practice of excessively trading on a client's account that is used by some broker-dealers and/or their agents to generate more commissions for themselves.

  D. the unethical practice of investment advisers who issue "buy" recommendations for stocks that they own themselves without disclosing the fact.

  Correct Answer: B

  Painting the tape refers to the illegal activity of a group of investors who buy and sell a security among themselves to create an artificially high volume of trading in hopes of luring investors to buy the security. This is an attempt to manipulate the market and, as such, is illegal.

• Question 247:

  Under the NASAA Model Rules, which of the following must an investment adviser provide its clients with at least once a year?

  A. the total number of agency cross transactions completed for the client during the period

  B. the total amount of commissions or other compensation that the investment adviser received or expects to receive in connection with agency cross transactions performed for the client during the period

  C. the number of any complaints that each of its investment adviser representatives has received during the period

  D. both A and B

  Correct Answer: D

  Under NASAA Model Rules, an investment adviser must provide its clients with the total number of agency cross transactions completed for the client during the period as well as the total amount of any commissions or other compensation that the investment adviser received or expects to receive in connection with agency cross transactions performed for the client during the period.

• Question 248:

  "Federal covered securities" were defined and exempted from state registration requirements by the:

  A. National Securities Markets Improvement Act of 1996 (NSMIA.)

  B. Gramm-Leach-Bliley Act of 1999 (GLBA.)

  C. Uniform Securities Act (USA.)

  D. National Conference of Commissioners on Uniform State Laws (NCCUSL.)

  Correct Answer: A

  The National Securities Markets Improvement Act of 1996 defined "federal covered securities" and exempted them from state registration requirements. The Gramm-Leach- Bliley Act focused on financial institutions and provided for their registration as broker- dealers under certain conditions. The National Conference of Commissioners on Uniform State Laws (NCCUSL) is the organization that drafted the Uniform Securities Act, which is not comprised of actual laws itself, but is, instead, just a guideline for each state to use when formulating its own securities laws.

• Question 249:

  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

  Correct Answer: D

  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 250:

  According to the NASAA Model Rules, a broker-dealer is not permitted to allow a customer to engage in margin transactions unless

  A. the broker-dealer already has a margin agreement signed by the client in hand.

  B. the broker-dealer receives a margin agreement signed by the client promptly after the client's first margin transaction.

  C. the client has a net worth of at least $500,000.

  D. the client has been a customer of the firm for at least 6 months.

  Correct Answer: B

  A broker-dealer is not permitted to allow a customer to engage in margin transactions unless the broker-dealer receives a margin agreement signed by the client promptly after the client's first margin transaction.