FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 21:

  Under the 2002 Uniform Securities Act, registration by coordination allows:

  A. federal covered securities to be registered simultaneously with the SEC and with the states in which the securities will be offered for sale.

  B. securities that do not fall within the category of federal covered securities to be registered simultaneously with the SEC and with the states in which the securities will be offered for sale.

  C. both state-registered and out-of-state investment bankers to participate in the underwriting and registration of a new security issue.

  D. issuers of federal covered securities to submit only a notice filing with the Administrator of states in which the securities will be offered for sale.

  Correct Answer: B

  Under the 2002 Uniform Securities Act, registration by coordination allows securities that are not federal covered securities to be registered simultaneously with the SEC and with the states in which the securities will be offered for sale. Federal covered securities are exempt from state registration and are required to submit only a notice filing with the Administrator of the state. This is not the same as registration by coordination.

• Question 22:

  Which of the following would be an unsuitable recommendation for your 68-year-old client?

  A. a Treasury Inflation Protected Security (TIPS)

  B. a deferred annuity

  C. an SandP 500 Index mutual fund

  D. a high quality corporate bond fund

  Correct Answer: B

  A deferred annuity would be an unsuitable recommendation for your 68-year-old client. These annuities charge significant penalties for early withdrawals-and "early" can mean before 10 years, or even longer. A 68-year-old client may have the need to withdraw his money early to make medical payments.

• Question 23:

  Which of the following conditions is necessary for an act involving securities fraud to be considered criminal and subject to criminal penalties?

  A. The act extended across state lines.

  B. The perpetrator willfully committed the fraudulent act.

  C. The victim(s) lost a combined total of at least $25,000 because of the act.

  D. The Administrator decides to send the case to criminal court.

  Correct Answer: B

  In order for an act of fraud to be considered criminal, the perpetrator must have willfully committed the fraudulent act. In this case, the Administrator will probably ask the court to impose criminal penalties, but an Administrator can't cause an act of fraud to be criminal by sending it to the criminal court system. If an agent misleads a customer regarding the returns to be expected on an investment but hasn't deliberately done so, it is still fraud, but not criminal fraud, regardless of how much the victims lost.

• Question 24:

  A "notice filing" refers to:

  A. the right of an issuer to run tombstone ads in the newspapers and other publications upon filing a registration application with the state Administrator.

  B. the filing by a federal covered investment adviser of forms already filed with the SEC along with a consent to service of process with the state Administrator.

  C. a document that the issuer must file with the SEC informing the SEC that the firm has applied to the state for registration of its new security.

  D. notification to the public by the issuer or its underwriters that the issue is being sold on an "all or nothing" basis.

  Correct Answer: B

  A "notice filing" refers to the filing by a federal covered investment adviser of forms filed with the SEC along with a consent to service of process with the state Administrator. The notice filing must be accompanied by the requisite state filing fee as well.

• Question 25:

  BondsRUs is a broker-dealer that (unsurprisingly) specializes in bonds. The firm has found that it is able to sell Treasury bonds that it buys for $90 per $100 of par value for $99 per confirmation statements BondsRUs sends them. BondsRUs is guilty of

  A. nothing. It is acting as a dealer in bonds and, as such, can charge its clients whatever the clients are willing to pay.

  B. overcharging its clients by unreasonable markups. A $9 dealer's spread on Treasury bonds is unwarranted.

  C. fraud.

  D. both B and C.

  Correct Answer: B

  BondsRUs is guilty of overcharging its clients by unreasonable markups. A $9 dealer's spread on a risk-free investment such as a Treasury bond is unwarranted, and this practice is prohibited. Based on the information provided, BondsRUs is not guilty of fraud since it appears that the firm is revealing the markup in its confirmation statements. The clients just aren't paying attention.

• Question 26:

  The CandS Railroad is in the process of issuing new bonds. Before these bonds can be offered for sale,

  A. they must be registered with the SEC since railroads are involved in interstate commerce.

  B. they must be registered in every state in which the bonds will be sold to investors.

  C. they must be registered with the SEC and in each state through which the railroad passes.

  D. None of the above statements is true.

  Correct Answer: D

  None of the statements is true because securities issued by highly regulated industries, such as the railroad industry are exempt from registration with both the SEC and the states.

• Question 27:

  Which of the following describes a prohibited practice in the sale of shares of investment companies?

  I. Sandy Slacker hands her client the fund's prospectus and tells him that the prospectus will provide him all that he needs to know about loads and fees associated with the fund.

  II. Elliot Eager tells a client who has an investment objective that includes current income that a certain bond fund has a current yield of 8% and provides the client with a prospectus so that the client can peruse the average annual returns that the fund has generated in past years when the client has the time.

  III.

  After explaining all the fees and loads involved in two different bond funds as well as the difference between current yield and total return, Patty shows the client the data on the average annual returns that the two bond funds provided. She explains to the client that the municipal bond fund has a lower yield than the similar-risk corporate bond fund because the interest income the client will receive from the municipal bond fund will be free from federal taxation, while the interest income on the corporate bond fund is fully taxable.

  A.

  All the choices describe prohibited practices in the sale of shares of investment companies.

  B.

  I only

  C.

  I and II only

  D.

  I and III only

  Correct Answer: C

  Only the scenarios described in Selections I and II represent prohibited practices. The NASAA rules state that it is not enough to hand a client a prospectus, but that the agent must fully explain all sales charges and also to explain the difference between current yield and total return to the client and present that client with the fund's most recent average annual returns over the past year, 5-year, and 10-year periods. Sandy and Elliot have not done this in the scenarios described. In Selection III, Patty has done so and has also provided the client with accurate and useful information regarding why a municipal bond offers a lower yield than a corporate bond fund.

• Question 28:

  BigCash Broker-Dealers is registered in the state and is in the process of purchasing a smaller broker-dealer, Target Investments, as a subsidiary. Target Investments is also registered in the state.

  After completing the purchase, what actions must BigCash take regarding registration of its new subsidiary?

  A. BigCash need do nothing since Target Investments was already duly registered with the state as a broker-dealer.

  B. BigCash must file a new application with the state to register its new subsidiary, but will be able to utilize the remainder of any annual filing fees that Target Investments had paid for the year.

  C. BigCash must file a new application with the state to register its new subsidiary and must also pay the annual filing fees required by the Administrator.

  D. BigCash will need to pay the annual filing fees required by the Administrator, but will not need to file a new registration application.

  Correct Answer: B

  After completing the purchase, BigCash will have to file a new registration application for its new subsidiary, but BigCash can utilize the remainder of any annual filing fees that Target Investments had paid for the year. Although registration applications are never transferable, annual filing fees are.

• Question 29:

  To say a security is "exempt," means that

  I. it is exempt from the state's anti-fraud laws.

  II. it is exempt from state registration requirements.

  III.

  any transaction involving it is considered to be an exempt transaction.

  A.

  I, II, and III

  B.

  I and II only

  C.

  II and III only

  D.

  II only

  Correct Answer: D

  To say a security is "exempt" means only that the security is exempt from state registration requirements. It is not exempt from the state's anti-fraud laws and may or may not be part of an exempt transaction. That is defined by the transaction.

• Question 30:

  A "market not held" order is

  A. an order in which the client tells the broker to use his own discretion in timing a purchase or sale in an attempt to get a better price.

  B. a prohibited activity in which an agent engages in the purchase or sale of securities that are not offered by his broker-dealer.

  C. an order to buy or sell a stock at a specified price, which differs from the current market price.

  D. an order to sell securities that the investor owns if the stock decreases by a certain amount from the current price.

  Correct Answer: A

  A "market not held" order is one in which the client tells the broker to use his own discretion in timing a purchase or sale in an attempt to get a better price than the current market price. An order to buy or sell stock at a specified price is a limit order. An order to sell securities that the investor owns if the stock decreases by a certain amount is known as a stop sell order or a stop loss sell order.