FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 31:

  The Administrator may not introduce a stop order to deny, revoke, or suspend the effective registration of a security based on facts that were disclosed during the registration process unless he does so within

  A. 30 days.

  B. 45 days.

  C. 60 days.

  D. 1 year.

  Correct Answer: A

  The Administrator may not introduce a stop order against the registration of a security based on facts that were disclosed during the registration process unless he does so within 30 days.

• Question 32:

  A tombstone advertisement is

  A. an offer to sell a new security.

  B. the announcement of a new security that may become available for purchase.

  C. the only type of advertisement that an investment advisory firm is allowed to use.

  D. an offer to sell a new security that is being issued by an Arizona firm.

  Correct Answer: B

  A tombstone advertisement is an announcement of a new security that may become available for purchase. It is the only type of advertisement that is allowed during the "cooling off period" once a firm has filed a registration statement for a new security. It is not an offer to sell the security, an act that is strictly prohibited during this period.

• Question 33:

  In which of the following instances is it permissible for an investment adviser to borrow money from a client?

  A. It is never permissible for an investment adviser to borrow money from a client.

  B. The investment adviser may borrow money from a client if the client is a bank.

  C. The investment adviser may borrow money from a client if the client is a close friend of the majority owner of the investment advisory firm.

  D. The investment adviser may borrow money in either of the scenarios described

  Correct Answer: B

  It is only permissible for an investment adviser to borrow money from a client if that client is in the business of loaning money, as would be the case if the client is a bank, but not if the client is merely a close friend of the majority owner of the investment advisory firm.

• Question 34:

  Which of the following is not considered to be a person, as defined by the Uniform Securities Act?

  A. a 16-year old cheerleader

  B. a law firm that is organized as a partnership

  C. a corporation

  D. a school district

  Correct Answer: A

  A minor is not considered to be a person, as defined by the Uniform Securities Act. However, partnerships, corporations, and governmental subdivisions, such as school districts, are included in the definition.

• Question 35:

  The current yield on a bond fund refers to

  A. the percentage increase in the fund's net asset value.

  B. the return that the fund earned because of the capital appreciation of the securities in the fund.

  C. the total return that the fund has earned over the most recent 12-month period.

  D. the return that the fund earned based only on the interest income it received.

  Correct Answer: D

  The current yield on a bond fund is the return that the fund earned from interest income only. The return from interest income plus the return due to the capital appreciation of the securities make up the total return earned by the fund. The investor's total return is equal to the return on the income received from the fund plus any change in the net asset value of the fund.

• Question 36:

  A-2-Z Associates is a full service brokerage and is also in the investment advisory industry, charging its clients for investment advice for additional remuneration. Which of the following statements is true?

  A. A-2-Z can charge an individual client an advisory fee for its advice or a commission when it executes a trade that the client makes based on that advice, but not both.

  B. A-2-Z can charge the client both an advisory fee for its advice and a commission on any trade the client makes based on the advice. This is all laid out in the advertising brochures full service brokerage firms like A-2-Z provide their prospective clients.

  C. A-2-Z can charge the client both an advisory fee for its advice and a commission for the execution of a trade based on that advice, but it must inform the client of its potential conflict of interest in doing so and get the client's written consent.

  D. A-2-Z can charge the client only an advisory fee when it is serving as an investment adviser; no commissions may be collected.

  Correct Answer: C

  A-2-Z can charge a client it advises an advisory fee for its advice and a commission for the execution of a trade based on that advice, but it must inform the client of the potential conflict of interest and get the client's written consent. It must also provide an itemized statement of all such agency cross transactions performed for the client at least annually.

• Question 37:

  The 1988 Insider and Securities Enforcement Act indicates that a person convicted of insider trading can be subject to which of the following penalties?

  A. up to 10 years in prison and a fine of $1 million or up to 3 times the amount of profits gained, or

  B. up to 3 years in prison, a $5,000 fine, or both

  C. up to 5 years in prison and a fine of $1,500,000 or both

  D. up to 7 years in prison and a fine equal to 200% of the amount of profits gained or losses avoided

  Correct Answer: A

  The 1988 Insider Trading and Securities Enforcement Act increased the penalties for a person convicted of insider trading to up to 10 years in prison and a fine of $1 million or up to 3 times the amount of profits gained, or losses avoided.

• Question 38:

  Ken Con is an agent with Blue Sky Broker-Dealers. He gets up early each morning so that he can study any late-breaking news that may affect the markets and figure out ways to incorporate this news into conversations with select clients in order to pressure them to restructure their portfolios by selling holdings they have in one particular industry to invest the money in another particular industry.

  Ken has been very successful with this strategy and executes more trades for his clients than any other agent with the firm, but is he in danger of losing his license?

  A. Yes. Ken is engaging in churning, a prohibited practice and can have his license revoked or suspended.

  B. It depends. If his clients have lost money, Ken may lose his license; but if a review indicates that his clients' accounts earn profits, then his license is safe.

  C. Yes. Ken is guilty of the prohibited practice of "tailgating."

  D. No. Ken is just a successful sales person who is working harder than the other agents in the firm.

  Correct Answer: A

  Yes. If Ken is getting up each morning in order to collect news that he can use to pressure his clients to buy and sell their securities, Ken is engaging in churning and can have his license revoked or suspended for this prohibited practice. A lot of the news might have a short-term effect on a particular industry, but any profits gained by trying to time the market will often not be sufficient to cover the commissions that the investor had to pay on the transactions and the taxes they may have to pay on the short-term capital gains they realized when they sold securities. Regardless, it doesn't matter whether his clients' accounts show a profit or not.

• Question 39:

  Which of the following describes an "exempt security," as defined by the Uniform Securities Act (USA)?

  A. An exempt security is any security that is being sold by an institutional investor, such as a bank, to another institutional investor, such as another bank or an insurance company.

  B. An exempt security is one that need not be registered in the state in which it is sold.

  C. An exempt security is any security being sold as a private placement.

  D. An exempt security is any security that is being sold in an isolated non-issuer transaction.

  Correct Answer: B

  As defined by the Uniform Securities Act, an exempt security is one that need not be registered in the state in which it is sold. Selections A and D describe exempt transactions. Although securities issued by financial institutions, such as banks, are exempt securities, not all securities that a bank purchases and sells qualify as exempt securities. Private placements may also be exempt transactions, but there are other stipulations that must be met.

• Question 40:

  Jack and Jill are a newly married couple in their mid-20s. They are determined to retire by the time they are 50 and have arranged a meeting with a representative of Professional Investment Advisers to structure a financial plan that will allow them to achieve this goal.

  The representative, Mr. Hill, advises them to invest at least 60% of their money in bond funds to minimize the risk of loss on the way to their goal. Mr. Hill has

  A. made an unsuitable recommendation for these clients and is subject to license suspension or revocation.

  B. advised Jack and Jill well with a conservative allocation of their money to preserve principal.

  C. committed fraud in indicating that bonds are less risky than stocks.

  D. has committed fraud in promoting their delusion that they can possibly expect to retire by the time they turn 50, regardless of their investment strategy.

  Correct Answer: A

  Mr. Hill has made an unsuitable recommendation in recommending a 60% investment in bonds to clients in their mid-20s with an investment goal of early retirement, and his license can be suspended or revoked because of this. Bonds do not generate the returns that stocks do, and Jack and Jill are unlikely to be able to retire by the time they are 50 with such a high percentage invested in bonds. Given their investment time horizon, they can invest in growth and aggressive growth stocks, which offer significantly higher returns and will advance them toward their goal, since they can ride the waves of the up and down markets. This, of course, assumes that they are risk-tolerant enough to do so. There has been no fraud since a couple in their mid-20s can retire by the time they turn 50 if they have reasonably well-paying jobs, are frugal, and invest wisely.