FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 51:

  Mr. Teche is an agent with broker-dealer CanDo, and his only compensation is the commissions he earns on trades he executes. He has applied for and been granted an adjunct teaching position with a local university that will allow him to earn money while he is establishing himself.

  Which of the following statements are true?

  A. As an agent with broker-dealer CanDo, Mr. Teche must notify CanDo in writing of this position prior to accepting it.

  B. CanDo can deny Mr. Teche permission to accept the adjunct teaching position.

  C. Mr. Teche is, in essence, an independent contractor with broker-dealer CanDo and can engage in any other business activity at will.

  D. Both A and B are true.

  Correct Answer: D

  Both statements A and B are true. As an agent for broker-dealer CanDo, Mr. Teche is required to inform CanDo in writing before accepting any outside position that will provide him with additional compensation, and CanDo has the right to deny Mr. Teche the permission to accept this position.

• Question 52:

  Harry Lange manages the investment portfolio for the Fidelity Magellan Mutual Fund. Mr. Lange is a(n)

  A. broker-dealer.

  B. agent.

  C. investment adviser.

  D. investment company.

  Correct Answer: C

  If Harry Lange is managing the investment portfolio of Fidelity Magellan Mutual Fund, he is an investment adviser. He is making the investment decisions and receives a percentage of the assets under management as his compensation. He is not selling the mutual fund or the fund's investors anything, which is the job of a broker-dealer or an agent. Fidelity Magellan is the investment company.

• Question 53:

  When a client has purchased securities on margin, the broker-dealer

  A. may require that the client leave all his securities, even those not purchased on margin, in street name.

  B. must keep the securities that the client paid cash for separate from the securities that the client purchased on margin.

  C. may use any securities that the client purchased on margin as collateral for a loan from a bank upon receiving a written agreement signed by the client.

  D. Both B and C are correct statements.

  Correct Answer: D

  A broker-dealer is required to keep any securities a client paid cash for separate from the securities that the client purchased on margin, and upon receiving a written agreement signed by the client-a hypothecation agreement-may use those securities that were purchased on margin as collateral for a loan from a bank. The broker-dealer may not require that a client leave securities purchased through cash transactions in street name.

• Question 54:

  White and Associates is an investment adviser registered in the state of Kentucky and, as such, is meeting Kentucky's minimum net capital requirement for investment advisers.

  The firm recently registered with the state of Virginia and has opened an office there.

  Virginia has a significantly higher net capital requirement for its investment advisers.

  Which of the following statements is true?

  A. According to the Uniform Securities Act, S. White will have to meet Virginia's higher requirement.

  B. According to the Investment Advisers Act of 1940, S. White needs only to meet the net capital requirement of Kentucky.

  C. According to the Securities Exchange Act of 1934, S. White needs to meet at least the minimum net capital requirement specified by that Act since it is now operating in multiple states.

  D. According to the Investment Advisers Act of 1940, S. White will have to maintain a minimum net capital equal to the average of the net capital requirements of the two states.

  Correct Answer: B

  Since S. White is already registered in the state of Kentucky and meeting the net capital requirement of that state, the Investment Advisers Act of 1940 stipulates that Virginia cannot require a higher minimum net capital. The Act states that if an investment adviser is registered in one state and is meeting its net capital requirement, a second state cannot impose a higher net capital requirement on the investment adviser.

• Question 55:

  Individual states are prohibited from requiring a broker-dealer or investment adviser to file financial reports more frequently than:

  A. once a year.

  B. twice a year.

  C. four times a year.

  D. twelve times a year.

  Correct Answer: C

  Individual states are prohibited from requiring a broker-dealer or investment adviser to file financial reports more frequently than four times a year. Under the Securities and Exchange Act of 1934, individual states are prohibited from imposing more stringent requirements than those already required by the SEC, and the SEC requires quarterly reporting. Therefore, a state may not require that a broker-dealer or investment adviser file monthly reports with it.

• Question 56:

  Gazillions is an investment adviser with offices in the state that is registered with the SEC and has $100 billion dollars under management. A client has filed a complaint asserting that the firm has been involved in fraudulent activities. In this case,

  A. Gazillions only has to answer to the SEC regarding the allegations. Since it is a federal covered investment adviser, it need not respond to any state-issued requests for information.

  B. Gazillions only has to answer to the state in which the complaint was filed.

  C. Gazillions has to answer to both the SEC and the state in which the complaint was filed.

  D. Gazillions is in trouble for not registering with both the state and the SEC given the amount of money it has under management.

  Correct Answer: C

  If Gazillions is operating as an SEC-registered adviser in a state, it must answer to both the SEC and the state in which the complaint has been filed, even though there is no requirement that it had to register with the state, given that it was a federal covered investment adviser. Allegations of fraud come under the state's authority as well, even if the adviser is a federal covered investment adviser.

• Question 57:

  Which of the following is not a security, as defined by the Uniform Securities Act?

  I. an option contract

  II. a futures contract on gold

  III. a 401K plan

  IV.

  a variable annuity

  A.

  None of the selections listed are securities.

  B.

  Only Selection III is not a security.

  C.

  Only Selections II and III are not securities.

  D.

  Selections II, III and IV are not securities.

  Correct Answer: C

  Only Selections II and III are not securities. Neither retirement plans nor commodity futures contracts are deemed to be securities by the Uniform Securities Act. A 401K plan may be invested in securities, but it is not a security itself. A gold futures contract is a contract between two parties for the delivery of the underlying asset, gold. The profits (or losses) are not dependent on the performance of an outside party, which is a critical element, based on a 1946 U.S. Supreme Court decision, which defines a security as "an investment of money. . . with profits to come solely from the efforts of others."

• Question 58:

  Which of the following is an example of a non-issuer transaction?

  A. IBM sells a new issue of bonds to an insurance company.

  B. Jose purchases a 10-year bond issued by Progress Energy when it has 6 years remaining to maturity.

  C. Google offers more shares of its stock for sale to the public.

  D. NewCorp, which has been a privately held company, is engaging in an initial public offering (IPO) of its stock.

  Correct Answer: B

  When Jose buys a 10-year bond that has 6 years remaining to maturity, it is a non-issuer transaction since he is buying it in the secondary market from another investor, and Progress Energy does not benefit from the transaction. If a firm receives money when its securities are sold, it is considered an issuer transaction; otherwise it is a non-issuer transaction. When Progress Energy originally issued the bond, it had ten years to maturity, and Progress Energy received the proceeds from the bond issue; that was an issuer transaction. When Jose buys the bond, another investor is receiving the proceeds. When IBM sells new bonds, regardless of whether it is to the general public or to an institutional investor, IBM receives the proceeds from the transaction, so it is an issuer transaction. Similarly, when a firm that is already publicly held, like Google, sells more shares, the firm receives money from the sale, just as when a firm that is going public for the first time, like NewCorp, receives the proceeds generated through the IPO. Those are examples of issuer transactions.

• Question 59:

  Newbie Corporation is considering the possibility of an interstate initial public offering (IPO) of its stock. In the initial meetings with BigFee Investment Bankers, Newbie has learned that the underwriting spread will be 15%. Although the actual offering price won't be set until Newbie's registration statement is approved by the SEC, BigFee has indicated that the offer price will probably be between $3 and $4 a share and that the stock will initially be listed on the OTC Bulletin Board.

  What methods for state registration does Newbie have available?

  I. registration by coordination

  II. registration by notification

  III.

  registration by qualification

  A.

  Newbie may elect to register by any one of the above methods although registration by qualification would be the most burdensome choice.

  B.

  Method I only

  C.

  Methods I and III only

  D.

  Method II only

  Correct Answer: C

  Newbie may apply for state registration using either the registration by coordination or the registration by qualification method, although the latter method is the most burdensome of the three. The firm is not eligible to register by notification. To be eligible, the offer price of the IPO would have to be at least $5, and the underwriting spread would need to be no greater than 10%.

• Question 60:

  In its capacity as a full service broker, A-2-Z Associates is also in the investment advisory industry, charging its clients for investment advice for additional remuneration. One of the firm's clients has been advised to buy some U.S. government treasury inflation-protected securities (TIPS.) A-2-Z is a dealer in these securities in the secondary market.

  Which of the following statements is true?

  A. Under no circumstances may A-2-Z sell the client TIPS that A-2-Z holds in its own portfolio. This would be a conflict of interest.

  B. A-2-Z can sell the client TIPS from its own portfolio as long as it tells the client that it is taking on the part of the seller in the transaction.

  C. A-2-Z can only sell the client TIPS if it informs the client it is acting as the seller in this transaction and receives the client's written consent before the transaction is settled.

  D. A-2-Z can sell the client TIPS indirectly by getting a 3rd party-another broker-dealer-to effect the sale.

  Correct Answer: C

  A-2-Z can only sell a client TIPS from its own portfolio if it informs the client that it is acting as the seller in this transaction and receives the client's written consent before the settlement date of the transaction.