FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 61:

  Which of the following securities would be exempt from state registration requirements, according to the Uniform Securities Act?

  I. a municipal bond issued by the Canadian province of Nova Scotia

  II. a bond issued by the county of Cork, Ireland

  III.

  a bond issued by Nationwide Insurance Company

  A.

  All of the selections would be exempt from state registration requirements under the Uniform

  B.

  Selection I only

  C.

  Selection I and III only

  D.

  Selection III only

  Correct Answer: C

  The municipal bond issued by the Canadian province of Nova Scotia and the bond issued by Nationwide Insurance Company are both exempt securities under the Uniform Securities Act. Bonds issued by Canadian government entities at both the national and the municipal level and bonds issued by domestic entities in highly regulated industries, as is the case with insurance companies, are exempt. The bond issued by a county in Ireland is not exempt; with the single exception of Canada, only bonds issued by national governments with which the U.S. has diplomatic relations are exempt.

• Question 62:

  Your next-door neighbor's brother works for a large pharmaceutical company and confided in her that one of the company's chemists has just discovered a compound that will cure baldness and that the firm plans to make the discovery public later in the week. Your next- door neighbor passes this information on to you over a cup of coffee the next morning. You immediately call your broker and place an order to buy shares of the company's stock.

  Has any illegal insider trading taken place?

  A. Yes. The agent who executes your purchase order has engaged in illegal insider trading.

  B. No. You are in no way related to your next-door neighbor's brother, and she could have been lying.

  C. Yes. You, your neighbor, and her brother are all guilty of illegal insider trading.

  D. Yes. You are guilty of illegal insider trading because you traded on information that had not yet been made publicly available.

  Correct Answer: D

  Yes. You are guilty of illegal insider trading because you traded on information that was not yet public. Your neighbor and her brother did not execute any trades based on the information, so they're innocent, as is the agent who executed your purchase order, who had no way of knowing that you had insider knowledge when you placed the order.

• Question 63:

  A limited power-of-attorney gives the designated person the right to

  I. order the sale of an asset owned by the account holder and have a check written to the account holder for the amount of the proceeds.

  II. obtain account statements, including tax statements, on behalf of the account holder.

  III.

  order the purchase of an asset for the account holder's account.

  A.

  I, II, and III

  B.

  I and II only

  C.

  II and III only

  D.

  I and III only

  Correct Answer: C

  Only Selections II and III are true. A limited power-of-attorney gives the designated person the right to obtain account statements, including tax statements, on behalf of the account holder and to order the purchase of an asset for the account holder's account. Only a full (or unlimited) power-of-attorney allows the designated person to withdraw any proceeds from the account.

• Question 64:

  Which of the following statements is false?

  A. A state cannot require a higher minimum net capital for broker-dealers than the amount specified by the Securities Exchange Act of 1934.

  B. A state cannot require a higher minimum net capital for investment advisers than the amount specified by the Investment Advisers Act of 1940.

  C. The minimum net capital requirement for investment advisers that take custody of their clients' assets is higher than the net capital requirement for advisers who do not take custody of the assets.

  D. None of the above statements is false; all are true statements.

  Correct Answer: B

  "A state cannot require a higher minimum net capital for investment advisers than the amount specified by the Investment Advisers Act of 1940" is a false statement. The Investment Advisers Act of 1940 does not specify a minimum net capital requirement. The Act simply indicates that if an investment adviser is already registered in one state and meeting that state's minimum net capital requirement, a second state can't impose a higher net capital requirement on it.

• Question 65:

  Stable Corporation registered a bond issue that it plans to offer for sale in the state with the Administrator.

  The bond has a par value of $1,000 and will pay interest of 7% a year, with the principal to be repaid in 5 years. The registration became effective on September 8th. The registration is effective

  A. until the maturity date on the bond.

  B. for one full year.

  C. until December 31st of the same year

  D. for two full years.

  Correct Answer: B

  The bond's registration is effective for one full year from the effective date of the registration.

• Question 66:

  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.

  Correct Answer: C

  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 67:

  An investment adviser representative with Capital Investment Advisors, Inc. advised his client to invest $5,000 in bonds of a firm that the adviser claimed was an investment "almost as risk-free as investing in U.S. government bonds; maybe even more so, given the magnitude of the government deficit these days." The client paid a total of $200 for this advice. The bonds paid interest at the rate of 6%, with semiannual payments, and the client received $300 in interest payments before the firm went belly-up at the end of a year, and its bonds were deemed worthless. The client has filed suit, and its attorneys' fees and court costs are expected to be $1,000. When the investment is a bond, the state has recently been assessing an interest rate equal to the interest rate paid by the security as an equitable interest payment guideline in civil penalties.

  The maximum the client can expect in civil penalties is

  A. $5,900.

  B. $6,200.

  C. $5,200.

  D. $6,000.

  Correct Answer: B

  The maximum amount the client can expect in civil penalties in this case is $6,200. In civil court, the client is awarded the cost of the investment plus any attorneys' fees and court costs, plus any interest that the state deems appropriate, less any income earned on the investment. In this instance, the only income is the interest that the client earned, which is identical to the interest that the Administrator mandates the investment adviser pay, so that is a wash. The investment advisory fee is included as part of the investor's cost, so the client can sue for the recovery of his original investment of $5,000 plus the $200 he paid for the investment advice plus the court costs and attorneys' fees of $1,000, or $6,200 total.

• Question 68:

  Which of the following statements best explains the difference between an agent and a broker-dealer?

  A. An agent is an individual who represents a broker-dealer or an issuer and buys and sells securities he does not own in return for a commission on the transactions he executes. A broker-dealer may also buy and sell securities for his own portfolio, in which case the broker-dealer enjoys any price appreciation on those securities.

  B. A broker-dealer must be licensed in the state in which he conducts business, but there are no separate licensing requirements for agents.

  C. Agents are engaged exclusively in the purchase and sale of stocks whereas broker- dealers also buy and sell bonds and option contracts.

  D. Agents conduct their business exclusively in the secondary market, while broker-dealers also operate in the primary market.

  Correct Answer: A

  The main difference between an agent and a broker-dealer is that an agent represents either a broker-dealer or an issuer and buys and sells securities he doesn't own, receiving a commission for the trades he executes. A broker-dealer, when functioning as a dealer, is buying and selling for his own portfolio, thereby profiting from any price appreciation in the assets in his portfolio. Both agents and broker-dealers must meet state licensing requirements; both engage in the purchase and sale of stocks, bonds, and option contracts; and both operate in both the primary and secondary markets.

• Question 69:

  Stu Pede is an agent with broker-dealer Cavalier. A customer calls with a request to establish a classic IRA and asks for Stu's advice regarding where the money in the IRA should be invested. Stu suggests a municipal bond fund, explaining to his client that the interest income earned on it will be tax-free at the federal level, and some of it may even be tax-free at the state and local levels.

  Has Stu engaged in any prohibited practices?

  A. Yes. Stu is an agent with a broker-dealer. He is not an investment adviser representative and is not allowed to make recommendations regarding investments to the firm's clients.

  B. No. Although Stu has given investment advice, it was solicited by the client, and Stu received no additional compensation for the advice.

  C. Yes. Municipal bonds are not suitable investments for a classic IRA, and Stu can have his license revoked or suspended.

  D. No. Although municipal bonds are not suitable investments for a classic IRA, Stu obviously didn't know this and is merely guilty of stupidity.

  Correct Answer: C

  Yes. When Stu recommends an investment in municipal bonds for a classic IRA account, he has made an unsuitable recommendation, which is a prohibited practice, and he can have his license revoked or suspended. Municipal bonds are not suitable investments for a classic IRA because municipal bonds pay interest that is at least free from federal taxation, so they offer a lower yield than fully taxable bonds of similar risk. The money in a classic IRA grows tax-free anyway, so the client is getting a lower yield with no benefit.

• Question 70:

  Elizabeth is the owner of Lizbeth Investment Advisers, a small, state-registered investment advisory firm. She has decided that her firm needs a niche and has learned that a consulting group is coming to the area and offering a 3-day seminar on asset allocation for senior citizens offered by Advantage for Retirement Persons (ARP). The seminar will cost $1,000 per individual, but after attending the seminar, each attendee will receive a certificate verifying their involvement in the program. Elizabeth decides this is the niche she has been looking for and signs up herself and her three investment adviser representatives for the program. After attending the seminar and receiving their certificates, Elizabeth and her team can

  A. represent themselves as certified senior citizen investment advisers.

  B. have the words "Senior-Citizen Investment Specialists" printed on their business cards.

  C. indicate that they are certified by the ARP program since money was paid for their attendance.

  D. do none of the above.

  Correct Answer: D

  After attending the ARP seminars on asset allocation for senior citizens, Elizabeth and her team cannot represent themselves as certified senior citizen investment advisers, print "Senior-Citizen Investment Specialists" on their business cards, or indicate that they are certified by the ARP program. Under the NASAA model rules, their attendance does not entitle them to say they are in any way especially certified to serve senior citizens. The attendance certification they received does not have any competency requirements attached.