FINRA FINRA Certifications FINRA-SERIES-63 Questions & Answers

• Question 71:

  AllTime Investment Advisers advertises that its phones are manned 24/7, so that a client "doesn't have to lie awake all night worrying about a financial problem." In fact, AllTime does have a answering service that answers calls in the evenings and on the weekends when its offices are closed. The service informs the caller of the firm's business hours, which will be the earliest opportunity the caller will have to talk to an investment adviser representative.

  Is this a violation of any securities laws?

  A. No. It's not a violation of any securities laws, but the firm probably won't retain many clients this way.

  B. Yes. The Uniform Securities Act prohibits investment advisers from making deceptive statements in the solicitation of clients as well as in advising clients.

  C. No. The firm's phones are manned 24/7, so it hasn't lied.

  D. It depends. If, before a client signs a contract with the firm, it is made clear that investment adviser representatives are not, in fact, available to him 24/7, then AllTime is in the clear.

  Correct Answer: B

  Yes. The Uniform Securities Act prohibits investment advisers from making deceptive statements in the solicitation of its clients, so when AllTime suggests in its advertisements that a client will be able to talk to someone who can relieve his worries, AllTime has violated the law and is guilty of fraud.

• Question 72:

  Erin is a registered agent who works for SecureMoney Brokers-dealers. One of her clients, Mrs. McTurk, is a recently-widowed woman who relies on Erin for advice about her investment portfolio. Mrs. McTurk reminds Erin of her own grandmother, and she is happy to provide guidance within the sphere of her own knowledge.

  Based on these facts, which of the following statements is true?

  A. SecureMoney Broker-dealers must register as an investment adviser since one of its employees is providing investment advice.

  B. Erin must register as an investment adviser since she is providing investment advice.

  C. SecureMoney Broker-dealers must register as an investment adviser since one of its employees is providing investment advice, and Erin must register as an investment adviser representative as the firm's employee.

  D. Neither SecureMoney Broker-dealers nor Erin must register as an investment adviser based on the facts provided.

  Correct Answer: D

  Neither SecureMoney Broker-dealers nor Erin must register as an investment adviser based on the facts provided since neither the broker-dealer nor Erin is receiving any compensation for the advice Erin is giving Mrs. McTurk. In this instance, the advice provided is considered incidental to the broker-dealer business.

• Question 73:

  Which of the following is an example of commingling?

  A. Sly is an agent with a broker-dealer who recently executed a stock purchase for his client and had the client make the check for the purchase out to Sly for deposit in Sly's broker-dealer account.

  B. In order to generate more commissions for herself Ms. Fox makes trades on some of her client's accounts and has the trade confirmations sent to a P.O box she owns.

  C. Mr. Hawk encourages his clients to leave their securities in "street name" with the broker-dealer for which Mr. Hawk works.

  D. All of the above are examples of commingling.

  Correct Answer: A

  When Sly has his client pay for a stock purchase by making the check out to Sly himself, he has engaged in the prohibited practice of commingling. Ms. Fox is also engaged in a prohibited practice, but she is engaged in making unauthorized transactions. Mr. Hawk is doing nothing wrong. It is typical for clients to leave securities on deposit with their broker- dealers in what is called "street name." This makes it easier for the client to sell the securities later on since he physically will not have to deliver the securities to the broker, for one thing.

• Question 74:

  Which of the following entities is subject to be accused of churning?

  I. investment advisers

  II. investment adviser representatives

  III. broker-dealers

  IV.

  agents

  A.

  II and IV only

  B.

  I and III only

  C.

  II, III, and IV only

  D.

  I, II, III, and IV

  Correct Answer: D

  Selections I, II, III, and IV-investment advisers, their representatives, and broker-dealers and their agents-are subject to accusations of churning. Any activity on the part of any of these parties that suggests that they are engaged in encouraging excessive trading on the accounts of their clients makes them subject to allegations of churning their customers' accounts.

• Question 75:

  Which of the following statements regarding "registration by qualification" is true?

  A. Registration by qualification refers to the fact that certain categories of securities are exempt from state registration requirements.

  B. Registration by qualification is the preferred method used by issuers since it requires the least amount of paperwork.

  C. In its simplest form, registration by qualification requires the issuer to supply voluminous amounts of information about both the firm and its directors, officers, and major shareholders.

  D. Registration by qualification refers to the fact that the highest quality bonds, i.e., those with a AAA rating, are exempt from registration with the state.

  Correct Answer: C

  Registration by qualification, in its simplest form, requires the issuer to supply voluminous amounts of information about both the firm and its directors, officers, and major shareholders. The state Administrator also has the authority to require even more documentation. It is the least favorite method of registration for obvious reasons.

• Question 76:

  Which of the following may be given to prospective investors during the "cooling off period?"

  A. a tombstone advertisement

  B. a final prospectus

  C. a copy of the registration statement

  D. all of the above

  Correct Answer: A

  During the "cooling off period" prospective investors may be given only a tombstone advertisement for the security.

• Question 77:

  An investment adviser may not

  A. also be registered as a broker-dealer in the state.

  B. accept any kind of soft dollar compensation for using certain broker-dealers to execute trades on their clients' accounts.

  C. take a position-either long or short-in securities in which any of its clients have a position.

  D. recommend a stock to a client that the adviser itself holds without disclosing to the client that the adviser owns the stock.

  Correct Answer: D

  An investment adviser may not recommend a stock to the client that the adviser holds without disclosing to the client that it owns the stock. They are permitted to also be registered as a broker-dealer in the state and to accept certain types of soft dollars as compensation from brokers. And they can have positions in securities that their clients have positions in-just as long as this is disclosed.

• Question 78:

  Which of the following entities would be required to register with the state as a broker- dealer under the guidelines of the Uniform Securities Act (USA)?

  A. an underwriter with no offices in the state that is helping a firm that is incorporated within the state with the sale of its new bond issue to insurance companies.

  B. a credit union that operates within the state and provides loans to its members.

  C. an agent who executes the purchase and sale of stocks and bonds for his clientsD.

  D. None of the above entities would be required to register with the state as a broker-dealer under the guidelines of the Uniform Securities Act.

  Correct Answer: D

  Under the guidelines of the USA, none of the entities described in Selections A, B, or C would be required to register with the state as a broker-dealer since the term, as defined by the USA, does not include agents, savings institutions, or entities with no offices in the state who deal exclusively with issuers and/or other broker-dealers, financial institutions, insurance companies, pension funds, or insurance companies. Selections B and C refer to a financial institution and an agent, respectively. In the scenario described in Selection A, the underwriter has no offices in the state and is dealing exclusively with the issuer of the bonds and insurance companies.

• Question 79:

  Which of the following documents must a broker-dealer deliver on or prior to the confirmation due date to a client who is purchasing a security?

  A. a margin agreement if the purchase is being made on margin

  B. a final prospectus

  C. a preliminary prospectus

  D. a hypothecation agreement

  Correct Answer: B

  A broker-dealer must deliver a final prospectus to a client who is purchasing a security either on or prior to the confirmation due date. The margin agreement need not be signed until after the initial transaction takes place. The hypothecation agreement is part of the margin agreement. As an alternative, a preliminary prospectus can be provided, but it must be accompanied by additional information that is contained in the final prospectus, but is missing from the preliminary prospectus. Therefore, Choice C, as written, is not correct.

• Question 80:

  Which of the following does not describe a prohibited practice for investment advisers?

  I. The adviser sells its non-institutional clients securities that it has issued.

  II. The adviser makes a discretionary trade for a client after receiving verbal authorization only and does not receive written authorization from the client within 10 business days of doing so.

  III.

  The investment adviser requires an advisory fee of $300 to be paid in advance at the beginning of each quarter.

  A.

  None of the selections describe prohibited practices.

  B.

  I only

  C.

  I and III only

  D.

  II and III only

  Correct Answer: D

  Selections II and III do not describe prohibited practices. If an adviser makes a discretionary trade for a client after having received verbal authorization to do so and does not receive written authorization from the client within 10 business days of doing so, the adviser is limited to making recommendations to the client and executing unsolicited trades only, but he has not engaged in a prohibited practice, and this is the scenario described in Selection II. There is no provision that prohibits an adviser from requiring an advisory fee to be paid in advance as long as it is reasonable, as described in Selection III. An adviser is not permitted to sell its non-institutional clients securities it has issued itself because of the significant conflict of interest involved. The exception is if the client is an institution that is in the business of lending money, but Selection I specifically indicates "non-institutional clients."