FINRA FINRA-SERIES-63 Online Practice Questions and Exam Preparation

FINRA FINRA-SERIES-63 Online Questions & Answers

• Question 81:

  Which of the following funds can an agent indicate is "no load?"

  A. a fund with no front-end or back-end load that has 12b-1 fees equal to 0.30% of the average net assets of the fund.
  B. a fund with no front-end load that has 12b-1 fees equal to 0.10% of the average net assets of the fund and a rear-end load that varies depending on how long the investor has held the shares.
  C. a fund with no front-end or back-end load that has 12b-1 fees equal to 0.25% of the average net assets of the fund.
  D. Both A and C can be advertised as "no load" funds.
  C. a fund with no front-end or back-end load that has 12b-1 fees equal to 0.25% of the average net assets of the fund.

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  Explanation/Reference:

  A fund with no front-end or back-end load that has 12b-1 fees equal to 0.25% or less of the average net assets of the fund is considered a no load fund. In Choice A, the 12b-1 fees exceed 0.25%, and in Choice B, there is a rear-end load.

• Question 82:

  Iggy recently started his own company. He soon discovered it required more cash to keep it going than he had anticipated. He ran an ad in the local paper for investors and got a response. He found a template for a promissory note on the internet, filled in the requisite information specific to the agreement he and the investor had worked out, and printed it out. On it, he promised to make monthly interest payments of 2% on the loan and to repay the principal amount at the end of 18 months. A few months after the arrangement, Iggy read an article in a small business publication that indicated that promissory notes had to be registered with the state unless they were sold in an exempt transaction, such as one enacted with a financial institution, prior to being offered for sale. The article indicated that a seller who had sold an unregistered note in error could remedy the situation by sending the buyer a formal offer to buy the security back, with interest. Iggy turned to the computer once again, found a form that could be used for a formal offer of rescission, filled it out, and sent it to the investor. Having done this,

  A. Iggy cannot be sued for civil damages if the investor fails to respond to the offer within 30 days.
  B. Iggy must follow up with a second notice sent via registered mail if he has not heard from the investor within 30 days.
  C. Iggy must wait 6 months for a response from the investor. If no response is received by the end of 6 months, Iggy is off the hook.
  D. Iggy will not be assessed any penalties by the Administrator of the state, but the investor can still sue for damages in civil court.
  A. Iggy cannot be sued for civil damages if the investor fails to respond to the offer within 30 days.

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  Explanation/Reference:

  Since Iggy realized the promissory note he had sold to the investor required state registration and sent a formal offer of rescission to the investor, he cannot be sued for civil damages if the investor has not responded to the offer within 30 days. The investor has 30 days to accept or reject the offer. If he either rejects it or fails to accept it by not responding to the offer at all, the investor has lost the right to sue for damages.

• Question 83:

  Skip is a registered agent with state. He recently quit his job with Venus Broker-Dealers to become affiliated with Mars Broker-Dealers.

  Which of the three entities must report this change to the state Administrator?

  A. Skip only
  B. Skip and either Mars or Venus, but not both
  C. Both Skip and Venus
  D. Skip, Mars, and Venus
  D. Skip, Mars, and Venus

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  Explanation/Reference:

  When Skip leaves one broker-dealer and signs on with another, all three entities-Skip, Mars, and Venus-must report this to the state Administrator. Under the Uniform Securities Act, when an agent leaves a broker-dealer, both the agent and the broker-dealer are required to report this to the state Administrator, and when an agent begins employment with a new broker-dealer, both the agent and the new broker-dealer must report it.

• Question 84:

  Joe Treader is the owner of a small, state-registered investment advisory firm that is on the verge of becoming insolvent. One of his clients who has become like a mother to him is aware of his financial difficulties and has offered to sell off some of the assets that he manages for her and loan him the money to get him through this period of economic uncertainty until he is able to get on his feet again.

  Can Joe take her up on her offer?

  A. Yes. Based on the facts presented, it is an unsolicited offer and, as such, Joe can (and should) accept it.
  B. Yes, but only if Joe draws up a formal loan agreement with a fair interest rate, based on the going market rates, stated in the agreement as well as a firm date for principal repayment.
  C. No. As the client's investment adviser, he has a fiduciary relationship with the client. Entering a loan agreement with this client could lead to conflicts of interest.
  D. Both A and B are true.
  C. No. As the client's investment adviser, he has a fiduciary relationship with the client. Entering a loan agreement with this client could lead to conflicts of interest.

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  Explanation/Reference:

  No, Joe cannot take his client's offer of a loan because it could lead to a conflict of interest- -if not today, perhaps in the future--and as a fiduciary Joe will be expected to put this client's welfare ahead of his own. If it takes him a lot longer than expected to get on his feet again, he may be tempted to act in his own best interest.

• Question 85:

  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
  A. a 16-year old cheerleader

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  Explanation/Reference:

  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 86:

  Cal Turner calls his client and recommends that the client sell his shares in the Alpha High Quality Bond Fund and use the proceeds to buy shares in the Omega High Quality Bond Fund. Cal has done nothing unethical if his recommendation is based on the fact that

  A. the Alpha Fund has a back-end load.
  B. the Omega Fund has a front-end load.
  C. the Alpha Fund has been performing poorly relative to other funds in the same category.
  D. It would always be unethical for Cal to recommend that a client sell shares in one fund in order to buy shares of another fund that has the same investment objective.
  C. the Alpha Fund has been performing poorly relative to other funds in the same category.

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  Explanation/Reference:

  Cal has done nothing unethical if his recommendation that a client sell his shares in the Alpha Fund and buy shares of the Omega Fund is due to the fact that the Alpha Fund has been performing poorly relative to other funds in the same category. While past performance is no guarantee of future performance, a client may not want to hang on to a fund that isn't returning as much as its competition.

• Question 87:

  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
  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.
  D. II only

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  Explanation/Reference:

  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 88:

  Which of the following would not fall under the classification of "institutional investor"?

  A. Prudential Insurance
  B. Chase Bank
  C. Neuring Investment Advisers
  D. Franklin Templeton Mutual Funds
  C. Neuring Investment Advisers

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  Explanation/Reference:

  Nuering Investment Advisers would not fall under the classification of "institutional investor." Institutional investors are defined as banks, insurance companies, mutual funds, some pension plans, and broker-dealers registered under the Securities Exchange Act of 1934. Investment advisers are not part of this group.

• Question 89:

  Which of the following does not describe a prohibited activity by investment advisers and their representatives, according to NASAA Model Rules?

  A. A new client comes to Simon LaGree for investment advice. The client has $25,000 to invest. Simon tells the client that it will cost the client $5,000 to have a customized financial plan developed for him, but after that the client needs to pay only 5% of the total value of the assets under management each quarter.
  B. A 72-year-old retired social worker comes to Simon LaGree for investment advice. She has $50,000 to invest. Simon recommends she invest half of it in an international growth mutual fund and half in a variable annuity.
  C. The agreement that Simon LaGree has his clients sign indicates that LaGree uses SecureMoney Broker-Dealers in executing trades for his clients and that, in return, LaGree receives software from the broker-dealer that allows LaGree to perform some fundamental and technical analysis.
  D. All of the above describe prohibited practices.
  C. The agreement that Simon LaGree has his clients sign indicates that LaGree uses SecureMoney Broker-Dealers in executing trades for his clients and that, in return, LaGree receives software from the broker-dealer that allows LaGree to perform some fundamental and technical analysis.

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  Explanation/Reference:

  It is not prohibited for LaGree to receive the software from SecureMoney in return for executing trades through that broker-dealer since LaGree has disclosed this to his clients. An investment adviser is permitted to receive soft dollars from broker-dealers in return for executing trades through them, as long as the client is informed of the arrangement and the soft dollars will benefit both the client and the adviser, which is the case in this instance since the software gives LaGree the ability to do research in order to better advise his client. Choice A is clearly prohibited since it constitutes an "unreasonable advisory fee." In Choice B, LaGree is making unsuitable recommendations to his client. A 72-year-old retired social worker is likely to have a greater-than-average need for liquidity to pay for unexpected items, such as medical bills. Variable annuities are designed to be long-term investments, not short-term investments, so they would not meet this need. They typically have high surrender penalties that the client would be subject to if she needed to make withdrawals within, say, the next 10 years. Likewise, international growth funds are not liquid investments. International growth mutual funds are invested in foreign stocks and are riskier than average, and are, thus, not suitable investment vehicles for the typical 72-year- old retired social worker.

• Question 90:

  Which of the following is not a prohibited practice for broker-dealers under the NASAA Model Rules?

  A. lending money to clients for them to invest
  B. borrowing money from a client
  C. charging commissions that are significantly higher than those charged by other broker- dealers
  D. providing a client with a copy of their most recent balance sheet upon request
  A. lending money to clients for them to invest

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  Explanation/Reference:

  Lending money to clients for them to invest is not a prohibited practice. This is otherwise known as a margin transaction.