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FINRA Series-63 Sample Question Answers

Question # 1

Which of the following compensation arrangements between an investment adviser and an individual client with a net worth of $600,000 would be disallowed?

A. The client agrees to pay the investment adviser an hourly fee of $60.00. 
B. The investment adviser will receive 0.1% of the total value of the client’s assets under management as of the end of each month. 
C. The investment adviser will receive 0.1% of the gross capital gains earned on the portfolio each quarter. 
D. All of the above are legitimate compensation arrangements between and investment adviser and an individual client with a net worth of $600,000. 

Question # 2

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. 

Question # 3

The C&S Railroad is in the process of issuing new bonds. Before these bonds can be offered for sale, 

A. they must be registered with the SEC since railroads are involved in interstate commerce.  
B. they must be registered in every state in which the bonds will be sold to investors.  
C. they must be registered with the SEC and in each state through which the railroad passes.  
D. None of the above statements is true.  

Question # 4

“T + 3” refers to  

A. the form, also known as a “trade ticket,” that is filled out when an order is entered into the market.  
B. the form that is filled out and sent to the client confirming that the trade has been executed.  
C. the fact that the settlement date will be three business days after the trade date, which is the “regular way settlement” for transactions involving stocks and corporate and municipal bonds.
D. a procedure to minimize the potential for money laundering.  

Question # 5

Noah Scruples, an agent with CanDo Broker-Dealers, just got a copy of the most recent report on a certain stock. The report was generated by CanDo’s analyst department and is hot off the presses. It has not yet even been put on the firm’s website for the firm’s clients. The analyst department has just changed its recommendation on the stock from “Hold” to “Strong Buy” based on new information that it has obtained on the company. Can Noah rush to his office to buy shares of the stock before the analysts release their reports to CanDo’s clients?

A. Yes. The firm’s analysts used publicly available information to assess the stock and make its recommendation, so Noah can buy the stock now on his own account.
B. No. It is unethical for him to trade based on this information before the firm’s clients have received the information. 
C. No. This is a prohibited activity referred to as “painting the tape.”
D. Both B and C are true statements. 

Question # 6

Which of the following would a firm not be expected to provide to the Administrator when registering an issue of securities with the state?

A. all sales and advertising materials that will be used in conjunction with the offering.  
B. the agreement between the issuing firm and the underwriters  
C. the agreement among the underwriters themselves  
D. The firm will be expected to provide all of the above to the Administrator when registering an issue of securities with the state. 

Question # 7

Which of the following laws deals with identity theft protection?  

A. the Bank Secrecy Act (BSA)  
B. the USA Patriot Act  
C. ERISA  
D. Regulation S-P  

Question # 8

Mr. Noah Scruples is a registered representative with CanDo Broker-Dealers. A client calls and wants Noah to purchase shares of a mutual fund the client has read about. CanDo is not authorized by this particular fund to effect purchases or sales of the fund shares. Can Noah execute the order anyway?

A. No. This would be considered money laundering, which is highly illegal.
B. No. This is a prohibited practice known as selling away.
C. No. This is a prohibited practice known as front running.
D. Yes. Since this is an unsolicited trade, Noah can execute the transaction on behalf of his client.

Question # 9

Under the guidelines of the Bank Secrecy Act (BSA), the Treasury Department now requires broker-dealers to obtain and keep certain information relating to clients that make or receive funds transfers that involve 

A. $3,000 or more.  
B. $10,000 or more.  
C. $5,000 or more.  
D. $100,000 or more.  

Question # 10

As an agent, which of the following statements about the Securities Investor Protection Corporation (SIPC) can you legitimately make to your client?

A. The SIPC is the FDIC of the stock and bond markets.”  
B. “The SIPC was established to restore funds to investors when the brokerage firm they have been using is bankrupt or in financial distress.” 
C. “The SIPC is a government agency created by an Act of Congress to combat fraud.”  
D. “The SIPC is a government agency that was created by an Act of Congress to protect investors against losses in the stock and bond market.”

Question # 11

Today’s edition of the Wall Street Journal carried a front page story regarding a federal lawsuit that has been filed against a software manufacturer for monopolistic practices. The CFO of the company called his broker today and sold some of the shares he owns in the company. Which of the following statements are true?I. The CFO is guilty of illegal insider trading.II. If the agent who effected the transaction for the CFO knew he was CFO of the software company, the agent is guilty of illegal insider trading.III. The broker-dealer for whom the agent works may have its license suspended or revoked if its agent has knowingly executed this illegal insider trade for not having supervised the agent properly. 

A. I only
B. I and II only
C. I, II, and III
D. None of the statements is true.

Question # 12

Which of the following statements regarding an open-end investment company is not true?  

A. Its shares are bought and sold through the company.  
B. Its securities are federal covered.  
C. Its shares may sell for either net asset value or greater than net asset value, but not below  
D. Its shares are bought and sold on exchange floors.  

Question # 13

Registration by coordination is provided for by which of the following federal securities acts?  

A. Securities Act of 1933  
B. Securities and Exchange Act of 1934  
C. Investment Advisers Act of 1940  
D. Investment Company Act of 1940  

Question # 14

You execute a stock transaction for a client on Thursday, September 23rd. The settlement date on the order ticket will be

A. Thursday, September 23rd.
B. Monday, September 27th.
C. Friday, September 24th.
D. Tuesday, September 28th.

Question # 15

In accordance with the National Securities Markets Improvement Act of 1996, which of the following is a federal covered adviser and, therefore, exempt from registering with the state Administrator?I. An adviser who does business in 26 statesII. An adviser who manages the portfolio of a mutual fund that is registered with the SEC.III. An adviser with $35 million in assets under management    

A. All of the selections meet the qualifications of a federal covered adviser.  
B. I and II only  
C. II and III only  
D. I and III only  

Question # 16

Layered Corporation wants to issue a bond that will have warrants attached. Each warrant gives the holder the right to buy 5 shares of Layered’s common stock at a price stipulated on the warrant. In this instance, Layered must file to register which of the following securities with the state?I. the bondsII. the warrants III. the common stock     

A. I only  
B. I and III only  
C. I and II only  
D. I, II, and III  

Question # 17

Your client calls you with a market order to purchase 500 shares of the stock of Oracle and asks when payment will be due. If today is Wednesday, September 15th, you inform the client that payment is due on  

A. Monday, September 20th.
B. Thursday, September 16th.
C. Friday, September 17th.
D. Saturday, September 18th.

Question # 18

To say a security is “exempt,” means thatI. 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  

Question # 19

Alice Wonder called her broker on Tuesday, August 10th, with a market order to buy 10 calls on the stock of Abbott Laboratories. Under normal conditions, Alice will have to pay for the calls on

A. Wednesday, August 11th.
B. Tuesday, August 10th.
C. Friday, August 13th.
D. Monday, August 16th.

Question # 20

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.  

Question # 21

The Administrator of a state will deny the registration of a security ifI. the mandated filing fee has not been paid. II. the compensation of the underwriters is excessive. III. the registration statement is incomplete. IV. the issuer is registering the security through the registration by coordination process and has not complied with all the stipulated requirements.      

A. I, II, III, or IV  
B. I or III only  
C. III or IV only  
D. I, III or IV only  

Question # 22

The settlement date refers to

A. the date the order to purchase or sell the security is sent to the market.
B. the date the buyer must pay for the securities purchased.
C. the date the order to purchase or sell a security is actually executed. This may differ from the date that the order is sent to the market in the cases of limit or stop orders.
D. the latest date on which broker-dealers can file their quarterly financial statements with the Administrator of the state.

Question # 23

Which of the following would not be found in a tombstone advertisement?  

A. the price at which the security will be offered  
B. the names of the underwriters  
C. the name of the issuer  
D. the interest rate and time to maturity of a bond issue  

Question # 24

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.  

Question # 25

The trade confirmation must be received by the customer no later than

A. one week after the settlement date.
B. the settlement date.
C. the day after the trade takes place.
D. five business days after the settlement date.

Question # 26

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  

Question # 27

To continue operating as an agent, broker-dealer, investment adviser, or investment adviser representative next year, you must pay the filing fee to renew your license with the state Administrator by 

A. January 15th of the new year.
B. January 30th of the new year. 
C. December 31st of this year. 
D. the anniversary date of the original issue date on your license. 

Question # 28

If an issuer registers securities with the state, how long can the documentation supplied in the registration statement for those securities be incorporated by reference only into a registration statement for future securities the issuer wants to offer for sale? 

A. one year  
B. two years  
C. five years  
D. seven years  

Question # 29

You have passed the necessary exams (congratulations!) and are applying for registration as a securities agent. It is already the end of September. Therefore, you must pay 

A. one-fourth of the annual fee required since only one quarter of the year remains
B. the full annual fee, and your license will expire on September 30th next year
C. the full annual fee, and your license will expire on December 31st next year. 
D. the full annual fee, and your license will expire on December 31st this year. 

Question # 30

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.  

Question # 31

Which of the following would not appear on a trade confirmation?

A. the client’s account number
B. the commission
C. the settlement date
D. All of the above items appear on a trade confirmation.

Question # 32

Fly-By-Night Investment Advisers has closed its doors. Which of the following statements is true?

A. Fly-By-Night is required to shred all documentation of client transactions and communications. 
B. Fly-By-Night must send all records of client transactions and communications to the state Administrator for safekeeping. 
C. Fly-By-Night must preserve and maintain all records, including client transactions and communications, advertising materials, and financial statements of the now-defunct business for five years. 
D. Fly-By-Night must send each of its former clients its records of all that client’s transactions and communications with the firm over the past five years. 

Question # 33

Which of the following is a security as defined by the Uniform Securities Act (USA)?  

A. a debenture  
B. a futures option contract on wheat  
C. a term life insurance policy  
D. Both A and B are securities as defined by the Uniform Securities Act.  

Question # 34

Rich Quick is a broker-dealer registered in the state of Massachusetts. He occasionally trades on abnormalities he observes in bond yield spreads for his own account, short selling a bond that appears to be overpriced based on its yield and buying a bond that is identical in almost every respect except for the price, which is less than that of the other bond. He has been able to earn arbitrage profits 95% of the time when he does this. Rich Quick

A. is in violation of securities laws. Arbitrage is a prohibited activity. 
B. is skilled if he is able to earn profits 95% of the time using this strategy.
C. is trading on insider information, which is a violation of securities laws. 
D. engaged in a fraudulent activity.

Question # 35

Don is a state-registered agent with GetErDone Broker-Dealers. He has three other friends who are licensed agents-Huey, Dewey, and Louie. Huey is also an agent with GetErDone Broker-Dealers. Dewey is an agent with a different firm in the same city, CanDo Broker-Dealers. Louie works for a Broker-Dealer with an office just across the state line. Don can enter a commission-splitting agreement with

A. Huey only.  
B. either Huey or Dewey or both  
C. Dewey only.  
D. Either Huey, Dewey, or Louie or any combination of the three  

Question # 36

Which of the following entities are subject to post-registration provisions?I. broker-dealers II. agentsIII. investment advisersIV. investment adviser representatives  

A. I and II only 
B. I and III only
C. II and IV only 
D. All of the entities are subject to post-registration provisions. 

Question # 37

Shady Corporation’s executives are concerned over the firm’s steadily declining stock price and decide to do something about it. They each decide to make significantly large purchases of their firm’s stock in order to stabilize and hopefully even to drive up its price, reasoning that they can sell the stock for the higher price down the road and profit from the transaction. You are a broker-dealer for the firm’s executives. Are Shady’s executives planning to do anything illegal? 

A. No. It’s a win-win. They are using their own money to buy stock of their firm, and this can help drive the stock price up and put profits in their pockets. 
B. Yes. To purchase shares of their own company is considered to be illegal insider trading.  
C. No. As long as they follow the rules and report their purchases to the SEC, it is not illegal for them to purchase shares of their firm’s stock. 
D. Yes. Although it is not illegal for them to purchase shares of their firm’s stock, they cannot do so in order to try to manipulate the price of the stock. 

Question # 38

Which of the following describes a prohibited practice in the sale of shares of investment companies?I. Sandy Slacker hands her client the fund’s prospectus and tells him that the prospectus will provide him all that he needs to know about loads and fees associated with the fund.II. Elliot Eager tells a client who has an investment objective that includes current income that a certain bond fund has a current yield of 8% and provides the client with a prospectus so that the client can peruse the average annual returns that the fund has generated in past years when the client has the time. III. After explaining all the fees and loads involved in two different bond funds as well as the difference between current yield and total return, Patty shows the client the data on the average annual returns that the two bond funds provided. She explains to the client that the municipal bond fund has a lower yield than the similar-risk corporate bond fund because the interest income the client will receive from the municipal bond fund will be free from federal taxation, while the interest income on the corporate bond fund is fully taxable.  

A. All the choices describe prohibited practices in the sale of shares of investment companies.  
B. I only 
C. I and II on
D. I and III only 

Question # 39

Which of the following would not appear on an order ticket?

A. the stock symbol
B. the account number of the client buying or selling the security
C. the settlement date
C. the settlement date

Question # 40

Painting the tape refers to  

A. the practice of buying large amounts of a security to drive its price up artificially.  
B. the illegal activity of a group of investors who buy and sell a security among themselves to create an artificially high volume of trading in hopes of luring investors to buy the security. 
C. the prohibited practice of excessively trading on a client’s account that is used by some broker-dealers and/or their agents to generate more commissions for themselves. 
D. the unethical practice of investment advisers who issue “buy” recommendations for stocks that they own themselves without disclosing the fact. 

Question # 41

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. 

Question # 42

Price pegging refers to  

A. the practice of buying large amounts of a security to drive its price up artificially.  
B. the illegal activity of a group of investors who buy and sell a security among themselves to create an artificially high volume of trading in hopes of luring investors to buy the security. 
C. the prohibited practice of excessively trading on a client’s account that is used by some broker-dealers and/or their agents to generate more commissions for themselves. 
D. the unethical practice of investment advisers who issue “buy” recommendations for stocks that they own themselves without disclosing the fact. 

Question # 43

Cassie Clueless has recommended that a client purchase shares of a mutual fund prior to its ex-dividend date, so that the client will receive the dividends when they are distributed. In which of the following situations might this recommendation be justifiable and not in violation of NASAA rules? I. The investor has refused to provide Cassie any information regarding his investment goals.II. The investor is a young professional with an investment goal of long-term capital appreciation.III. The investor is a retiree in a low tax bracket and needs current income to augment her social security check 

A. I only 
B. I and II only
C. III only 
D. It is always in violation of NASAA rules to recommend that a client purchase shares of a mutual fund prior to its ex-dividend date. 

Question # 44

Mina is a new agent with SecureMoney Broker-Dealers and is struggling to make ends meet. She gets a job as a receptionist at a fitness club on the weekends to generate more income. Which of the following is true?

A. Mina should have notified SecureMoney in writing before signing on to work at the fitness club.
B. Because the job as a receptionist at a fitness club has nothing to do with the world of finance, Mina has done nothing inappropriate.
C. Mina simply needs to tell her immediate supervisor at SecureMoney about her new job.
D. Mina needs to send notice to the state Administrator informing him of her extracurricular activity.

Question # 45

In which of the following scenarios will the investment adviser be subject to criminal fraud charges?  

A. An adviser owns the stock of TweedleDee Corporation and has issued a report recommending the stock as a “buy” without disclosing the fact that it owns the stock. 
B. An adviser owns the stock of TweedleDee Corporation and has issued a report recommending the stock as a “buy,” disclosing the fact that it owns the stock 
C. An adviser sells its shares of TweedleDee Corporation after issuing a report recommending the stock as a “buy.” 
D. all of the above. It is considered criminal fraud for an investment adviser to make any recommendations on a security in which it has or plans to have a position. 

Question # 46

S. 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.

Question # 47

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

Question # 48

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  

Question # 49

When selling shares in a closed-end investment company, an agent must inform the client of any I. commissionsII. underwriting feesIII. miscellaneous offering expenses  

A. I, II and III 
B. I only
C. I and II only
D. I and III only 

Question # 50

You are an investment adviser representative. Your client, Mr. I. M. Pulse, calls you with what he thinks is exciting news. He just passed a restaurant and saw Microsoft’s Bill Gates having lunch with a local entrepreneur who owns a small firm in the computer software industry that trades on the OTC pink sheets. He is sure that this means Microsoft is negotiating a purchase of the smaller company and instructs you to take the cash balance in his account and buy shares of the local company. You should

A. tell Mr. I.M. Pulse that this would be an illegal insider trade and that you are unable to fulfill his request. 
B. call your supervisor and alert him immediately of Mr. Pulse’s attempt to have you place an illegal order on his behalf in case Mr. Pulse decides to place the order elsewhere. 
C. advise Mr. Pulse that he may be jumping the gun, but place the order if he insists.
D. do both A and B.