Series 63 Practice Questions

The best answer is C. While Treasury securities are considered to be "risk free" when it comes to risk of default (since the U.S. Government has the power to "print" the money to pay off its debt, if worse comes to worse), any fixed interest rate security with a long term expiration is subject to market or interest rate risk. This is the risk that as market interest rates rise, the price of fixed income securities must fall to bring their yield up to a level that is competitive with current market rates. It would be unethical not to disclose this risk to a customer.

A customer contacts an agent of a broker-dealer, asking for an investment that has no risk. The agent recommends the purchase of Treasury notes or bonds, stating that these are "riskless" securities. Which statement is CORRECT regarding this recommendation? A. The agent has not violated the Uniform Securities Act because Treasury securities are free from risk of default of either payment of interest or principal B. The agent has not violated the Uniform Securities Act because Treasury securities are free from interest rate or market risk C. The agent has acted unethically because Treasury securities that are not a short term maturity have interest rate risk D. The agent has acted unethically because there are no securities that are completely free of risk

The best answer is A. This question is based on reality. In New York City and other "high rent" locations. Broker-dealers offer so-called "hedge fund hotels," where they offer hedge fund advisers nice office space that they own (on places like Park Avenue) at subsidized rents if the hedge fund agrees to direct its portfolio trades to that broker-dealer. The SEC requires that investment advisers that accept soft dollars disclose this on Form ADV and the disclosure must be specific. Because most hedge fund advisers are set up as partnerships, hedge funds are not subject to the mutual fund soft dollar rule which requires that the soft dollar benefit accrue to the shareholders. All of the "partners" in a hedge fund may get a benefit from the reduced expenses that the hedge fund will enjoy from the subsidized rent. However, the SEC (and also NASAA, because each State uses the same ADV Form) requires that the hedge fund disclose the practice of accepting soft dollars as a line item in the Form ADV and that it disclose that, in return for getting the rent subsidy, it may be paying a higher commission rate to that executing broker-dealer.

A hedge fund offers to provide a minimum level of trades to a broker-dealer in return for receiving below-market office space from the broker-dealer. Which statement is TRUE? A. This is an unethical practice unless it is disclosed on the Form ADV filing with the Administrator B. This is an illegal usage of soft dollar compensation C. This is a legal usage of soft dollar compensation D. This is an unethical practice unless the broker-dealer is also licensed as a real estate agency in the State

The best answer is C. If a representative were to sell these promissory notes offered by an outside individual, then the rep would be "selling away" from his firm - that is selling securities to a customer that are not being offered by that firm. This is a violation of NASAA rules (since the customer thinks he is buying the securities from the broker-dealer and not from some other person!). The only way that a representative can "sell away" is if the representative asks the firm's permission in writing; receives written permission of the firm; and the firm records the transaction on its books and records and supervises it as if it were its own transaction (like that would ever happen!).

A representative at a member firm is approached by a person outside that firm to sell promissory notes through that member's branch office. Which statement is TRUE? A. The representative is prohibited from selling the promissory notes B. The representative may only sell the promissory notes after receiving verbal permission of the member firm C. The representative may only sell the promissory notes after receiving written permission of the member firm D. The representative may sell the promissory notes without restriction

The best answer is A. Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The amount of commission charged and if a payment was made for order flow must be disclosed. Finally, the customer name, account number, size of the trade, and price of execution must all be on the confirmation.

All of the following information must be included on a customer confirmation EXCEPT: A. whether the transaction was solicited or unsolicited B. whether a payment for order flow was made C. the customer name and account number D. the price of execution

The best answer is C. Advisers with $100,000,000 or more of assets under management must register with the SEC as "Federal Covered Advisers" and cannot be required to be registered in each State (though each State can require a notice filing). The SEC then issued some interpretations regarding this requirement. These are: Advisers that have between $100,000,000 and $110,000,000 of assets under management have the choice of registering either at the State or Federal level. Thus, SEC registration as an adviser is truly only required once an adviser has $110,000,000 or more of assets under management. The SEC then issued interpretations regarding so-called "mid-size" advisers, which are advisers with at least $25,000,000 under management. These are: Mid-size advisers that are not required to be registered in a State where they have their principal office must register with the SEC (there are a handful of States that do not require investment advisers to register and this forces them to register with the SEC and be regulated by someone!); Mid-size advisers that do business in 15 or more States can choose to register with the SEC rather than having to register with, and be regulated by, 15 or more States.

An investment adviser has determined that it can register as a federal covered adviser. This means that the adviser: I solicits clients on behalf of other investment advisers II currently operates in at least 15 States III has at least $25,000,000 of assets under management IV provides financial planning to customers for compensation as a regular business A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. NASAA requires that the investment adviser furnish the Brochure (Form ADV Part 2A) and the Brochure Supplement (Form ADV Part 2B) to an advisory client or a prospective advisory client. The Brochure and Supplement must be furnished: not less than 48 hours prior to entering into any advisory contract with such client or prospective client; or at the time of entering into the contract, the advisory client has the right to terminate the contract without penalty within 5 business days.

An investment adviser is looking to offer advisory services to new clients. Which statement is TRUE regarding delivery of Form ADV Parts 2A and 2B? A. They must be delivered only if the individual becomes a client of the investment adviser B. They must be delivered regardless of whether the individual becomes a client of the investment adviser C. They must be delivered only upon written request of the individual that is considering becoming a client D. They must be delivered only upon receiving a check for the initial investment amount from the client

The best answer is D. The Prudent Man Rule does not detail the types of investments to be made, nor does it specify that only securities are permitted investments. When investing under the rule, investments must be managed in the way that a prudent investor would. The use of futures as a hedge against loss of value due to currency fluctuations seems like a prudent strategy here.

An investment adviser representative manages a large portfolio for a wealthy customer, age 65. The portfolio contains a large holding of British securities and the adviser is worried that the British Pound may appreciate against the U.S. dollar. Which statement is TRUE regarding the use of currency futures to hedge against this risk? A. The Prudent Man Rule prohibits the use of futures contracts as investments B. Because futures contracts are inherently risky, their use would be in contravention of the Prudent Man Rule C. The Prudent Man Rule only applies to securities and not to futures, so the adviser cannot use them D. The Prudent Man Rule does not specify the types of investments that can be used, so futures could be suitable as a hedging instrument

The best answer is A. If a representative of a federal covered adviser that transacts business in a State terminates employment, it is the responsibility of the representative to notify the State promptly. Remember that in this case, the advisory firm is not registered with the State; only the representative is registered with the State. Thus, it cannot be the responsibility of the advisory firm to notify the State since it is not registered there. Only the registered representative must notify the State since only the representative is registered in the State.

If a representative that transacts business in a State terminates employment with a federal covered adviser: A. notice must be given to the Administrator by the representative only B. notice must be given to the Administrator by the federal covered adviser only C. notice must be given to the Administrator by both the federal covered adviser and the representative D. no notice is required to be given to the Administrator

The best answer is C. The Administrator is permitted to modify the Uniform Securities Act in his or her State, and thus, can change any "exempt" transaction. However, the Administrator cannot change the exemption from registration given to the securities specified as exempt under the Act, such as U.S. Government or municipal bonds.

The Administrator, by order, can deny any exemption from registration for which of the following? I A municipal bond issued by another state, sold in the Administrator's state II An isolated non-issuer transaction III A sale of securities to a bank trust department IV A private placement A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

The best answer is A. NASAA has a Model Rule covering "Business Continuity and Succession Planning for Investment Advisers" (Broker-Dealers are already covered under a similar FINRA rule). It states that every investment adviser must establish, implement and maintain a Business Continuity Plan based on the facts and circumstances of the RIA's business model including the size of the firm, types of services provided, and number of locations of the investment adviser. The plan must provide, at a minimum, for: The protection, backup, and recovery of books and records; Alternate means of communicating with customers, key personnel, employees, vendors, service providers and regulators, including providing notice to these persons of significant business interruption, cessation of business activities or death or unavailability of key personnel; Office relocation in the event of temporary or permanent loss of a principal place of business; Assignment of duties to qualified persons in the event of death or unavailability of key personnel; and Minimizing service disruptions and client harm that could result from a significant business disruption.

Under NASAA rules, each Registered Investment Adviser must establish, implement and maintain a Business Continuity and Succession Plan that: A. is based on the investment adviser's business model including the size of the firm, types of services provided, and number of business locations B. ensures that key management personnel have been familiarized with the policies and procedures to be followed in the event of a significant business interruption C. designates the investment adviser's independent outside accountant as the person to take responsibility in the event of a significant business interruption D. announces to the public in local newspapers and on the internet the fact that a significant business interruption has occurred

The best answer is B. The typical arrangement is that an agent is only registered with one broker-dealer, both at the Federal and State level. However, in rare cases, an agent may be "dual registered." This occurs most often if one broker-dealer sells a very limited product range (say limited partnerships only) and the individual wants to be licensed to sell another type of product (say mutual funds) to his customers. He or she can associate with another broker-dealer that only sells mutual funds. To do so, the dual affiliation is disclosed on both the Federal and State registration applications submitted by each of the broker-dealers to register that agent.

Under Uniform State Law, an agent is permitted to sell securities for more than 1 broker-dealer: A. only if the types of securities offered by each broker-dealer are mutually exclusive B. only if the agent is separately registered with each broker-dealer C. only if one broker-dealer solely offers exempt securities and the other broker-dealer solely offers non-exempt securities D. under no circumstances

The best answer is D. The "consent to service of process" appoints the Administrator as attorney for the registrant so that any legal papers can be properly served. It is required for all initial registrations with the Administrator.

Under the Uniform Securities Act, a consent to service of process is filed for each initial: I Agent registration II Broker-dealer registration III Investment adviser registration IV Securities registration A. I only B. II only C. II and III D. I, II, III, IV

The best answer is A. Securities sold through a private placement are unregistered; this is an exempt transaction. Under Uniform State Law, a private placement is defined as an offer to no more than 10 persons in a 12 month period.

Under the Uniform Securities Act, securities that are sold through a private placement: A. are unregistered B. must be registered by filing in the State C. must be registered by coordination in the State D. must be registered by qualification in the State

The best answer is C. Common stock of a New York Stock Exchange listed issuer is exempt from registration under State law under the "blue chip" exemption. While Canadian government bonds are also exempt, the issues of Canadian companies are non-exempt and must be registered. Fixed annuities and contracts to buy fixed annuities are not defined as securities. Finally, endowment contracts are excluded from the definition of a security because they are an insurance product and hence, are not registered.

Which of the following are exempt securities, or are excluded from the definition of a security, under the Uniform Securities Act? I Common stock of a New York Stock Exchange listed issuer II Common stock of a Canadian mining company III Contracts requiring periodic payments of fixed amounts into fixed annuities IV Endowment contracts A. I and II only B. III and IV only C. I, III and IV D. I, II, III, IV

The best answer is C. Choice A is true - a broker-dealer with no place of business in a State that deals with non-institutional clients in the State (this means the general public) must be registered in the State. Choice B is true - a broker-dealer with no place of business in a State that solely offers exempt securities must also register, as must its agents. "Exempt" only means that the securities being offered are exempt from State registration - the broker-dealers and agents that sell exempt securities must still be registered in the State. Choice C is false - an investment adviser with no place of business in a State that only deals with institutional clients is EXEMPT from registration. If the adviser with no office in the State offers its services to the general public in the State, then it must register. Choice D is true - an adviser with no place of business in a State that offers its services to no more than 5 prospective customers in the State within a 12 month period is exempt from registering (the de minimis exemption).

Which statement is FALSE regarding registration and licensing requirement for broker-dealers and investment advisers in a State? A. A broker-dealer with no place of business in a State that solely offers securities to non-institutional customers must register B. A broker-dealer with no place of business in a State that solely offers municipal securities must register C. An investment adviser with no place of business in a State that only deals with institutional customers must register D. An investment adviser with no place of business in a State that offers its services to a limited number of non-institutional customers is exempt from registering in the state