Series 63 Chapter 3

An administrative assistant employed by ABC Industries has accumulated a portfolio that includes U.S. Government securities, a conservative growth fund, and 100 shares of ABC Industries common stock. This assistant has heard a rumor that ABC industries is about to purchase P Corporation and feels that this will be a disaster for ABC Industries. Not wanting to suffer a large loss in their portfolio, the assistant tells her agent about this rumor in confidence and instructs the agent to sell the holding in ABC Industries as soon as possible. Which of the following is true regarding the agent's next actions? A) The agent should inform their supervisor of the situation prior to executing the order B) The agent should not execute the order, but should also keep this client's information totally confidential C) The agent should immediately execute the order, but should then inform their supervisor of possible insider trading D) The agent must execute any sell order a client gives them, and must keep the client's information confidential

A) The agent should inform their supervisor of the situation prior to executing the order While keeping client information confidential is an accepted principle, an agent (registered representative) should not assist another person in breaking the law. If the agent enters order without voicing their concerns to their supervisor, They could put both themselves and their firm at risk of assisting someone who is trading on inside information.

With regard to a security, when the term guaranteed is used, it means: A) No risk B) Payment of principal, interest, and dividends C) Backed by SIPC D) Backed by FDIC

B) Payment of principal, interest, and dividends

Which of the following is NOT required to be part of an investment advisory contract under the Uniform Securities Act? A) The term of the contract B) The advisory fee and any formula for computing it C) A clause granting discretionary authority to the adviser D) The services to be provided

C) A clause granting discretionary authority to the adviser An advisory contract must indicate whether discretionary authority has been granted to the adviser, but the USA does not require such authority to be granted.

Which of the following best describes the meaning of "guaranteed" in the Uniform Securities Act? A) Unlikely to cause a loss for the client B) Backed by the U.S. Government C) Guaranteed as to principal, interest, or dividends D) Guaranteed as to principal only

C) Guaranteed as to principal, interest, or dividends

Which of the following sales practices are violations of the USA or NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers or Agents? I Recommending a very speculative stock to a customer II Sharing inside information with a customer who executes the resulting trade at a different firm III Charging two customers different commissions on trades that are identical in all other respects IV Recommending municipal bonds to a low-income investor A) I and II B) II and III C) II and IV D) II, III and IV

C) II and IV Sharing inside information with anyone other than your manager or compliance officer is typically a violation of both the USA and federal securities laws. Municipal bonds are not a suitable investment for a low-income customer. Municipal bonds traditionally pay lower interest rates than taxable bonds. The only way they are attractive is if the customer is in a high enough tax bracket that the tax savings makes up for the lower interest. Low income customers are better off buying taxable bonds, because, after taxes, their yield will still be higher than the yield on the municipal bonds.

If a client opens a margin account, which of the following must be obtained promptly after the first transaction? A) A hypothecation agreement B) Written discretionary authority C) An executed stock power D) Full payment for the transaction

A) A hypothecation agreement

In the absence of an order from the Administrator prohibiting an IA from assuming custody over customer funds, the IA may take custody: A) As long as prompt notification is provided to the Administrator B) If the IA is also a bank, savings institution, broker-dealer, or trust company C) As long as they notify the Administrator in advance of their intention to do so D) With no restrictions

A) As long as prompt notification is provided to the Administrator IAs may accept custody of customer funds without prior notification to the Administrator (as long as the Administrator has not specifically prohibited them from doing so) but must notify the Administrator promptly after assuming custody. Recall that the financial and reporting requirements for IAs with custody are greater than for those who do not assume custody.

Which of the following activities by an agent constitutes market manipulation? I. Creating the impression that a security is actively trading II. Providing false market quotations III. Recommending an investment without considering the client's risk tolerance IV. Excessive trading in a client's account A) I & II B) II & III C) I & IV D) II & IV

A) I & II

Under the Uniform Securities Act, an investment adviser may take and hold client funds and/or securities if: I The state Administrator has not prohibited this action II The adviser notifies the state Administrator III The adviser is registered as a broker-dealer IV The adviser sends monthly statements to the clients A) I and II B) I, II, III and IV C) I, II, and III D) II and III

A) I and II An investment adviser may only hold client funds if the State Administrator is notified of such action, and such action is not prohibited by the state Administrator. The adviser need not be registered as a broker-dealer.

Under the Uniform Securities Act, the term guaranteed can be used to describe the following: I Performance II Principal III Interest IV A security where the customer cannot lose their investment A) II and III B) I and III C) II and IV D) I and IV

A) II and III

According to the Uniform Securities Act, which two of the following are true regarding an investment adviser's responsibility related to delivery of its brochure? I It may be delivered within five business days of entering into an investment advisory contract II It may be delivered at the time of entering into an investment advisory contract if the advisory client has a right to terminate the contract without penalty within five business days III It may be delivered not less than 48 hours prior to entering into any investment advisory contract IV It must be delivered not less than 48 hours prior to entering into any investment advisory contract if the advisory client has a right to terminate the contract without penalty within five business days A) II and III B) I and III C) II and IV D) I and IV

A) II and III An investment adviser must furnish each advisory client with a written disclosure statement not less than 48 hours prior to entering into any investment advisory contract with such client, or at the time of entering into any such contract if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.

An agent and their sibling wish to open a joint cash account. Under what circumstances is this permissible? A) The agent's sibling and the employing broker-dealer must give written permission B) The employing broker-dealer must give written permission and the siblings must share profits equal to their contribution C) The client must give written permission and they can share profits in any way they agree to in writing D) The client and the employing broker-dealer must give written permission and the siblings must share profits equally

A) The agent's sibling and the employing broker-dealer must give written permission An agent may share in the profits or losses in a client's account if there is prior written approval by the client and the agent's employing broker-dealer. Profits and losses do not have to be shared in proportion according to state law.

Which type of cybersecurity preparedness helps firms protect customer information from being accessed through third party firms? A) Vendor management B) Technical safeguards C) Incident response planning D) Data loss protection

A) Vendor management

If an agent suggests in her oral presentation that the SEC approves a particular security, this is: A) Wrong, because only State Securities Commissioners approve securities B) A criminal offense C) Permitted only with unsolicited transactions of securities D) Not allowed until the SEC releases the security issue for sale

B) A criminal offense Every prospectus contains an SEC disclaimer that states that, "these securities have not been approved or disapproved by the Securities and Exchange Commission or by any state securities commission nor has the Securities and Exchange Commission or any state securities commission passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense."

The Customer Identification Program is: A) A program that provides information to the IRS for tax purposes B) A mandatory program for broker-dealers to verify the identity of customers C) A program that provides customers the ability to verify the firm's abilities D) A program that mandates investors have 3 forms of valid identification to open an account

B) A mandatory program for broker-dealers to verify the identity of customers

An agent hears from a friend who is on the board of directors of a company that it may be taken over at a stock price higher than its current market price. The agent has confidence in his friend and proceeds to recommend the stock to a customer without reference to the possible news. The actions of this agent: A) Requires disclosure of the source of the information the recommendation was based upon B) Are prohibited C) Are allowed only with institutional investors D) Are acceptable

B) Are prohibited Non-public information is not allowed to be passed along or acted upon.

All securities sold by an agent must be: A) Approved by the Administrator B) Authorized and approved by the agent's employing broker-dealer C) Unsolicited and non-exempt D) Authorized by the SEC

B) Authorized and approved by the agent's employing broker-dealer

According to the Uniform Securities Act, the advisory brochure of a registered investment adviser must include all of the following, except: A) Fees to be charged B) Detailed information about investment returns expected C) Details of the adviser's background and experience D) Types of services offered

B) Detailed information about investment returns expected The advisory brochure includes the adviser's background and experience, types of services offered, fees to be charged, and more. Providing information regarding expected returns is a prohibited practice.

Which of the following is an essential characteristic of a churning violation? A) Unprofitable transactions B) Excessive transactions C) Abuse of discretion D) Unauthorized trades

B) Excessive transactions

The Prudent Man Rule requires a fiduciary to: I.Make investment decisions based on the portfolio as a whole II.Always choose the most conservative investments III.Consider the needs of the beneficiary IV.Obtain the beneficiary's prior permission to complete any transaction A) I & II B) I & III C) II & III D) II & IV

B) I & III

Which of the following are true characteristics of accounts with which there is an agreement for a client and agent to share in profits? I Depositing client funds into an agent's personal checking account is prohibited II Only under this circumstance is it permissible for the client and agent funds to be commingled​ III All sharing must be in direct proportion to the contributions made by each party A) I and III B) I and II C) II and III D) I, II, and III

B) I and II An RR and a customer can share in profits and losses in the same account. Under the USA, the sharing arrangement does not need to be in proportion to the contributions placed into the plan by each owner. Even though under normal circumstances an agent cannot commingle a customer's money with the firm's money, OR the customer's securities with the firm's securities, through 'sharing in profits and losses', the customer and the agent can share the same account. Remember the agent can never deposit customers' money into the agent's personal account.

Which of the following are prohibited sales practices under the Uniform Securities Act? I Recommending the purchase of a mutual fund based on an upcoming dividend II Explaining to a customer that you are a financial expert as demonstrated by passing a rigorous qualifications exam III Explaining to a customer that the interest and principal payments on a U.S. T-bill are guaranteed by the government IV Charging a customer a $25 commission on the purchase of $100 of stock A) II and III B) I and II C) III and IV D) II, III and IV

B) I and II Recommending the purchase of a mutual fund based on an upcoming dividend (selling dividends) is prohibited under the USA, since the customer receives no net benefit. Agents are prohibited from exaggerating the impact of passing a qualification exam; they may simply state that they are registered or licensed. Although $25 is large in percentage terms on a $100 stock purchase, firms do have minimum commission rates. For very small trades such as this one, the agent should take extra care to explain to the customer the size of the commission involved relative to the amount of the trade.

Which of the following are required in order for an investment adviser to execute agency cross trades for a customer? I. A blanket authorization must be renewed annuallyII. The client does not need to receive a disclosureIII. The client must have the right to revoke a blanket authorization at any timeIV. The adviser must not recommend a transaction to both parties to the agency cross A) I & III B) III & IV C) II & III D) I & IV

B) III & IV An annual summary must be provided to the client. Disclosure of compensation is required upon request. If a blanket authorization has been signed by the client, they must be notified of the ability to revoke that authorization and a cross cannot be recommended to both parties of the transaction. There is no requirement to disclose the name of the other party involved in the cross.

When firms use the internet to provide investors with general information about their products and services, they must do all of the following, except: A) Comply with regulations pertaining to communications B) Provide investors with a prospectus C) Review all information prior to dissemination D) Ensure the information is accurate

B) Provide investors with a prospectus This is considered general dissemination of information and is not considered effecting or attempting to effect securities transactions. No product recommendations or investment advice are supplied, therefore, there would be no prospectus requirement. The other choices are all necessary when firms disseminate general information through their websites or through social media.

Which of the following is not a permissible soft dollar expenditure? A) Computer B) Seminar Tuition C) Investment research software D) Investment publication subscription

B) Seminar Tuition

Which of the following is not a method of cyberattack? A) Denial of service B) Stabilization C) Malware D) Phishing

B) Stabilization

An agent receives a call from one of his largest customers that is also a family friend. The customer is calling to purchase 10,000 shares of P industries for their own account. The customer also instructs the agent to purchase 1,000 shares for his wife and 500 shares for his sister. Which of the following statements is correct? A) The agent may only execute the trades in Karl's personal account and his wife's account B) The agent may only execute the trade in the customer's personal account C) The agent may execute all three trades D) The agent may execute all three trades provided he pays for them with his own funds

B) The agent may only execute the trade in the customer's personal account Since we are not told otherwise, we must assume that the customer does not have trading authority in either his wife's or sister's account. Only account owners or other individuals given written permission to trade may execute transactions in an account.

An agent who guarantees a security does which of the following? A) Guarantees the interest or dividends only B) Violates the anti-fraud provisions of the USA C) Guarantees all scheduled payments D) Recommends it as a sure thing

B) Violates the anti-fraud provisions of the USA

An IAR with BB Advisers, has provided one of his clients with a research report on EFG Corporation. This distribution is prohibited by the Uniform Securities Act if it: A_ Is a report prepared by BBA and the IAR fails to disclose that fact B) Was prepared by a third party and the IAR fails to disclose that fact C) Was prepared by a consultant compensated by BBA D) Is a published report approved by a principal of BBA

B) Was prepared by a third party and the IAR fails to disclose that fact Providing a report or recommendation to any advisory client prepared by someone other than the adviser without disclosing that fact is prohibited. This prohibition does not apply to a situation where the adviser uses published research reports or statistical analyses to render advice or where an adviser orders such a report in the normal course of providing service.

Which of the following best defines affinity fraud? A) A tool used by people to provide a safe harbor for investments B) A tool that helps investors locate similar investors via social media C) A tool used by criminals to gain the trust of victims by claiming to be members of the same identifiable group D) A tool used by criminals to access databases at broker-dealers

C) A tool used by criminals to gain the trust of victims by claiming to be members of the same identifiable group

An investment adviser is considering lending money to one of its clients. According to the Uniform Securities Act and NASAA's Model Rule on Unethical Business Practices of Investment Advisers, in which two of the following situations is this activity permissible? I The client is an affiliate of the adviser II The client is an accredited investor III The adviser is a financial institution in the business of lending IV The adviser is solely in the investment advisory business A) II and III B) II and IV C) I and III D) I and IV

C) I and III

Which of the following sales practices are violations of the Uniform Securities Act and/or NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? I Guaranteeing your customer a profit on their first transaction at the firm II Offering a private security transaction and informing your broker-dealer promptly III Explaining to your customer that you are FINRA-approved as an investment adviser IV Engaging in arbitrage with a stock position and a convertible bond of that same corporation A) I and II B) III and IV C) I and III D) II, III and IV

C) I and III An agent can engage in offering a private security transaction to a customer, they must promptly notify their firm of the transaction, and only need to get written permission from their firm if compensation is involved. Arbitrage is the simultaneous purchase and sale of two related securities and is not a violation under the USA. An agent may never state that the SEC, FINRA, or any other regulator "approves" of their activities. Additionally, an agent can never guarantee a profit or a loss to a client, this is a "willful violation" of the Act.

P Strategies is an IA registered in State V. P has been acquiring shares of F Pharmaceuticals for its own investment account. Under what circumstances must P notify customers of its investments in F? I In principal transactions II If P is recommending the purchase of F to customers III If P is encouraging customers to sell their stock in F IV If P is trading on nonpublic information A) I, II, III and IV B) II and III C) I and III D) I, II and III

C) I and III Investment advisers are not generally required to inform customers of their own investments, unless the adviser is engaging in a principal transaction with the customer or the adviser's own investments are contrary to the advice given to clients, such as buying a stock while encouraging a customer to sell the same stock.

A financial planning firm is in the process of revising its fee structure. Which of the following methods of compensation being considered are acceptable under the Uniform Securities Act and NASAA Statements of Policy and Model Rules? I Flat fee II Hourly rate III Percentage of assets under management IV Percentage of profits earned in the account A) I, II, III and IV B) I and II C) I, II and III D) III and IV

C) I, II and III Investment advisers typically charge a percentage fee based on the value of assets under management. In other cases, the fee is flat or based on an hourly rate. Generally, IAs are prohibited from charging a fee based on account appreciation or capital gains generated within the portfolio.

Under the Customer Identification Program, all of the following are acceptable forms of identification, except: A) Valid driver's license B) Unexpired passport C) Insurance card D) Valid military ID card

C) Insurance card An insurance card would not be considered an acceptable form of identification since they are not regulated. Also note that a Social Security card is not an acceptable for of identification under the CIP.

Which of the following is not required in the customer disclosure document when a broker-dealer shares space with a bank? A) The securities are not guaranteed nor are they in any other way obligations of the bank B) The securities are not FDIC insured C) The Securities are SIPC insured D) The securities carry investment risk

C) The Securities are SIPC insured While the disclosure document must state that the securities are NOT FDIC insured, it is not required to state that they are covered under SIPC. The broker-dealer must make every effort to obtain a signed disclosure document from the customer. However, the broker-dealer is not required to obtain it if the customer refuses.

A customer was referred by a bank employee to its affiliated broker-dealer, located across the lobby, and purchased several mutual funds. Which of the following statements regarding this transaction is correct? A) The bank employee must be registered as an agent for the broker-dealer B) This is an unlawful transaction C) The agent must obtain a signed disclosure agreement from the customer D) The customer's purchase is insured by the FDIC

C) The agent must obtain a signed disclosure agreement from the customer The disclosure must be obtained, and states that the securities are not federally insured, not obligations of the bank, and that they are subject to investment risks.

An agent who guarantees a security does which of the following? A) Guarantees the interest or dividends only B) Recommends it as a sure thing C) Violates the anti-fraud provisions of the USA D) Guarantees all scheduled payments

C) Violates the anti-fraud provisions of the USA

Announcing to a client that a registered security is soon to be listed on an exchange when you have no knowledge of the facts, is: A) A violation of anti-churning statutes B) Permitted if the registered representative has discretionary authority C) A lawful sales technique D) A violation of the Act

D) A violation of the Act

A customer of a registered broker-dealer bought $50,000 of BCD, Inc. stock in her margin account, but she did not pay for the entire transaction by the settlement date. The broker-dealer lent her the balance of the purchase price. How can this practice be best described? A) Unethical B) Freeriding C) Manipulative D) Acceptable

D) Acceptable This practice is perfectly acceptable. Clients do not have to pay in full in a margin account where the broker-dealer finances part of the transaction for the customer.

A method used by con artists to gain the trust of people by identifying with a large target group is: A) DoS B) Identity theft C) Phishing D) Affinity Fraud

D) Affinity Fraud

An agent of a broker-dealer may split a commission on a securities transaction with: A) An insurance agent B) Any employee of the same broker-dealer C) An attorney D) An agent of an affiliated broker-dealer

D) An agent of an affiliated broker-dealer

Under the Uniform Securities Act, which of the following statements is true regarding an investment adviser having custody of client funds or securities? A) An investment adviser that takes custody of client funds or securities may not charge a fee for this service B) An investment adviser may not have custody of client funds or securities C) An investment adviser may not have custody of client funds or securities unless it is also registered as a broker-dealer D) An investment adviser that takes custody of client funds or securities must notify the Administrator

D) An investment adviser that takes custody of client funds or securities must notify the Administrator Investment advisers may not have custody of client securities or funds if the Administrator prohibits it. If the Administrator does not prohibit advisers from having custody, they must notify the Administrator promptly if they do take custody of client assets.

Promising to reimburse a client when a loss occurs, or pledging a minimum rate of return, is which of the following prohibited practices? A) Converting B) Rebating C) Soliciting D) Guaranteeing

D) Guaranteeing

Under the anti-fraud clause of the Uniform Securities Act, it is unlawful to: I. Employ any device, scheme, or artifice to defraud II. Make any untrue statement of fact III. Omit a material fact IV. Engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person A) II only B) I, II, and IV only C) I, II, III, and IV D) I, III, and IV only

D) I, III, and IV only It is not fraudulent to make an untrue statement of an immaterial fact when selling securities. Therefore "make any untrue statement of fact" is not considered fraud.

A potential investor met with an investment adviser representative on Friday afternoon. The investor stated that they are ready to open an account with the adviser immediately. The IAR gave the investor a copy of the firm's brochure and brochure supplement. Which of the following would be true in this situation? I The adviser must wait 48 hours before executing a contract with the new customer II The adviser may execute a contract with the customer immediately if the customer is given 5 business days right to rescind without penalty III The adviser may execute a contract with the customer on Monday if the customer is given 5 business days right to rescind without penalty IV The adviser may execute a contract with the customer on Monday and need not give 5 business days right to rescind without penalty A) I and IV B) I and III C) II and III D) II and IV

D) II and IV The investment adviser brochure rule states that an IA must present each new customer with a copy of the IA's ADV Part 2, or a document (brochure) containing substantially the same information as the ADV Part 2. This document must be provided to the customer either: a. At least 48 hours prior to execution of an advisory contract (Choice IV), or; b. At time of execution of the contract, provided the customer has five business days to cancel the contract without penalty (Choice II)

Concerning investment recommendations, no person may make security sales or purchases based upon the use of: A) Credible sources of information B) Material information C) The advice of their broker D) Material inside information

D) Material inside information

Which one of the following agent's actions are prohibited? A) Referencing information contained in the prospectus B) Referencing a market letter published by your competitor C) Referencing a company's current income statement D) Referencing material non-public information

D) Referencing material non-public information

A client calls his broker and says his wife will be calling later in the day with an order. The client requests that the broker honor the deal and send them a third party trading authorization form to be returned as soon as possible. What should the broker do? A) Tape record the conversation with John and then place the order B) Place the order, since the customer has approved it C) Get the approval of his principal D) Refuse the order until he has a written trading authority

D) Refuse the order until he has a written trading authority It is unlawful for an agent to effect on order placed by a third party without a signed trading authorization.

An IAR has a client with a non-discretionary account. This client has placed an order to invest $50,000 in a "blue chip drug stock" whenever the IAR thinks there is an opportunity. According to NASAA Model Rule on Unethical Business Practices Of Investment Advisers, Investment Adviser Representatives, And Federal Covered Advisers, which of the following is true? A) The IAR can execute this order without additional documentation B) This order cannot be accepted in a non-discretionary account C) The IAR must obtain written discretionary authority within 10 calendar days of the transaction D) The IAR must obtain written discretionary authority within 10 business days of the transaction

D) The IAR must obtain written discretionary authority within 10 business days of the transaction Broker-dealers would be able to execute this without additional documentation. Be cautious of who the question is referring to (IA/IAR vs BD) because they have different sets of rules and regulations.

ABC Brokerage has several hundred shares of a specific company in its inventory. Although ABC knows that this company is teetering on the brink of bankruptcy, it continues to recommend this stock to its customers without telling them about the company's financial condition. Under what circumstances would this NOT be a violation of the Uniform Securities Act? A) The security being recommended is a federal covered security B) None of ABC's clients accept its recommendation C) ABC's account form contains a clause relieving it of any liability under blue sky laws D) There are no circumstances under which this would not be a violation of the USA

D) There are no circumstances under which this would not be a violation of the USA If a broker-dealer has material information about a company and then makes recommendations contrary to that information, it is performing a sales practice that is prohibited by the Uniform Securities Act. If the action was done with intent to defraud the customer, it would be considered fraudulent.

According to the Uniform Securities Act, fraud may have occurred: A) Only if a sale of $10,000 or more occurred B) Only if a sale occurred C) Only if an offer occurred D) Whether a sale occurred or not

D) Whether a sale occurred or not