Series 63 exam

If a prospective client wanted to know what type of investment strategies are used by an investment adviser, that information would be found in the adviser's: A. Form ADV Part 1A B. Form ADV Part 1B C. Form ADV Part 2A D. Form ADV Part 2B

(C)

A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to: A) loan out the customer's margin securities B) commingle the customer's securities with securities owned by the firm C) lend the customer money D) hypothecate securities in the account

(A)

Under the USA, which of the following statements regarding the registration of a successor firm is(are) TRUE? A. The appropriate filing fee must be included with the application B. The successor firm must be in existence before the filing of the application C. The registration of the successor firm will be effective until December 31st renewal date D. All of the above

(C)

When a brokerage firm sells stock from its own inventory, it is acting in the capacity of a(n): A) principal and charges a commission. B) principal and charges a mark-up. C) agent and charges a commission. D) agent and charges a mark-up.

A broker dealer that purchases securities for, or sells securities from, its inventory is acting in the capacity of a principal. Principals charge mark-ups on sales from inventory. When acting in the capacity of agent (facilitating a transaction between a buyer and seller), the broker/dealer receives a commission. Reference: 3.5.2.2 in the License Exam Manual. (B)

Disclosure to customers of a broker-dealer's control relationships is required in: 1. agency transactions 2. principal transactions 3. exempt transactions

All 3. The nature of any control relationship or conflict of interest must be disclosed to customers, regardless of the capacity in which the firm acted or the type of transaction made.

It has long been custom for broker-dealers to provide research and other customer-related services to investment advisers who direct brokerage business to them. Details about what is and what is not allowable are found in: A) the Dodd-Frank Act of 2010 B) Section 206 of the Investment Advisers Act of 1940 C) Section 414 of the Uniform Securities Act of 1956 D) Section 28(e) of the Securities Exchange Act of 1934

It is Section 28(e) of the Securities Exchange Act of 1934 that deals with the topic of soft-dollar compensation from broker-dealers to investment advisers. (D)

In which of the following situations did an agent commit fraud? A) An agent knowingly sold a nonexempt, non-registered security to a retail client for whom the security was deemed suitable. B) An agent sold shares in a company to a client by omitting immaterial information during the discussion, so as not to distract the client from making the purchase. C) A client claims an agent sold him unsuitable securities. D) On review of his files, an agent discovered he had sold a nonexempt, unregistered security to a retail client.

Fraud requires the intent to deceive. The agent knowingly deceived the client by selling unregistered securities, therefore committing a securities fraud. An agent is not required to discuss all information, only that which is material information. The term retail client refers to individual or non-institutional clients. (A)

A broker-dealer operating on the premises of a bank would have to make certain disclosures in an advertisement unless it was: A) published in a general circulation magazine B) only sent to existing customers of the bank C) a television spot of 30 seconds or less D) a radio spot of 30 seconds or less

The required disclosures for broker/dealers operating on the premises of a bank do not have to be disclosed in a radio advertisement that does not exceed 30 seconds in length. (D)

When an agent's permanent residence address changes, updates must be made to the information on file with the regulatory bodies. The proper procedure is to file a: A. Form U4 within 30 days B. Form U4 within 45 days C. Form U5 within 30 days D. Form U5 within 45 days

(A)

Risible Research and Recommendations, Inc. (RRR) is an investment adviser registered in State P. Last year's updating amendment to its Form ADV showed AUM of $85 million. Business has been very good this year and it is anticipated that the next updating amendment will show AUM of about $125 million. The effect of this would be: A. RRR would continue its registration in State P B. RRR would continue its registration in State P while also registering with the SEC C. RRR would have the choice of registering with the SEC or remaining registered in State P D. RRR would have 90 days to register with the SEC and withdraw its registration from State P

(D)

Which of the following actions should be taken by an agent when a client decides to open an options account? A) Obtain approval from the designated options supervisor to open the account no later than 1 business day after the first options trade B) Before the first options trade, review with the client the risks involved when trading options C) Provide an options disclosure document no later than 15 days after the first trade D) Assure that the options agreement has been signed prior to the first trade takes place

Before the first options trade, review with the client the risks involved when trading options. It is imperative that suitability and risk be addressed with the client before allowing options trading to take place. The ODD must be delivered no later than with account opening, and the signed options account agreement must be returned no later than 15 days after the account opening. An options account must be approved by a designated supervisor prior to any trading taking place in the account. (B)

All of the following activities and communications would fall outside the definition of a recommendation EXCEPT: A) a broker-dealer provides research tools on its website that allow customers to screen through all Nasdaq securities B) a broker-dealer sends an email to its more conservative clients stating this would be an excellent time to invest in public utility stocks, and includes a list of those paying the highest dividends C) a broker-dealer's website places a search engine in a prominent spot on its landing page that can be used to access charts of multiple stocks in the large-cap sector D) a broker-dealer's website was created to be available to customers that contains a link to an electronic library of research reports that contains buy-sell recommendations from the author of the research reports

Specificity, such as a list of securities, invariably results in a communication being deemed a recommendation. All of the other choices given would generally be viewed as falling outside the definition of recommendation. (B)

Under the Uniform Securities Act, an investment adviser who has custody of client securities or funds must do all of the following EXCEPT: A) Have client funds and securities examined at least once a year by an independent public accountant on a surprise basis B) Maintain one or more separate bank accounts where client funds are deposited and keep customers' securities clearly marked and segregated C) Send clients itemized statements no less frequently than every 6 months detailing the funds and securities in the adviser's custody at the end of the period D) Notify the Administrator in writing that the adviser is maintaining custody

The adviser must send clients quarterly (not semi-annual) itemized statements listing the funds and securities in the adviser's custody at the end of the period and all transactions during the period. The adviser must deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held. The adviser must also arrange for an annual, surprise audit by an independent public accountant of client funds and securities. The adviser must notify the Administrator that the adviser has or may have custody of client securities or funds. (C)

All of the following would be prohibited practices under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers EXCEPT: A) maintaining custody of customer's funds and securities without notification to the Administrator B) charging fees that were higher than customary, but offering a toll-free contact number to compensate for the higher fees C) accepting an order from a client's spouse shortly after receiving a written trading authorization D) using a testimonial in an advertisement

With written trading authorization, orders may be accepted from the designated person. Offering a toll-free number to justify higher fees? In the 21st century, every firm has them and most clients don't need them because they have unlimited calling as part of their phone plans. Testimonials may never, ever be used by investment advisers. Broker-dealers can, but not IAs. If an IA intends to maintain custody of client assets, either directly or through a qualified custodian, notification must be made to the Administrator; permission is not required. (C)

A person who is vested with legal rights and powers to be exercised for the benefit of another is known as: A) a fiduciary B) a sponsor C) a beneficiary D) a broker

(A)

Thomas Hobson is the founder and principal owner of Hobson Investment Strategies (HIS). HIS has its principal office in State A and also has branches in States B, C, and D. On its last annual updating amendment, HIS reported AUM of $300 million. HIS maintains custody of client assets. As a result, when it comes to meeting financial requirements, Hobson's choice would be adhering to those of: A. The SEC B. State A C. The state with the highest requirements D. The state where the custody is maintained

(A)

What is the official designation of the person or agency that enforces the USA in each state? A. Administrator B. Transfer Agent C. Registrar D. Issuer

(A)

Wilson Erving works for Broad Street Limited (BSL) a registered investment adviser. Wilson limits his advice exclusively to equity securities traded on the Nasdaq Stock Market. Under the USA, Wilson: A. Must register as an IAR B. Does not need to register as an IAR C. Would need registration as a federal covered IAR D. Is not covered by the anti-fraud rules because these are federal covered securities

(A)

Write A if the person is an agent and B if not. A person who effects transactions in municipal securities on behalf of a broker-dealer

(A)

Write A if the person is an agent and B if not. An agent's salaried secretary who takes buy and sell orders from clients

(A)

Write A if the person is an agent and B if not. An individual who represents her nonexempt employer in the sale of its securities to existing employees for a commission

(A)

Write A if the phrase describes an investment adviser that must register under the USA and B if it does not. Broker-dealer that charges a fee for providing investment advice over and above commissions from securities transactions

(A)

Write A if the phrase describes an investment adviser that must register under the USA and B if it does not. Investment adviser that manages $10 million in assets

(A)

Mammon Money Managers (MMM) has its principal office in State A and is also registered in States B, C, and D. MMM exercises discretion in client accounts. As a result, MMM would have to meet the net worth or bonding requirements of: A. The SEC B. State A C. The State with the highest requirement D. Each state

(B)

Under the USA, the definition of investment adviser would include: A. Bank B. A lawyer charging a fee to advise clients how to invest an injury settlement she just won for them C. An investment adviser representative D. None of the above

(B)

Under the USA, which of the following automatically becomes registered as an agent when a broker-dealer registration becomes effective? A. Only the designated supervisory principal B. Any partner, officer, or person of similar status or similar function who activities fall under the definition of an agent C. All agents currently registered with FINRA through that broker-dealer D. No one

(B)

Under the Uniform Securities Act, the term agent would NOT include an individual who represents an issuer in effecting non-exempt transactions in any security: A. Issued or guaranteed by any federal credit union B. Issued or guaranteed by any bank organized under the laws of the United States C. Issued or guaranteed by a regulated public utility or public utility holding company D. Of an issuer equal to or senior to common stock which is a federal covered security

(B)

Under the Uniform Securities Act, the term agent would include: A. An individual who represents an issuer in exempt transactions B. An individual who represents a broker-deal in a transaction in an exempt security C. A receptionist for a broker-dealer who directs calls for trade information to the appropriate individual D. The vice president of human resources for a national brokerage firm

(B)

Write A if the person is an agent and B if not. A person who represents an issuer in effecting transactions with underwriters

(B)

Write A if the person is an agent and B if not. An employee of a bank whose job is selling securities issued by the bank

(B)

Write A if the phrase describes an investment adviser that must register under the USA and B if it does not. Publisher of a monthly investment newsletter with an annual subscription fee that does not render specific advice based on the needs of any subscriber

(B)

Write A if the phrase describes an investment adviser that must register under the USA and B if it does not. Publisher of a newspaper that renders general financial advice

(B)

Under the USA, the term investment adviser representative would NOT include: A. An officer of a registered investment advisory firm whose responsibility includes supervision of solicitors B. An associated person of the firm who, from time to time, makes specific recommendations to clients C. A payroll clerk employed by an advisory firm whose responsibilities include computing the earnings of investment adviser representatives D. A new employee of an advisory firm who has only been able to sign up 2 clients in his first 4 months.

(C)

Under the Uniform Securities Act, a broker-dealer is defined as any person who: A. Buys securities B. Sells securities C. Is in the business of effecting securities transactions for its own account or for the account of others D. Is registered with the SEC

(C)

Which of the following is NOT considered one of the three prongs making a person an investment adviser? A. Giving advice on securities B. Being in the business of giving advice C. Executing trades in recommended securities D. Receiving compensation for the advice rendered

(C)

Under the Uniform Securities Act, the term agent would include an individual who represents an issuer in effecting non-exempt transactions in: A. A city of Montreal General Obligation bond B. Common stock offered by a commercial bank C. A New Jersey Turnpike revenue bond D. Commercial paper with a 19-month maturity

(D)

True or False: A broker-dealer registered in several states must meet the net capital standard of the state with the most stringent requirement.

(F)

True or False: The GEMCO Employees Retirement Plan currently has assets of $750,000. Under the Uniform Securities Act, the plan would be considered an institutional investor

(F)

True or False? A Canadian broker-dealer, properly registered with the Administrator of the province in which he is headquartered and with no office in the state, may do business with his customers who are on a skiing vacation in Vail without registering with the Colorado Administrator.

(F)

True or False? A consent to service of process must be submitted with each renewal application.

(F)

True or False? An Administrator may establish net capital requirements for agents of broker-dealers

(F)

True or False? An administrative employee who receives specific compensation for offering investment advisory services is not an investment adviser representative

(F)

True or False? An employee of an investment advisory firm is an investment adviser representative if his duties are limited to clerical activities

(F)

True or False? An investment adviser representative must register with the SEC if she has clients with assets of $110 million or more under management

(F)

True or False? When a securities professional registers in a state, he must provide the Administrator with a list of all states in which he intends to register

(F)

True or False: A person not defined under the USA as a broker-dealer in the state need not register as such.

(T)

True or False: In general, a person who effects transaction in securities for itself or for the account of others in the course of business must register in the state as a broke-dealer

(T)

True or False: Under the USA, a broker-dealer with no place of business in this state, who is transacting business with an established customer who is on vacation in this state, is not considered a broker-dealer in this state.

(T)

True or False: Under the Uniform Securities Act, the city of Atlanta would be included in the definition of the term person.

(T)

True or False? An employee of an investment advisory firm is an investment adviser representative if his duties involve making investment recommendations

(T)

A client purchased a security per an agent's recommendation, and soon after, it declined by more than 50%. To compensate for the loss, the agent promised the client 1,000 shares in an oversubscribed IPO. In this situation, the agent has: A) engaged in an unethical business practice as outlined in NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents B) acted properly because he did not guarantee the profit on the IPO C) made a promise that he will not be able to fill D) acted properly provided the client pays for the IPO in full prior to resale for a profit

First of all, NASAA's Statement of Policy prohibits the compensation of clients for losses on accounts. Provided the agent made the recommendation on good investment grounds per the provisions of the Uniform Securities Act, the agent has no liability toward the client. The nature of stocks is to fluctuate in value. Secondly, that same Statement of Policy requires that oversubscribed IPOs be fairly allocated among clients. The actions of this agent would not pass the fairness test. We have no way of knowing if the agent can fulfill this promise, but, in any case, the activity is unethical and by far the better answer choice. (A)

One of the unethical practices under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents is market manipulation. Which of the following are examples of a broker-dealer engaging in that practice? 1. Arbitrage 2. Churning 3. Matched orders 4. Wash trades

Matched orders occur when one or more broker/dealers engage in buying and selling between themselves for the purpose of creating the misleading appearance of increased activity in a security. A wash trade is an attempt to manipulate a security's price by creating an apparent interest in the security that really does not exist. Arbitrage is the simultaneous buying and selling of the same security in different markets to take advantage of different prices. It is not a form of market manipulation. Churning is a prohibited activity, but has nothing to do with the market, just a client's account. (3 & 4)

Which of the following statements regarding brokerage and advisory activities under the USA are TRUE? 1. It is not unlawful for an investment adviser or broker-dealer to employ any device, scheme, or artifice to defraud in the sales of securities to institutional investors because the USA is designed to protect individual investors. 2. Under the USA, it is unlawful for an investment adviser to deceive a person when an advisory relationship does not exist. 3. Sanctions for both investment advisers and broker-dealers include administrative proceedings, judicial injunctions, and civil and criminal prosecutions. 4. It is unlawful for any person, whether technically defined as an investment adviser or not, to deceive another person for compensation as to the value of securities.

Sanctions for violations are administrative proceedings, judicial injunctions, and civil and criminal prosecutions. It is also true that any individual, whether technically defined as an adviser or not, may not deceive another person when providing investment advice if he is compensated for providing the advice. (3 & 4)

An investment adviser representative lends $10,000 to her brother-in-law who is her client and works in the firm's IT department. He signs an agreement to pay her back in 5 years at below market interest. This arrangement is: A) acceptable because she made the loan to a fellow employee of the firm B) acceptable if any profits and losses in the customer's account are shared in proportion to each party's financial contribution and with the firm's prior permission C) unacceptable as the interest rate is too low D) acceptable because the client is considered an immediate family member

The April 18, 2004, NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers permits IAs or their IARs to lend money to associated persons with the same firm. Unless there is an exception like this, you can never lend money to an immediate family member who is a client. Where is anything written in the question about sharing profits and losses? This is just an interest-bearing loan—there are no profits or losses to consider. (A)

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT: A) charges for wiring funds B) commissions on unsolicited trades C) account maintenance fees D) account transfer fees

There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1) commissions 2) markups and markdowns 3) advisory fees for those firms that are also registered as investment advisers. (B)

NASAA has a Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents in Connection with Investment Company Shares. One of the things the Policy does is restrict statements that may be made when referring to a mutual fund as "no-load". Under the Policy, one could claim or imply that a mutual fund is no-load as long as the fund did not have a: 1. contingent deferred sales load 2. 12b-1 fee in excess of .25% of average net fund assets per year 3. service fee in excess of .25% of average net fund assets per year 4. front-end load in excess of .25% of the purchase price

There are four things that will prohibit a fund from being referred to as no-load: 1) ANY front-end load 2) Any CDSC 3) A 12b-1 charge in excess of .25% of average net fund assets per year 4) A service fee in excess of .25% of average net fund assets per year So, what is wrong with choice IV? Any front-end load, even one LESS than .25%, will lead to a prohibition against using the term no-load. (B) I, II, and III

An agent has a part time job as an usher at an NFL football team's stadium. His primary function is to provide assistance to those who are seated in the luxury boxes. While serving drinks, he overhears a discussion about a planned hostile takeover bid that will be made during the coming week. What should an agent do when he comes across material, non-public information like this? A) Keep it confidential B) Report it to the firm's trading desk C) Only use the information for trades in his personal account D) Only use the information for his discretionary account clients

When a securities professional is made aware of material non-public information, there are only two choices on the exam that can be correct: (1) keep it confidential or (2) report it to the appropriate supervisor (not the trading desk—can you imagine what traders would do with this information?) (A)

A customer placed an order with an agent to sell 100 shares of ABC and he instructed the agent to limit any losses. The agent did not have written discretionary authority over the account and waited to sell the shares, hoping to get a better price for the customer. Several hours later, the price of the shares went down, so the agent sold 50 ABC shares to limit the customer's losses. According to the Uniform Securities Act, this is a: A) permissible activity because the agent is obligated to get the best price for the customer B) permissible activity because the agent does not need written authorization to determine price or time of the order C) violation because the agent is required to execute sell transactions immediately after the order is placed D) violation because the agent exceeded his authority

violation because the ​agent acted without discretionary authority. An ​agent may determine the price and timing of a transaction without discretionary authority. As a result, the ​agent is not necessarily required to execute a transaction immediately after an order is placed. In this situation, the ​agent acted without authority when he changed the amount of the security sold. (D)