Finra Series-63 Exam Practice Test Instant Access

Question 1

Switch Advisory is a small investment adviser partnership registered in a single state. A larger investment adviser firm, Bait Investment Adviser, is registered in the same state as well as two other states. Bait has offered to buy out three of Switch's partners who want to retire. This will give Bait a 60% ownership in Switch Advisory.

Which of the following statements are true?

I . Switch Advisory must obtain the approval of its clients before the partners can sell their interests to Bait.

II . Switch Advisory must notify the state Administrator of this event.

III . Switch Advisory must notify their clients of this event, but does not need the clients' approval.

IV . Switch Advisory must notify the SEC of this event.

AI only

BI and II only

CII, III, and IV only

DI, II, and IV only

Answer : B

Only Selections I and II are true. Switch must obtain the approval of its clients before the partners can sell their interests, and Switch must notify the state Administrator of this event. Whenever a change in partnership will result in new ownership of the business, which is the case when an external entity acquires a 60% interest, an investment adviser must get its clients' approval. As a state-registered investment adviser, switch also needs to notify the state Administrator. The SEC does not require notification since Switch is not a federal covered investment adviser.

Question 2

An investment adviser suggests that his client, Arnold, a 74-year old gentleman, should consider a reallocation of the assets in his portfolio. The adviser tells Arnold that he has far too much invested in bonds, which don't earn as much as stocks. He advises Arnold to take 80% of the money he has in bonds and invest it in an aggressive growth mutual fund that has provided an average annual return of 40% over the past three years. Arnold is impressed and follows this advice. Shortly thereafter, there is a steep drop in the market in general, and the net asset value of the aggressive growth mutual fund falls 85%.

Does Arnold have any remedies available to him?

ANo. Arnold had the choice and got greedy. As the old saying goes, ''Bulls get rich, and bears get rich, but pigs get led to slaughter.''

BYes. Arnold can sue for the amount of his losses, plus interest, as well as an amount assessed by the court for ''pain and suffering.''

CNo. The investment adviser had no way of knowing that the market was going to fall when he provided the advice, so the adviser did not fail in his fiduciary responsibility to Arnold.

DYes. Arnold can sue for the amount of his losses, plus interest, court costs, and attorneys' fees.

Answer : D

If Arnold loses his money because he took the advice of his investment adviser and reallocated a large percentage of his money from bonds to an aggressive growth mutual fund, he can sue the investment adviser in civil court for the amount of his losses, plus interest, court costs, and attorneys' fees. The courts do not award damages for ''pain and suffering'' in these cases. The investment adviser failed in his fiduciary responsibility to Arnold in recommending that a 74-year old man reallocate a large percentage of his money from the relative safety of bonds to the much riskier investment of an aggressive growth mutual fund.

Question 3

An investment adviser or its representative may

Aonly exercise any discretionary power in the purchase or sale of securities for a client's account after receiving written authority prior to the execution of the transactions.

Bexercise discretionary power in the purchase or sale of securities for a client's account as long as it receives written discretionary authority over the account within 10 business days of the first discretionary transaction placed, assuming oral authority has already been given.

Cexercise discretionary power in the purchase or sale of securities for a client's account as long as.

Dexercise discretionary power in the purchase or sale of securities for a client's account only after.

Answer : B

An investment adviser or its representative may exercise discretionary power in the purchase or sale of securities for a client's account as long as it receives written discretionary authority over the account within 10 business days of the first transaction placed, assuming oral authority has already been given.

Question 4

Mr. Sailor is cruising through the Bahamas when he learns that a healthcare company in which he owns stock is being sued by former patients, doctors, nurses, and even the federal government. He doesn't have his broker's number handy, and he doesn't have internet access, so he calls his son and tells him to call the broker and instruct the broker to sell his shares. As a registered agent for his broker, you take the call.

Should you execute this transaction?

AYes. This is a legitimate request from a client, and you are required to follow the client's instructions.

BNo, not unless you and your broker-dealer have a written document that gives Mr. Sailor's son the power-of-attorney to trade on his account.

CYes, as long as the son presents proper identification that proves his relationship to Mr. Sailor, such as a birth certificate.

DYes, as long as the son is at least 21 years old and not a minor child.

Answer : B

No, you cannot execute this transaction unless you and your broker-dealer have a written document that gives Mr. Sailor's son the power-of-attorney to trade on his account. Otherwise, you will be executing an order from an unauthorized third party, which is a prohibited practice, and you can lose your license for doing so.

Question 5

According to the NASAA Model Rules, which of the following institutions would not be considered a qualified custodian?

Aa broker-dealer that is registered with the state

Ba bank that is insured by a private, state-sponsored insurance company

Ca foreign financial institution

Da savings institution that is insured by the FDIC

Answer : B

According to the NASAA Model Rules, a bank that is insured by a private, state-licensed insurance company would not be considered a qualified custodian. Registered broker-dealers, foreign financial institutions, and banks and savings institutions that are insured by the FDIC are on the list of qualified custodians.

Question 6

You are an investment adviser to Mr. Crochety, an elderly man who lives solely on his social security income although he managed to accumulate an investment portfolio worth about $100,000 over the years. Mr. Crochety recently got his hands on a business publication and read about the tax-free interest paid by municipal bonds. He calls you and instructs you to sell his other investments and invest all his money in a municipal bond portfolio, so that ''the government doesn't get any more of my hard-earned money.'' You tell Mr. Crochety that you don't believe this is a wise move because he's in such a low tax bracket that municipal bonds are not a good investment for him, but he is insistent. Based on these facts, you should

Aignore Mr. Crochety's instruction since it is not in his best interest.

Brequire Mr. Crochety to sign an affidavit of liability waiver, indicating that you will not be held responsible for any adverse consequences of this decision.

Chave Mr. Crochety sign a statement of investment policy that indicates that this transaction is being executed on the client's instructions and that you have advised the client against it.

Dcall Mr. Crochety's relatives and suggest they have him examined for mental instability.

Answer : C

Given that you have advised Mr. Crochety that this is not a wise move and he still insists on it, you should protect yourself by getting it in writing. In no case, however, can you require a client to sign an affidavit of liability waver, nor can you refuse to follow his adamant instructions.

Question 7

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

Athey must be registered with the SEC since railroads are involved in interstate commerce.

Bthey must be registered in every state in which the bonds will be sold to investors.

Cthey must be registered with the SEC and in each state through which the railroad passes.

DNone of the above statements is true.

Answer : D

None of the statements is true because securities issued by highly regulated industries, such as the railroad industry are exempt from registration with both the SEC and the states.

Finra Uniform Securities State Law Examination Series-63 Exam Practice Test