Series-63 Practice Exam Questions with Answers Uniform Securities State Law Examination Certification

A tombstone advertisement is an announcement of a new security that may become available for purchase. It is the only type of advertisement that is allowed during the “cooling off period” once a firm has filed a registration statement for a new security. It is not an offer to sell the security, an act that is strictly prohibited during this period.

The scenarios described in Selections II and III only would be prohibited. Five S&P 500 Index mutual funds, even if offered by different fund families, all have the same investment objective-duplicating the returns earned on the S&P 500 Index, and they will be invested in very similar stocks. Therefore, the client is getting little or no more diversification of risk by investing in five funds over investing in just one. The agent is just getting richer from more commissions. Encouraging a client to swap his money between two funds in the same family without informing the client that this creates a taxable event is not providing the client with “full and fair disclosure.” It may well be in the client’s best interest to make the switch, but he needs to be made aware of the tax consequences. It is not necessarily prohibited to sell a client shares of a load stock fund when a no load stock fund with the same investment objective exists as long as the agent believes that the load stock fund is a better investment for his client.

An issue of commercial paper with a $100,000 denomination and a maturity of five months with an AA rating from Standard and Poors meets the requirements for an “exempt security.” A short-term security, with no more than 270 days to maturity, that has a denomination of at least $50,000, and has a rating of AAA, AA, or A from a recognized rating agency is exempt from registration with the state Administrator.

Only Selections II and III are correct. The Administrator may require a firm to supply it with any prospectus, pamphlet, advertisement, or other sales literature intended for prospective investors unless the security is a federal covered security or is issued by a state credit union, both of which are on a longer list of exempted securities. It doesn’t matter whether or not the securities will be sold to clients of an investment advisory firm.

Don can enter a commission-splitting agreement with Huey only since he is the only one who is also working for GetErDone Broker-Dealers. It is considered unethical to split “commissions, profits or other compensation. . .with any person not also registered as an agent for the same broker-dealer,” under NASAA Model Rules.

Yes. Constance is guilty of fraud. She misled her client into thinking he couldn’t lose money if he invested the money in a U.S. government bond fund. Although U.S. government bonds are referred to as risk-free, this just means they are considered free from default risk. The value of the bonds-and, therefore, the U.S. government bond funds-will change with changes in interest rates. As an investment adviser representative, Constance should know this. Regardless of whether or not she does, she is guilty of fraud simply by providing the misleading information. If she knew it and deliberately misled the client, she is guilty of criminal fraud.

You can tell her that you will be able to execute this for her as a “market not held” order that permits you to use your discretion in timing the purchase in order to try to get a better price than currently exists. As long as you are only being requested to use your discretion in the timing and price of the transaction, and not in the actual security being traded or the size of the trade, you do not need written authorization. However, if written authorization is required, you must have it in your hand before you can effect a transaction. In other words, it isn’t good enough for it to be in the mail.

An investment adviser may not recommend a stock to the client that the adviser holds without disclosing to the client that it owns the stock. They are permitted to also be registered as a broker-dealer in the state and to accept certain types of soft dollars as compensation from brokers. And they can have positions in securities that their clients have positions in-just as long as this is disclosed.

Registration cancellation is a non-punitive order. The Administrator issues a cancellation order if a registered person dies, becomes mentally incompetent, is no longer in business, or is unable to be located.

Yes. When Stu recommends an investment in municipal bonds for a classic IRA account, he has made an unsuitable recommendation, which is a prohibited practice, and he can have his license revoked or suspended. Municipal bonds are not suitable investments for a classic IRA because municipal bonds pay interest that is at least free from federal taxation, so they offer a lower yield than fully taxable bonds of similar risk. The money in a classic IRA grows tax-free anyway, so the client is getting a lower yield with no benefit.

The Administrator of a state will deny the registration of a security under any of the situations described in Selections I, II, III, and IV-if the mandated filing fee has not been paid; if the compensation of the underwriters is excessive; if the registration statement is incomplete; or if the issuer is attempting to use registration by coordination and has not complied with all the stipulated requirements of that process.

The agent’s commission does not appear on an order ticket. It does appear on the trade confirmation, however, which the client receives.

If Desi recommends a mutual fund that has a deferred sales load to a client who requests a mutual fund with no sales charge, he is in violation of NASAA rules regarding investment company shares. The NASAA rules specify that it is prohibited for an agent to state or imply that the investment has no sales charge if there is a deferred sales load involved. It doesn’t matter if, in fact, the deferred load may never have to be paid by the client. A letter of intent involves a statement of intent by the investor to invest an amount that will meet a breakpoint that will entitle him to a lower load charge. This is not pertinent to this specific question.

Both a debenture and a futures option contract on wheat are securities as defined by the USA. A debenture is a long-term, unsecured debt instrument and is specifically listed as a security in the Act. Although commodity futures contracts are not considered to be securities as defined by the Act, options on commodity futures contracts are.

Nuering Investment Advisers would not fall under the classification of “institutional investor.” Institutional investors are defined as banks, insurance companies, mutual funds, some pension plans, and broker-dealers registered under the Securities Exchange Act of 1934. Investment advisers are not part of this group.

Selections I, II, and III are all disallowed under the NASAA Model Rules. In Selection I, Broker-dealer Anon has made an unauthorized transaction and has also stolen from his client. The stop order indicated that the client’s Amazon.com order should be effected only if the stock dropped to $131 a share or less. Anon jumped the gun and sold it for $133, but only gave the client the specified price of $131 a share. In the scenario described in Selection II, Penny’s intentions might have been good, but an agent is not allowed to refund commissions. Anon is also in violation in Selection III’s scenario. A member of the selling group is expected to make “bona fide” public offerings of the securities allotted him. To purchase some of the securities for itself is prohibited.

In order for an act of fraud to be considered criminal, the perpetrator must have willfully committed the fraudulent act. In this case, the Administrator will probably ask the court to impose criminal penalties, but an Administrator can’t cause an act of fraud to be criminal by sending it to the criminal court system. If an agent misleads a customer regarding the returns to be expected on an investment but hasn’t deliberately done so, it is still fraud, but not criminal fraud, regardless of how much the victims lost.

Prior to revoking Samuel’s license, the Administrator will provide Samuel with prior notice (I), an opportunity for a hearing (III), and a written statement regarding the facts and the legal consequences (IV).

Yes. Jeremy is guilty of security violations under the Uniform Securities Act when he provides misleading information when offering securities for sale, even if no securities are actually sold. Partnership interests fall under the definition of securities, and Jeremy’s claim to have generated a return of at least 15% on other inventions that he never created is an absolute falsehood.

The firm will be expected to provide all of the above-sales and advertising materials to be used in the offering, the agreement between the issuing firm and its underwriters, and the agreement among the underwriters themselves.

Sam has the legitimate option of filing an appeal of the decision in a court of law within 60 days. He will not be able to register as an investment adviser with the SEC or with another state. His application will be denied when it is discovered that Sam has had his license revoked by one state.

If, as a registered agent with a broker-dealer, you receive an order from a client that you don’t believe is in her best interests, you should tell her that, but you must still execute the transactions if she insists. You may not legally ignore her instructions, nor should you bother either the mutual fund or your supervisor with this, given the facts as provided; you should deal with it yourself.

The price at which the security will be offered will not be found in a tombstone advertisement. A tombstone advertisement is not an offer to sell the security and, in any case, it is unlikely that the final offer price will have even been decided on at this point.

The maximum monetary civil liability that a person who has violated a securities law can be expected to pay is the original investment + a state-deemed appropriate interest rate + court costs and reasonable attorneys’ fees - any income the victim has received on the investment. The monetary liability is reduced by any dividends, interest income, or capital gains the investor may have received. Monetary awards for pain and suffering are not considered.

The TCPA mandates that you place your calls only between the hours of 8 a.m. and 9 p.m., based on your prospective customer’s time zone. This is a rule that applies to all telemarketers.

Once you have passed the Series 63 exam, it is the state administrator who can approve or deny your registration. NASAA developed the Uniform Securities Agent State Law Examination and FINRA administers it. The SEC is not a party to the state registration process.

When Jose buys a 10-year bond that has 6 years remaining to maturity, it is a non-issuer transaction since he is buying it in the secondary market from another investor, and Progress Energy does not benefit from the transaction. If a firm receives money when its securities are sold, it is considered an issuer transaction; otherwise it is a non-issuer transaction. When Progress Energy originally issued the bond, it had ten years to maturity, and Progress Energy received the proceeds from the bond issue; that was an issuer transaction. When Jose buys the bond, another investor is receiving the proceeds. When IBM sells new bonds, regardless of whether it is to the general public or to an institutional investor, IBM receives the proceeds from the transaction, so it is an issuer transaction. Similarly, when a firm that is already publicly held, like Google, sells more shares, the firm receives money from the sale, just as when a firm that is going public for the first time, like NewCorp, receives the proceeds generated through the IPO. Those are examples of issuer transactions.

Based on the facts provided, Rich Quick need not register in Florida since he has no offices in the state of Florida, and he is conducting business for existing clients who are merely vacationing in Florida and are not residents of the state.

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.

Only Selections II and III are correct. Under NASAA Model Rules, a registered representative of a broker-dealer is entitled to split his or her commission only with his or her broker-dealer or with another registered representative of that broker-dealer. He is not permitted to share commissions with a client or with anyone who works for the broker-dealer, but is not a registered agent.

A margin transaction refers to a transaction in which the client borrows some of the money that he is investing. It is a recognized practice.

An individual who represents a broker-dealer in buying and selling securities is called an agent or a registered representative. An agent may also work for an issuer, which refers to the entity that is selling securities to raise money for itself. An underwriter is the entity that aids the issuer in bringing the new securities to market. Administrator is the title many states use to refer to the official in charge of enforcing the state’s securities regulations.

Yes, there have been violations of securities laws in this instance; the promissory note required registration, and Ms. Naiveté has been defrauded. Promissory notes are considered to be securities as defined by the Uniform Securities Act and, as such, must be registered with the state before they can be offered for sale. Furthermore, a promissory note is a promise to repay, and Mr. Smooth has defaulted on this promise after telling Ms. Naiveté that the investment was close to being risk-free. In essence, he took Ms. Naiveté’s money under false pretenses when he sold her the note, and that is the definition of fraud.

The maximum amount the client can expect in civil penalties in this case is $6,200. In civil court, the client is awarded the cost of the investment plus any attorneys’ fees and court costs, plus any interest that the state deems appropriate, less any income earned on the investment. In this instance, the only income is the interest that the client earned, which is identical to the interest that the Administrator mandates the investment adviser pay, so that is a wash. The investment advisory fee is included as part of the investor’s cost, so the client can sue for the recovery of his original investment of $5,000 plus the $200 he paid for the investment advice plus the court costs and attorneys’ fees of $1,000, or $6,200 total.

During the “cooling off period” prospective investors may be given only a tombstone advertisement for the security.

Only selections I and III are subject to post-registration provisions. Broker-dealers and investment advisers can be required to file advertising materials and financial reports with the Administrator, as specified by the Administrator. They are also required to keep records to the specifications of the Administrator. These records will include items such as client e-mails, client letters of complaint, and advertising brochures and must be kept for three years.

Regardless of whether the investment adviser is register with the SEC or is itself registered with the state, all of its investment adviser representatives (IARs) are required to register with the state if they operate a place of business in the state.

A stock that is listed on the OTC Bulletin Board would not be exempt from state registration unless it already happens to be registered under the Uniform Securities Act. Variable annuities and stocks listed on the American Stock Exchange are classified as federal covered securities by the NSMIA of 1996 and are exempt from state registration. An amendment to the Securities and Exchange Act of 1934 exempts option contracts from state registration.

The amount of money that the investment adviser currently has under management need not be included in an investment advisory contract. The contract does have to include the term of the contract, the advisory fees and the formula used to compute them, and a statement that the contract cannot be assigned to another party without the client’s consent, along with other information.

Agents, investment advisers, investment adviser representatives, and broker-dealers must all sign a consent to service of process, allowing the Administrator to receive legal documents in their stead. The consent to service of process must accompany the application for registration with the state or the documentation provided with a notice filing when permitted.

Under the guidelines of the BSA, the Treasury Department now requires broker-dealers to obtain and keep information relating to clients that make or receive funds transfers that involve $3,000 or more. If the transaction is a cash transaction over $10,000, the same rules apply, and a Currency Transaction Report must be filed with FinCEN. Under the USA Patriot Act, if the broker-dealer thinks that a transaction of $5,000 or more is suspect, the broker-dealer must file a suspicious activity report (SAR.)

When Sly has his client pay for a stock purchase by making the check out to Sly himself, he has engaged in the prohibited practice of commingling. Ms. Fox is also engaged in a prohibited practice, but she is engaged in making unauthorized transactions. Mr. Hawk is doing nothing wrong. It is typical for clients to leave securities on deposit with their broker-dealers in what is called “street name.” This makes it easier for the client to sell the securities later on since he physically will not have to deliver the securities to the broker, for one thing.

An investment adviser representative is required to disclose the fact that someone else performed the research on which advice to the client is based in scenarios described in I and III only. If the representative provides a recommendation to the client based solely on the recommendations provided by others to whom he provided the data, he must disclose this. However, if the adviser representative has based his recommendations on his own assessment of analysts’ reports and recommendations, as is suggested in Selection II, then there is no disclosure requirement.

As defined by the Uniform Securities Act, an exempt security is one that need not be registered in the state in which it is sold. Selections A and D describe exempt transactions. Although securities issued by financial institutions, such as banks, are exempt securities, not all securities that a bank purchases and sells qualify as exempt securities. Private placements may also be exempt transactions, but there are other stipulations that must be met.

Neither SecureMoney Broker-dealers nor Erin must register as an investment adviser based on the facts provided since neither the broker-dealer nor Erin is receiving any compensation for the advice Erin is giving Mrs. McTurk. In this instance, the advice provided is considered incidental to the broker-dealer business.

It is not prohibited for LaGree to receive the software from SecureMoney in return for executing trades through that broker-dealer since LaGree has disclosed this to his clients. An investment adviser is permitted to receive soft dollars from broker-dealers in return for executing trades through them, as long as the client is informed of the arrangement and the soft dollars will benefit both the client and the adviser, which is the case in this instance since the software gives LaGree the ability to do research in order to better advise his client. Choice A is clearly prohibited since it constitutes an “unreasonable advisory fee.” In Choice B, LaGree is making unsuitable recommendations to his client. A 72-year-old retired social worker is likely to have a greater-than-average need for liquidity to pay for unexpected items, such as medical bills. Variable annuities are designed to be long-term investments, not short-term investments, so they would not meet this need. They typically have high surrender penalties that the client would be subject to if she needed to make withdrawals within, say, the next 10 years. Likewise, international growth funds are not liquid investments. International growth mutual funds are invested in foreign stocks and are riskier than average, and are, thus, not suitable investment vehicles for the typical 72-year-old retired social worker.

An investment adviser provides investment advice to clients and may also buy and sell securities in their clients’ accounts for the clients. He does not, however, sell securities to his clients.

Yes. If Ken is getting up each morning in order to collect news that he can use to pressure his clients to buy and sell their securities, Ken is engaging in churning and can have his license revoked or suspended for this prohibited practice. A lot of the news might have a short-term effect on a particular industry, but any profits gained by trying to time the market will often not be sufficient to cover the commissions that the investor had to pay on the transactions and the taxes they may have to pay on the short-term capital gains they realized when they sold securities. Regardless, it doesn’t matter whether his clients’ accounts show a profit or not.

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.

The statement that an agent must demonstrate a specific minimum level of financial stability for his registration application to be accepted is false. The Administrator may require an agent to post a bond, but there are no specific minimum financial requisites that must be met. The Administrator also has the right to terminate an agent’s registration if the agent becomes bankrupt. Both the agent and his broker-dealer affiliate are required to inform the Administrator whenever there is a change in the agent’s personal information, such as a name change or a change of address.

No. If CanDo is not authorized to effect purchases and sales of the fund, Noah would be engaged in the prohibited practice known as selling away if he were to execute the order. If his broker-dealer is not authorized to trade a security, Noah can’t either.

Yes, Ari will be violating a securities law if he distributes the business cards because the cards suggest he has been approved by the state Administrator. The Uniform Securities Act specifically states that the effective registration of a person does not mean that the Administrator has “given approval to” that person. Any statement to this effect is considered an unlawful representation.

If Harry Lange is managing the investment portfolio of Fidelity Magellan Mutual Fund, he is an investment adviser. He is making the investment decisions and receives a percentage of the assets under management as his compensation. He is not selling the mutual fund or the fund’s investors anything, which is the job of a broker-dealer or an agent. Fidelity Magellan is the investment company.

The main difference between an agent and a broker-dealer is that an agent represents either a broker-dealer or an issuer and buys and sells securities he doesn’t own, receiving a commission for the trades he executes. A broker-dealer, when functioning as a dealer, is buying and selling for his own portfolio, thereby profiting from any price appreciation in the assets in his portfolio. Both agents and broker-dealers must meet state licensing requirements; both engage in the purchase and sale of stocks, bonds, and option contracts; and both operate in both the primary and secondary markets.

The Uniform Securities Act excludes annuity contracts wherein an insurance company promises either to pay a fixed sum, either in a lump amount or through periodic payments, from its definition of a security. Debentures, CDs, and option contracts are all classified as securities under the USA.

If you discover that a security you purchased has not been registered with the state and was sold unlawfully, you can file a civil claim against the seller as long as you do so within two years from discovery or three years from the event, whichever comes first, under the guidelines of the Uniform Securities Act. Therefore, if you know about an unlawful sale for more than two years or if the sale took place more than three years ago, you cannot sue. The statute of limitations has expired.

A-2-Z can only sell a client TIPS from its own portfolio if it informs the client that it is acting as the seller in this transaction and receives the client’s written consent before the settlement date of the transaction.

Stocks listed on the Tokyo Stock Exchange would not necessarily be exempt from state registration. Stocks that are registered with the SEC, such as NASDAQ National Market Issue stocks, securities issued or guaranteed by the Canadian government, and securities issued or guaranteed by banks or credit unions are all exempt.

A “market not held” order is one in which the client tells the broker to use his own discretion in timing a purchase or sale in an attempt to get a better price than the current market price. An order to buy or sell stock at a specified price is a limit order. An order to sell securities that the investor owns if the stock decreases by a certain amount is known as a stop sell order or a stop loss sell order.

The administrator of a state would not have jurisdiction in the scenarios described in Selections I and II. In Selection I, more than 2/3 of the circulation of the newspaper is outside the state, which excludes it from the jurisdiction of the Administrator. Selection II describes an electronic communication that originates from outside the state, which excludes it. Selection III constitutes an offer to sell securities within the state, and this will always fall under the jurisdiction of the Administrator of the state.

In order for MoeMoney to continue servicing its five individual clients who have relocated to Colorado, neither MoeMoney nor its clients need to do anything. The National Securities Markets Improvement Act of 1996 (NSMIA) established a “deminimis” exemption for investment advisers if they have no office in a state and do business with “no more than five non-institutional clients” during a one-year time frame.

If Rich Quick is able to earn profits 95% of the time by trading on abnormalities he observes in bond yield spreads, he is skilled. There is nothing illegal in what he is doing. Arbitrageurs attempt to earn profits when they observe what they believe to be mispriced securities, and this is an accepted activity. Rich is not using insider information; bond yields are publicly available information.

Once you have passed the necessary exams and are applying for registration as an agent, you must pay the full annual fee and your license will expire on December 31st of the current year, no matter how late in the year it is.

If you execute a stock transaction for a client on Thursday, September 23rd, the settlement date for that trade will be Tuesday, September 28th, which is T + 3, meaning three business days after the trade date.

If Gazillions is operating as an SEC-registered adviser in a state, it must answer to both the SEC and the state in which the complaint has been filed, even though there is no requirement that it had to register with the state, given that it was a federal covered investment adviser. Allegations of fraud come under the state’s authority as well, even if the adviser is a federal covered investment adviser.

A-2-Z can charge a client it advises an advisory fee for its advice and a commission for the execution of a trade based on that advice, but it must inform the client of the potential conflict of interest and get the client’s written consent. It must also provide an itemized statement of all such agency cross transactions performed for the client at least annually.

If Alice places a market order to buy call options on Tuesday, August 10th, she will have to pay for them on Wednesday, August 11th, the next business day. Options and U.S. government bonds settle on the day after the trade date, or T + 1.

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.

Yes. In recommending that Mr. and Mrs. Cleaver and their son allocate their assets in identical fashions, Mr. Eddie has made an unsuitable recommendation since investors with different investment time horizons have different investment needs. Making unsuitable recommendations is a prohibited practice, and Mr. Eddie could have his license suspended or revoked.

If a client calls CanDo with a market-not-held order to buy 5,000 shares of CSR, he is leaving the price and timing of the trade to the broker’s discretion, and the broker cannot be held responsible if the price turns out not to be optimal after-the-fact. The client still owes CanDo its commissions, and to refuse to pay for the stock on the settlement date would subject the client to criminal penalties.