Series 63 practice questions with answers

Answer: A) Disclose in writing that it is acting as principal and get the client's consent before the trade is completed

For a principal trade, the adviser must disclose in writing the capacity in which it is acting and get the client's consent before each transaction is completed.

• ACorrect. Written disclosure of the adviser's capacity and the client's consent are both required before the transaction is completed.
• BIncorrect. Disclosure and consent must come before the transaction is completed. Telling the client after the fact does not meet the rule.
• CIncorrect. The duty runs to the client, who must receive written disclosure and give consent. No notice filing with the regulator is required.
• DIncorrect. Disclosure and consent are required for each transaction before it is completed. A general consent signed at account opening is not enough.

Answer: C) Prohibited unless the solicitor is properly registered

• AIncorrect. The amount doesn't matter.
• BIncorrect. They're regulated.
• CCorrect. Solicitors are usually treated as IARs.
• DIncorrect. Hiding it makes it worse.

Answer: B) Excluded from the definition of broker-dealer

Banks are excluded from the definitions of broker-dealer and investment adviser under the Uniform Securities Act. Since the Gramm-Leach-Bliley Act, the bank exclusion covers activities that fit specific exceptions, such as trust and fiduciary activities paid mainly through trust fees.

• AIncorrect. A bank whose securities activities fit within the recognized bank exceptions, such as trust and fiduciary activities, is excluded from the definition of broker-dealer. It does not register as one.
• BCorrect. The Uniform Securities Act excludes banks from the definition of broker-dealer. The 2002 Act ties this exclusion to the bank exceptions in federal law. Trust activities where the bank is chiefly compensated by trust fees are one of those exceptions under Regulation R.
• CIncorrect. An agent is an individual who represents a broker-dealer or issuer. A bank is an institution, and it is excluded from the broker-dealer definition.
• DIncorrect. Banks are also excluded from the definition of investment adviser under the Uniform Securities Act, so the bank does not register as an adviser either.

Answer: A) Issue an order suspending or restricting the firm's registration

A broker-dealer that fails the financial requirements set by rule under the Act can have its registration suspended, revoked or restricted. NSMIA prevents states from setting those requirements above the SEC's levels, not from enforcing them.

• ACorrect. The Administrator may set financial requirements, such as net capital, by rule. Willfully violating a rule under the Act is a ground to deny, suspend, revoke or restrict a registration if the order is in the public interest. Insolvency is a separate ground, and a net capital shortfall is not the same as insolvency.
• BIncorrect. NSMIA limits how high a state can set capital requirements. It does not stop the state from enforcing financial requirements against firms registered in the state.
• CIncorrect. The Act has no remedy that makes agents fund their firm's capital. The Administrator acts against the registration itself.
• DIncorrect. Under NSMIA, states may not set net capital or other financial requirements for SEC-registered broker-dealers that go beyond the federal requirements.

Answer: D) Form U5

• AIncorrect. That is a company report.
• BIncorrect. That registers agents.
• CIncorrect. That is for advisers.
• DCorrect. Form U5 reports termination through CRD.

Answer: B) Not an agent

• AIncorrect. The exclusion applies.
• BCorrect. This activity is excluded when no commission is paid.
• CIncorrect. Individuals selling for issuers aren't BDs.
• DIncorrect. No advice for pay is given.

Answer: A) An exempt transaction

• ACorrect. Institutional transactions are exempt.
• BIncorrect. It is allowed.
• CIncorrect. It is exempt.
• DIncorrect. The state exemption applies.

Answer: B) The fees paid and actual damages, plus interest, costs and attorneys' fees, less income received

A client defrauded by a paid investment adviser can recover the consideration paid for the advice and actual damages. Interest at the legal rate, costs and reasonable attorneys' fees are added, and any income received from the fraud is subtracted.

• AIncorrect. The Uniform Securities Act does not provide treble damages in civil suits against investment advisers. Recovery is based on the consideration paid and actual damages.
• BCorrect. The client may recover the consideration paid for the advice and any actual damages caused by the fraud. Interest is added at the state's legal rate, along with costs and reasonable attorneys' fees set by the court. Any income the client received from the fraudulent conduct is subtracted.
• CIncorrect. Recovery is more than a bare refund of fees. It also covers actual damages, and the Act adds interest, costs and reasonable attorneys' fees.
• DIncorrect. The private right of action does not depend on an order from the Administrator. Recovery also includes the consideration paid for the advice, not just losses above the fees.

Answer: B) The name of the agent's broker-dealer firm

FINRA Rule 2210 requires correspondence and retail communications to prominently disclose the member firm's name so customers know which broker-dealer they are dealing with.

• AIncorrect. An agent's CRD number is available through BrokerCheck, but the communications rules do not require it in correspondence.
• BCorrect. FINRA Rule 2210 requires all retail communications and correspondence to prominently disclose the member firm's name, or the name under which it primarily conducts its broker-dealer business.
• CIncorrect. Correspondence is subject to supervision and review, but it does not have to state that a principal approved it.
• DIncorrect. Correspondence does not have to list the agent's state registrations.

Answer: A) It is a misleading communication, because the target misrepresents the firm's research and has no reasonable basis

Any price target in a research report needs a reasonable basis, a valuation method and a fair presentation of the risks. An agent who inserts his own target into the firm's report misrepresents the research and is making a misleading communication.

• ACorrect. A price target in a research report must have a reasonable basis and come with an explanation of the valuation method and a fair presentation of the risks. A figure the agent added himself has none of these, and presenting it as part of the firm's report misrepresents the research. That is a misleading, unethical practice.
• BIncorrect. A generic disclaimer doesn't cure a misstatement of material fact. The target still misrepresents the firm's research and still has no reasonable basis.
• CIncorrect. Price targets are held to a reasonable-basis standard and must be supported by a disclosed valuation method and risks. Calling a target an opinion doesn't let anyone invent one or attribute it to the firm's research.
• DIncorrect. Approving the report afterward doesn't make a misleading communication acceptable. The problem is the content: an unsupported target attributed to research that never issued it.

Answer: C) Isn't FDIC-insured

• AIncorrect. The key problem is implied safety.
• BIncorrect. That isn't the problem.
• CCorrect. Comparing it to insured deposits misleads investors.
• DIncorrect. The key problem is implied safety.

Answer: A) Backing away

A dealer that refuses to trade at its own firm quote is backing away, which violates FINRA Rule 5220 and is treated as an unethical practice. Best execution, front running and freeriding are different concepts.

• ACorrect. Backing away means failing to honor a firm quotation. FINRA Rule 5220 says a member may not offer to buy or sell at a stated price unless it is prepared to trade at that price. A quote that is not clearly marked as not firm must be honored for a normal unit of trading.
• BIncorrect. Best execution (FINRA Rule 5310) is a firm's duty to use reasonable diligence to find the best market so the customer's price is as favorable as possible. It is an obligation the firm must meet, not the name of a prohibited practice like refusing a quote.
• CIncorrect. Front running (FINRA Rule 5270) means trading while holding material, non-public information about an imminent block transaction, getting ahead of the pending order. It has nothing to do with honoring a published quote.
• DIncorrect. Freeriding is when a customer buys a security in a cash account and sells it before paying for it, which Regulation T prohibits and which can lead to a 90-day account freeze. It is a customer payment violation, not a dealer quotation practice.

Answer: B) The refusal is improper, because the customer is entitled to copies of the documents for her own account

Customers are entitled to copies of their own account documents. Broker-dealers must even send customers their account record on a set schedule, so refusing a customer's request is improper.

• AIncorrect. Privacy protections limit sharing a customer's nonpublic personal information with unrelated third parties. They do not stop a firm from giving customers their own account documents.
• BCorrect. The agreement and account information belong to the customer's own account. SEC Rule 17a-3(a)(17) requires broker-dealers to send customers their account record within 30 days of opening and at least every 36 months afterward, so the customer can review and correct it. Refusing a reasonable request for these documents is not consistent with fair dealing.
• CIncorrect. An oral summary does not replace the written documents. The customer is entitled to see what she actually signed and what the firm has on record about her.
• DIncorrect. A customer's right to her own account documents does not depend on whether she has filed a complaint.

Answer: D) A deceptive practice, since the agent's undisclosed selling contradicts the advice

An agent who recommends a security while secretly selling the same security is trading against the recommendation. This undisclosed conflict is a deceptive practice that can lead to discipline under NASAA's dishonest-or-unethical-practices rule.

• AIncorrect. A suitable recommendation does not fix the problem. The agent hid a personal interest that contradicts the advice, and that hidden conflict is deceptive whether or not the stock fits the customers' profiles.
• BIncorrect. Holding the account at the employing firm makes supervision possible, but it does not make it acceptable to trade against your own recommendations without disclosure.
• CIncorrect. The violation is the undisclosed conflict and the misleading recommendation. It does not depend on who got the better price.
• DCorrect. Trading against your own recommendation without disclosure (a form of scalping) puts the agent's interest ahead of the customers'. NASAA's rule lists nondisclosure and manipulative or deceptive practices as grounds for discipline.

Answer: D) Escalate to a supervisor and consider asking the trusted contact about her health

When a customer shows signs of diminished capacity, the agent should take extra care and escalate the concern. The firm may contact the trusted contact person, who has no authority to approve or place trades.

• AIncorrect. Marking the order unsolicited does not remove the agent's duty to deal fairly with the customer. Signs of diminished capacity call for extra care, not routine processing.
• BIncorrect. A signed acknowledgment does not cancel the agent's obligations. It also does not address whether the customer can understand the transaction.
• CIncorrect. A trusted contact person has no authority to transact on the account and is not the same as a power of attorney. The firm may contact that person, but not to authorize trades.
• DCorrect. With signs of cognitive decline, the agent should act carefully and escalate internally. FINRA Rule 4512 lets the firm contact the trusted contact person, for example to confirm health status, and Rule 2165 allows temporary holds if exploitation is suspected.