Pass the FINRA Uniform Securities State Law Series-63 Questions and answers with CertsForce

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.

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.

Newbie may apply for state registration using either the registration by coordination or the registration by qualification method, although the latter method is the most burdensome of the three. The firm is not eligible to register by notification. To be eligible, the offer price of the IPO would have to be at least $5, and the underwriting spread would need to be no greater than 10%.

Registration by exception is not a method that is used to register securities with the state. Registration by notification is a method available for those securities that meet a certain set of criteria and requires the least amount of paperwork. Registration by coordination is the method used for most securities. Registration by qualification is the most burdensome method, requiring a voluminous amount of paperwork.

Selections II and III do not describe prohibited practices. If an adviser makes a discretionary trade for a client after having received verbal authorization to do so and does not receive written authorization from the client within 10 business days of doing so, the adviser is limited to making recommendations to the client and executing unsolicited trades only, but he has not engaged in a prohibited practice, and this is the scenario described in Selection II. There is no provision that prohibits an adviser from requiring an advisory fee to be paid in advance as long as it is reasonable, as described in Selection III. An adviser is not permitted to sell its non-institutional clients securities it has issued itself because of the significant conflict of interest involved. The exception is if the client is an institution that is in the business of lending money, but Selection I specifically indicates “non-institutional clients.”

No, Mr. Ranger has not violated any laws or engaged in any prohibited practices in his recommendation to Mr. Tonto. He has simply informed Mr. Tonto of the rumor and has told him of the risk involved, and he has not lied or misled Mr. Tonto about the investment. He is also well aware of his friend’s risk tolerance level, so he is not making an unsuitable recommendation. This is not considered insider trading since there is no way Mr. Ranger can know whether or not the rumor is true. Selection A is not true because there can be violations of laws or practices, even if the agent and client are friends.

Only Selection III would not violate NASAA rules regarding the sale of investment company shares because it is the only true statement. If a fund has a breakpoint at $25,000 that triggers a reduced front-end load and allows an investor to receive the reduced load charge if the investor signs a letter of intent stipulating that the additional investment will be made within 13 months, the only penalty to the investor who doesn’t meet the breakpoint is payment of the difference in the two loads. Investing in shares of a money market mutual fund is not identical to putting money in a savings account at a bank. The bank account is insured by the FDIC in most cases; the money market mutual fund is not insured by the FDIC, and the investor can lose money (although, to date, money market mutual funds have covered any losses that they’ve experienced and not passed those losses onto their investors.) A U.S. government bond fund that is invested only in U.S. government bonds is free from default-risk, but it is still subject to interest rate risk. If interest rates increase, the value of the bonds in these funds-and therefore the fund itself-will decrease.

The statement that you can legitimately make about the SIPC to your client is that it was established to restore funds to investors when the brokerage firm they have been using is bankrupt or in financial distress. The SIPC does not insure investors against losses in the stock and bond markets like the FDIC does bank deposits, and it does not combat fraud.

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.

Only Selections I and III are correct. If one of the partners dies, Alter Advisers must inform both the state Administrator and the firm’s clients of this event. This represents a change in the partnership. The SEC need not be notified since Alter Advisers is not registered with the SEC.