SERIES 63 EXAM QUESTIONS WITH
CORRECT ANSWERS
Which of the following activities is NOT considered an unethical business practice for a broker-
dealer?
a. Reducing the sales commission on a mutual fund for a longtime customer of the firm
b. Failing to properly segregate the proprietary securities of the broker-dealer
c. Basing the markup on a security trade based on the broker-dealer's acquisition
d. Charging fees for transferring, safekeeping, and custody of securities - ✔✔D
Explanation:
Incorrect.
It is permissible to charge clients reasonable and equitable fees for miscellaneous services
performed by a broker-dealer. Some of these services include appraisals, safekeeping,
transferring, and custody of a client's securities. They also include collection of dividends,
interest, and principal payments. Sales commissions (loads) on mutual funds may only be
reduced based on the breakpoints stated in a the fund's prospectus. Reducing the load simply
based on the client's longevity with a firm is not acceptable. A broker-dealer must segregate it's
proprietary securities from those of it's customers. Markups for securities trades must be based
on the prevailing price for the securities, sometimes called the inside market. Basing markups on
the dealer's cost is not acceptable.
A broker-dealer has filed an application to withdraw its registration. Which of the following
statements is TRUE?
a. The withdrawal will become effective within 60 days after the application is received by the
Administrator
b. The withdrawal will become effective when the Administrator determines whether there is an
action for revocation of the firm's license pending at the time the application was filed
c. By filing an application to withdraw, the firm agrees to settle all charges currently pending
without admitting or denying them
d. The Administrator has two years after the date the firm's registration is withdrawn to initiate a
proceeding for revocation of its license - ✔✔B
Explanation:
Incorrect.
, An application for withdrawal generally becomes effective 30 (not 60) days after it was filed.
However, the withdrawal will not become effective until the Administrator declares whether
there are proceedings pending or instituted against the firm at the time the application for
withdrawal was filed. (This is also true if the Administrator institutes proceedings within 30 days
after the application was filed.) The Administrator has one year (not two) after the registration is
withdrawn to begin revocation or suspension proceedings against the firm.
In practical terms, the reason for this is because if violations have occurred in a state and the
broker-dealer (B/D) withdraws, the Administrator can still bring a cause of action against the
B/D for up to one year after the withdrawal. The cause of action may carry over to other states.
This prevents a B/D from avoiding the consequences of rule violations.
An agent's registration is:
a. Considered an indication that the Administrator considers those securities sold by the agent to
be properly registered
b. Transferrable to another broker-dealer without filing a new Form U4 as long as the agent is
sponsored within 30 days
c. Effective only during the period in which the agent is associated with a properly registered
broker-dealer
d. Effective in all states where the broker-dealer is registered or where the broker-dealer's
registration is pending - ✔✔C
Explanation:
Incorrect.
An agent's registration is effective only during the period in which the agent is employed by a
properly registered broker-dealer. An agent may not transact business unless associated with a
broker-dealer. An agent's registration has no impact on the registration of securities, choice (a),
nor can it be transferred without filing Form U4. An agent is not registered automatically in
every state in which his employer, the broker-dealer, is registered.
Which of the following funds may an agent describe as no-load?
a. A fund with no front-end sales charges or contingent deferred sales charges together with a
12b-1 fee of less than 1%
b. A fund with no front-end sales charges or contingent deferred sales charges together with a
12b-1 fee of .25%
,c. A fund with no front-end sales charges, but having a contingent deferred sales charge of 1%
and no 12b-1 fee
d. A fund with no front-end sales charges, but having a contingent deferred sales charge of less
than 1% and no 12b-1 fee - ✔✔B
Explanation:
An investment company (mutual fund) may be called a no-load fund only if it has no front-end
sales charges, no contingent deferred sales charge, and a 12b-1 fee that is equal to or less than
.25% of the fund's average asset value.
A broker-dealer may need to file all of the following material with the Administrator, EXCEPT:
a. The prospectus for an oil and gas limited partnership
b. The marketing materials for a new issue of municipal bonds
c. The sales literature for an issue that will be sold within the Administrator's state only
d. A form letter distributed to an adviser's current clients explaining the benefits of a variable
annuity - ✔✔B
Generally, the Administrator may require the filing of "any prospectus, pamphlet, circular, form
letter, advertisement or other sales literature or advertising communication" intended for
distribution to investors or prospective investors. However, the Administrator may not require
that sales materials related to exempt securities, exempt transactions, or federal covered
securities be filed. Municipal securities, choice (b), are exempt securities.
Which of the following investment advisory practices are permitted?
a. A client's portfolio increases in value from $100,000 to $150,000 over a one-year period and
the adviser charges the client a fee of only 1% of the $50,000 increase
b. An investment advisory firm is purchased by a large broker-dealer and all client contracts will
remain in force as long as the terms of the contracts are not altered
c. An investment advisory firm appoints three new senior partners and, for competitive reasons,
it does not disclose this to anyone
d. A client terminates an advisory relationship with an investment adviser halfway through the
contract and the advisory firm refunds 50% of all prepaid fees, as called for in the contract -
✔✔D
Explanation:
Correct.
, Investment advisory contracts must provide that:
• The adviser will not be compensated on the basis of a share of the capital appreciation of the
account.
• The adviser may not assign client contracts without the consent of the client.
• If the adviser is a partnership, clients will be notified of changes in the partnership within a
reasonable period of time.
A broker-dealer has filed an application to withdraw its registration. Which of the following
statements is TRUE?
a. The withdrawal will become effective within 60 days after the application is received by the
Administrator
b. The withdrawal will become effective when the Administrator determines whether there is an
action for revocation of the firm's license pending at the time the application was filed
c. By filing an application to withdraw, the firm agrees to settle all charges currently pending
without admitting or denying them
d. The Administrator has two years after the date the firm's registration is withdrawn to initiate a
proceeding for revocation of its license - ✔✔B
An application for withdrawal generally becomes effective 30 (not 60) days after it was filed.
However, the withdrawal will not become effective until the Administrator declares whether
there are proceedings pending or instituted against the firm at the time the application for
withdrawal was filed. (This is also true if the Administrator institutes proceedings within 30 days
after the application was filed.) The Administrator has one year (not two) after the registration is
withdrawn to begin revocation or suspension proceedings against the firm.
In practical terms, the reason for this is because if violations have occurred in a state and the
broker-dealer (B/D) withdraws, the Administrator can still bring a cause of action against the
B/D for up to one year after the withdrawal. The cause of action may carry over to other states.
This prevents a B/D from avoiding the consequences of rule violations.
An agent's registration is:
a. Considered an indication that the Administrator considers those securities sold by the agent to
be properly registered
b. Transferrable to another broker-dealer without filing a new Form U4 as long as the agent is
sponsored within 30 days
CORRECT ANSWERS
Which of the following activities is NOT considered an unethical business practice for a broker-
dealer?
a. Reducing the sales commission on a mutual fund for a longtime customer of the firm
b. Failing to properly segregate the proprietary securities of the broker-dealer
c. Basing the markup on a security trade based on the broker-dealer's acquisition
d. Charging fees for transferring, safekeeping, and custody of securities - ✔✔D
Explanation:
Incorrect.
It is permissible to charge clients reasonable and equitable fees for miscellaneous services
performed by a broker-dealer. Some of these services include appraisals, safekeeping,
transferring, and custody of a client's securities. They also include collection of dividends,
interest, and principal payments. Sales commissions (loads) on mutual funds may only be
reduced based on the breakpoints stated in a the fund's prospectus. Reducing the load simply
based on the client's longevity with a firm is not acceptable. A broker-dealer must segregate it's
proprietary securities from those of it's customers. Markups for securities trades must be based
on the prevailing price for the securities, sometimes called the inside market. Basing markups on
the dealer's cost is not acceptable.
A broker-dealer has filed an application to withdraw its registration. Which of the following
statements is TRUE?
a. The withdrawal will become effective within 60 days after the application is received by the
Administrator
b. The withdrawal will become effective when the Administrator determines whether there is an
action for revocation of the firm's license pending at the time the application was filed
c. By filing an application to withdraw, the firm agrees to settle all charges currently pending
without admitting or denying them
d. The Administrator has two years after the date the firm's registration is withdrawn to initiate a
proceeding for revocation of its license - ✔✔B
Explanation:
Incorrect.
, An application for withdrawal generally becomes effective 30 (not 60) days after it was filed.
However, the withdrawal will not become effective until the Administrator declares whether
there are proceedings pending or instituted against the firm at the time the application for
withdrawal was filed. (This is also true if the Administrator institutes proceedings within 30 days
after the application was filed.) The Administrator has one year (not two) after the registration is
withdrawn to begin revocation or suspension proceedings against the firm.
In practical terms, the reason for this is because if violations have occurred in a state and the
broker-dealer (B/D) withdraws, the Administrator can still bring a cause of action against the
B/D for up to one year after the withdrawal. The cause of action may carry over to other states.
This prevents a B/D from avoiding the consequences of rule violations.
An agent's registration is:
a. Considered an indication that the Administrator considers those securities sold by the agent to
be properly registered
b. Transferrable to another broker-dealer without filing a new Form U4 as long as the agent is
sponsored within 30 days
c. Effective only during the period in which the agent is associated with a properly registered
broker-dealer
d. Effective in all states where the broker-dealer is registered or where the broker-dealer's
registration is pending - ✔✔C
Explanation:
Incorrect.
An agent's registration is effective only during the period in which the agent is employed by a
properly registered broker-dealer. An agent may not transact business unless associated with a
broker-dealer. An agent's registration has no impact on the registration of securities, choice (a),
nor can it be transferred without filing Form U4. An agent is not registered automatically in
every state in which his employer, the broker-dealer, is registered.
Which of the following funds may an agent describe as no-load?
a. A fund with no front-end sales charges or contingent deferred sales charges together with a
12b-1 fee of less than 1%
b. A fund with no front-end sales charges or contingent deferred sales charges together with a
12b-1 fee of .25%
,c. A fund with no front-end sales charges, but having a contingent deferred sales charge of 1%
and no 12b-1 fee
d. A fund with no front-end sales charges, but having a contingent deferred sales charge of less
than 1% and no 12b-1 fee - ✔✔B
Explanation:
An investment company (mutual fund) may be called a no-load fund only if it has no front-end
sales charges, no contingent deferred sales charge, and a 12b-1 fee that is equal to or less than
.25% of the fund's average asset value.
A broker-dealer may need to file all of the following material with the Administrator, EXCEPT:
a. The prospectus for an oil and gas limited partnership
b. The marketing materials for a new issue of municipal bonds
c. The sales literature for an issue that will be sold within the Administrator's state only
d. A form letter distributed to an adviser's current clients explaining the benefits of a variable
annuity - ✔✔B
Generally, the Administrator may require the filing of "any prospectus, pamphlet, circular, form
letter, advertisement or other sales literature or advertising communication" intended for
distribution to investors or prospective investors. However, the Administrator may not require
that sales materials related to exempt securities, exempt transactions, or federal covered
securities be filed. Municipal securities, choice (b), are exempt securities.
Which of the following investment advisory practices are permitted?
a. A client's portfolio increases in value from $100,000 to $150,000 over a one-year period and
the adviser charges the client a fee of only 1% of the $50,000 increase
b. An investment advisory firm is purchased by a large broker-dealer and all client contracts will
remain in force as long as the terms of the contracts are not altered
c. An investment advisory firm appoints three new senior partners and, for competitive reasons,
it does not disclose this to anyone
d. A client terminates an advisory relationship with an investment adviser halfway through the
contract and the advisory firm refunds 50% of all prepaid fees, as called for in the contract -
✔✔D
Explanation:
Correct.
, Investment advisory contracts must provide that:
• The adviser will not be compensated on the basis of a share of the capital appreciation of the
account.
• The adviser may not assign client contracts without the consent of the client.
• If the adviser is a partnership, clients will be notified of changes in the partnership within a
reasonable period of time.
A broker-dealer has filed an application to withdraw its registration. Which of the following
statements is TRUE?
a. The withdrawal will become effective within 60 days after the application is received by the
Administrator
b. The withdrawal will become effective when the Administrator determines whether there is an
action for revocation of the firm's license pending at the time the application was filed
c. By filing an application to withdraw, the firm agrees to settle all charges currently pending
without admitting or denying them
d. The Administrator has two years after the date the firm's registration is withdrawn to initiate a
proceeding for revocation of its license - ✔✔B
An application for withdrawal generally becomes effective 30 (not 60) days after it was filed.
However, the withdrawal will not become effective until the Administrator declares whether
there are proceedings pending or instituted against the firm at the time the application for
withdrawal was filed. (This is also true if the Administrator institutes proceedings within 30 days
after the application was filed.) The Administrator has one year (not two) after the registration is
withdrawn to begin revocation or suspension proceedings against the firm.
In practical terms, the reason for this is because if violations have occurred in a state and the
broker-dealer (B/D) withdraws, the Administrator can still bring a cause of action against the
B/D for up to one year after the withdrawal. The cause of action may carry over to other states.
This prevents a B/D from avoiding the consequences of rule violations.
An agent's registration is:
a. Considered an indication that the Administrator considers those securities sold by the agent to
be properly registered
b. Transferrable to another broker-dealer without filing a new Form U4 as long as the agent is
sponsored within 30 days
