FINRA Series_63 : Uniform Securities Agent State Law Examination

Which of the following describes a prohibited practice in the sale of shares of investment companies?
I. Sandy Slacker hands her client the fund's prospectus and tells him that the prospectus will provide him
all that he needs to know about loads and fees associated with the fund.
II. Elliot Eager tells a client who has an investment objective that includes current income that a certain
bond fund has a current yield of 8% and provides the client with a prospectus so that the client can peruse
the average annual returns that the fund has generated in past years when the client has the time.
III. After explaining all the fees and loads involved in two different bond funds as well as the difference
between current yield and total return, Patty shows the client the data on the average annual returns that
the two bond funds provided. She explains to the client that the municipal bond fund has a lower yield
than the similar-risk corporate bond fund because the interest income the client will receive from the
municipal bond fund will be free from federal taxation, while the interest income on the corporate bond
fund is fully taxable.

• A. I and II only
• B. I and III only
• C. I only
• D. All the choices describe prohibited practices in the sale of shares of investment companies.

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Mr. Bigwig, CEO of HiGrowth Corporation, meets with the president of BigFee Investment Bankers and
arranges for BigFee to underwrite an Initial Public Offering (IPO) for the firm. When the IPO comes to
market, GetErDone Broker-Dealers is part of the selling group, which handles the sale of the stock to the
public. In this scenario, which party is the broker?

• A. HiGrowth Corporation
• B. GetErDone Broker-Dealers
• C. Mr. Bigwig
• D. BigFee Investment Bankers

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Goldie Locks is an agent with Bear Broker-Dealers. One of her clients is a single woman, Annie Spinster,
who is retired and needs income from her investment portfolio to meet her current needs for liquidity. In
addition to investing in mutual funds, Annie likes the thrill of investing in single stocks and asks Goldie for
recommendations. Goldie recommends Annie invest some of her money in Alcon (ACL), a medical
instrument and supplies company selling on the NYSE, based on the fact that it has a high dividend yield
and is paying a dividend of $2.21 a share, which is guaranteed to continue or even increase, Goldie
assures Annie. Has Goldie violated any laws or engaged in any prohibited practices?

• A. No. Goldie merely responded to a recommendation request from a client, and the recommendation is
  suitable since the client has a need for current income and the recommended stock pays a high dividend.
• B. Both A and B are true.
• C. Yes. At the very least, Goldie has committed fraud since she cannot guarantee that a firm's dividend
  will continue or increase.
• D. Yes. As the agent of a broker-dealer, Goldie is not permitted to make recommendations for specific
  investments. Only investment adviser representatives and investment advisers can do that.

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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?

• A. No. 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.
• B. Yes. Arnold can sue for the amount of his losses, plus interest, as well as an amount assessed by the
  court for "pain and suffering."
• C. No. 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."
• D. Yes. Arnold can sue for the amount of his losses, plus interest, court costs, and attorneys' fees.

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The Turnover Corporation, a firm with 25,000 employees, has recently hired 50 new employees, many of
whom have been hired to replace middle-level managers who have retired. Turnover has omitted this fact
from its prospectus. Turnover is guilty of

• A. nothing. The hiring of 50 new employees by a firm with 25,000 employees is not a material fact.
• B. misrepresentation.
• C. misusing insider information.
• D. fraud.

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