Series 63 Exam Questions & Answers (SIA Instructor Verified)

It is never okay to sell something fraudulently. Some state criminal codes refer to this as “theft by deception,” which would include, for example, rolling back the odometer on a used car before selling it or trading it in to a dealer. The point of such an exam question is to point out that only securities are subject to the Uniform Securities Act. That includes securities that are exempt from registration, too, such as T-notes or municipal bonds. A fixed annuity, however, is an example of an investment of money that is not a security. It is an insurance product. Therefore, it is outside the scope of the Uniform Securities Act, even the anti-fraud statute.

You are correct that many well-known banks are also in the brokerage and investment advisory businesses. The point of these exam questions is that the bank is a separate entity from either the related broker-dealer or investment adviser.  Typically, well-known banks are bank holding companies, with stock trading on the secondary market. Under the bank holding company, we find a bank, a broker-dealer, and a wealth manager/investment adviser. The three entities are related yet separate. Therefore, a bank is not a broker-dealer or an investment adviser, even when related to them under a common parent company.

We know candidates taking the Series 63 will have to understand registration of securities professionals to this level of detail. First, the state where the individual lives is irrelevant. What matters to the State Securities Administrator is, first, where the individual maintains a place of business. That is State B in your hypothetical, so the IAR must register with the Administrator of State B. If all clients in State C are institutional clients, no registration is required there. But if the IAR serves more than 5 retail investors residing in State C, the IAR must register there, as well.

This assumes that the agent is working for a state registered investment adviser. If the agent worked for a federally covered adviser the agent would only register where he / she works.

The word “cancellation” has a serious and final connotation to it, which is what makes it a good false answer to such a question. A cancellation order, like a withdrawal order, is not a punitive order.  The Administrator cancels a registration if the registrant dies, is declared mentally incompetent, or cannot be located. The most severe punitive order the Administrator issues is an order of revocation.

When the broker-dealer files Form BD with the regulators, the three owners will provide their disclosure information at that time. When a brokder-dealer files for registration in a state at least 1 officer must also register as an agent of the broker-dealer. As all 3 of the owners of the broker-dealer will be selling securities. All of the owners in this case will be required to register. 

The risk faced by an investor holding U.S Treasury securities is, certainly, low, but there are a few risks. First, these securities pay relatively low yields, making them more subject to purchasing power/inflation risk than other investments. Also, although the interest and principal payments are guaranteed by the United States Treasury, the securities have market prices, which fluctuate. An investment of $1 million into T-Bonds could drop to, say, a market value of just $800,000 if interest rates rise suddenly, for example. If that investor sells, he/she loses money. And, if the investor holds, their account value has dropped. Either way, an investment in U.S. Treasuries is low-risk, but no securities investment is “zero risk” or ensures the investor “can’t lose money.”

A fixed annuity does not meet the definition of a “security” under the Uniform Securities Act. It is, rather, an insurance product. An exempt security is a security that is not subject to registration requirements, for example a U.S. Treasury note or a municipal bond. Exempt securities are subject to the Uniform Securities Act’s anti-fraud statute, while a fixed annuity is outside the scope of the Uniform Securities Act, as is a whole life insurance policy. State insurance laws regulate these products. 

The Uniform Securities Act defines an “issuer” as, “any person who issues or proposes to issue any security.” The word “person” includes individuals and entities such as corporations, partnerships, and estates.

Securities agents and investment adviser representatives are individuals—natural persons—who receive compensation while representing a broker-dealer or an investment adviser. A broker-dealer or investment adviser could be owned as a corporation, a partnership, or an LLC. Or the firm could be owned as a sole proprietorship. If owned as a sole proprietorship, the broker-dealer or investment adviser would be indistinguishable from the individual who owned it. In that case, the broker-dealer or investment adviser would be a natural person, rather than a legal person such as a C-corporation.

Broker-dealers perform many different activities, from investment banking to providing custody for both retail and institutional investors. Investment advisers provide two main services: financial planning, or portfolio management. A mutual fund involves the services of a broker-dealer and an investment adviser. Sometimes, the two firms are affiliated. Sometimes, they are not. Either way, the investment adviser manages the portfolio of securities for compensation, while the broker-dealer acts as the sponsor of the fund. That means the broker-dealer markets the mutual funds and lines up broker-dealers to promote and sell the shares.

The better the investment results achieved by the investment adviser, the easier it is for the broker-dealers to sell the fund shares to investors. In a fictitious example, for the ABC Funds, ABC Distributors is a broker-dealer, while ABC Capital Management is the registered investment adviser to the fund. The broker-dealer markets and sells the investment to investors, while the investment adviser manages the portfolios for the various funds within the family.

Investment advisers providing portfolio management services to high net worth individuals and institutions typically have unaffiliated broker-dealers act as custodians for client assets. Broker-dealers are good at this kind of recordkeeping, while RIAs specialize in managing securities portfolios.