WILEY SERIES 63 EXAM REVIEW 2014

WILEY FINRA SERIES

Th is series includes the following titles:

Wiley Series 4 Exam Review 2014 + Test Bank: Th e Registered Options Principal Qualifi cation Examination

Wiley Series 6 Exam Review 2014 + Test Bank: Th e Investment Company Products/Variable Contracts Limited Representative Examination

Wiley Series 7 Exam Review 2014 + Test Bank: Th e General Securities Representative Examination

Wiley Series 9 Exam Review 2014 + Test Bank: Th e General Securities Sales Supervisor Qualifi cation Examination—Option Module

Wiley Series 10 Exam Review 2014 + Test Bank: Th e General Securities Sales Supervisor Qualifi cation Examination—General Module

Wiley Series 24 Exam Review 2014 + Test Bank: Th e General Securities Principal Qualifi cation Examination

Wiley Series 26 Exam Review 2014 + Test Bank: Th e Investment Company Products/Variable Contracts Limited Principal Qualifi cation Examination

Wiley Series 55 Exam Review 2014 + Test Bank: Th e Equity Trader Qualifi cation Examination

Wiley Series 62 Exam Review 2014 + Test Bank: Th e Corporate Securities Limited Representative Examination

Wiley Series 63 Exam Review 2014 + Test Bank: Th e Uniform Securities Examination

Wiley Series 65 Exam Review 2014 + Test Bank: Th e Uniform Investment Adviser Law Examination

Wiley Series 66 Exam Review 2014 + Test Bank: Th e Uniform Combined State Law Examination

Wiley Series 99 Exam Review 2014 + Test Bank: Th e Operations Professional Qualifi cation Examination

For more on this series, visit the website at www.wileysecuritieslicensing.com.

WILEY SERIES 63 EXAM REVIEW 2014

The Uniform Securities Examination

The Securities Institute of America, Inc.

Cover Design: WileyCover Image: © iStockphoto.com / LuisB

Copyright © 2014 by Th e Securities Institute of America, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Previous editions published by Th e Securities Institute of America, Inc. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best eff orts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. Th e advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

ISBN 9781118719541 (Paperback)ISBN 9781118844496 (ePDF)ISBN 9781118844526 (ePub)

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

Contents

ABOUT THE SERIES 63 EXAM IX

ABOUT THIS BOOK XIII

ABOUT THE TEST BANK XV

ABOUT THE SECURITIES INSTITUTE OF AMERICA XVII

CHAPTER 1 FEDERAL LAW REVIEW 1

The Securities Act of 1933 1The Prospectus 2The Final Prospectus 2Misrepresentations 3The Securities Exchange Act of 1934 3Net Capital Requirement 7Customer Coverage 7Fidelity Bond 8The Insider Trading and Securities Fraud Enforcement Act of 1988 8Firewall 9The Telephone Consumer Protection Act of 1991 9National Securities Market Improvement Act of 1996 10

vi Contents

The Uniform Securities Act 11The Uniform Prudent Investors Act of 1994 11

CHAPTER 2 DEFINITIONS OF TERMS 13

Security 13Person 15Broker Dealer 16Pension Consultants 18Form ADV 18Investment Adviser Representative 19Off er/Off er to Sell/Off er to Buy 21Sale/Sell 21Guarantee/Guaranteed 22Contumacy 22Federally Covered Exemption 22Pretest 23

CHAPTER 3 REGISTRATION OF BROKER DEALERS, INVESTMENT ADVISERS, AND AGENTS 29

Registration of Broker Dealers and Agents 29Agent Registration 30Registering Broker Dealers 31Financial Requirements 32Broker Dealers on the Premises of Other Financial Institutions 32Registering Agents 32Canadian Firms and Agents 34Investment Adviser Registration 34The National Securities Market Improvement Act of 1996/The Coordination Act 35Investment Adviser Representative 36Investment Adviser Registration 36

Contents vii

Capital Requirements 37Exams 37Advertising and Sales Literature 38Brochure Delivery 39Wrap Accounts 39Pretest 41

CHAPTER 4SECURITIES REGISTRATION, EXEMPT SECURITIES, AND EXEMPT TRANSACTIONS 47

Exempt Securities 47Securities Registration 48Registration of IPOs Through Coordination 48Registration Through Notice Filing 49Registration of Non-Established Issuers/Registration Through Qualifi cation 49Exempt Securities/Federally Covered Exemption 51Exempt Transactions 52Pretest 57

CHAPTER 5PROFESSIONAL CONDUCT AND PROHIBITED AND FRAUDULENT ACTIONS 63

Fraud 63Professional Conduct 64Suitability 64Market Manipulation 66Customer Complaints 67The Role of the Investment Adviser 67Additional Compensation for an Investment Adviser 68Agency Cross Transactions 68Disclosures by an Investment Adviser 68Investment Adviser Contracts 70

Private Investment Companies/Hedge Funds 70Soft Dollars 70Pretest 73

CHAPTER 6THE STATE SECURITIES ADMINISTRATOR AND THE UNIFORM SECURITIES ACT 81

Actions by the State Securities Administrator 81Cancellation of a Registration 82Withdrawal of a Registration 83Actions Against an Issuer of Securities 83Rule Changes 83Administrative Orders 83Interpretive Opinions 84Administrative Records 84Investigations 85Civil and Criminal Penalties 85Jurisdiction of the State Securities Administrator 86Administrator’s Jurisdiction over Securities Transactions 86Right of Rescission 88Statute of Limitations 89Pretest 91

ANSWER KEYS 97

GLOSSARY OF EXAM TERMS 105

INDEX 171

viii Contents

About the Series 63 Exam

Congratulations! You are on your way to becoming a registered repre-sentative licensed to conduct securities business in all states that require the Series 63. Th e Series 63 exam will be presented in a 60-question multiple-choice format. Each candidate will have one hour and 15 minutes to complete the exam. A score of 72% or higher is required to pass.

Th e Series 63 is as much a knowledge test as it is a reading test. Th e writ-ers and instructors at Th e Securities Institute have developed the Series 63 textbook, exam prep soft ware, and videos to ensure that you have the knowl-edge required to pass the test and to make sure that you are confi dent in the application of the knowledge during the exam. Th e writers and instructors at Th e Securities Institute are subject-matter experts as well as Series 63 test experts. We understand how the test is written, and our proven test-taking techniques can dramatically improve your results.

IMPORTANT EXAM NOTE

The Series 63 exam may use the terms NASD, FINRA, or both to describe

itself or its rules. Test takers are advised to be aware of this and to treat the

two terms as interchangeable. This text in most instances uses the most

up-to-date term—FINRA.

TAKING THE SERIES 63 EXAM

Th e Series 63 exam is presented in multiple-choice format on a touch-screen computer known as the PROCTOR system. No computer skills are required, and candidates will fi nd that the test screen works in the same way as an

x WILEY SERIES 63 Exam Review 2014

ordinary ATM. Each test is made up of 60 questions that are randomly chosen from a test bank containing several thousand questions. Th e test has a time limit of one hour and 15 minutes and is designed to provide enough time for all candidates to complete the exam. Each Series 63 exam will have fi ve additional questions that do not count towards the fi nal score. Th e Series 63 comprises questions that focus on the following areas:

State securities rules and regulations 36 questions 60%

Ethical practices & fi duciary obligations 24 questions 40%

TOTAL 60 questions 100%

HOW TO PREPARE FOR THE SERIES 63 EXAM

For most candidates, the combination of reading the textbook, watching the videos, and using the exam prep soft ware is enough to successfully complete the exam. It is recommended that the candidate spend at least 30 hours preparing for the exam by reading the textbook, underlining key points; watching the video class; and completing as many practice questions as possible. We recommend that candidates schedule their exam no more than one week aft er completing their Series 63 exam prep.

Test-Taking Tips

□ Read the full question before answering. □ Identify what the question is asking. □ Identify key words and phrases. □ Watch out for hedge clauses, for example, except and not. □ Eliminate wrong answers. □ Identify synonymous terms. □ Be wary of changing answers.

HOW MUCH HAS THE SERIES 63 EXAM CHANGED?

Over the last several years, the Series 63 exam has been made signifi cantly more challenging. Th e North American Securities Administrators Associa-tion (NASAA) has increased the percentage of the exam that concentrates on

the National Securities Market Improvement Act of 1996. On April 1, 2002, NASAA increased the number of total questions on the exam by 20%, from 50 to 60. Th e passing score was increased to 72% on January 1, 2010. Each test will also contain practice questions that are not graded.

WHY DO I NEED TO TAKE THE SERIES 63 EXAM?

In order to conduct securities business, most states require that an agent successfully complete the Series 63, in addition to obtaining a Series 6, 7, or 62 registration.

WHAT SCORE IS NEEDED TO PASS THE EXAM?

A score of 72% or higher is needed to pass the Series 63 exam.

ARE THERE ANY PREREQUISITES FOR THE SERIES 63?

A candidate is not required to have any other professional qualifi cations prior to taking the Series 63 exam.

HOW DO I SCHEDULE AN EXAM?

Ask your fi rm’s principal to schedule the exam for you or to supply you with a list of test centers in your area. If you are not with a member fi rm, you may obtain a Form U10 from the North American Securities Administrators Association (NASAA) to make an appointment. Th e Series 63 exam may be taken any day that the exam center is open.

WHAT MUST I TAKE TO THE EXAM CENTER?

A picture ID is required. All other materials will be provided, including a calculator and scratch paper.

About the Series 63 Exam xi

xii WILEY SERIES 63 Exam Review 2014

HOW SOON WILL I RECEIVE THE RESULTS OF THE EXAM?

Th e exam will be graded as soon as you answer your fi nal question and hit the Submit for Grading button. It will take only a few minutes to get your results. Your grade will appear on the computer screen, and you will be given a paper copy from the exam center.

If you do not pass the test, you will need to wait 30 days before taking it again. If you do not pass on the second try, you will need to wait another 30 days. If you fail a third time, you are required to wait six months to take the test again.

About This Book

Th e writers and instructors at Th e Securities Institute have developed the Series 63 textbook, exam prep soft ware, and videos to ensure that you have the knowledge required to pass the test, and to make sure that you are con-fi dent in the application of the knowledge during the exam. Th e writers and instructors at Th e Securities Institute are subject-matter experts as well as Series 63 test experts. We understand how the test is written, and our proven test-taking techniques can dramatically improve your results.

Each chapter includes notes, tips, examples, and case studies with key information, hints for taking the exam, and additional insight into the topics. Each chapter ends with a practice test, to ensure that you have mastered the concepts before moving on to the next topic.

About the Test Bank

Th is book is accompanied by a test bank of approximately 200 questions to further reinforce the concepts and information presented here. Th e access card in the back of this book includes the URL and PIN code you can use to access the test bank. Th is test bank provides a small sample of the questions and features that are contained in the full version of the Series 63 exam prep soft ware.

If you have not purchased the full version of the exam prep soft ware with this book, we highly recommend it to ensure that you have mastered the knowledge required for your Series 63 exam. To purchase the exam prep soft ware for this exam, visit Th e Securities Institute of America online at www.SecuritiesCE.com or call 877-218-1776.

About the Securities Institute of America

Th e Securities Institute of America, Inc. helps thousands of securities and insurance professionals build successful careers in the fi nancial services industry every year.

Our securities training options include:

• Onsite training classes• Private tutoring• Classroom training• Interactive online video training classes• State-of-the-art exam preparation soft ware• Printed textbooks • Real-time tracking and reporting for managers and training directors

As a result, you can choose a securities training solution that matches your skill level, learning style, and schedule. Regardless of the format you choose, you can be sure that our securities training courses are relevant, tested, and designed to help you succeed. It is the experience of our instructors and the quality of our materials that make our courses requested by name at some of the largest fi nancial services fi rms in the world.

To contact Th e Securities Institute of America, visit us on the Web at www.SecuritiesCE.com or call 877-218-1776.