Ch 20: Resolving Disputes & Suitability
Simplified arbitration may be used if a dispute does not exceed $_______.
$50,000
A client was screaming at an RR on the telephone. Is a record of this complaint required to be maintained?
No. Only records related to written complaints are required to be maintained.
List some of the items found on an associated person's Form U4.
Personal data, address, 10-year employment history, personal bankruptcy within the last 10 years, SEC or SRO discipline
According to FINRA, complaints must be maintained in a file for how long?
four years.
If a client's goal is preservation of principal, what fund would be most appropriate?
money market fund
True or False: Zero coupon bonds would be a suitable recommendation for college funding.
True, especially since clients may want to avoid stock market risk.
A written customer complaint is retained for _____ years from the date of its resolution.
4 years
Firms are required to maintain written complaint records for _____ years.
4 years
A 60-year-old individual who's about to retire is heavily invested in one company's stock. The most suitable adjustment to the portfolio is to reallocate the assets to...
60% bonds and 40% equity.
What is a suitable asset mix for a 65-year-old retiree?
65% fixed income and 35% equity
What is a suitable investment for a conservative client seeking monthly income?
A GNMA Fund, since income is typically paid monthly
A company has current assets of $5 million, fixed assets of $15 million, and intangible assets of $7 million. The company also has current liabilities of $2 million, long-term liabilities of $10 million, and shareholders' equity of $15 million. What's the company's working capital? A) $27 million B) $3 million C) $5 million D) $8 million
B) $3 million The formula for calculating the working capital is current assets minus current liabilities (i.e., Working Capital = Current Assets - Current Liabilities). Since the company has $5 million of current assets and $2 million of current liabilities, the working capital is $3 million ($5 million current assets - $2 million current liabilities).
A registered representative has a 33-year-old client with a stable income with no foreseeable need to access money. The client is looking for a long-term investment that will offer a guaranteed rate of return, that can also share in the performance of the stock market, and offers some form of death benefit. Which of the following investments is MOST suitable for this client? A) A fixed annuity B) An equity-indexed annuity C) A variable annuity D) A variable life insurance policy
B) An equity-indexed annuity An equity-indexed annuity will satisfy the objectives of this client. It is a hybrid investment which offers the benefits of a fixed annuity—guaranteed rate of growth—as well as those of a variable annuity—growth potential in the market. These, like most annuities, are not designed as short-term investments. The variable life insurance policy is designed to provide death benefits that can increase because of growth in the market. (73825)
A registered representative recently purchased a new vacation home and is in the process of renovating it. The RR is disputing an overage expense of $14,000 with her contractor, but the contractor responds by filing a lien against the RR. What's the BEST course of action for the RR to take? A) Contact the contractor and attempt to settle the matter using arbitration. B) File an updated Form U4. C) Take no action until the lien is satisfied. D) Take no action since the amount of the lien doesn't exceed $15,000.
B) File an updated Form U4. Form U4 must be updated for any unsatisfied judgments or liens. Once the lien is settled, the RR is required to update her Form U4. The $15,000 threshold is only for investment-related arbitration, civil litigation, or complaints.
Which of following investments would be the BEST recommendation for a customer with a medium or moderate risk tolerance? A) 10% large-cap equity funds, 5% international equity mutual funds, 55% bond funds, and 30% cash B) 15% large-cap equity funds, 5% small-cap equity funds, 10% international equity funds, 45% bond funds, and 25% cash C) 35% large-cap equity funds, 15% small-cap equity funds, 15% international equity funds, 30% bond funds, and 5% cash D) 45% large-cap equity funds, 25% small-cap equity funds, 20% international equity funds, 5% bond funds, and 5% cash
C) 35% large-cap equity funds, 15% small-cap equity funds, 15% international equity funds, 30% bond funds, and 5% cash Moderate or medium risk tolerance is best defined as; willing to accept some risk to initial principal and some volatility in exchange for higher returns. The portfolio choice of 35% large-cap equity funds, 15% small-cap equity funds, 15% international equity funds, 30% bond funds, and 5% cash is the most appropriate with an allocation of 65% equity and 35% bonds and cash. The portfolio with 45% large-cap equity funds, 25% small-cap equity funds, 20% international equity funds, 5% bond funds, and 5% cash is too aggressive with 90% equity exposure. The remaining two choices are too conservative—not enough equity exposure. (31677)
Industry disputes are handled through ______________.
arbitration
An options investor who expects that a stock is about to appreciate, but wants to limit potential losses, should consider a ....
bullish call spread.
With principal approval, a registered representative can perform a ___________________ to rectify an order being executed in the wrong account for a client.
cancel and rebill
An investor who has a large sum of money to invest, but will need to liquidate the investment within the next couple of years, may find the ____________ shares of a mutual fund to be most suitable.
class A
It's unsuitable to recommend the purchase of class ________ mutual fund shares to a customer who has a significant amount of money to invest and a short investment horizon.
class B
If an individual's investment objective is capital growth, but he wants to engage in intraday trading, he could consider an...
exchange traded fund (ETF).
If a daughter has trading authority in her mother's account and believes that inappropriate fees are being charged, she can do what?
file a complaint with the firm.
If an individual is or has been charged with any felony and/or certain misdemeanors, he's required to...
disclose this information on Form U4
A variable annuity is most suitable for a client who is seeking ________ ____________ over a long period.
A variable annuity would be most suitable for a client who is seeking capital appreciation over a long period.
A registered representative receives a sell order from his customer. When he submits the order, he accidentally transposes two of the digits in the account number and the order is processed under the wrong account. This problem is rectified: A) By the branch office manager B) With a purchase of the security out of the wrong account C) By placing the order in an error file D) By the registered representative
A) By the branch office manager The branch office manager will rectify this error by correcting the account number and crediting the sale in the proper account. The order is not placed in the error file since it was properly executed, but in the wrong account. The registered representative doesn't rectify these types of problems. The wrong account will not be responsible for anything related to the incorrect order. (15607)
A customer who's in his late 20s wants capital appreciation and is willing to take a moderate degree of risk in his initial investment. If the customer is also concerned about the inflationary risk to his portfolio, which of the following investments is MOST suitable? A) Equities B) Corporate debt C) Municipal debt S) Variable annuities
A) Equities Since the investor is concerned about inflationary risk and is willing to accept a moderate degree of risk to his initial investment, equities are the most appropriate investment. If the investor wanted a tax-deferred investment with the same investment objectives, variable annuities are the most suitable choice. (15658)
Which of the following actions by an applicant for registration are grounds for statutory disqualification? A) Making false or misleading statements concerning her business relationship with a person who has been banned from the securities industry B) Failing to graduate from high school C) Conviction in U.S. federal court of a securities-related felony 15 years ago D) Failing to notify the firm of a felony indictment for which the applicant was not convicted
A) Making false or misleading statements concerning her business relationship with a person who has been banned from the securities industry The following four actions would be grounds for the statutory disqualification of an applicant's registration. 1) Having been expelled or suspended from membership or participation in, or barred or suspended from being associated with, any self-regulatory organization or foreign equivalent of a self-regulatory organization 2) Having associated with any person who is known or, with exercise of reasonable care, should be known, to be a person that is subject to an order of the Commission, other appropriate regulatory agency, or foreign financial regulatory authority 3) Having been convicted, not simply indicted, within the last 10 years of any felony or securities-related misdemeanor. 4) Having willfully made any statement that was false or misleading with regard to any material fact, or having omitted to state any material fact in any self-regulatory organization application, report, or proceeding. The level of education is not important. Had the applicant made a false statement regarding his level of education, would be grounds for disqualification. (32613)
An applicant will be subject to statutory disqualification for any felony conviction within the last ___ years.
An applicant will be subject to statutory disqualification for any felony conviction within the last 10 years.
To whom are written or electronically-sent grievances (complaints) forwarded?
An immediate supervisor
Which of the following securities would be LEAST suitable for an investor interested in preservation of capital? A) Long-term CDs B) Reverse convertible bonds C) A corporate bond fund D) A floating rate bond maturing in five years
B) Reverse convertible bonds Reverse convertible securities would not be suitable for an investor interested in preservation of capital. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the "knock-in level". If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal (the most beneficial option). If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal. (73550)
_____________ is most suitable for investors seeking income, NOT capital appreciation or preservation of capital.
Blue chip preferred stock
Blue chip preferred stock is most suitable for investors seeking ________, NOT ________________ or _________________
Blue chip preferred stock is most suitable for investors seeking income, NOT capital appreciation or preservation of capital.
An investment banking principal has received a letter from a customer complaining about a recent new issue that declined substantially on its first day of trading. The client purchased the shares based on a recommendation by an associated person of the firm. The customer contends that the recommendation was unsuitable. Which of the following statements is TRUE? A) The firm must keep a copy of the complaint for six years B) The principal must review the complaint and submit a written response to the customer C) A memo must be prepared describing any action taken in response to the complaint D) The firm must enter promptly into arbitration (or mediation) with the customer to determine whether a reimbursement is warranted
C) A memo must be prepared describing any action taken in response to the complaint All written complaints must be reviewed by a principal and must be kept in a file, along with a memo describing any action taken in response to the complaint. There is no requirement to respond to the client in writing or to enter into arbitration or mediation. Under FINRA rules, records of complaints must be kept for a minimum of four years. (66219)
If a customer intends to engage in intraday trading and has an investment objective of capital growth, she may purchase: A) An index fund B) An index option C) An exchange-traded fund (ETF) D) A balanced fund
C) An exchange-traded fund (ETF) Of the choices given, only an ETF offers an investor the ability to engage in short-term trading and meet the objective of capital growth. Both index and balanced funds offer capital growth, but not short-term trading; on the other hand, index options offer short-term trading, but not capital growth. (33337)
A customer wishes to make a purchase based on his belief that interest rates will decline over the next 15 years. The recommendation of which TWO of the following securities is NOT consistent with the customer's belief? I. A 5-year noncallable bond II. A tax anticipation note (TAN) III. Floating rate notes IV. A 15-year bond with a 5-year put feature A) I and III B) I and IV C) II and III D) II and IV
C) II and III Since the customer believes interest rates will decline, he wants to lock in a high yield for the next 15 years. A TAN is a short-term security and a floating rate note's interest rate would be adjusted downward with prevailing interest rates. Neither would lock in the high return. The 5-year noncallable bond would lock in a high return without the possibility of being called prior to maturity. The 15-year bond locks in the high return and the 5-year put feature permits the investor to redeem the bond after 5 years or keep it to maturity. This decision would depend on the prevailing rates in 5 years.
If an investor expects interest rates to fall significantly in the next two years, what would be the most appropriate investment? A) T-bills B) Treasury notes C) Treasury bonds D) Mortgage pass-through certificates
C) Treasury bonds Long-term bond prices are more volatile than short-term bond prices. If the investor expects interest rates (yields) to decline, the investor is anticipating rising bond prices. Of the four choices, the investment that would appreciate the most is the Treasury bonds. (85117)
A customer who's in his late 20s wants capital appreciation and tax-deferred growth. He's willing to take a moderate degree of risk in his initial investment, but is concerned about the inflationary risk to his portfolio. Which of the following investments is MOST suitable? A) Equities B) Corporate debt C) Variable annuities D) Municipal debt
C) Variable annuities Since the investor is concerned about inflationary risk, wants tax-deferred growth, and is willing to accept a moderate degree of risk to his initial investment, variable annuities are the most appropriate investment. If the investor didn't want a tax-deferred investment with the same objectives, equities would be the most suitable choice. (15654)
A customer who's in his early 50s recently received a sizeable bonus and his investment objective is to maximize his tax-free income. He has two children who are already attending college. Which of the following choices is the BEST method of investing the funds? A) Contribute the maximum amount allowable to a 529 plan B) 50% equities, 20% general obligation bonds, 15% utility revenue bonds, and 15% Treasury Inflation-Protected Securities (TIPS) C) 20% high-yield corporate bonds, 20% airport revenue bonds, 20% general obligation bonds, 20% Treasury bonds, and 20% tax anticipation notes D) 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds
D) 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds Since this customer is seeking to maximize his tax-free income, he needs to invest in different types of municipal securities. A portfolio of 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds is suitable for this investor. There's no reason to be overly concerned with having a small percentage (20%) invested in high-yield municipal bonds. Equities, corporate bonds, Treasury Bonds, and Treasury Inflation-Protected Securities (TIPS) are all taxable fixed income securities that will not maximize tax-free income. Since the customer's children are already attending college, the tax-free growth that's available with a 529 plan wouldn't be advantageous or a suitable investment when seeking tax-exempt income. (15661)
A CMO would be suitable for an investor seeking: A) Monthly tax-free income, assuming he does need the principal returned at maturity B) Quarterly income, assuming he does not need the principal returned at maturity C) Monthly income, assuming he needs the entire principal returned at maturity D) Monthly income, assuming he does not need the entire principal returned at maturity
D) Monthly income, assuming he does not need the entire principal returned at maturity CMOs pay monthly income made up of interest, which is taxable, and principal, which is a tax-free return of capital. Due to the structure of a CMO, a fluctuating amount of principal is returned monthly, not at maturity, which makes CMOs different from most other fixed-income securities. (72867)
A business development company (BDC) is MOST suitable for which of the following investors? A) An investor who is seeking a liquid investment in a portfolio of established companies B) An investor who is seeking a non-speculative investment in a portfolio of companies that are privately held C) An investor who is seeking a speculative investment in a portfolio of distressed companies and understands that the investment will not offer liquidity D) An investor who is seeking a speculative investment in a portfolio of distressed companies and is interested in liquidity
D) An investor who is seeking a speculative investment in a portfolio of distressed companies and is interested in liquidity A business development company (BDC) raises capital by selling securities to investors, has a structure that is similar to a closed-end investment company, and provides the investor with access to their capital (liquidity). A BDC will use the money it raises to invest in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. Since some of the funds are invested in the equity of non-public companies, purchasing shares of a BDC is similar to buying a publicly traded investment in a private equity firm. Due to the speculative nature of BDC investments, RR's should inform investors of all of the potential risks before making the investment. (30712)
A registered person is concerned that his boss is making inappropriate advances. This allegation must be settled by: A) Arbitration B) Litigation C) Mediation D) Any method of the registered person's choosing, including remediation through the court system
D) Any method of the registered person's choosing, including remediation through the court system By signing the application for securities industry registration (Form U4), registered persons agree to a statement that says, in part, "I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or bylaws, of the SROs indicated ... " FINRA rules require that disputes between firms, a firm and its employee, or a firm and a clearing corporation must go to arbitration. An exception exists when the dispute involves statutory discrimination claims, such as sexual harassment. The aggrieved party (the employee) may choose mediation, or may pursue his claim in either arbitration or the court system. (79501)
Prior felony convictions must be disclosed on Form U4 if the conviction occurred: A) Within the last 2 years B) Within the last 5 years C) Within the last 10 years D) At any time
D) At any time Any person filing Form U4 is required to disclose all felony convictions regardless of when they occurred. The person seeking registration will be statutorily disqualified if the conviction was within the last 10 years. The person may be registered if she requests and receives permission at a special hearing. (63375)
An investor's goal is to buy a security that establishes a fixed return, for a long period, with no reinvestment risk. Which of the following securities BEST suits the investor's needs? A) Treasury bonds B) Common stock C) Highly rated corporate bonds D) Treasury STRIPS
D) Treasury STRIPS The typical yield-to-maturity calculation assumes that each interest payment is reinvested at the same yield. There is no guarantee that the investor could reinvest at the same yield (reinvestment risk). Treasury STRIPS are zero-coupon bonds (long-term). Interest is automatically reinvested and compounded at the same yield and reinvestment risk is avoided. (72794)
True or False: Form U4 provides information regarding the schools the associated person has attended.
False
For what reasons would a firm use its error account?
If the firm or one of its RRs executed a trade involving the wrong security/quantity or on the wrong side of the market
What should an RR do if she receives a written complaint?
Immediately forward it to her manager
In the case of an erroneous transaction report, the _______ execution price is binding on the client.
In the case of an erroneous transaction report, the actual execution price is binding on the client.
May a customer be forced to use arbitration?
No, but signed pre-dispute arbitration agreements are binding.
An RR is required to update his Form U4 if a lien is placed against him, regardless of the dollar amount of the lien. True or false?
True
When arbitration involves public customers, __________ of arbitrators must be from outside the securities industry.
When arbitration involves public customers, a majority of arbitrators must be from outside the securities industry.
After acknowledging receipt of a written complaint, when must firms respond to the complaint?
Within a reasonable period
When a minor dispute is handled through simplified arbitration, is the ruling final and binding?
Yes, all arbitration decisions are final.
A _______ beta stock is most suitable for aggressive investors, while a ________ beta stock is most suitable for conservative investors
high beta low beta
Form U4 contains a person's employment history for the last ____ years.
last 10 years
A customer who's subject to the AMT and is seeking tax-free income should purchase...
non-AMT municipal bonds.
An investor who anticipates a decline in the value of a security, but can only afford to lose the entire value of the investment, should purchase ________ options on the security.
put
With principal approval, a registered representative can perform a cancel and rebill to do what?
rectify an order being executed in the wrong account for a client.
what type of order is the most cost-effective method of protecting an investment from a decline in value?
sell stop order
A __________ strategy is the most suitable method of reducing interest-rate risk in a bond portfolio.
short-duration
Convictions for any felony or securities-related misdemeanors within the last 10 years will subject a person to....?
statutory disqualification. conviction can be from any domestic, foreign or military court.
If a customer submits a written complaint to a broker-dealer and later withdraws it, is the firm obligated to maintain a record?
yes, the firm has an obligation to maintain a record of the complaint as well as any action taken to resolve it.
Form U4 contains details about settlements exceeding $______ related to complaints, arbitration, or civil litigation.
$15,000
he maximum claim under simplified arbitration is $________.
$50,000
A BD bought 100 shares of CBA for Jim, rather than ABC shares. How is the BD's error account used to fix the mistake?
1) Move CBA to error acct 2) sell ABC to client from error acct 3) buy ABC to cover sale 4) sell CBA from error acct
Which of the following allocations would be the LEAST suitable for an investor with a thirty-year time horizon, moderate risk tolerance, and the goal of long-term growth? A) 50% money-market funds, 50% long-term government bond funds B) 50% large-cap stock index funds, 25% small-cap funds, 25% emerging markets funds C) 75% large-cap stock funds, 25% international stock funds D) 50% equity income funds, 30% small-cap funds, 10% global funds, 10% balanced funds
A) 50% money-market funds, 50% long-term government bond funds An investor with a long time-horizon and a goal of growth should have some part of her portfolio in equity securities. An allocation of 50% money-market funds and 50% long-term government bond funds, is unlikely to meet this investor's goal. (84042)
A conservative investor has a long-term time horizon. He wants an investment that will provide him with long-term capital appreciation, and will not be too volatile. Which of the following funds would be the MOST suitable for him? A) A value fund B) A growth fund C) A fund of funds D) An emerging markets fund
A) A value fund Of the choices given, a value fund would be the best option for the investor. As with a growth fund, the main objective of a value fund is long-term capital appreciation. Value funds are usually considered less volatile than growth funds, since they invest in companies that are priced low in relation to their earnings. They also tend to invest in more mature companies that are more likely to pay regular dividends than pure growth funds. Both a fund of funds and an emerging markets fund would be too risky for him. (31624)
For an investor seeking income, which of the following is the MOST suitable investment in an IRA? A) Corporate bonds B) U.S. government bonds C) Variable annuity D) Municipal bonds
A) Corporate bonds Since the IRA is a tax sheltered account, corporate bonds are the most suitable since they have the highest yields (i.e., rates of return). Since municipal bonds offer interest that's federally tax-exempt, their yields are lower than corporate bonds that have the same credit risk. Variable annuities are typically not suitable as investments in an IRA, unless the investor needs regular payments in retirement.
A customer who's in his late 20s wants capital appreciation and is willing to take a moderate degree of risk in his initial investment. If the customer is also concerned about the inflationary risk to his portfolio, which of the following investments is MOST suitable? A) Equities B) Corporate debt C) Municipal debt D) Variable annuities
A) Equities Since the investor is concerned about inflationary risk and is willing to accept a moderate degree of risk to his initial investment, equities are the most appropriate investment. If the investor wanted a tax-deferred investment with the same investment objectives, variable annuities are the most suitable choice. (15658)
An individual wants to buy an interest in an oil and gas limited partnership that has the LEAST amount of risk. The MOST suitable recommendation is a(n): A) Income program B) Exploratory program C) Developmental program D) Balanced program
A) Income program Since an income program purchases producing wells and the risk of not finding oil is eliminated, it's the safest investment of the four types of oil and gas programs. Developmental programs drill in areas of known reserves and reduce the risk of not striking oil and/or gas. Exploratory programs drill in new areas and have the highest risk of not striking oil and/or gas. A balanced program does both developmental and exploratory drilling. For that reason, it's more risky than a developmental program, but less risky than an exploratory program. (15629)
A customer wants safety of income and preservation of capital. Which of the following securities is MOST suitable? A) Investment-grade corporate bonds B) Convertible bonds C) Collateralized mortgage obligations D) High-yield corporate bonds
A) Investment-grade corporate bonds Investment-grade (highly rated) corporate bonds offer an investor safety of income and preservation of capital. The risk of default is minimal. The investor realizes income as well as preservation of capital. The other choices offer income, but have a higher degree of capital risk and, therefore, less preservation of capital. (72660)
An individual places an order to be executed in her traditional IRA, but it was accidentally executed in her Roth IRA. After notifying the principal, what should the registered representative do? A) Perform a cancel and rebill to the traditional IRA. B) Cancel the transaction. C) Tell the customer that execution in the Roth IRA is better. D) Secretly change the firm's execution records.
A) Perform a cancel and rebill to the traditional IRA. This is a relatively easy adjustment that can be completed by the registered representative after receiving permission from his supervising principal. To accomplish this, a confirmation will be generated to cancel the original trade in the Roth IRA and another confirming the trade in the customer's traditional IRA.
A registered representative is meeting with a new client who's 92 years old. The client receives Social Security, a monthly pension, and has a $1.2 million portfolio which has a current allocation of 35% in bonds and 65% in equities. What should the RR recommend? A) Rebalance the portfolio to 10% equities and 90% bonds B) Make no changes to the portfolio's allocation C) Sell all of the equities and invest the proceeds in bonds D) Leave the bond allocation the same, liquidate the equity portion, and invest the proceeds a fixed annuity
A) Rebalance the portfolio to 10% equities and 90% bonds Since the client is in her early 90s, approximately 90% of the portfolio should be invested in bonds and 10% should be invested in equity securities. As a rough estimate, a client's age (e.g., 92) is the percentage of the portfolio that should be in bonds and 100% minus the customer's age is the percentage to be invested in equity (e.g., 100% - 92% = 8%). It's unnecessary for 100% of the portfolio to be invested in bonds since the client is receiving income from Social Security and her pension (i.e., safe sources of income).
A variable annuity would be MOST suitable for which of the following customers? A) client in a high tax bracket who is purchasing the annuity for his spouse's retirement needs B) A client in a high tax bracket who is purchasing the annuity for short-term liquidity needs C) A client who is purchasing the annuity in a 401(k) for his retirement needs D) A client who is purchasing the annuity in order to have the funds available by the age of 50
A) client in a high tax bracket who is purchasing the annuity for his spouse's retirement needs A variable annuity is most suitable for an investor seeking long-term, tax-deferred income for retirement. A tax-deferred investment, as with a variable annuity, becomes more advantageous for an investor with a higher tax bracket. A variable annuity is unsuitable for customers that have short-term needs since the insurance company may impose surrender charges if the annuity proceeds are withdrawn early. It would also be unsuitable for a client purchasing the annuity in a tax-qualified account such as a 401(k) or IRA, since these accounts already have the benefits of tax-deferred growth. If a client withdraws the proceeds of a variable annuity prior to age 59 1/2, a 10% tax penalty applies. (73447)
An investor is looking for an investment that will generate deductions but also provide the potential for future cash flow. Which of the following is NOT an appropriate investment? A) raw land program B) An existing properties real estate program C) An oil and gas drilling program D) An oil and gas exploratory program
A) raw land program All of the choices provide potential for future cash flow and deductions except for a raw land program. In a raw land program, deductions are negligible and the profit potential comes in the form of capital appreciation, not cash flow. (72249)
Any amendment to Form U4 must be filed within ___ days of the event.
Any amendment to Form U4 must be filed within 30 days of the event.
According to SRO rules, an email message complaining about excessive commissions sent to an RR's personal electronic device: A) Does not constitute an official complaint since the electronic device is not an official broker-dealer contact channel and its use for business is typically prohibited B) Is a complaint and must be maintained by the broker-dealer C) Is a complaint and must be forwarded to the appropriate SRO D) Must be followed up within 10 business days by a written document from the client to be considered an official complaint
B) Is a complaint and must be maintained by the broker-dealer Records of customer complaints must be maintained according to SRO record-keeping rules. Complaints may be delivered in any written format, including letters, email, IMs, and text messages. There is no requirement to follow up an electronic communication with a paper document or to send the complaint to the appropriate SRO. (73407)
A direct participation program in undeveloped land is considered: A) Conservative B) Speculative C) Income-oriented D) Depreciable
B) Speculative A direct participation program in undeveloped land is considered speculative. (72257)
As a customer's tax bracket increases, an RR is likely to allocate more of a customer's portfolio to: A) Bond funds B) Tax-exempt funds C) Stock funds D) International funds
B) Tax-exempt funds This question focuses on an investor whose tax burden is increasing. An investment that produces a taxable return is taxed at the investor's marginal rate (i.e., the investor's tax bracket). However, dividend income from a tax-exempt fund doesn't incur this burden. (Note that capital gains distributions from a tax-exempt fund are still taxable.) (15652)
A registered representative enters an order for a client. In error, the RR purchases shares of the wrong security. Which of the following statements is TRUE? A) The shares must be placed in the RR's error account B) The shares must be placed in the broker-dealer's error account C) The RR must contact the client and cancel the original transaction D) The firm is required to report the error to the market in which the order was executed
B) The shares must be placed in the broker-dealer's error account All broker-dealers are required to maintain an error account. It is used by a broker-dealer if the firm or an RR executes a trade in error (e.g., the wrong security or the wrong side of the market). RRs do not have an error account. It is maintained by the firm. The firm should execute the original transaction immediately and maintain a record of the error. The firm is not required to notify the market where the order entered in error was executed.
A customer has a net worth of $2 million and has $475,000 in a brokerage account. The customer wants to use some of the funds to purchase a vacation property near a beach, but has not yet found the right property. If the customer is subject to the highest marginal tax rate, wants preservation of capital, and access to her funds, what should her registered representative recommend? A) Short-term corporate debt B) Treasury bills C) Treasury notes D) Short-term U.S. government agency debt
B) Treasury bills For this customer, the best choice is Treasury bills since they have the lowest interest-rate and credit risk and offer safety of principal. Also, they're the most liquid securities which provides quick access to the funds.
As a retirement vehicle, which of the following choices would probably provide the greatest protection of purchasing power? A) Fixed annuities B) Variable annuities C) Corporate bonds D) Mortgage-backed securities
B) Variable annuities Variable annuities, theoretically, provide the greatest protection against loss of purchasing power. The payout is based on the securities (mostly equity securities) in the separate account, which historically have increased in inflationary periods. This provides for a larger cash payout to offset the effects of inflation. The other choices given have a fixed payout and do not offer protection against the loss of purchasing power in inflationary periods. (73296)
A high net worth investor who's seeking safety of principal will MOST likely invest in: A) Corporate convertible bonds B) Non-investment-grade corporate bonds C) An investment-grade corporate bond fund D) A variable annuity
C) An investment-grade corporate bond fund Safety of principal refers to a customer's desire to preserve or retain the initial amount of the investment over its life. Many bonds will offer investors this feature. The higher a bond's rating, the greater the likelihood the investor will achieve safety of principal. An investment-grade corporate bond fund offers more safety of principal than non-investment-grade and convertible corporate bonds. A variable annuity may fluctuate in value based on the performance of the subaccounts that are chosen by the investor. (15659)
An investor sells short 100 XYZ at 47 and buys 1 XYZ Nov 50 call at 3. Is the investor bullish or bearish on XYZ?
Bearish since the investor is short the stock. The call is purchased to protect upside risk.
What should an investor do on the VIX if she anticipates an increase in volatility?
Buy VIX Calls. If volatility increases, the underlying VIX will rise and the calls will increase in value.
A client enters a sell order. His broker-dealer executed the order and confirmed the sale at $60, but the day's highest sale price was $65. What price does the client receive for selling his shares? A) $65 B) $62.50 C) $60 D) The next calculated bid price
C) $60 In this question, the customer's instructions were followed and the execution price is binding. The highest or lowest price for the day may be higher or lower than a customer's execution price.
An investor has recently rolled over his 401(k) into an IRA at your firm. Which of the following securities will be MOST suitable if the investor wanted diversification and a higher return? A) A municipal revenue bond B) A Treasury note C) A hybrid REIT D) An equity REIT
C) A hybrid REIT Since this is a tax-deferred (retirement) account, the municipal security would not be suitable and, since the investor wants a higher return, the Treasury note would not be the best choice. Although either REIT may be suitable, the hybrid REIT is a better choice since the investor wants diversification. There are three types of REITs: mortgage REITs which provide funds to real estate owners in the form of lending them funds (i.e., a mortgage), equity REITs which own and operate income producing real estate (for example, apartment buildings, commercial property, shopping malls and other types of retail property, and vacation resorts), and hybrid REITs, which invest in both of these ventures. By purchasing a hybrid REIT, the investor can take advantage of buying a security that invests in actual equity ownership of real estate as well as investing in an interest-rate-sensitive security such as a mortgage REIT. (73282)
Joanne is a 50-year-old woman who just left the job she had held for 20 years. She has a substantial amount accumulated in her 401(k), which she's rolling over into an IRA. If she's planning to use this money to retire in 12 to 15 years, which of the following investments is the most appropriate for her? A) A bonus variable annuity B) A fixed annuity C) A stock fund D) A municipal bond fund
C) A stock fund Joanne's time horizon is long enough to make a stock fund an appropriate choice for her IRA. Since Joanne is already receiving the benefits of tax-deferred growth, a variable annuity is not an appropriate option. Generally, buying a variable annuity for a tax-deferred retirement account is often an expensive way of needlessly duplicating the tax benefits that most of these accounts already provide. Municipal bond funds are appropriate for investors who are seeking tax-exempt income. (15646)
A couple has a portfolio of domestic equity and bond funds. They wish to diversify their portfolio further. Which of the following investments would MOST likely fulfill this goal? A) An asset allocation fund B) A balanced fund C) An international fund D) A global fund
C) An international fund This is a question where you need to understand terminology. The client has a portfolio of domestic securities. What does that mean? Domestic implies within the United States. The funds the couple already own contain securities issued in the United States. Since they wish to diversify, they need to purchase securities from outside the United States. An asset allocation fund and a balanced fund contain domestic securities, so they would not offer any further diversification. A global fund means securities from around the world, including the United States. Remember, the couple has enough of their money invested in U.S. securities. The International Fund is the best answer. It holds only foreign securities in the portfolio. (84509)
Which of the following investors would be LEAST suitable for an oil and gas direct participation program (DPP)? A) An investor in the highest federal tax bracket B) A retired investor who is in the highest federal tax bracket C) An investor who is concerned about the alternative minimum tax D) An investor who recently inherited $5,000,000
C) An investor who is concerned about the alternative minimum tax An investment in an oil and gas limited partnership may have excess depletion and depreciation as well as excess intangible drilling costs. These are tax preference items and may result in an investor being subject to the alternative minimum tax (AMT). The other investors may or may not be suitable for an oil and gas DPP. It would depend on many other factors. However, an investor concerned about the AMT would not want to invest in a security that normally has tax preference items. (73594)
Which of the following investors is LEAST likely to purchase a collateralized debt obligation (CDO)? A) Agawam Commercial Bank & Trust Company B) Oakdale Pension Fund C) Robert & Susan Abramowitz, JTWROS D) Lincolnshire Hedge Fund
C) Robert & Susan Abramowitz, JTWROS Due to their highly complex nature, CDOs are generally not suitable for retail investors. A CDO (collateralized debt obligation) is a sophisticated financial instrument that begins with an individual loan (such as a mortgage or corporate debt). These loans are placed in a pool, and investors then purchase a security (bond, tranche, slice) that represents an interest in that pool. Each of these securities has a different maturity and credit risk, depending on the nature of the collateral behind it. This type of investment carries many risks and considerations that make it largely unsuitable for a typical retail investor. (74096)
Which of the following securities will provide an investor with protection against purchasing-power risk? A) Treasury bills B) Treasury notes C) TIPS D) STRIPS
C) TIPS Treasury Inflation-Protected Securities (TIPS) are U.S. government securities that are inflation-adjusted based on the Consumer Price Index (CPI). With TIPS, the rate of interest is fixed. However, the principal amount on which that interest is paid will vary based on the CPI. They are usually purchased as protection against inflationary or purchasing power risk. The other choices are U.S. government securities that pay an investor either a fixed rate or a fixed amount. (72808)
A customer submits a written complaint alleging unsuitable recommendations were made by her registered representative (RR). After the branch manager, the RR, and the customer met to discuss the complaint, the customer agreed that the investments were suitable and she withdrew the complaint. In this situation: A) The firm is only required to maintain a record of the complaint and the action taken if the firm provides written documentation of the suitability of the investments B) The firm is not required to maintain a record of the complaint C) The firm is still required to maintain a record of the complaint and the action taken to resolve it D) The firm is not required to maintain a record of the complaint if the customer submits a written statement that the complaint was withdrawn
C) The firm is still required to maintain a record of the complaint and the action taken to resolve it If a customer submits a written complaint and later withdraws it, the firm has an obligation to maintain a record of the complaint as well as any action taken to resolve it.
A woman with a low income has saved $5,000 to invest for her young son's college education. Which of the following investments would be the MOST appropriate? A) T-bills B) Municipal bonds C) Zero-coupon bonds D) A real estate limited partnership
C) Zero-coupon bonds Since the woman has a low income, municipal bonds and limited partnerships would not be of benefit. Since the son is young, a long-term investment would be most appropriate. (72276)
What actions may the hearing panel take regarding rule violations?
Censure, fine, suspension, request to requalify, or expulsion of the respondent
For what type of investor is a large-cap mutual fund most suitable?
Conservative equity investors, since the portfolio consists of stocks of large, established companies
Name some of the advantages of buying convertible bonds.
Consistent interest payments, appreciation if stock rises, downside protection if stock falls (since it's still a bond).
What must be included in a file related to written customer complaints?
Customer ID, date, name of the RR handling the account, complaint description, and a record of action taken
Which of following investment allocations is the BEST recommendation for a customer with an aggressive risk tolerance? A) 10% large-cap equity funds, 5% international equity mutual funds, 55% bond funds, and 30% cash B) 15% large-cap equity funds, 5% small-cap equity funds, 15% international equity funds, 45% bond funds, and 20% cash C) 35% large-cap equity funds, 15% small-cap equity funds, 15% international equity funds, 30% bond funds, and 5% cash D) 50% large-cap equity funds, 20% small-cap equity funds, 20% international equity funds, 5% bond funds, and 5% cash
D) 50% large-cap equity funds, 20% small-cap equity funds, 20% international equity funds, 5% bond funds, and 5% cash An aggressive risk tolerance is for investors who want high growth and do not need income. These investors are willing to accept high volatility and the possibility of substantial loss of their principal. The best recommendation from the listed choices would be the allocation with the largest amount of equity securities (50% large-cap equity funds, 20% small-cap equity funds, 20% international equity funds, 5% bond funds, and 5% cash). The remaining three choices offer too small of an allocation in equities. (31671)
A 75-year-old client is looking for a high level of income for his retirement fund. He wants to maintain a balance between income and safety of principal. Which of the following funds will MOST LIKELY meet this requirement? A) A high-yield fund B) An investment-grade fund C) A balanced fund D) A GNMA fund
D) A GNMA fund This question is a bit tricky, since there are two potentially correct answers. So, let's determine the answer that's the MOST correct. When a client states that he wants both safety of principal and income, it can be assumed that a large portion of his money should be invested in bonds. This makes a balanced fund a poor choice because a balanced fund contains both stocks and bonds, which implies a higher principal risk. Another concern with a balanced fund is that it's not a very good investment for a person who wants income because stocks generally pay less than bonds in percentage terms. A high-yield fund invests in junk bonds. Since high yield equates to high risk, this is not a good choice either. Now, what remains are the investment-grade fund and the GNMA fund. The GNMA fund is a better choice; but why? For starters, the GNMA fund will consist of GNMA securities which are fully backed by the U.S. government. In contrast, the investment-grade bond fund will consist of bonds that are issued by corporations with ratings as high as AAA and as low as BBB. Overall, the backing of a corporation is not as secure as the backing of the U.S. government. It's important to note that neither fund is backed by the government; instead, it's the contents of the GNMA fund that's backed by the U.S. government. Although the investment-grade fund may pay a little more in income, another benefit of the GNMA fund is that it will pay more interest than Treasury securities because GNMA yields are based on mortgages. These two facts are what make the GNMA fund a better choice for this investor.
A customer asks an RR for a recommendation as to how to invest a $150,000 inheritance. The customer would like to use the funds to start a new business within the next year. Which of the following would be the LEAST suitable recommendation for this customer? A) Taxable money-market funds B) Tax-exempt money-market funds C) Short-term U.S. government funds D) Balanced funds
D) Balanced funds While all of these funds are somewhat conservative, the balanced fund will contain some equity investments, which will expose the customer to market risk. Given the customer's short time horizon and objective of preservation of capital, the balanced fund would be the least suitable of the choices listed. (84475)
A client is seeking a safe investment that pays interest on a monthly basis. Which of the following securities would be an appropriate recommendation? A) STRIPS B) Preferred stock C) Treasury notes D) GNMA modified pass-through certificates
D) GNMA modified pass-through certificates Interest (and principal) payments on GNMA pass-through certificates are made monthly. Treasury notes and bonds pay interest semiannually. Preferred stock dividends are paid to shareholders only when declared by the corporation's board of directors. STRIPS are a zero-coupon Treasury security (non-interest-bearing). (74070)
If an investor was primarily interested in safety of principal, which of the following securities would you LEAST likely recommend? A) State GO bond B) GNMA security C) Railroad equipment trust bond D) Industrial development revenue bond
D) Industrial development revenue bond Industrial development revenue bonds are secured by a lease agreement with a corporation and are only as secure as the corporation. State GOs are generally of high quality and a GNMA is secured by the U.S. government. The holder of an equipment trust bond has a lien on the equipment that secures the issue. (74078)
If a pricing error occurs when reporting a trade, the client is obligated to accept the ________ price.
If a pricing error occurs when reporting a trade, the client is obligated to accept the actual price.
Investors who want to generate income on a stock position should ______ an option.
Investors who want to generate income on a stock position should sell an option.
List events that must be reported on an RR's Form U4.
Declaration of bankruptcy in the last 10 years, felony convictions, or making false statements to regulators
What steps should be taken when an RR executes a trade but uses the wrong account number?
Do a cancel and re-bill. Transfer the trade to the correct account number with permission of a supervising principal.
True or False: Listed securities and OTC securities have the same threshold for filing erroneous trade reports.
False
True or False: The findings of an arbitration panel may be appealed.
False. Arbitration decisions are final and binding.
True or False: A difference between arbitration and mediation is that mediation is binding and arbitration is not.
False. Arbitration is binding on all parties, whereas mediation is not.
True or False: If an RR executes a trade in error, the trade goes into the RR's error account.
False. Firms, not RRs, maintain error accounts.
True or False: A gambling-related misdemeanor must be reported on Form U4.
False. Only gambling-related felonies must be reported.
True or False: In settling disputes, arbitration and mediation attempt to help the disputing parties reach an agreement.
False. Only mediation seeks to find a mutually acceptable resolution for the disputing parties.
What annuity does not protect an investor against inflation?
Fixed (guaranteed) contracts are not a good hedge against inflation.
What is a suitable investment in a college fund for a 3-year-old?
Growth funds, since the child has a long time horizon
Hearing Panel findings may be appealed to the ___________________________,then the _____, and then ________________.
Hearing Panel findings may be appealed to the National Adjudicatory Council (NAC), then the SEC, and then federal court.
What is a suitable investment in a college fund for a 17-year-old?
High-grade bond funds, since the individual has a short time horizon.
If a firm makes an error in executing a client order, a __________ must be consulted to correct the error.
If a firm makes an error in executing a client order, a principal must be consulted to correct the error.
Simplified arbitration procedures are used for monetary disputes not exceeding $__________.
exceeding $50,000
Member firms must acknowledge receipt of written customer complaints within ____ business days of receipt.
Member firms must acknowledge receipt of written customer complaints within 15 business days of receipt.
Is market-timing a suitable recommendation for mutual fund investors?
No, since market-timing is a short-term trading strategy
Is an income bond appropriate for a client who desires income?
No. Income (adjustment) bonds will only pay interest if the issuer has sufficient income.
What is a suitable investment for a client whose goal is capital preservation?
T-bills or a U.S. Government money-market fund
What is the CRD?
The Central Registration Depository (CRD). CRD is FINRA's database for member registrations.
Shares were mistakenly bought in a client's account. Who is authorized to place the shares in the firm's error account?
The firm's principal
If a written complaint is received from a customer, what must be kept in the firm's complaint file?
The original complaint, the firm's response, as well as any action taken
To apply for a securities license, one must file Form _____ with FINRA.
To apply for a securities license, one must file Form U4 with FINRA.
An investor buys 100 shares of RST at 30 and sells 1 RST October 35 call at 2. What is the reason for selling the call?
To provide premium income on stable stock. Also note the premium provides a partial hedge against downside risk.
True or False: A sales practice violation settled for $10,000 or more requires an amendment to Form U4.
True
True or False: Any tax liens against an agent must be reported on Form U4.
True
True or False: Covered call writing is a conservative option strategy that is designed to generate income.
True
True or False: Mediation is often cheaper and quicker than an arbitration proceeding.
True
True or False: On Form U4, a person must disclose any aliases or previously used names.
True. An alias or previously used name could simply include a person's maiden name.
True or False: To hedge a stock position, buying options provides more protection than writing options.
True. When long stock, investors may buy a put. When short stock, investors may buy a call.
If a transaction is reported at a clearly erroneous price, when will review and action be taken by FINRA?
Under normal circumstances, within 30 minutes
If short stock, a call option can be used to limit _________ risk.
limit upside risk
Would a civil lawsuit filed by a customer against an RR be reported on the RR's Form U4?
Yes. Arbitration cases and civil lawsuits are reportable events.
If long stock, a put option can be used to limit ___________ risk.
downside risk
A BD must file Form U5 with FINRA when a person's association with that firm ______________.
ends/ceases