Chapter 11 Customer Accounts Questions
A) Only SIPC Answer Explanation: The difference between FDIC and SIPC insurance is that only one has an "F" in the name i.e., is federally backed. SIPC is a not-for-profit corporation, and only SIPC's assets stand behind its promises. If necessary, SIPC can increase assessments against its members (brokerage firms) to meet obligations. Textbook Reference: Please see textbook section 11.6.3
What agency stands behind the promises of SIPC to protect assets held in customer accounts at brokerage firms? A) Only SIPC B) The US Government C) A US government agency is morally obligated D) The Federal Reserve
C) The U.S. Government Answer Explanation: The FDIC is a U.S. Government corporation that insures the deposit accounts of member banks, up to limits. The FDIC increases confidence in the banking system by putting a U.S. Government guarantee behind all insured deposit accounts, including CDs, up to limits prescribed by law. Textbook Reference: Please see textbook section 11.6.4
What entity stands behind the deposit insurance offered by the Federal Deposit Insurance Corporation (FDIC)? A) A consortium of financial institutions B) Private insurance companies C) The U.S. Government D) The Federal Reserve
D) Assets are disposed of according to terms of the owner's will or trust Answer Explanation: All individual accounts are frozen at death. If the brokerage firm has no record of a beneficiary, assets will be disposed of under terms of the owner's will or trust. Textbook Reference: Please see textbook section 11.3.1
What happens to assets held in an individual brokerage account after the owner's death, when the owner has not designated a beneficiary? A) Assets automatically go to the surviving spouse B) Assets automatically go to the surviving children C) Cash is distributed to an escrow account and securities are impounded D) Assets are disposed of according to terms of the owner's will or trust
C) The child gains control over assets at majority age Answer Explanation: The child gains access and control over all UGMA or UTMA assets at majority age and can use them for any purpose he/she chooses, whether or not they are college-related. Textbook Reference: Please see textbook section 11.3.3.1
What is a drawback of using a UGMA or UTMA account to plan for college expenses? A) Parents are allowed to use the assets for their own benefit B) Amounts that may be held in the account are limited C) The child gains control over assets at majority age D) Investments are restricted to bonds and money market funds
C) To act in the best interest of customers or clients Answer Explanation: The fiduciary duty focuses on putting customers' interests first and avoiding conflicts-of-interest. This includes an obligation to place client's interests ahead of the firm's own interests. Textbook Reference: Please see textbook section 11.3.3
What is required of a financial service provider that has a fiduciary duty to its clients? A) To maximize shareholder returns B) To ensure that all relevant facts are fully disclosed before actions are taken C) To act in the best interest of customers or clients D) To report any suspected violations of regulation or law
D) Unlimited Answer Explanation: Customers may keep unlimited amounts of cash in a cash account, and most broker-dealers pay money market interest rates on cash balances. However, SIPC only covers up to $250,000 of cash. Textbook Reference: Please see textbook section 11.2.1
What is the maximum amount of cash most broker-dealers allow customers to maintain in a cash account? A) $1 million B) Up to the FDIC limit C) Up to the SIPC limit D) Unlimited
C) 50000 Answer Explanation: A customer can buy double the amount of cash deposited to open the account (with a minimum deposit of $2,000). In other words, cash must be worth at least 50% of the securities purchase price. Textbook Reference: Please see textbook section 11.2.2.1
What is the maximum amount of stocks a customer can buy when opening a new margin account with a cash deposit of $25,000? A) 25000 B) 2000 C) 50000 D) 12500
C) 30% Answer Explanation: The minimum maintenance requirement for a short margin account is 30%. The requirement is 25% for a long account. Textbook Reference: Please see textbook section 11.2.2.3
According to FINRA rules, the minimum maintenance requirement for a short margin account is A) 25% B) 100% C) 30% D) 50%
B) An unaffiliated third party Answer Explanation: Under the provisions of Gramm Leach Bliley, a customer may opt out of sharing information with nonaffiliated third parties of the broker-dealer. Textbook Reference: Please see textbook section 11.6.1
According to industry regulation on customer privacy, a customer of a broker-dealer is permitted to opt out of sharing information with which of the following entities? A) The broker-dealer for the purpose of marketing other products to the customer B) An unaffiliated third party C) A subsidiary of the broker-dealer that offers a customer record keeping service D) A law enforcement agency that is investigating alleged financial fraud
A) Using customer securities as collateral for the broker-dealer's own borrowing Answer Explanation: In some margins accounts, brokers are allowed to re-hypothecate margined securities, which means the broker-dealer is re-pledging the customer's securities as collateral for the broker-dealer's own borrowing. The broker-dealer can then re-loan those funds to customers for making purchases on margin. Textbook Reference: Please see textbook section 11.2.2.5
A broker-dealer "re-hypothecates" securities that its customers hold in margin accounts. Which of the following statements best describes this practice? A) Using customer securities as collateral for the broker-dealer's own borrowing B) Haircutting the value C) Selling securities, if necessary, to meet margin calls D) Holding securities in a special escrow account
B) an agent trade and disclose the commission Answer Explanation: When a firm acts as an agent in a trade it charges a commission. This information must be included on the confirmation. Textbook Reference: Please see textbook section 11.5.2
A broker-dealer acts on behalf of a customer to purchase stock to fill the customer's order. The confirmation of the sale must report this trade as A) a principal trade and disclose the commission. B) an agent trade and disclose the commission. C) a principal trade and disclose the markup. D) an agent trade and disclose the markup.
D) on the morning of the fifth business day after the trade was made. Answer Explanation: If no extension is received, the position must be sold out on the morning of the fifth business day after the trade was made, and the account must be frozen for 90 days. Textbook Reference: Please see textbook section 11.2.1.1
A broker-dealer has frozen a cash account because the customer has not paid for a securities purchase. When must the broker-dealer sell out the securities? A) after 10 business days. B) on the Reg T settlement date. C) after the frozen account status is lifted. D) on the morning of the fifth business day after the trade was made.
C) The custodian of the account Answer Explanation: In an UGMA, the name of the custodian would appear on the new account registration form. The name of the donor would not appear on the paperwork, unless the donor was also the custodian. Textbook Reference: Please see textbook section 11.3.3.1
A broker-dealer has just received the new account paperwork for an UGMA account. Which of the following parties' names appears on the account form? A) The primary donor to the account B) The beneficiary of the account C) The custodian of the account D) A principal of the firm
B) must confirm customer acceptance of this delivery method electronically, and continue mailing hard copy statements to those who do not wish to accept electronic delivery. Answer Explanation: Broker-dealers can deliver annual statements electronically only if customers have given electronic consent to receive delivery of account information in this way. Textbook Reference: Please see textbook section 11.5.3
A broker-dealer plans to discontinue mailing hard copies of annual statements and instead will distribute the statements electronically. In order to begin electronic delivery of annual statements, the broker-dealer A) must send written notice of its intention 60 days in advance of the distribution of the statements. B) must confirm customer acceptance of this delivery method electronically, and continue mailing hard copy statements to those who do not wish to accept electronic delivery. C) can only furnish annual statements electronically to person who have online accounts. D) must request permission of FINRA and can then discontinue hard copy delivery after providing advance written notice.
B) minor Answer Explanation: A brokerage firm cannot open an individual account for a minor. It can open a UGMA account with an adult as the custodian for one minor. Textbook Reference: Please see textbook section 11.3.3.1
A brokerage firm can open an account for all of the following EXCEPT a(n) A) estate B) minor C) pension fund D) insurance company
C) Originated by the customer Answer Explanation: Confirms must show whether orders are solicited (recommended by a broker) or unsolicited (originated by the customer). Textbook Reference: Please see textbook section 11.5.2
A confirmation shows that an order was unsolicited. This means that it was A) Not specific as to a stated security B) Not directed to a specific venue for trading C) Originated by the customer D) Not specific as to a stated price
C) Place the order, mark the order ticket unsolicited and obtain signed and dated documentation from the customer for their file that specifies circumstances of the trade. Answer Explanation: If customers initiate trades for their accounts, the rules of suitable recommendations technically do not apply. However, in these situations, the order ticket should be marked unsolicited, and the representative should ensure the customer file is properly documented with the date, signature, and circumstances of the trade. Textbook Reference: Please see textbook section 11.1.3
A customer calls to insist on placing an order for municipal securities that you believe is inappropriate for the investment objectives of the account. You should A) Refuse to place the order B) Refuse to place the order and document your reason in writing. Documentation should be dated and kept in the customer's file with your signature. C) Place the order, mark the order ticket unsolicited and obtain signed and dated documentation from the customer for their file that specifies circumstances of the trade. D) Place the order and mark the order ticket unsolicited
B) 90 days Answer Explanation: If a sell-out occurs, the broker-dealer is required to freeze the customer's account for 90 days. Textbook Reference: Please see textbook section 11.2.1.1
A customer does not meet the Reg T call in a cash account. The broker-dealer has sold out securities in the account, and must freeze the account for A) 30 days. B) 90 days. C) ten business days. D) five business days.
C) send a copy of its most recent balance sheet by email. Answer Explanation: A broker-dealer must respond to requests for financial information with its most recent balance sheet. Responses can be in electronic form only if the customer confirms, through electronic means, that electronic form is acceptable. Textbook Reference: Please see textbook section 11.6.6
A customer emails his broker-dealer requesting a return email with financial information about the firm. The broker-dealer may, in accordance with FINRA rules, A) send a paper copy of its annual statement by mail since financial requests cannot be answered electronically. B) send a copy of its annual statement by email. C) send a copy of its most recent balance sheet by email. D) send a paper copy of its most recent balance sheet by mail since financial requests cannot be answered electronically.
B) acted as principal and received a markup Answer Explanation: An order to purchase stock that is filled from the firm's inventory is a principal transaction, and the compensation received by the firm is a markup. This information must be included in the confirmation. Textbook Reference: Please see textbook section 11.5.2
A customer has purchased ABC stock from a broker-dealer in a transaction that was filled from the broker-dealer's inventory. The customer's confirmation must report that the firm A) acted as agent and received a markup. B) acted as principal and received a markup. C) acted as agent and received a commission. D) acted as principal and received a commission.
A) Effect a short sale in their brokerage account Answer Explanation: All short sales must be effected in a margin account, for which a signed Margin Agreement is necessary. Textbook Reference: Please see textbook section 11.2.2.5
A customer must sign a Margin Agreement in order to A) Effect a short sale in their brokerage account B) Make an investment in a money-market mutual fund C) Purchase a stock and make full payment to the firm D) Purchase a speculative growth stock
C) acted as principal and received a markdown Answer Explanation: When stock is sold to the broker-dealer's inventory it is marked down. The confirmation must reflect the principal transaction and the amount of the markdown. Textbook Reference: Please see textbook section 11.5.2
A customer sells XYZ stock, which was purchased by the brokerdealer's inventory. The customer's confirmation must report that the firm A) acted as agent and received a commission. B) acted as agent and received a markdown. C) acted as principal and received a markdown. D) acted as principal and received a markup
C) the client did not provide certain financial information on the new account form. Answer Explanation: A client may place unsolicited orders only, if she did not provide required financial information to the firm. Textbook Reference: Please see textbook section 11.1.3
A customer would be permitted to place only unsolicited orders in an account if A) there are insufficient funds in the account. B) he did not indicate whether he has securities accounts at other broker-dealers. C) the client did not provide certain financial information on the new account form. D) the client's account was opened within the last ten days.
B) Is available upon request. Answer Explanation: A broker-dealer must provide access to information regarding its financial condition whenever requested by a customer to do so. Textbook Reference: Please see textbook section 11.6.6
A customer would like information about the financial condition of the firm they are dealing with. This information A) Is available only to institutional clients of the firm. B) Is available upon request. C) Is proprietary and may not be shared with customers. D) Must be requested through the SEC only.
C) The confirmation must be given or sent at or before the completion of the transaction Answer Explanation: MSRB rules specify that customer confirmations must be given or sent to the client at or prior to the completion of the trade (settlement). Textbook Reference: Please see textbook section 11.5.2
A municipal broker-dealer has sold bonds to a client in a secondary market transaction. Which of the following statements is TRUE regarding the customer confirmation? A) A telephoned confirmation is acceptable if agreeable to both parties to the trade B) Confirmation of the trade occurs on T+3, unless the transaction is settled in cash C) The confirmation must be given or sent at or before the completion of the transaction D) Confirmation is required no later than the business day following the trade
D) ensure that the investment objective of the account is appropriately aligned with the risk profile of the customer. Answer Explanation: In the account approval process, the principal or designated person who is reviewing the account must ensure that the account objectives of the account are consistent with the risk profile. Verification of all financial information is not required. Although the firm must send verification of the account information within 30 days of account opening, the account can be approved for trading before this occurs. Textbook Reference: Please see textbook section 11.1.4
A principal who is reviewing the suitability of an account in order to accept it on behalf of the broker-dealer must A) wait 30 days for the customer to verify the account suitability information before the account can be approved. B) verify all financial information. C) confirm the objectives with the representative before approving the account. D) ensure that the investment objective of the account is appropriately aligned with the risk profile of the customer.
D) indefinitely. Answer Explanation: An individual will remain on a firm do-not-call list for an indefinite period of time. There is no specific time frame mentioned in the rule. Textbook Reference: Please see textbook section 11.1.1
A prospective client of a broker-dealer has been placed on the firm's do-not-call list. This person will remain on the list A) for one year. B) for 5 years. C) for 10 years. D) indefinitely.
D) prohibited because cold calls can only be made between 8am and 9pm in the potential customer's time zone. Answer Explanation: Cold calls can be made between 8am and 9pm in the customer's time zone. Although it is 7:30pm in California, it is actually 10:30pm in New Jersey because of the difference in time zones. Therefore, this call is prohibited. Textbook Reference: Please see textbook section 11.1.1
A registered representative located in California makes a 7:30pm cold call to a potential customer in New Jersey. This is A) permitted as long as the potential customer is not on the do-not-calllist. B) permitted as long as the registered rep had prior verbal consent from the potential customer. C) permitted because the call occurred between the hours of 8am and 9pm. D) prohibited because cold calls can only be made between 8am and 9pm in the potential customer's time zone.
D) At the discretion of the trustor. Answer Explanation: A revocable trust can be altered or modified as the trustor wishes. Beneficiary consent not required in this instance. Textbook Reference: Please see textbook section 11.3.3.2
A revocable trust can be altered or cancelled A) With the consent of the state where the trust was drawn. B) Only with the beneficiary's written consent. C) Under no circumstances D) At the discretion of the trustor.
B) Custodial accounts Answer Explanation: Separate account disclosure is required when the account risk may be relatively high, as in options accounts, margin accounts and day trading accounts. Custodial accounts require additional documentation but not additional disclosure. Textbook Reference: Please see textbook section 11.2
A separate risk disclosure statement is required when all of the following types of accounts are opened for non-institutional investors EXCEPT A) Day trading accounts B) Custodial accounts C) Options accounts D) Margin accounts
A) The action, asset, or quantity to trade Answer Explanation: For a rep to be able to select the action, asset, OR quantity, written discretion must be granted by the customer. Textbook Reference: Please see textbook section 11.2.4
A trade is considered discretionary when the registered rep is able to decide A) The action, asset, or quantity to trade B) The asset, quantity, and price at which to trade C) The action and the quantity to trade D) The action to take and the asset to trade
A) manage the assets of a beneficiary. Answer Explanation: A trust is a legal entity, formed while a person is alive or deceased, whose purpose is to manage the assets of a beneficiary. This is usually accomplished through the trustee for the trust who acts as a fiduciary for the beneficiary. Textbook Reference: Please see textbook section 11.3.3.2
A trust is best characterized as an entity formed to A) manage the assets of a beneficiary. B) receive and pay bills for the estate of a deceased party. C) provide asset allocation advice to a custodian acting for a minor. D) ensure an investor will have positive returns in the securities markets.
D) Irrevocable trust Answer Explanation: An irrevocable trust may only be altered or terminated with the consent of the trust beneficiary. Textbook Reference: Please see textbook section 11.3.3.2
A type of trust which can only be altered with the consent of the trust beneficiary is a A) Living trust B) Executor trust C) Revocable trust D) Irrevocable trust
B) A minor Answer Explanation: A minor is considered a legal non-individual and is not permitted to open an account with a broker-dealer. Textbook Reference: Please see textbook section 11.3.3.1
All of the following are permitted to open accounts with brokerdealers EXCEPT A) A partnership B) A minor C) A married couple D) A trust Answer Explanation: A minor is considered a legal non-individual and is not permitted to open an account with a broker-dealer. Textbook Reference: Please see textbook section 11.3.3.1
C) The identity of the SROs that regulate the broker-dealer and its businesses Answer Explanation: The confirmation is not required to disclose the identity of the SROs that regulate the firm. It must, however, disclose potential conflicts of interest, such as whether the firm makes market in the security, receives payment for order flow, or is in a control relationship with the issuer. Textbook Reference: Please see textbook section 11.5.2
All of the following information must be included on a customer confirmation EXCEPT A) Whether payment was made for order flow B) Whether the broker-dealer is a market maker in the security C) The identity of the SROs that regulate the broker-dealer and its businesses D) Whether there is a control relationship between the broker-dealer and the issuer of the securities
A) Transactions in a discretionary account must be approved by the client prior to execution of the trade. Answer Explanation: FINRA Conduct Rules state that a registered rep must receive written authorization from a customer before exercising any discretionary authority. Additionally, all trades in discretionary accounts must be approved by a supervisor in writing (but not before the execution of the trade), and must be supervised diligently to detect any excessive trades or churning. Textbook Reference: Please see textbook section 11.2.4
All of the following statements about FINRA requirements for discretionary accounts are true EXCEPT A) Transactions in a discretionary account must be approved by the client prior to execution of the trade. B) A registered representative must have the client's prior written authorization before exercising any discretionary power. C) A designated person at the broker-dealer must approve in writing each discretionary order entered and must frequently review all discretionary accounts to detect excessive trading. D) Transactions in discretionary accounts cannot be excessive in size.
A) Approval must take place before any trading in the account Answer Explanation: The account approval must take place prior to or promptly after the first trade in a new account. Textbook Reference: Please see textbook section 11.1.4
All of the following statements about new account approvals are true EXCEPT A) Approval must take place before any trading in the account. B) Net worth information (excluding the value of the personal residence) must be collected for personal accounts to determine whether the account is suitable. C) Credit references and financial information, if required, should be verified by someone other than the representative who opened the account. D) The written account approval must become part of the permanent account record.
C) The social security number of the custodian is required for the opening of an UGMA account. Answer Explanation: An UGMA/UTMA account must include the custodian's name, and the name and Social Security number of the minor. Textbook Reference: Please see textbook section 11.3.3.1
All of the following statements are true regarding the opening of customer accounts EXCEPT A) The financial information of all partners must be collected when opening a partnership account. B) Court documentation is required to name a conservator as the responsible party for the account of an incompetent adult. C) The social security number of the custodian is required for the opening of an UGMA account. D) Margin account trading is permissible in corporate accounts if authorized.
A) Yes, if the individual has provided prior written consent. Answer Explanation: An individual on the national do-not-call list may provide specific written consent for the firm, or a representative of the firm, to contact them by telephone. Textbook Reference: Please see textbook section 11.1.1
An individual is on the national do-not-call list. May a registered representative of a broker-dealer place a telemarketing call to this individual? A) Yes, if the individual has provided prior written consent. B) Yes, if the broker dealer has requested and received written consent from FINRA to contact this individual. C) No, unless the individual previously received marketing materials from the firm. D) No, as the individual has specifically requested to be placed on this list and does not wish to receive any further phone calls from this firm.
A) 300000 Answer Explanation: After replacing securities, SIPC covers any remaining claims up to a maximum of $500,000, including not more than $250,000 in cash. If SIPC covers $200,000 in cash it then can cover up to $300,000 per investor in lost securities up to the $500,000 total limit. Textbook Reference: Please see textbook section 11.6.3
An investor has $200,000 of cash in a brokerage account with a broker-dealer that goes bankrupt and SIPC reimburses all of it. What is the maximum additional value of lost securities for which SIPC will reimburse the same investor in his account with the same broker dealer? A) 300000 B) 800000 C) 50000 D) None
B) market value at the time of death Answer Explanation: When securities are inherited following the death of the owner, the cost basis is the value of the securities at the time of death. Textbook Reference: Please see textbook section 11.3.3.2
An investor has inherited securities from a relative who has passed away. The cost basis of these securities to the investor is the A) original purchase price B) market value at the time of death C) market value at the end of the month in which the death occurred D) weighted average value at the time of death
B) An Options Disclosure Document and a Margin Disclosure Statement Answer Explanation: All customers who wish to engage in options trading must receive an Options Disclosure Document at or before the account approval. A margin disclosure statement must be provided to margin customers in a separate document prior to or at the opening of a margin account, and in an abbreviated form on an annual basis. Pattern day trading disclosure is required only if customers engage in day trading, which means they transacts four or more stock or options day-trades within a five-day period in a margin account. Textbook Reference: Please see textbook section 11.2.3
An investor that wishes to open an account to trade options on margin must receive which of the following disclosure documents? A) An Options Prospectus and a Margin Disclosure Statement B) An Options Disclosure Document and a Margin Disclosure Statement C) An Options Disclosure Document only D) An Options Disclosure Document, a Margin Disclosure Statement and a Day Trading Disclosure Statement
A) Churning Answer Explanation: An operations professional who suspects that a registered representative is engaging in churning should escalate the matter to his supervisor. Textbook Reference: Please see textbook section 11.2.4.1
An operations professional notices that a registered representative has been consistently generating excessive trades in a customer's account. What is the term for this violation of industry rules? A) Churning B) Front-running C) Inter-positioning D) Positraction
C) cannot continue to trade the account. Answer Explanation: At the time of death, an individual brokerage account is frozen, and any trading authority is cancelled. Normally, the account will then be re-titled into an account in the name of the beneficiary named on the transfer-ondeath (TOD) form. Textbook Reference: Please see textbook section 11.3.1
An owner of an individual brokerage account has given trading authority to his son. After the owner's death, the son A) can only continue trading the account if he is the beneficiary of the account. B) can place sell orders, but not buy orders. C) cannot continue to trade the account. D) can continue to trade the account for only a period of 30 days after death.
C) of the bankruptcy court filing date. Answer Explanation: Claims for SIPC coverage are based on the market value of the eligible securities held with the firm as of the date of the bankruptcy court filing. Textbook Reference: Please see textbook section 11.6.3
Broker-dealer Z has become insolvent, and SIPC has been notified. Customer claims for SIPC coverage will be based on the market value of eligible securities held with the firm as of the date A) that the next round of audited financial statements are required to be filed with the SEC. B) the independent auditor for the firm first indicated that a problem existed on the firm's books. C) of the bankruptcy court filing date. D) the broker-dealer first encountered financial difficulty.
B) I and III Answer Explanation: Although broker-dealers may charge reasonable services charges for some services, they are prohibited from charging customers for mailing proxy statements and providing research reports. Textbook Reference: Please see textbook section 11.5.3
Broker-dealers are prohibited from charging service fees for which two of the following activities? I. Sending proxy statements to customers II. Collecting dividends III. Providing research reports IV. Safekeeping of securities A) II and III B) I and III C) II and IV D) I and IV
C) excessive trading in the account of a retail customer Answer Explanation: Churning is excessive trading a customer account, typically beyond what the customer is suitable for and can afford. This conduct can result in additional commissions being paid by the customer. Textbook Reference: Please see textbook section 11.2.4.1
Churning is best defined as A) portfolio adjustments made on a quarterly basis. B) frequent buying and selling by a mutual fund. C) excessive trading in the account of a retail customer. D) day trading by an institutional investor
B) Money market mutual funds Answer Explanation: All bank deposit products are covered by FDIC. Money market mutual funds sold through banks are not deposits and are not FDIC insured. Textbook Reference: Please see textbook section 11.6.4
FDIC insurance covers losses in each of the following types of products offered by banks EXCEPT: A) Interest-bearing savings accounts B) Money market mutual funds C) Checking accounts D) CDs
D) The name of the registered representative Answer Explanation: A bond sale confirmation need not include the name of the registered representative. It must include detailed information about the security and potential conflicts of interest like control relationships, and it typically includes the name of the broker-dealer. Textbook Reference: Please see textbook section 11.5.2
FINRA requires that all of the following are included on a customer confirmation for a purchase of debt securities EXCEPT A) Any control relationship between the broker-dealer and the issuer of the bonds B) The price of the bond C) The maturity date of the security D) The name of the registered representative
D) Assessments against broker-dealers' gross revenues from their securities business Answer Explanation: Most of SIPC's funding comes from member assessments, which are based on a percentage of each member's gross revenues from their securities business. Textbook Reference: Please see textbook section 11.6.3
Funding for the Securities Investor Protection Corp. (SIPC) comes mostly from what source? A) A transaction tax on securities trades B) Earnings on special issue U.S. Treasury obligations C) Direct U.S. Treasury appropriations D) Assessments against broker-dealers' gross revenues from their securities business
A) at the opening of the account and once per calendar year thereafter. Answer Explanation: The disclosure of the risks of margin account trading must be given to the customer at the time the account is opened and annually thereafter. Textbook Reference: Please see textbook section 11.2.2.6
How often must a customer who opens a margin account receive disclosure of the risks of trading in such an account? A) at the opening of the account and once per calendar year thereafter. B) quarterly. C) at the opening of the account only. D) with each account statement.
D) Yield to worst Answer Explanation: On debt securities trades made at a dollar price, the confirmation must include the dollar price and the yield to worst, which is the lower of the yield to call or yield to maturity. Textbook Reference: Please see textbook section 11.5.2
If a bond trades with a dollar price, the confirmation must include which of the following types of yield? A) Holding period yield B) Taxable-equivalent yield C) Current yield D) Yield to worst
D) A trust agreement Answer Explanation: A trust account is controlled by a trustee, who acts under powers and limits set forth in a trust agreement. Clients who wish to set up trust accounts must give the broker-dealer a copy of the trust agreement. Textbook Reference: Please see textbook section 11.3.3.2
If a broker-dealer customer wants to open a trust account, what documentation will be required? A) A will B) A general liability release C) A perpetual power-of-attorney D) A trust agreement
C) A trade confirmation Answer Explanation: The trade confirmation is a first line of timely defense against unauthorized trading. The confirm must be delivered on at or before completion of each transaction. This gives the client a chance to cancel any scam trades before they are completed (settled). If the broker also has been scammed, the broker may not know to alert the client to the sham trade. Textbook Reference: Please see textbook section 11.5.2
If a con artist calls a broker and places an unauthorized trade in a client's account, using a voice replication program, how can the client find out about the trade and cancel it on a timely basis? A) A quarterly summary of account transactions B) Direct communication with the broker C) A trade confirmation D) A monthly brokerage statement
B) 2000 Answer Explanation: In a short margin account, a customer must deposit $2,000 even if the full value of the transaction is less than $2,000. Textbook Reference: Please see textbook section 11.2.2.2
If a customer wishes to open a short margin account and sell short 100 shares of stock at $15 per share, the customer must deposit A) 1000 B) 2000 C) 750 D) 1500
C) The general partner Answer Explanation: In a limited partnership, a general partner has management responsibility, including trading authority over a partnership brokerage account. Limited partners are passive investors who do not have hands-on management responsibilities or trading authority. Textbook Reference: Please see textbook section 11.4.2
In a brokerage account opened by a limited partnership, who has trading authority? A) The trustee B) The board of directors C) The general partner D) One or more limited partners
A) II and IV Answer Explanation: The rules of settlement that apply to corporate securities in a cash account are regular way settlement of T + 2 and payment is required two business days later (T + 4). Failure to pay by T + 4 results in the firm selling out the customer's securities and freezing the account. Textbook Reference: Please see textbook section 11.2.1.1
In a cash account, which TWO of the following rules of settlement apply to the purchase of corporate securities? I. Regular way settlement of T + 1 II. Regular way settlement of T + 2 III. Payment is required by T + 3 IV. Payment is required by T + 4 A) II and IV B) II and III C) I and III D) I and IV
D) corporate resolution. Answer Explanation: When a corporate account is opened, a copy of the corporate resolution is required to identify the person(s) authorized to trade on the corporation's behalf. Textbook Reference: Please see textbook section 11.4.1
In a corporate account, the document that identifies the persons who are permitted to make trades on behalf of the corporation is the A) corporate charter. B) power of attorney. C) articles of incorporation. D) corporate resolution.
B) Parental approval if the account is to be opened by another adult on behalf of the minor Answer Explanation: An UGMA or UTMA custodial account does not require parental approval. In UGMA or UTMA accounts there must be one adult custodian and one minor only, and the account must be registered under the Social Security number of the minor. Textbook Reference: Please see textbook section 11.3.3.1
In an UGMA account, all of the following are required EXCEPT A) Social Security number of the minor B) Parental approval if the account is to be opened by another adult on behalf of the minor C) One adult custodian only D) One minor only
D) debit balance. Answer Explanation: Margin accounts allow customers to borrow against the market value of securities held in the account. The broker-dealer acts as lender, charging a competitive rate of interest on the amount borrowed the "debit balance." Textbook Reference: Please see textbook section 11.2.2.5
In margin accounts, broker-dealers charge customers a competitive rate of interest on the amount borrowed, which is called A) securitized lien. B) loan principal. C) collateral. D) debit balance
C) may impose a 15- business day hold on the wire request Answer Explanation: To protect the interests of vulnerable investors who have accounts at a broker-dealer, the firm may place a temporary hold on the account for up to 15 business days, so that it may further investigate what it deems potential suspicious activity. This FINRA rule is designed to protect specified adults against financial exploitation by person who have control over their account. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes. Textbook Reference: Please see textbook section 11.6.5
Instructions have been received from the trusted contact to wire $100,000 from a 72-year-old client's account at a broker-dealer to a designated bank account. To determine that this is a legitimate action not intended to exploit the interests of the client, the broker-dealer A) must alert its chief compliance officer that such a request was received. B) must place a 10 - business day hold on the request until confirming the request is legitimate. C) may impose a 15- business day hold on the wire request. D) must promptly notify FINRA of its suspicion that financial exploitation may be occurring at the firm.
A) The time his order was received by his firm Answer Explanation: Trade confirmations are not required to disclose the time the order was received by the firm. The other items must be disclosed. Textbook Reference: Please see textbook section 11.5.2
John has purchased 5,000 shares of Issuer X. The confirmation that John will receive will not disclose A) The time his order was received by his firm B) Date of the transaction C) Capacity of broker-dealer D) Execution quantity
B) The time Mary's order was executed (or a statement that the time is available upon request Answer Explanation: The confirmation for Mary's trade will disclose the time of the trade, or a statement that the time is available upon request. Textbook Reference: Please see textbook section 11.5.2
Mary placed an order to buy 20,000 shares of XYZ Co. Subsequently Mary is notified that she has purchased only 15,000 shares. The confirmation that Mary will receive will indicate A) The CRD number of the firm B) The time Mary's order was executed (or a statement that the time is available upon request) C) The time Mary's order was received D) The signature of the RR who executed her order
C) Put his name on the FTC's do-not-call registry and request that his two brokerage firms do not call Answer Explanation: By putting his name on the do-not-call registry of the Federal Trade Commission (FTC), he legally prevents firms with which he does not have a relationship from cold-calling, for any reason. If they do call, they can be subject to fines. However, the registry does not block firms with which he already has a relationship from calling. He will have to make a do-not-call request to each of these firms also. Textbook Reference: Please see textbook section 11.1.1
Maxwell is a sophisticated investor who is sick of getting cold calls from different brokerage firms. How can he legally prevent any brokerage firm from calling him on the phone to offer investment ideas? A) Put a do-not-call message on his answering machine B) Request that one of his two brokerage firms does not call; all other securities firms must honor this instruction. C) Put his name on the FTC's do-not-call registry and request that his two brokerage firms do not call D) Put his name on FINRA's do-not-call list
A) Prior to engaging in any securities business with that customer Answer Explanation: Under Regulation S-P, a privacy notice must be sent to a customer prior to entering into an agreement to engage in business with that client. Textbook Reference: Please see textbook section 11.6.1
Pursuant to Regulation S-P, a broker-dealer must provide a privacy notice to a customer A) Prior to engaging in any securities business with that customer. B) When a confirmation of a trade is sent. C) At the time a solicitation is made to purchase a security. D) When a statement of account is sent.
B) They can always be purchased on margin Answer Explanation: OTC stocks can only be purchased on margin if approved by the Federal Reserve Board. Textbook Reference: Please see textbook section 11.2.2.4
Regarding penny stocks, which of the following statements is not accurate? A) Their market price is under $5 per share B) They can always be purchased on margin C) They are considered extremely risky D) There are special suitability requirements for investors who trade penny stocks
C) Four Answer Explanation: Under Regulation T, customers must pay for securities within four business days from trade date, and this is called the "Regulation T date." Textbook Reference: Please see textbook section 11.2.1.1
Regulation T specifies that customers must pay for securities purchased within how many business days after trade date? A) Two B) Five C) Four D) Seven
B) proxy. Answer Explanation: Proxy statements are a document provided to shareholders prior to a vote on corporate matters, such as mergers or election of board members. Textbook Reference: Please see textbook section 11.5.3
Shareholders receive information about important voting matters via a A) registration statement. B) proxy. C) 10-K. D) Regulation S-P notice.
A) Protecting against the bankruptcy of broker-dealers Answer Explanation: The FDIC is an independent agency created by Congress to maintain financial stability and public confidence in the U.S. banking system. SIPC, not FDIC, protects investors against the bankruptcy of broker-dealers. Textbook Reference: Please see textbook section 11.6.4
The FDIC is responsible for all of the following functions EXCEPT: A) Protecting against the bankruptcy of broker-dealers B) Insuring bank deposits C) Examining and supervising financial institutions for safety and soundness D) Managing receiverships that involve insured institutions
C) the loss of securities due to a firm's failure Answer Explanation: SIPC increases the public's investment confidence by protecting customers of U.S. broker-dealers against the loss of their securities due to a brokerdealer's failure. Cash held in brokerage accounts also is protected against a firm's failure, up to a limit. Textbook Reference: Please see textbook section 11.6.3
The Securities Investor Protection Corp. (SIPC) was established under federal law to protect customers of U.S. broker-dealers against A) poor investment decisions. B) back-office errors and omissions. C) the loss of securities due to a firm's failure. D) catastrophic market conditions.
C) commingling Answer Explanation: This is known as commingling, and is prohibited by securities industry regulations. Textbook Reference: Please see textbook section 11.6.2
The act of combining customer and broker-dealer securities together is A) aggregating B) combining C) commingling D) integration
D) manage the assets of a minor. Answer Explanation: A guardian is appointed by a court, and is required to manage the assets of a minor. Textbook Reference: Please see textbook section 11.3.3.1
The court appointed guardian is entrusted to A) provide investment recommendations to a senior investor. B) administer the affairs of the estate of a deceased party. C) oversee the property of an incompetent individual. D) manage the assets of a minor.
D) options disclosure document. Answer Explanation: At or prior to the time a customer's account is approved for trading options, the broker-dealer must provide the Options Disclosure Document to the customer, detailing the risks involved in options trading. Textbook Reference: Please see textbook section 11.2.3 Question
The disclosure document that identifies risks of options positions and must be given to customers as part of the new account process is the A) OCC Brochure. B) options agreement. C) options prospectus. D) options disclosure document.
B) 100% of the premium Answer Explanation: A call or put contract with 9 months or less to expiration cannot be purchased on margin. Therefore, the customer must deposit 100% of the purchase price. Textbook Reference: Please see textbook section 11.2.2.4
The initial margin requirement for the purchase of an equity call or put option with 9 months or less until expiration is A) 50% of the premium B) 100% of the premium C) 75% of the premium D) 25% of the premium
C) with no limitations Answer Explanation: The same person may act as both the custodian and a donor in an account established under the UGMA/UTMA. Textbook Reference: Please see textbook section 11.3.3.1
The mother of a ten-year-old girl is the custodian on her daughter's UGMA. The mother would be permitted to make a cash contribution as a donor to her daughter's account A) up to an annual limit of $3,000. B) under no circumstances. C) with no limitations. D) only if the custodial agreement permits the mother to contribute to her daughter.
D) only a designated principal. Answer Explanation: The customer and registered representative do not need to sign the new account form. It must be reviewed, approved and signed by a designated principal prior to any trading in the account. Textbook Reference: Please see textbook section 11.1.4
The new account form must be signed by A) the customer and a designated principal. B) the customer and the registered representative. C) the registered representative and a designated principal. D) only a designated principal
C) clearing house Answer Explanation: The central role of the clearing house is to ensure the timely settlement of the transaction. The largest clearing house in the security industry is the National Securities Clearing Corporation, which is a subsidiary of the Depository Trust and Clearing Corporation. Textbook Reference: Please see textbook section 11.5.2
The party standing between the buyer and seller in a trade to ensure timely settlement of the trade is the A) transfer agent B) SEC C) clearing house D) market maker
C) II and III Answer Explanation: The MSRB's telemarketing rule applies to both telephone and fax communications. Firms must maintain a do not call list and cannot contact persons added to the list. The rule does not apply to existing customers of the firm. Textbook Reference: Please see textbook section 11.1.1
The provisions of the MSRB's Telemarketing Rule I. Apply to telephone communication only II. Apply to telephone and fax communication III. Require firms to maintain a do not call list IV. Apply to existing customers of the firm A) I and IV B) II and IV C) II and III D) I and III
A) The broker-dealer Answer Explanation: The securities lending units of broker-dealers act as middle-man in these transactions, with no price risk. The mutual fund and the investor who purchases the short shares have price risk if shares decline in value. The customer who sells short has risk if shares rise in value. Textbook Reference: Please see textbook section 11.2.2.5
The securities lending unit of a broker-dealer borrows shares owned by a mutual fund and loans them to its customer, who then sells them short to another investor. Which entity has the least amount of price risk associated with these securities, under this arrangement? A) The broker-dealer B) The mutual fund C) The customer who sells short D) The investor who purchases the shares sold short
A) Margin Answer Explanation: Through margin accounts, customers borrow cash or securities from their broker-dealers. All loans are secured by securities held in the customer's own margin account. Textbook Reference: Please see textbook section 11.2.2
Through which function do broker-dealers engage in the lending business and earn interest on loans of cash or securities to their customers? A) Margin B) Custody C) Clearing D) Settlement
D) Regulation T Answer Explanation: The determination of which securities can be margined, and the maximum margin ("leverage") on each type is made by restrictions imposed by the Federal Reserve under Regulation T. Each broker-dealer can impose additional margin rules and restrictions for its own customers. Regulation T is considered an important Fed tool in its overall oversight over U.S. credit extension. Textbook Reference: Please see textbook section 11.2.2.1
Under which regulation does the Federal Reserve impose restrictions on margin lending, including the types of securities that are eligible collateral for margin loans? A) Regulation CC B) Regulation M C) Regulation Fair Disclosure D) Regulation T
A) the new account form. Answer Explanation: Broker-dealers must collect detailed information about each customer on a new account form. Textbook Reference: Please see textbook section 11.1.2
When a new brokerage account is opened, customer information is captured on A) the new account form. B) the account's trust agreement. C) the disclosure statement. D) the registration statement.
B) No later than the date of settlement Answer Explanation: A customer confirmation must be delivered after the trade and before the settlement date. Textbook Reference: Please see textbook section 11.5.2
When must a confirmation of purchase of equity securities be sent to the customer? A) Upon request B) No later than the date of settlement C) Within five business days after the date of settlement D) One business day after the settlement date
B) At or before completion of each transaction Answer Explanation: Confirmations must be delivered to customers at or before completion of each transaction. Textbook Reference: Please see textbook section 11.5.2
When must the brokerage firm deliver a customer confirmation to the customer? A) Upon the customer's request B) At or before completion of each transaction C) Within three days of trade date D) When an order is placed
B) minor. Answer Explanation: The social security number of the minor is used, as the minor is the legal owner of the assets. Textbook Reference: Please see textbook section 11.3.3.1
When opening a minor's account, the social security number to be used is that of the A) registered rep. B) minor. C) custodian. D) parent.
C) I and III Answer Explanation: Firms are required to send account statements a minimum of once per quarter. Active accounts typically receive account statements once per month.
Which TWO of the following statements about broker-dealer requirements for sending account statements are TRUE I. Firms are required to send account statements at least once per quarter. II. Firms are required to send account statements at least once per year. III. Firms typically send account statements for active accounts on a monthly basis. IV. Firms typically send account statements for active accounts on a quarterly basis. A) I and IV B) II and IV C) I and III D) II and III
B) I and III Answer Explanation: A principal must give written approval for new accounts. By approving the account, the principal has confirmed that the account is appropriate based on the information gathered in during the account opening process. The principal who is approving the account does not confirm the accuracy of the information. Textbook Reference: Please see textbook section 11.1.4
Which TWO of the following statements are TRUE of a principal's approval of a new opened account? I. It must be in writing. II. It indicates that all the account information is complete and correct. III. It indicates that the account is appropriate for the person opening the account based on the information collected. IV. It must be kept in the customer account file that is maintained by the representative who opened the account. A) I and IV B) I and III C) II and III D) II and IV
B) Margin Answer Explanation: The margin department handles all credit transactions for a client Textbook Reference: Please see textbook section 11.2.2
Which department in a brokerage firm would handle all credit transactions for a client? A) Cashiering B) Margin C) Reorganization D) Purchase and sales
A) Margin account Answer Explanation: The opening of a margin account requires a separate margin risk disclosure document be provided to each customer prior to or at the time of opening the account. None of the other accounts require special additional documentation. Textbook Reference: Please see textbook section 11.2.2.5
Which of the following account types require an additional disclosure document to be delivered at or prior to the account opening? A) Margin account B) Cash account C) Special cash account D) Joint Account
D) It is a government agency designed to protect the public Answer Explanation: Note that this question is asking what statement is NOT true. SIPC is a non-profit corporation that is funded and supported by broker dealers. It is not a government agency, although it is subject to SEC oversight. Textbook Reference: Please see textbook section 11.6.3
Which of the following is NOT true of SIPC? A) It is a nonprofit corporation designed to protect the public in the event a broker-dealer fails B) It is subject to SEC oversight C) It is funded by broker-dealers D) It is a government agency designed to protect the public
A) An initial 15- business day hold has terminated, and the firm is continuing to review the facts and circumstances surrounding potential financial exploitation of the account. Answer Explanation: To investigate potential financial exploitation of a specified adult, the firm may place an initial 15-business day hold on disbursements, followed by an additional 10-business day hold as it deems necessary. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes. Textbook Reference: Please see textbook section 11.6.5
Which of the following is a reason why a broker-dealer may impose a 10- business day hold on disbursements from a customer's account? A) An initial 15- business day hold has terminated, and the firm is continuing to review the facts and circumstances surrounding potential financial exploitation of the account. B) It is FINRA policy to require a firm to impose such a hold until the request can be re-confirmed with the customer. C) The hold can be imposed if the customer request has been received via email rather than through a verbal request on the phone. D) The customer has informed the firm that he will be traveling for the next two weeks.
A) "buy 200 shares of ABC stock sometime today" Answer Explanation: Where time and price are the only variables left to the registered reps choosing, this is an example of a "not held" order. The other choices are discretionary orders. Textbook Reference: Please see textbook section 11.2.4
Which of the following is an example of a "not held" order? A) "buy 200 shares of ABC stock sometime today" B) "sell one of the three gaming stocks that I own today" C) "sell enough of my XYZ stock so that I can purchase as much MJK stock as you can get" D) "buy 500 shares of any food company, as my portfolio could use a boost"
D) "I own 1,000 shares of LBK. Please sell it all when the market opens" Answer Explanation: Discretion is not being utilized when a customer specifies the asset, action, and quantity. If the rep will decide ANY of these factors, discretion is being utilized. Textbook Reference: Please see textbook section 11.2.4
Which of the following is not an example of a discretionary order? A) "Sell some of my ABC stock today if you hear something bad" B) "Buy as much HMK stock as you think I should if you hear good news today" C) "Buy shares of a social media stock sometime today" D) "I own 1,000 shares of LBK. Please sell it all when the market opens
B) Truth-in-lending form Answer Explanation: A standard Margin Agreement does not contain a Truth-in-Lending form. Textbook Reference: Please see textbook section 11.2.2.5
Which of the following items is not part of a standard Margin Agreement? A) Hypothecation Agreement B) Truth-in-lending form C) Credit Agreement D) Loan consent form
A) Churning Answer Explanation: Excessive trading activity in customer accounts, called "churning," is a prohibited practice. Textbook Reference: Please see textbook section 11.2.4.1
Which of the following terms describes a registered representative's practice of consistently generating excessive trades in customer accounts? A) Churning B) Washing C) Front-running D) Burning
A) Investment Club Answer Explanation: Investment clubs are formed by a group of people who share investment ideas and pool their money to make common investments. They often are formed as partnerships. However, broker-dealers may require that they open a special investment club account. Textbook Reference: Please see textbook section 11.4.2
Which of the following types of brokerage account would be appropriate for a group of people who share investment ideas and pool their money to make common investments? A) Investment Club B) Trust C) Proprietorship D) Conservatorship
D) FINRA Answer Explanation: FINRA Rule 2264 requires firms to provide a margin disclosure statement to each customer prior to or at the time of opening a margin account. Textbook Reference: Please see textbook section 11.2.2.1
Which regulator requires broker-dealers to deliver a Margin Disclosure Statement on an individual basis, to non-institutional customers, before any margin account is opened? A) SEC B) FDIC C) Comptroller of the Currency D) FINRA
A) II and I V Answer Explanation: New options customers must receive an Options Disclosure Document at or prior to the approval of their account. Textbook Reference: Please see textbook section 11.2.3
Which two of the following statements regarding options disclosure to new options customers are TRUE? I. The document that must be furnished to a customer for disclosure is the Options Prospectus II. The document that must be furnished to a customer for disclosure is the Options Disclosure Document III. The disclosure document must be given to an options customer before the account is opened IV. The disclosure document must be given to an options customer at or prior to the approval of the account A) II and I V B) II and III C) I and III D) I and IV
C) Mother and 15-year-old daughter Answer Explanation: A joint account may not be opened between a parent and a minor child. Textbook Reference: Please see textbook section 11.3.2
Which two parties may not open a joint account? A) Husband & wife B) Brother & sister C) Mother and 15-year-old daughter D) Father and adult child
C) II and III Answer Explanation: UGMAs and UTMAs are custodial accounts established for the benefit of a minor. The adult that makes the gift (the donor) may name someone else as custodian of the account. There is no annual limit on the size of the gift, although gift tax may apply if the gift exceeds the annual gift limit. There may be only one custodian and one minor per UGMA or UTMA accounts. Textbook Reference: Please see textbook section 11.3.3.1
With regard to UGMA and UTMA accounts, which two of the following statements are TRUE? I. The custodian and the donor must be the same person II. The Social Security number of the minor must be listed on the account III. There is no annual limit on the size of the gift IV. There may be more than one minor listed on the account A) I and III B) II and IV C) II and III D) I and IV