Chapter 14 Customer Exam
Which of the following is classified as a joint account? A) An account shared between two brothers. B) An account established under UGMA/UTMA. C) An account with third party trading authorization. D) A spousal IRA.
A) An account shared between two brothers. In a joint account, all participants are considered part owners of the account. The custodian of a UGMA account manages the account, but the minor is the owner of the securities. Likewise, a person with third-party trading authorization can help manage the account, but is not an owner. All IRA accounts are individual accounts; there are no joint IRAs. A spousal IRA is owned by the spouse whose name is on the account. This is true even if the other spouse earned the income that was contributed to the account.
To determine whether churning has occurred in a discretionary account, the primary concern is: A) The frequency of trading B) The suitability of the investments C) Whether the client lost money D) Whether the registered representative had full trading authority
A) The frequency of trading To determine whether churning has occurred, the primary concern is the frequency of trading. Even if all of the separate investments made are suitable, the frequency of trading may be deemed inappropriate. Although a client may have realized a profit, the number or frequency of trades may not meet the client's objectives. In a discretionary account, a registered representative is able to make investment decisions with both limited and full trading authority.
Which of the following accounts allow for its owners to have different percent interests? A) Joint tenants with rights of survivorship B) Joint tenants in common C) Spousal IRAs D) Uniform Transfer to Minors
B) Joint tenants in common Only joint tenants in common (JTIC) allow for owners to have different percent interests in the account. Owners in joint tenants with right of survivorship (JTWROS) have equal interests. Spousal IRAs and Uniform Transfers to Minors (UTMA) are indvidual accounts and only have one owner.
Which of the following statements is TRUE concerning custodian accounts? A) A donor may give gifts of cash only B) A donor may give gifts of securities only C) A donor may give gifts of cash and securities D) An individual may not be both the custodian and donor
C) A donor may give gifts of cash and securities The only true statement given about custodian accounts is a donor may give gifts of cash and securities.
Which of the following statements is NOT TRUE regarding discretionary accounts? A) All discretionary orders must be marked discretionary B) A written power of attorney must be on file C) Orders must be approved verbally by the customer prior to execution D) Orders must not be excessive in terms of size or frequency
C) Orders must be approved verbally by the customer prior to execution When transacting business for a discretionary account, the registered representative must have written power of attorney authorizing her to act for the customer. Each order in which the registered representative exercises discretion must be marked discretionary. The registered representative should not enter orders that are excessive in size or frequency (in order to churn the account to generate commissions). The registered representative makes the investment decisions and does not need to receive the customer's approval for each order being executed.
A registered representative (RR) has a customer who is a senior officer of a corporation. The customer wants to open an account in the name of the corporation. Which of the following statements is TRUE? A) The RR may open an account in the normal fashion since this is an existing customer. B) The RR may open an account in the normal fashion since the customer is a senior officer of the corporation. C) The RR may not open the account unless the customer provides a corporate resolution authorizing her to open the account. D) The RR may not open an account in the name of a corporation since the account must be opened only in the name of an individual.
C) The RR may not open the account unless the customer provides a corporate resolution authorizing her to open the account. In order to open a corporate account, an individual must supply a corporate resolution authorizing one or more persons to open and operate the account. Orders accepted from anyone not named in the corporate resolution would be unauthorized.
A 55-year-old investor has earned $55,000 in pension income and $1,500 from a part-time job this year. How much can she contribute to her IRA? A) $5,500 B) $6,500 C) $0 D) $1,500
D) $1,500 IRA contribution limits are currently $5,500 or 100% of earned income, whichever is less (if there's sufficient earned income, an additional $1,000 can be contributed by individuals who are age 50 or older). In this question, the investor's pension income is not considered earned and cannot be invested in an IRA. Since her earned income is only $1,500, that's the maximum amount that she can contribute. (17562)
Signatures of which tenants must be obtained when opening a joint account? A) Only one, the tenant with authority to trade in the account. B) Only one, the tenant with the greatest percent interest in the account. C) All tenants, but only one has authority to trade in the account. D) All tenants, and all have authority to trade in the account.
D) All tenants, and all have authority to trade in the account. When opening a joint account signatures of all tenants must be obtained. In addition, all tenants have the ability to trade in the account, but if securities are liquidated the check must be payable to all tenants.
A husband and wife have a joint account. If the husband instructed his RR to sell securities and send a check, the check could be made payable to: A) The husband only B) The wife only C) Either the husband or the wife D) The husband and wife jointly
D) The husband and wife jointly An order may be accepted from either party to a joint account, but the payment check may only be drawn in joint names (as the account is titled).
Required minimum distributions (RMDs) from a traditional IRA account must: A Begin within one year of when the individual retires B Be completed within a 10-year period C Begin by April 1 of the year following the one in which the individual turns 59 1/2 D Begin by April 1 of the year following the one in which the individual turns 70 1/2
DBegin by April 1 of the year following the one in which the individual turns 70 1/2
For a broker-dealer to be permitted to use a customer's securities as collateral, the customer must sign: A) A hypothecation agreement B) A credit agreement C) A loan consent agreement D) A trust agreement
For a customer to be permitted to purchase securities on margin, she must sign a margin agreement. Within a margin agreement, there are three sections—the credit agreement (mandatory), the hypothecation agreement (mandatory), and the loan consent agreement (optional). A signed hypothecation agreement verifies that the customer has pledged the purchased securities as collateral to support the margin loan. The credit agreement explains the terms and conditions of the loan and establishes the customer's responsibility to pay interest on the debit balance. If signed, the loan consent agreement allows the firm to loan a customer's securities to another customer (e.g., to short sellers).
A qualified plan has all of the following characteristics, EXCEPT: A) Tax-free distributions B) Tax-deferred growth C) Pre-tax contributions D) Non-discrimination
Qualified plans allow for tax-deferred growth, pre-tax contributions, and non-discrimination of participants. However, the plans do not provide for tax-free distributions. Instead, distributions of previously untaxed money are taxed at ordinary income rates when received.
A registered representative who holds limited discretionary authority over a customer's account may: A) Buy or sell securities in the account without consulting the customer B) Withdraw money from the account C) Receive a fee for exercising discretion while trading within the account D) Purchase stock issued by his broker-dealer for the customer's account without the customer's permission
A) Buy or sell securities in the account without consulting the customer A registered representative who holds limited discretionary authority over a customer's account is able to buy or sell securities in the account without consulting the customer. Only with full discretionary authority is a registered representative permitted to withdraw money from a client's account. A registered representative cannot receive a fee for exercising discretion while trading a customer's account. Stock that's issued by the RR's broker-dealer can only be purchased in a customer's account if the customer's prior written permission is obtained.
Which of the following is a characteristic of a Roth IRA? A) Contributions are made in after-tax dollars. B) Contributions are permitted regardless of an individual's gross income. C) Distributions from the plan are taxed as long-term capital gains. D) Qualified distributions are taxed as ordinary income.
A) Contributions are made in after-tax dollars. Since a Roth IRA is funded with after-tax dollars, there is no immediate tax benefit. Individuals who earn above a maximum amount are not permitted to contribute to a Roth. Also, qualified distributions from a Roth IRA may be withdrawn tax-free.
The investments in a Coverdell Education Savings Account (CESA) are: A) Determined by the investor B) Determined by the firm through which it's opened C) Limited to AAA rated bonds D) Limited to mutual funds
A) Determined by the investor Investments in a CESA are self-directed, which allows investors to buy and sell virtually any and all types of securities. Conversely, Section 529 plans are not self-directed; instead, the investments are determined by the entity that manages the plan.
Three business partners have opened a brokerage account as Joint Tenants with Right of Survivorship (JTWROS). All of the following statements are TRUE, EXCEPT: A) If one partner dies, his interest in the account will pass to his estate B) The firm may accept an order from any of the partners C) Checks that are issued by the firm from the account must be in the name of all of the owners D) When opening the account, the firm must obtain Social Security numbers from all three owners
A) If one partner dies, his interest in the account will pass to his estate An account that is established under the JTWROS, the interest of a deceased owner will pass to the surviving owners of the account. If the account had been opened under the Tenants-in-Common form of ownership, the deceased partner's portion would flow to their estate. (31756)
Regarding cash and margin accounts, which of the following statements is NOT TRUE? A) In a cash account, a customer is only required to deposit 50% of a purchase B) In a margin account, a customer is only required to deposit 50% of a purchase C) Under Regulation T, a customer must fully pay for her purchase in a cash account by no later than the fourth business day following the trade date D) Under Regulation T, a customer must pay for her portion of a purchase in a margin account by no later than the fourth business day following the trade date
A) In a cash account, a customer is only required to deposit 50% of a purchase The provisions of Regulation T apply to both cash and margin accounts. In both accounts the required customer deposit must be made by the fourth business day after the trade date. However, the required customer deposit amount is different based on whether the purchase is made in a cash or margin account. For any purchases that are made in a cash account, a customer must make full payment (no credit is extended by the B/D); on the other hand, for any purchases that are made in a margin account, a customer is only required to pay 50% (50% credit is extended by the B/D).
Which of the following BEST describes the purpose of a hypothecation agreement in a margin account? A) The agreement gives the broker-dealer permission to pledge a customer's securities to a bank as collateral for a margin loan. B) The agreement gives the broker-dealer permission to lend the customer's securities to other investors who are executing short sales. C) It describes the provisions of the loan that the customer is taking out for trading on margin. D) It details the terms of the loan that the broker-dealer is taking out to comply with industry net capital requirements.
A) The agreement gives the broker-dealer permission to pledge a customer's securities to a bank as collateral for a margin loan. Hypothecation agreements permit a broker-dealer to pledge a customer's securities to a bank as collateral against the customer's margin loan. Broker-dealer's require customers to sign these agreements when a margin account is opened.
Which of the following statements is TRUE regarding trustee-to-trustee IRA transfers? A) There is no limit to the number of transfers per year. B) Transfers must be completed within 60 days. C) Transfers are the same as IRA rollovers. D) There may be a penalty tax on the transfer.
A) There is no limit to the number of transfers per year. A transfer of funds from one IRA trustee to another is not considered to be a distribution or a rollover. There is neither a limit to the number of transfers, nor are there any taxes or penalties. This differs from a distribution from a retirement plan. The distribution must be rolled over into another qualified plan, within 60 days of receiving the money, in order to avoid taxes and penalties. Rollovers may only be done once each year.
Discretionary accounts require: A) Written authorization from the customer B) Oral authorization from the customer C) Written authorization from the client for each trade the registered representative executes D) The registered representative to send the client a letter detailing the proposed transaction
A) Written authorization from the customer Discretionary accounts require written authorization from the customer. In addition, each discretionary order must be approved on the day the order is entered by a manager, partner, or authorized person.
A 60-year-old individual is receiving $60,000 per year from a pension and $2,500 per year from a part-time job. How much can the individual contribute to her IRA? A) $0 B) $2,500 C)$4,500 D) $6,500
B) $2,500 The maximum contribution to an IRA is the lesser of 100% of earned income or $5,500. Individuals who are age 50 or older can contribute and addition $1,000 of earned income. In this example, the $60,000 that she receives from her pension is not considered earned income; therefore, the maximum contribution to her IRA is the $2,500 of income from her part-time job.
Reinvested dividends and capital gains distributions from the investments within an IRA are: A) Taxable to the investor in the year in which they are declared B) Allowed to accumulate on a tax-deferred basis C) Used to reduce the cost basis of the investment D) Tax-deferred only if the IRA contribution that funded the account was tax-deductible
B) Allowed to accumulate on a tax-deferred basis All growth, distributions, and accumulations in an IRA are tax-deferred. Any tax consequences will occur when distributions to the holder of the account begin.
A fee-based account is most suitable for customers who: A) Are unsure of which investments will best meet their objectives B) Engage in frequent trading C) Utilize a buy-and-hold strategy D) Have discretionary accounts
B) Engage in frequent trading Fee-based accounts charge an annual fee for investment advice regardless of whether any transactions occur. These accounts are most suitable for customers who engage in frequent trading and want to avoid being charged commissions on each trade separately.
Which of the following statements is NOT TRUE about Coverdell Education Savings Accounts (CESA) and 529 plans? A) Distributions from CESAs and 529 plans can be used for pre-college education expenses. B) Investments in CESAs and 529 plans are self-directed. C) CESAs are set up by individuals and 529 plans are set up by states. D) Distributions from CESAs and 529 plans are tax-free if they are used for qualified education expenses.
B) Investments in CESAs and 529 plans are self-directed. Investments in a CESA are self-directed, which allows investors to buy and sell virtually any and all types of securities. Conversely, Section 529 plans are not self-directed; instead, the investments are determined by the entity that established the plan. Distributions from both can be used for pre-college education expenses (529 plans are limited to withdrawals of up to $10,000 per year for pre-college expenses) and are tax-free if they are used for qualified education expenses. CESAs are set up by individuals through brokerage firms or mutual fund companies, while 529 plans are set up by states.
Which of the following documents allows a broker-dealer to lend a customer's securities to other clients or broker-dealers? A) Hypothecation agreement B) Loan consent agreement C) Margin disclosure statement D) Credit agreement
B) Loan consent agreement The loan consent agreement allows a broker-dealer to lend a customer's securities to other customers or broker-dealers. This is usually to accommodate short sellers. The hypothecation (pledge) agreement allows the broker-dealer to use the customer's securities as collateral to secure a loan from a bank on behalf of the customer. The margin disclosure document identifies the risks to which a customer is exposed when a margin account is opened. The credit agreement discloses the terms of any loan that's extended to a customer.
Premature withdrawals of earnings from an IRA that qualify for an exception are subject to: A) Neither a 10% tax penalty on the amount withdrawn nor ordinary income taxes on that same amount B) Ordinary income taxes on the amount withdrawn, but not a 10% tax penalty on that same amount C) A 10% tax penalty on the amount withdrawn, but not ordinary income taxes on that same amount D) A 10% tax penalty plus ordinary income taxes on the amount withdrawn
B) Ordinary income taxes on the amount withdrawn, but not a 10% tax penalty on that same amount If earnings are withdrawn from an IRA for any of the allowable exceptions, the individual avoids the 10% tax penalty; however, the amount withdrawn is subject to ordinary income taxes.
The major provisions of ERISA provide protection for: A) Investors in mutual funds B) Participants in pension plans C) The benefits available in a defined contribution plan D) Loss of funds in the case of a broker-dealer's bankruptcy
B) Participants in pension plans ERISA gave the government jurisdiction over private pension plans and protects employees from improper investments by their employers. ERISA does not protect investors in mutual funds, the benefits in defined contribution plans, or the loss of funds due to the bankruptcy of a broker-dealer.
If a customer wishes to open an account to trade options, the account must be approved: A) 15 days prior to the time an initial order is accepted B) Prior to the time an initial order is accepted C) No later than the time the confirmation is mailed to the customer for his initial transaction D) Within 15 days of the acceptance of the initial order
B) Prior to the time an initial order is accepted If a customer wishes to open an account to trade options, the account must be approved by an ROP prior to the time an initial order is accepted.
The husband of a customer calls to place an order in his spouse's account. He informs you that his wife is traveling but said to the place the order. The registered representative: A) Should accept the order from the husband. B) Should not accept the order unless hearing from the wife. C) Accept the order and make note it was placed by the husband. D) Should not accept the order unless approved by a principal.
B) Should not accept the order unless hearing from the wife. Only individual's with trading authority can place orders for an account. It does not indicate the husband has trading authority and as a result, the order cannot be accepted. Principals are not permitted to approve orders for accounts in which the individual does not having trading authority.
The payment date for securities purchased in a cash or margin account as stated by Regulation T is: A) Ten business days from the settlement date B) Two business days from the settlement date C) Three business days from the trade date D) One business day from the trade date
B) Two business days from the settlement date According to current FRB requirements, securities purchased in a cash or margin account must be paid for within two business days of the settlement date of the transaction.
When comparing revocable trusts to irrevocable trusts, which of the following statements is TRUE? A) Changes can be made after the agreement is signed in both revocable and irrevocable trusts. B) Changes cannot be made after the agreement is signed in both revocable and irrevocable trusts. C) Changes can be made after the agreement has been signed in revocable trusts, but not in irrevocable trusts. D) Changes can be made after the agreement has been signed in irrevocable trusts, but not in revocable trusts.
C) Changes can be made after the agreement has been signed in revocable trusts, but not in irrevocable trusts. Changes can be made after the agreement has been signed in revocable trusts, but not in irrevocable trusts.
Which of the following statements is NOT TRUE regarding profit-sharing plans? A) Contributions are allocated based on a pre-determined formula. B) The board of directors determines the amount of contributions. C) Contributions are required to be made each year. D) Contributions are in pre-tax dollars.
C) Contributions are required to be made each year. In a profit-sharing plan, contributions are not required to be made each year and can be adjusted based on the profitability of the company. The board of directors determines the amount of the contributions, which are in pre-tax dollars and allocated based on a pre-determined formula.
A husband and wife have a joint account with right of survivorship. If one of the parties places an order, the RR: A) Should contact the other party prior to placing the order B) May accept the order only if the other party has granted trading authorization C) May accept the order D) Must have the order approved by a principal prior to execution Explanation: Incorrect Answer chosen Joint accounts have more than one owner of record. In most cases, any joint owner may initiate activity in the account (e.g., enter orders to buy or sell securities). There is no requirement to contact the other party prior to placing an order. Trading authorization is required if a person who is not the owner of the account is going to enter orders.
C) May accept the order Joint accounts have more than one owner of record. In most cases, any joint owner may initiate activity in the account (e.g., enter orders to buy or sell securities). There is no requirement to contact the other party prior to placing an order. Trading authorization is required if a person who is not the owner of the account is going to enter orders.
A customer would like to open an account designated by number. The registered representative should: A) Open the account B) Not open the account because it is a violation of SEC rules C) Open the account if the customer signs a written statement acknowledging the account is the customer's D) Not open the account because it is a violation of industry rules
C) Open the account if the customer signs a written statement acknowledging the account is the customer's A customer may open a numbered account for reasons of confidentiality. However, the registered representative should open the account only if the customer signs a written statement acknowledging the fact that the account is the customer's. This must be kept on file at the brokerage firm.
An 75-year old individual has contributed $40,000 to a qualified plan that currently has a value of $100,000. If she decides to take a lump-sum distribution of the total value, she is taxed on: A) None of the $100,000 B) $40,000 C) $60,000 D) $100,000
D) $100,000 Since contributions to a qualified plan are made in pre-tax dollars, this results in a zero cost basis (i.e., none of the funds have been taxed). As a result, when distributions are made, the entire amount is taxable as ordinary income.
Which of the following statements are TRUE regarding a margin account? A) A customer cannot lose more than the amount deposited. B) A customer can choose which securities will be sold in the event of a margin call. C) The firm must contact the customer when it sells securities from the account. D) An extension of time cannot be granted to meet a maintenance call.
D) An extension of time cannot be granted to meet a maintenance call. Extensions of time to meet maintenance (margin calls) are not permitted. Customers can lose more than they deposited, they cannot choose which securities will be sold to meet margin calls, and a firm is not required to contact the customer when it sells securities from the account.
A broker-dealer's stock is publicly traded. In order to purchase this stock in a customer's discretionary account, the registered representative: A) Must wait 30 days B) Can make the purchase if the investment is suitable for the customer C) Can make the purchase if it's approved by a principal of the broker-dealer D) Can make the purchase if the customer's written approval is received
D) Can make the purchase if the customer's written approval is received A conflict of interest exists when a broker-dealer is placing its own stock in a client's discretionary account. Due to the conflict, the registered representative must obtain the client's prior written consent before making the purchase.
Which of the following statements is NOT TRUE of a Coverdell Education Savings Account? A) The maximum contribution is $2,000 per year. B) Contributions are permitted until the beneficiary turns age 18. C) Transfers are permitted to other family members who are under the age of 30. D) Distributions can only be made for higher education expenses.
D) Distributions can only be made for higher education expenses. The statement, "Distributions can only be made for higher education expenses" is NOT TRUE. Remember, distributions from Coverdell Education Savings Accounts are permitted for elementary and/or higher education expenses.
A customer gives his registered representative the following instructions. Buy 100 shares of General Motors whenever you think the price is right. Under current regulations, the order: A) Must be executed immediately B) May not be accepted C) Must be marked discretionary and approved by a branch manager D) May be accepted and may be executed anytime that day
D) May be accepted and may be executed anytime that day The order may be accepted and is not a discretionary order requiring written power of attorney. The customer told the registered representative which stock to buy (GM) and the amount (100 shares). The phrase whenever you think the price is right means the registered representative may use her judgement as to when the stock should be purchased. The order does not need to be executed immediately, but must be executed sometime during the day it was received.
