Customer Accounts

Which of the following verbal orders can be accepted from a customer without further documentation? A "Buy 100 shares of ABC stock sometime today" B "Invest $20,000 in bank stocks" C "Increase my portfolio position in ABC" D "Buy 200 shares of an auto stock"

The best answer is A. An order is not considered to be "discretionary" if the broker is limited to choosing the price or time of execution. If the broker chooses any other items, such as the security to be purchased, or the number of shares of a security to be purchased, then a written power of attorney giving discretionary power must be obtained from the customer.

Which statement is TRUE about entering trades into a custodial account? A Only the custodian can enter trades B Only the minor can enter trades C Only the donor can enter trades D Only the parents can enter trades

The best answer is A. In a custodial account, only the custodian is permitted to trade. Anyone can donate into such an account.

Custodial accounts can be opened as a: I Cash account II Margin account III Arbitrage account A I only B I and II C II and III D I, II, III

The best answer is A. The "default" setting of the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act is that custodial accounts can only be opened as cash accounts. They can be opened as margin accounts only if the state permits it in its version of the law (which some states do, most do not). For the exam, custodial accounts can only be opened as cash accounts, since this is the rule in most states.

The requirement for independent verification of a customer's identity when opening an account CANNOT be satisfied by examining a copy of the customer's: A birth certificate B driver's license C passport D military ID

The best answer is A. There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information. A birth certificate does not have the required information needed for matching.

In order to independently verify the identity of a corporation that wishes to open a brokerage account, which documentation is acceptable? I Certified articles of incorporation II Better Business Bureau membership certificate III State-issued business license IV State-issued driver's license of each corporate officer A I and III B I and IV C II and III D II and IV

The best answer is A. To verify the identity of a corporation that wishes to open an account, government issued identification is required to perform the match. This would take the form of the company's certified articles of incorporation (which are certified by the state); or a state issued business license. The Better Business Bureau is a private entity, so a membership certificate from the BBB cannot be used for the match. The driver's license of each corporate officer does not prove the existence of the corporation, so these are of no use either.

Which of the following signatures must appear on the New Account Form when a customer is opening a cash account? I Customer II Registered Representative III Manager or Principal A I and II B II and III C I, II, III D None of the above

The best answer is B. The customer does not need to sign the new account form - he or she does sign the margin agreement and loan consent agreement if a margin account is opened, however. This rule allows brokerage firms to open new cash accounts "over the phone." The registered representative signs the new account form, indicating that he believes the information to be true. The manager must review and approve the account by signing the form, before any trades take place. (Also note that this is very much a "test world" question. In the real world, pretty much every brokerage firm, as part of the new account form, has an embedded arbitration agreement and has the customer sign it when opening the account. However, this is a firm requirement and not an SEC or FINRA legal requirement. If a brokerage firm wanted to open a customer cash account without the customer signing an arbitration agreement, it could.)

What document, once signed, permits a broker dealer to borrow customer securities to effect short sales for other clients? A Hypothecation agreement B Loan consent agreement C Form 15g-2 D Option agreement

The best answer is B. When a customer opens a margin account, the customer must sign a hypothecation agreement, pledging the securities in the account as collateral for the margin loan. It is also customary (but not mandatory) that the customer signs a loan consent agreement. By signing this document, the customer permits the brokerage firm to borrow his or her securities positions and lend them to other clients who wish to sell that security short (the sale of borrowed shares). Form 15g-2 is the disclosure document given to new clients who open accounts to buy recommended penny stocks. The Options agreement is signed by a client when opening an options account only.

*** Approval of new accounts for MSRB member firms can be performed by the: I Branch Office Manager II Municipal Securities Principal III General Securities Principal IV Financial and Operations Principal A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is C. The Municipal Principal (Series 53 license) approves accounts at municipal securities firms. In addition, the MSRB permits the General Principal (Series 24 license) or the Branch Office Manager (Series 9/10 license) to approve new accounts. The Financial and Operations Principal (Series 27 license) is the firm's accountant, and cannot approve the opening of customer accounts.

When opening an options account, the customer must return the signed Options Agreement: A 15 days prior to opening the account B 5 days prior to opening the account C at or prior to opening the account D 15 days after opening the account

The best answer is D. A copy of the options new account form is part of the Options Agreement that is sent to the customer, to be signed and returned within 15 days of account opening. The Options Agreement is a recap of the customer new account profile including the suitability determination and it qualifies the customer for a level of options trading, detailing which options transactions are permitted. If the signed agreement is not returned, you are prohibited from accepting new orders - only closing transactions are allowed.

FINRA member firms are required to follow special procedures when opening accounts for all of the following EXCEPT an employee of a FINRA member firm who wishes to open a securities account at: A that firm B another FINRA member firm C a non-member bank D a non-member investment adviser

The best answer is A. If an employee of a FINRA member firm wishes to open an account at that firm, then no special procedures are required. However, if an employee of a FINRA member wishes to open an account at another member firm, or at a non-member bank or investment adviser, then: prior written consent of the employing member firm must be obtained; the executing member must be notified in writing of the employee's association with another member firm; and on written request of the employer member, the executing member must provide duplicate confirmations and statements.

A husband and wife wish to open an account that provides for 50% of the account assets to go to the surviving spouse upon death, with the remaining 50% going to other heirs. They should be advised to use a: A Transfer On Death (TOD) account B Tenants in Common account C Joint Tenants with Rights of Survivorship account D Community Property account

The best answer is B. In an account opened "Tenants in Common," if one participant dies, that person's share in the account goes to the estate. The disposition of the deceased person's interest is handled by the estate. The will should provide for the disposition of the assets in the account, per the couple's wishes. If the account is opened as "Joint Tenants with Rights of Survivorship," then the surviving spouse will own 100% of the account assets on death of the other spouse. The transfer avoids probate. TOD (Transfer On Death) registration can only be used for individual accounts, not joint accounts, and it allows the account owner to name the beneficiary or beneficiaries (by percentage) to whom the assets are to be transferred on death. The transfer avoids probate. The few States that have "community property" laws such as California are not tested on Series 7, meaning that this is always a wrong answer!

All of the following actions by a custodian in an account opened under the Uniform Gifts to Minors Act are permitted EXCEPT: A donating funds to the account to make additional investments B withdrawing funds from the account for the custodian's use C managing the investments in the account with the objective of generating enough income for college tuition D selling securities in the account to generate proceeds for other investments

The best answer is B. Custodians are obligated to manage the assets of the account in the best interests of the minor. Custodians cannot use account assets for their own benefit.

INCORRECT ANSWER All of the following are types of fiduciary accounts EXCEPT: A Receiver in Bankruptcy B Corporate Account C Executor of Estate D Conservator for Incompetent

The best answer is B. Receiver in Bankruptcy, Executor of Estate, and Conservator for Incompetent are all types of fiduciary accounts, where a third party is designated to manage the account in the best interests of the account owner. Corporate accounts are directly managed by the corporation, which passes a resolution authorizing the opening of the account, that designates the person(s) authorized to trade in the account.

Shares are purchased in a custodial account, and are later sold at a profit. Tax liability rests with the: A custodian B minor C minor at the age of majority D custodian at the age of majority

The best answer is B. Tax liability in a custodial account is the responsibility of the minor - it is the minor's social security number that is on the account. Thus, all income is reported to the IRS on the minor's number. Tax is due on income reported each year - there is no waiting until the minor reaches adult age (the IRS wants its money now!)

INCORRECT ANSWER A customer wishes to open an options account with your firm. Which of the following procedures are required PRIOR to the first trade? I The new account form must be completed II The customer must be sent an Options Disclosure Document III The customer must sign an Options Agreement IV The Registered Options Principal must approve the account before the first trade A I only B II and III only C I, II, IV D I, II, III, IV

The best answer is C. To open an options account, the new account form must be completed and the date that the customer was furnished with the latest Options Disclosure Document must be placed on the new account form. The ROP must approve the new account form and the first trade in writing. The customer does not have to sign the Options Agreement prior to the opening of the account. The Agreement must be sent to the customer and must be signed and returned within 15 days of opening the account.

Under the Uniform Gifts To Minors Act, which of the following statements are TRUE? I Only adults related to the minor may open a custodial account II Any adult can open a custodial account for a minor III Any gift donated into the account is revocable IV Any gift donated into the account is irrevocable A I and III B I and IV C II and III D II and IV

The best answer is D. Any adult can open a custodial account for a minor - the adult does not have to be related in any way to the minor. Any gift is irrevocable - once given to the minor, the donor can not take it back.

A social security number or tax identification must be obtained to open which of the following accounts? I Individual Account II Joint Account III Corporate Account IV Partnership Account A I and II only B III and IV only C I, II, IV D I, II, III, IV

D Social Security # Requirement The Internal Revenue Service requires that a social security number be on each customer account, so that dividends, interest, and transactions can be reported to the IRS on Form 1099. Business entities that open an account, such as a corporation or a partnership, must provide their tax identification number - again so that dividends, interest, and transactions can be reported to the IRS.

A customer must be sent which of the following at, or prior to, opening an options account? A Options Disclosure Document B Options Agreement C Loan Consent Agreement D Chicago Board Options Exchange manual

The best answer is A. An account is considered "opened" with the first trade. Prior to opening an options account, the new account form must be completed and the customer must be sent the latest Options Disclosure Document (ODD). This is a pamphlet entitled "Characteristics and Risks of Standardized Options" and is basically an options primer. The date that the customer was sent the ODD is noted on the options new account form. A copy of the options new account form is part of the Options Agreement that is sent to the customer, to be signed and returned within 15 days of account opening. The Options Agreement is a recap of the customer new account profile including the suitability determination and it qualifies the customer for a level of options trading, detailing which options transactions are permitted. A loan consent agreement allows the customer's securities to be loaned out on short sales - this only occurs with stocks and bonds. A copy of the CBOE manual must be made available to customers upon request.

A copy of the member firm's Business Continuity Plan must be provided to each customer: A at account opening B on each trade confirmation C on each account statement D every 36 months

The best answer is A. Each member firm must prepare a Business Continuity Plan that addresses the possibility of significant business disruptions and how the member plans to respond to events of increasing severity. Customers must be given a summarized version of the BCP at account opening. Additionally, the BCP must be posted on the member firm's Web site and must be mailed to customers on request.

The principal reason for an institutional investor to open a prime brokerage account is: A consolidation of account positions with one broker B lower commission costs on trade executions C direct access to execution venues D simplified reporting for tax purposes

The best answer is A. Hedge fund investors typically use a "prime broker" to consolidate all of their positions with one brokerage firm. In a prime brokerage agreement, the institutional investor can use different executing brokers for its trades, but all of these trades are settled by the "prime broker" who maintains custody of the positions, and most importantly, provides margin financing on these positions and arranges for stock loans on short stock positions. The hedge fund, in return for sending trades to different executing brokers at full commission rates, gets valuable research and recommendations in return. By using a prime broker to consolidate all positions, the hedge fund gets lower financing costs on borrowed funds and "front of the line" status when it wishes to borrow securities to effect short sales.

Form CRS must be provided to: A natural persons B accredited clients C hedge fund clients D institutional clients

The best answer is A. Regulation BI went into effect in mid-2020. It requires that customers receive a 2-page document at account opening called Form CRS - Customer Relationship Summary. Form CRS details: Whether the firm is acting as a broker-dealer in the relationship, where it can charge commissions; or if the firm is acting as an investment adviser in the relationship, where is can only charge fixed fees; That the firm must adhere to a suitability standard when making recommendations as a broker-dealer; and that the firm must adhere to a tougher fiduciary standard when acting as an investment adviser; The fees and costs that the customer will pay; Any conflicts of interest that the firm may have in providing its services to the client; and Whether the firm or its associated persons has had any reportable disciplinary events. The rule requires that Form CRS be provided to "natural persons" - meaning human clients. It makes no difference if the human client is wealthy or not! The rule does not apply to institutional clients, including hedge funds, since they are presumed to be sophisticated and understand the nature of the relationship that they have with the broker-dealer or investment adviser.

*** Under FINRA rules, a written power of attorney is required for a registered representative to choose which of the following order related items? I Security to be traded II Size of the order III Price of Execution IV Time of execution A I and II B III and IV C I, II, III D I, II, III, IV

The best answer is A. A registered representative can always pick the time and price of execution of an order without requiring a written power of attorney from the customer. However, if the registered representative selects the size of the trade and/or the security to be traded, then the trade is "discretionary" and requires a written power of attorney from the customer. Transactions Requiring Power... When effecting a trade, other than buy or sell, the major items chosen are: Size of the trade; Security to be traded; Price of execution; Time of execution. If a broker chooses either of the first 2 choices - Size and / or Security, then the trade is discretionary and a written power of attorney is needed for the broker to enter the order. If a broker chooses either of the last 2 choices - Price and / or Time, then no power of attorney is needed for the broker to enter the order. This is the same as a "Market - Not Held" order - a market order that is not held to an immediate execution, so it does not go into an automated trading system. Rather, it goes to a floor broker or OTC trader who decides the best price and time of execution.

Which statement is TRUE about donations into accounts opened under the Uniform Gifts to Minors Act? A Any adult can donate into a custodial account for a minor B Only a relative of the minor may donate into a custodial account for a minor C Only a parent of the minor may donate into a custodial account for a minor D Only a minor may donate into a custodial account for a minor

The best answer is A. Any adult can donate into a custodial account for a minor. The adult does not have to be related to the minor.

Jack Jones, age 82, has an individual account at your firm. He gives a full written trading authorization to his son, Jack Jones Jr. under a durable power of attorney. Upon the death of Jack Jones, the power of attorney: A is void B continues because it is a "durable" power of attorney C continues because it is a "full" power of attorney D continues until the executor over the Jack Jones estate is appointed

The best answer is A. Any power of attorney granted by a customer "dies" when that customer dies. The difference between a "durable" and a "non-durable" power of attorney only relates to mental incapacitation. If an individual that has granted a non-durable power of attorney becomes mentally incapacitated, then that power of attorney becomes void. If an individual that has granted a durable power of attorney becomes mentally incapacitated, the power of attorney continues in effect.

Which of the following accounts can be opened as margin accounts? I Investment Adviser account II Custodial account III Guardian account IV Executor for an Estate account A I only B II and III C I and IV D I, II, III, IV

The best answer is A. As a general rule, fiduciary accounts cannot be opened as margin accounts, unless the authorizing document specifically permits this. Custodial accounts, Guardian accounts, and Executor accounts are all fiduciary accounts. Investment adviser accounts are essentially regular customer accounts with a Third Party Trading Authorization given to the Investment Adviser. Customer accounts can be opened as either cash or margin accounts (as long as the proper documentation is completed).

Customers must be given information about SIPC: A at, or prior to, account opening B on the first trade confirmation sent after account opening C on the first account statement sent after account opening D semi-annually on the account statement

The best answer is A. At, or prior to, account opening, the customer must be provided with the telephone number and web site address of SIPC (Securities Investor Protection Corp., which insures customer accounts against broker-dealer failure), through which the customer can obtain a copy of the SIPC brochure. In addition, this information must be provided to the customer annually thereafter.

In a custodial account which of the following statements are TRUE? I There can only be one minor per custodian II There can be more than one minor per custodian III There can only be one custodian per minor IV There can be more than one custodian per minor A I and III B I and IV C II and III D II and IV

The best answer is A. Custodial accounts can only be set up as one minor per one custodian. There cannot be more than one minor per custodian; nor more than one custodian per minor.

The social security number(s) that is (are) used for Internal Revenue Service reporting in a custodial account is (are) the: A minor's social security number B custodian's social security number C account has the choice of using either the minor's social security number or the custodian's social security number D parent's social security number

The best answer is A. Custodial accounts use the social security number of the minor.

Regarding arbitration agreements between member firms and customers, which statement is FALSE? A FINRA requires each customer to sign an arbitration agreement as part of the account opening process B Each member firm can require each customer to sign an arbitration agreement as part of the account opening process C Industry arbitration is preferred over litigation as a means of settling disputes because it is cheaper and faster D Each member firm must provide the customer with a separate copy of the arbitration agreement for signature and return within 30 days of account opening

The best answer is A. FINRA does not require arbitration agreements between customers and member firms. However, each member firm can require this (and usually does). FINRA does require that if a customer signs an arbitration agreement as part of the account opening process, then the customer must be sent a separate "stand alone" copy of the agreement and must sign an acknowledgement of receipt within 30 days of account opening. Industry arbitration is preferred over litigation as a means of settling disputes because it is cheaper and faster.

When opening an account to buy options, which of the following signatures are needed on the options new account form? I Registered options principal signature II General principal signature III Registered representative signature IV Customer signature A I and III B I and IV C II and III D II and IV

The best answer is A. The customer's signature is not required on a new account form. It is required on the options agreement, margin agreement and loan consent agreement. The regular new account form for equity securities requires the signature of the registered representative and the general principal (Series 24 license). The options new account form, required for options trading, is signed by the registered representative, who is attesting to the fact that the information on the form is true; and must be approved before the account is traded by the registered options principal (Series 4 license). The same person can hold both the Series 24 General Principal and Series 4 Registered Options Principal licenses.

Which of the following parties of an account can give trading authorization to another party? A A second party can give trading authorization to a first party B A first party can give trading authorization to a second party C A third party can give trading authorization to a second party D A first party can give trading authorization to a third party

The best answer is A. The parties to an account are: First Party - Brokerage Firm; Second Party - Customer; Third Party - Anyone Else. The customer (Second Party) is always authorized to trade the account and draw checks on the account. The customer (Second Party) can authorize someone else to trade the account and draw checks. The customer (Second Party) can give a Third Party Trading Authorization; or a First Party Trading Authorization.

The rules of the options exchanges require that if a customer's financial condition changes materially, which of the following must be amended? A Options Agreement B Options Disclosure Document C Official Statement D Options Clearing Corporation Prospectus

The best answer is A. The rules of the options exchanges require that if a customer's financial condition changes materially, the options agreement signed by that customer must be amended to reflect the change. The revised agreement must be sent to the customer, and must be signed and returned within 15 days. At the same time, customer account information would also be updated.

Which of the following are TRUE statements about discretionary accounts? I Power of Attorney must be obtained in writing from the customer before discretion can be exercised II Each order ticket must be marked as "discretionary" III Each order ticket must be approved by the principal prior to entry IV The Power of Attorney must be renewed annually with the customer A I and II B II and III C I, III, IV D I, II, III, IV

The best answer is A. There is no requirement to renew a power of attorney annually with the customer. The power continues until the customer revokes it in writing or the customer dies. Discretionary order tickets must be approved by the manager "promptly," meaning by the end of the day. There is no requirement that they be approved before entry. Every discretionary order ticket must be marked as such, and a written power of attorney from the customer is required before discretion can be exercised.

Which statements are TRUE about non-managed fee based accounts? I The customer must be provided with a disclosure document prior to account opening II The customer must be provided with a disclosure document within 15 business days of account opening III The account must be reviewed at least annually for its appropriateness as a fee based account IV The account must be reviewed at least bi-annually for its appropriateness as a fee based account A I and III B I and IV C II and III D II and IV

The best answer is A. To open a non-managed fee based account (NMFBA) for a customer, a disclosure document must be provided, at, or prior to, account opening. Each account must be reviewed at least annually for its appropriateness for the customer.

A new customer wishes to open an options account with your firm. All of the following procedures are required prior to the first trade EXCEPT the: A customer must complete an Options Agreement B Registered Options Principal must approve the account before the first trade C customer must be sent an Options Disclosure Document D new account form must be completed

The best answer is A. To open an options account, the new account form must be completed and the date that the customer was furnished with the latest Options Disclosure Document (ODD) must be placed on the new account form. The ROP must approve the new account form and the first trade in writing. The customer does not have to complete the Options Agreement prior to the opening of the account. The Agreement must be sent to the customer and must be signed and returned within 15 days of opening the account.

When comparing a "Convenience Account" to Transfer on Death (TOD) registration: A opening a Convenience Account does not require a court order while a Transfer on Death account does B the named person in a Convenience Account has no ownership rights upon the owner's death, while the named person in a TOD account does C the named person in a Convenience Account has access to account funds only upon the death of the account owner, while the named person in a TOD account has access to account funds at will D opening a Convenience Account requires a smaller minimum deposit than the opening of a Transfer on Death account

The best answer is B. A Convenience Account is a "newer" type of account registration that is designed for an elderly parent who has many adult children. The elderly parent needs help managing his or her finances and wants one of the children to do this. The Convenience Account allows the elderly parent to name a person to use the funds in the account for the parent's benefit only. The "convenience" signer is simply an agent who can write checks from the account. There is no right of survivorship, so upon the parent's death, the funds in the account go to the estate. The "convenience signer" has no ownership rights, so all of the adult children know that the "convenience" signer, who is their sibling, will not have access to the funds in the account upon the parent's death. The funds will then be distributed according to the parent's will. In contrast, a TOD account names a beneficiary to whom the account assets are to be transferred upon the owner's death. The named beneficiary would only have the ability to trade the account or draw funds from the account while the owner is alive if the owner gave a written third party trading authorization to that person.

A parent opens a custodial account for a 10-year old child. The grandparents donate into the account. If the investment income in the account exceeds Internal Revenue Service guidelines, the income is taxed at the: A minor's tax rate B parent's tax rate C grandparent's tax rate D trust and estate tax rate

The best answer is B. If a custodian account is opened by a parent for a minor who is age 18 or under; and if the income exceeds $2,200 in 2021; then the income is taxed at the parent's tax rate - which is typically much higher. This tax rule is attempting to stop parents from shifting income to their children, who would typically have less income and thus would be taxed at lower rates.

A client has an options account that is qualified to buy options and sell covered calls. The client calls his representative, telling him that he wants to sell naked calls in the account. Which statement is TRUE about this? A The representative can do this without taking any further action B The "Special Statement for Uncovered Options Writers" must be provided before executing the transaction C The "Options Disclosure Document" must be provided before executing the transaction D The representative must open a separate options account for the customer and segregate the resulting naked options positions

The best answer is B. Most firms have a structure for options account qualification that codes accounts as Level 1, 2, 3 or 4. A Level 1 account can only sell covered calls (the most conservative and popular options strategy) or buy puts to hedge existing stock positions; A Level 2 account can also buy calls and buy puts to speculate; A Level 3 account can also take spread positions; and A Level 4 account can do anything, both covered or naked. For a customer to move up in Level, the suitability determination must be redone and the ROP (Registered Options Principal) must reapprove the account. To move to Level 4, the customer must also be given the "Special Statement for Uncovered Options Writers." This discloses that: Naked call writers have unlimited risk and naked put writers have substantial risk. If the broker demands additional margin due to an adverse market move, the broker may liquidate customer positions without prior notice if such margin payment is not received. If a secondary market in options were to become unavailable, the writer would be subject to exercise at any time until expiration of the contract. Uncovered option writing is only suitable for the knowledgeable investor who understands the risks and has the capacity to absorb substantial losses and has sufficient liquid assets to meet margin requirements. The writer of an American style option is subject to exercise at any time, whereas the writer of a European style option is only subject to exercise during the exercise period.

A new customer has come into your firm to open an account. He tells you that he has recently inherited some money that he wants to invest. When completing the new account profile with the client, when you ask him for his address, he tells you that he was recently evicted, is staying at a hotel, and has no current address until he locates a new apartment. Which statement is BEST about this situation? A The address to be used for Customer Identification purposes is the client's last known residence address B The address to be used for Customer Identification purposes is the address of a close relative C The address to be used for Customer Identification purposes is a P.O. Box D The address to be used for Customer Identification purposes is the address of the hotel

The best answer is B. One of the critical pieces of information that must be obtained at account opening is the customer's address - either residence or business street address. Also acceptable is the residence or business address of a next of kin. For example, maybe this is a person recently graduated from college who was sharing an apartment, and he and his apartment-mates were evicted for being too rowdy. You could use the address of his parents and when he finds a new apartment, update the account profile for the new address. A P.O. box is not acceptable; nor is a hotel address acceptable.

A married couple has a joint account at your firm held as "JTWROS." The representative has been informed by both the husband and the wife that they are involved in a messy divorce battle. The wife has contacted the representative with a request to withdraw a large sum from the account. The representative should: A follow the wife's request and make the withdrawal B not follow the wife's request and contact the firm's legal department to put a withdrawal restriction on the account C liquidate the account and hold the proceeds in an escrow account until the divorce proceeding is adjudicated D transfer the account assets into an irrevocable trust for both the husband and wife

The best answer is B. The action to take in this circumstance is based on the fact that the registered representative "knows" that the couple is getting a divorce. The wife can't simply drain the account - this is a joint asset that will typically be split 50/50 in a divorce proceeding. Brokerage firm legal departments will place a withdrawal restriction on the account for a fixed time period (typically anywhere from 14 days to 28 days), pending written instructions from BOTH parties to the account. Therefore, BOTH parties will now have to agree to the withdrawal of any funds from the account. On the other hand, if the representative did not know about the pending divorce, then he or she would simply follow the wife's instructions. However, any checks coming out of the account would have to be made out to full account name - that is, the name of both the husband and wife. Therefore, to cash the check, both signatures would be required.

Which statement is TRUE about a registered representative who wants to be appointed as trustee for a trust account being established by a client for the client's children? A The registered representative can act as the trustee without restriction B The registered representative can act as the trustee only with approval of the firm's compliance department C The registered representative can act as trustee only if no trustee fee is accepted D The registered representative cannot act as trustee under any circumstances

The best answer is B. The trustee over a trust account is a fiduciary who must manage the account in the best interest of the beneficiaries. It is an inherent conflict of interest for the registered representative to act as the trustee. This is the case because he or she, as "trustee," has the power to trade the account, and that trading activity will result in commissions paid to the representative. Thus, the representative would have an incentive to overtrade the account, earning excessive commissions at the expense of the trust beneficiaries. Typically, a trustee is a bank or an investment adviser, both of whom are already under a fiduciary obligation. The trustee decides who the broker will be. While it is "possible" for a registered representative to be a trustee in such an account (if there is written disclosure to the grantor of the trust of the nature of the conflict of interest and if the fees charged by the trustee are "reasonable"), many brokerage firms have an internal policy of prohibiting their representatives from being trustees in any accounts that they oversee. The only way that this can be overcome is if compliance is informed of the situation and approves.

Which statement is TRUE? A Real estate is a permitted asset that can be held in a UGMA account B Real estate is a permitted asset that can be held in a UTMA account C Real estate is a permitted asset that can be held in both UTMA and UGMA accounts D Real estate is a prohibited asset in both UTMA and UGMA accounts

The best answer is B. UGMA (Uniform Gifts to Minors Act) is the "older" legislation covering custodial accounts. It has been replaced is most states by UTMA - Uniform Transfers to Minors Act (the holdout states are Vermont and South Carolina, which still only have UGMA). One of the differences between them is that UTMA permits donations of real estate and artwork into the account, while UGMA does not.

The definition of a "pattern day trader" is a person who effects at least: A 2 day trades in a 5 business day period B 4 day trades in a 5 business day period C 10 day trades in a 5 business day period D 20 day trades in a 5 business day period

The best answer is B. A "pattern day trader" is defined as a person who effects at least 4 day trades in a 5 business day period, with each "day trade" being a round-turn buy and sell transaction on the same day. Such day traders are subject to a higher initial margin to open an account ($25,000 instead of $2,000); and have different (and more stringent) margin requirements than that for other accounts.

INCORRECT ANSWER A pattern day trader is defined as a person who: I effects a minimum of 4 day trades II effects a minimum of 10 day trades III in any given business day IV in 5 business days A I and III B I and IV C II and III D II and IV

The best answer is B. A "pattern day trader" is defined as a person who effects at least 4 day trades in a 5 business day period. To open a day trading account, the customer must be qualified with a very detailed suitability determination; must receive a risk disclosure document; and must post a higher minimum margin.

INCORRECT ANSWER An individual customer says the following to his broker: "Buy 100,000 shares of ABC stock whenever you think the time is best. This order is good unless I call you to cancel." Which statement is TRUE about the handling of this order? A An executed power of attorney must be obtained from the customer prior to accepting the order B The order must be executed by the close of the market on that trading day C The order can be accepted as given, and can be executed at the discretion of the brokerage firm at any time or day D This order can only be accepted if the customer places it via fax or e-mail

The best answer is B. Discretion over price and time of execution can be given verbally. However, the order must be filled by the close of the market on that day or it is canceled. If price and time discretion are given for a time period that is longer than 1 day, then a written power of attorney from the customer is required to accept the order.

When comparing fixed fee accounts to wrap accounts: I Fixed fee accounts generally only cover transaction costs II Fixed fee accounts generally cover transactions costs, asset allocation and portfolio management III Wrap accounts generally only cover transaction costs IV Wrap accounts generally cover transaction costs, asset allocation and portfolio management A I and III B I and IV C II and III D II and IV

The best answer is B. Fixed fee accounts (non-managed fee based accounts) only cover trading costs. They do not include charges for asset allocation and portfolio management. Wrap accounts include asset allocation and portfolio management. Any fixed fee product is defined as an "investment adviser" product.

An employee of a member firm wishes to open an options account at another firm. Which of the following statements are TRUE? I Before opening the account, prior written permission must be obtained from the employing firm II Prior approval of the employer is needed before executing each trade III Duplicate trade confirmations must be sent to the employer IV An affidavit is required to be on file from the employee that none of the trades are prohibited under existing rules and regulations A I and II only B I and III only C II, III, IV D I, II, III, IV

The best answer is B. For an employee of another firm to open an options account, prior written approval of the employer is required and duplicate confirmations of all trades must be sent to the employer. There is no requirement to get employer approval prior to executing each trade, nor is there a requirement to obtain an affidavit from the employee stating that none of the trades are prohibited under existing rules.

Your customer has been declared legally incompetent and his daughter has presented the proper legal papers appointing her as the guardian. Which statement is TRUE? A Trading instructions can be accepted only from the customer B Trading instructions can be accepted only from the daughter C Trading instructions can be accepted from either party D Trading instructions require joint approval of both the customer and the daughter

The best answer is B. Since the customer is legally incompetent, when the daughter presents the proper court papers, the account will be transferred from the customer's name to a guardian account, with the daughter acting as trustee. No instructions can be taken from the customer, since he does not have legal capacity to make decisions. All instructions regarding the account can only be taken from the guardian - who is the daughter.

Which statements are TRUE when comparing a custodial account is opened under UTMA (Uniform Transfers to Minors Act) to one opened under UGMA (Uniform Gifts to Minors Act)? I Under UGMA, assets in the account are transferred to the new adult at legal age II Under UGMA, assets in the account are transferred to the new adult at the age specified by the custodian III Under UTMA, assets in the account are transferred to the new adult at legal age IV Under UTMA, assets in the account are transferred to the new adult at the age specified by the custodian A I and III B I and IV C II and III D II and IV

The best answer is B. The main difference between UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) is that while the assets in an UGMA account transfer to the new adult at legal age, and an UTMA account, the custodian sets the transfer age (up to the maximum age set by that state - in most states, the maximum age is 21, a few have a maximum age of 25).

To open a cash account for a partnership, in addition to the new account form, which document is required? A Authorizing resolution B Partnership agreement C Corporate charter D Joint account agreement

The best answer is B. To open a partnership account, a copy of the partnership agreement must be obtained. This document will have a paragraph that authorizes the opening of such an account; and which specifies the partners that are permitted to effect transactions in the account.

An account registration that allows the customer to name the person into whose name securities in the account will be registered upon the death of the customer is known as: A tenancy in common B transfer on death C joint tenants with rights of survivorship D successor registration

The best answer is B. Transfer On Death (TOD) is a type of account registration that allows the registered owner to name the person into whose name the securities will be transferred upon the death of the customer. Thus, the securities are not required to be transferred into the name of the estate; and then retransferred to the beneficiary; after the estate clears probate.

Under FINRA rules, initial approval of new accounts must be performed, in writing, by the: A Financial and Operations Principal B Branch Office Manager C Registered Representative D Supervisory Analyst

The best answer is B. Under FINRA rules, new accounts must be approved, in writing, by a Branch Office Manager ("BOM" - Series 9/10 license) or a General Principal (Series 24 license). The Compliance Officer (Series 14 license) is responsible for overall compliance matters and overall supervision and approval of accounts. This person typically resides in the home office, and could also approve new accounts, but the BOM is the better answer. A Supervisory Analyst (Series 16 license) writes or approves research reports. The Financial and Operations Principal (Series 27 license) is responsible only for the firm's financial reporting and back office operations.

A customer wishes to give a gift of securities to her nephew under the Uniform Gifts To Minors Act. When the minor reaches legal age in that state, the: A custodian can continue in that capacity with the express permission of the minor B account must be transferred into the name of the minor C account must be liquidated and the proceeds paid to the new adult D custodian must pay the minor the highest market value that the account has had over its life

The best answer is B. Under UGMA (Uniform Gifts to Minors Act), when a minor reaches legal age, the registration on the custodial account is changed to the sole name of the new adult. The new adult is free to do as he or she wishes with the account.

All of the following individuals can legally grant a power of attorney over their accounts to a third party EXCEPT a: A 34-year old doctor who has signed up with Doctors Without Borders to work for 2 years in Madagascar B 56-year old who has been diagnosed with pancreatic cancer and is undergoing a Whipple gastric dissection procedure C 29-year old diagnosed with paranoid bipolar disorder who has been adjudicated legally incompetent D 20-year old college student who has recently inherited a large sum of money from his parents, who died unexpectedly in a car crash

The best answer is C. In order to give a power of attorney, the grantor must be legally competent. Thus, the grantor cannot be a minor, since minors have no legal capacity. Additionally, the grantor cannot have been legally adjudicated as incompetent in a court of law - typically due to mental incapacitation - in which case a guardian or conservator is appointed to manage that person's affairs. An individual would consider granting a power of attorney (durable) if he or she was going overseas to a dangerous place for an extended period of time, and also if that individual was in a situation that was life threatening, such as undergoing serious surgery. The college student is an adult and can give a power of attorney to a trusted individual to manage his or her finances.

INCORRECT ANSWER A client has an options account that is qualified to buy options and sell covered calls. The client calls his representative, telling him that he wants to sell naked calls in the account. In order to do this, all of the following procedures are required EXCEPT: A the registered representative must perform a new suitability determination to determine that naked options writing is appropriate for this client B The "Special Statement for Uncovered Options Writers" must be provided before executing the transaction C The "Options Disclosure Document" must be provided before executing the transaction D The Registered Options Principal must reapprove the account for naked options writing

The best answer is C. Most firms have a structure for options account qualification that codes accounts as Level 1, 2, 3 or 4. A Level 1 account can only sell covered calls (the most conservative and popular options strategy) or buy puts to hedge existing stock positions; A Level 2 account can also buy calls and buy puts to speculate; A Level 3 account can also take spread positions; and A Level 4 account can do anything, both covered or naked. For a customer to move up in Level, the suitability determination must be redone and the ROP (Registered Options Principal) must reapprove the account. To move to Level 4, the customer must also be given the "Special Statement for Uncovered Options Writers." This discloses that: Naked call writers have unlimited risk and naked put writers have substantial risk. If the broker demands additional margin due to an adverse market move, the broker may liquidate customer positions without prior notice if such margin payment is not received. If a secondary market in options were to become unavailable, the writer would be subject to exercise at any time until expiration of the contract. Uncovered option writing is only suitable for the knowledgeable investor who understands the risks and has the capacity to absorb substantial losses and has sufficient liquid assets to meet margin requirements. The writer of an American style option is subject to exercise at any time, whereas the writer of a European style option is only subject to exercise during the exercise period.

Under SEC rules, when and to whom must a Form CRS be provided? A Within a reasonable time after account opening, only for retail clients B Within a reasonable time after account opening, to both retail and institutional clients C At, or prior to, the making of a recommendation or account opening, only for retail clients D At, or prior to, the making of a recommendation or account opening, to both retail and institutional clients

The best answer is C. Regulation BI went into effect in mid-2020. It requires that customers receive a 2-page document at account opening called Form CRS - Customer Relationship Summary. Form CRS details: Whether the firm is acting as a broker-dealer in the relationship, where it can charge commissions; or if the firm is acting as an investment adviser in the relationship, where is can only charge fixed fees; That the firm must adhere to a suitability standard when making recommendations as a broker-dealer; and that the firm must adhere to a tougher fiduciary standard when acting as an investment adviser; The fees and costs that the customer will pay; Any conflicts of interest that the firm may have in providing its services to the client; and Whether the firm or its associated persons has had any reportable disciplinary events. If the firm presents a client with a package of documents at account opening, the Form CRS must be on the top. It must also be posted on prominently on the firm's website. Form CRS is only required to be provided to retail clients, including wealthy retail clients. It is not required to be provided to institutional clients, who are presumed to be sophisticated. The rule requires that the Form CRS be provided to retail clients at the earlier of making a recommendation or opening a new account.

If a member firm believes that a senior citizen with an account at the firm is being financially exploited, the member would contact the client's A attorney B closest relative C trusted contact person D registered representative

The best answer is C. To address growing problems with financial exploitation of vulnerable senior citizens, FINRA requires that "reasonable efforts" be made to obtain the name and contact information of a "trusted contact person" when an account is being opened. Note that this requirement applies to any new account, not just to accounts opened by senior citizens (age 65 or older). If a member places a temporary hold on a senior citizen's account because of suspected financial exploitation, within 2 business days of placing the hold, all parties authorized to do business in the account must be notified, as well as the trusted contact person. The "idea" is that the trusted contact person will take the steps necessary to stop the financial exploitation of the senior citizen (such as filing a complaint with the police).

Under FINRA rules, to ascertain which investments are suitable for the customer, the registered representative would inquire about the customer's: I Existing investment holdings II Current investment objective III Financial situation and needs IV Daily living expenses A I only B II and III C I, II, III D I, II, III, IV

The best answer is C. "Suitability" means that securities which are recommended to a customer are appropriate for that customer. To ascertain which investments are suitable for the customer, FINRA states that the basis for making the recommendation are the facts disclosed by the customer about his other security holdings and financial situation and needs. Inquiry should be made as the customer's investment objective, tax status, and financial status. Inquiring about the customer's daily living expenses might be a little too intrusive to ask.

Which of the following information items are needed to open a cash account for a customer? I Customer's name and address II Customer's social security number or tax I.D. number III Customer's signature IV Customer's occupation and employer A I and II only B III and IV only C I, II, IV D I, II, III, IV

The best answer is C. A customer signature is not needed to open a cash account (thus cash accounts can be opened over the phone). A signature is required for margin accounts only, since such an account requires that the customer pledge all the securities in the account to the brokerage firm in return for a margin loan. To open a cash account, the registered representative must complete a new account form which includes the Social Security number of the customer (tax I.D. number) so that the IRS gets its 1099 reports of income earned in the account; and the customer's occupation and employer because if the customer is employed by another brokerage firm, special procedures must be followed. The registered representative and the manager (principal) must sign the form. By signing, the registered representative indicates that the information is written as stated by the customer; and the manager is signing that the information has been reviewed prior to accepting the account for the firm.

*** In order to open a discretionary cash account, which of the following procedures are required? I Completed Customer New Account Form II Signed Trading Authorization III Signed Customer's Agreement IV Signature of Manager on New Account Form A I and II only B I and III only C I, II, IV D II, III, IV

The best answer is C. A signed customer's agreement is only required for a margin account; it is not used in a cash account. The customer's agreement is the hypothecation agreement. To open a discretionary cash account, a new account form must be completed by the registered representative and approved in writing by the manager. The customer must provide a signed trading authorization to the firm (first party trading authorization) allowing discretionary trades.

An account is opened "joint tenants with rights of survivorship." Which of the following statements are TRUE? I If one party to the account dies, the other party wholly owns the account II Orders may be given by either party III Checks can be drawn in the name of either party IV Mail can be sent to either party A I and II only B III and IV only C I, II, IV D I, II, III, IV

The best answer is C. Any checks drawn on an account are made out to the full account name. If it is a joint account, the names of the parties on the account will be on the check - not just one of the parties. In a joint account, orders can be entered by either party; mail can be sent to either party, and in an account with rights of survivorship - if one party dies, the other party wholly owns the account.

A firm holds a joint cash account for a husband and wife. The wife calls the registered representative and says "Sell 500 shares of ABC out of the account immediately and send a check for the proceeds made out to my name". The representative should inform the wife that: A her instructions will be followed exactly B the transaction requires approval of the husband since it is a joint account C the trade can be performed but the check must be made out to both names on the account D a written power of attorney must be on file to perform the trade

The best answer is C. Any party in a joint account can enter orders. However, any checks drawn on the account must be made out to all names on the account.

All of the following information is needed to open a new cash account for a customer EXCEPT: A the citizenship of the customer B whether the customer is an officer or director of a publicly held company C whether the customer owns the stock of another publicly traded broker-dealer D whether the customer is an employee of another broker-dea

The best answer is C. Country of citizenship is deemed to be an essential piece of information because the PATRIOT ACT requires that a copy of the customer's passport be obtained if an account is opened for a non-U.S. citizen and the customer must have a U.S. tax identification number. Officers and directors of publicly held companies are restricted under Federal law in their trades of that company's stock, so this information is essential. If a customer is employed by another financial services firm, then special procedures must be followed to open the account, so this information is essential. Whether a customer owns stock of another publicly traded broker-dealer is not essential - for example, if a customer opening an account at Merrill Lynch owns the stock of, say, Raymond James, this does not affect the opening of the account; nor how transactions are handled in the account.

Which of the following transactions are permitted in a custodial account? I Short sale of common stock II Sale of pre-emptive rights III Purchase of warrants IV Purchase of mutual fund shares A I and II only B IV only C II, III, IV D I, II, III, IV

The best answer is C. Custodial accounts cannot be margin accounts - so short sales are prohibited. If securities are purchased, they must be paid in full. If securities are sold, they must be long sales with the proceeds being used for other investments or expenses that benefit the minor. Any type of security can be purchased in a custodial account, as long as the investment is "prudent."

All of the following are types of fiduciary accounts EXCEPT: A Custodial Account B Guardian Account C Joint Account D Trust Account

The best answer is C. Custodial accounts, Guardian accounts, and Trust accounts are "fiduciary accounts," where a third party is designated to manage the account in the best interests of the account owner. Joint accounts are directly managed by an owner of the account, and thus are not fiduciary accounts.

Prior to opening an account that will engage in day trading, the customer must be provided with a: A Preliminary Prospectus B Trust Indenture C Disclosure Document D Power of Attorney

The best answer is C. Day traders take on greater risks than normal customers and are therefore subject to a more stringent suitability determination and must receive a risk disclosure document prior to account opening.

The main risk of investing in an ETN is: A marketability risk B liquidity risk C credit risk D market risk

The best answer is C. ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. Because they trade, the liquidity risk aspect of structured products is eliminated. What is not eliminated, however, is credit risk. These products are only as good as the guarantee of the issuing bank. They typically have a 7 year life - and a lot can go wrong in 7 years (just ask anyone who purchased Lehman Brothers structured products or ETNs).

Under FINRA rules, if a member suspects that a senior citizen is being financially exploited, a temporary hold may be placed on disbursements from the account for up to: A 5 business days B 10 business days C 15 business days D 20 business days

The best answer is C. FINRA permits member firms to place a temporary hold on disbursements from customer accounts if the firm suspects that the account owner is being financially exploited. The initial hold can be for up to 15 business days. In addition, if the member's review of the situation supports this, the member can extend the hold for another 10 business days.

A customer has sold an options contract and after 15 days, still has not returned the signed Options Agreement. The customer is only allowed to make which of the following transactions in this account? A opening purchase B opening sale C closing purchase D closing sale

The best answer is C. If the Options Agreement is not signed and returned within 15 days, only closing transactions are allowed. Since the customer made an opening sale (he sold the contract), this transaction is closed with a purchase.

A 35-year old customer in the 15% tax bracket tells her representative that she wants to buy a tax-sheltered investment. The representative explains that this is not suitable, but the customer insists that the representative execute the trade, The representative should: A refuse the order B submit the order to FINRA for approval prior to executing the order C execute the order, but note his or her exception in the customer account file D close the account

The best answer is C. If the customer tells you to do something, do it! It's the customer's account, not yours. Since you don't agree with the customer's decision, cover your actions by documenting your exception to the trade in the customer file.

INCORRECT ANSWER Which of the following are types of joint accounts? I Tenancy by Entireties account II Tenancy in Common account III Joint Tenants with Rights of Survivorship account IV Partnership account A I and IV B II and III C I, II, III D I, II, III, IV

The best answer is C. In a joint account, each owner can trade the account and can draw checks in the account's name. The joint account ownership options are Tenants in Common - each person has a divided interest with a specified ownership percentage for each party; and Joint Tenancy With Rights of Survivorship - each person has an undivided interest with each owning 100% of the account (another name for such an account is "Tenants by Entireties"). Partnership accounts are not joint accounts - only the designated partner(s) authorized in the partnership agreement can trade the account and draw checks - each individual partner is not permitted to do so.

Which of the following can open a joint account without restriction? A Parent and minor B Guardian and custodian C 3 limited partners D Registered representative and client

The best answer is C. Minors cannot participate in a joint account - the only way to open an account for a minor is via a custodial, guardian, or trust account. A guardian and a custodian cannot open a joint account as such - the custodian opens an account for the benefit of the designated minor; the guardian opens the account for the benefit of the designated person whose assets need to be protected. A registered representative and a client cannot open a joint account unless the firm approves; and profit and loss is shared in proportion to capital contributed. As a practical matter, almost all firms prohibit such sharing outright. 3 limited partners could open a joint account (they could also open a partnership account).

INCORRECTLY ANSWERED Which statement about SEC rules covering customer account information is FALSE? A The customer must be sent a copy of the collected information for verification within 30 days of account opening B Collected suitability information must be sent for verification, including income and net worth C CIP (Customer Identification Procedures) information must be sent for verification, including date of birth and social security number D The customer account profile must be resent to the customer every 36 months for reverification

The best answer is C. SEC rules require that the basic customer account information collected at account opening be sent separately to the customer for verification within 30 days of account opening; and this information must be sent for reverification and updating (if needed) every 36 months thereafter. Any collected suitability information must be included, however the rule states that customer social security number and date of birth are not required to be verified to help protect the customer from potential identity theft.

An individual comes into your firm to open a cash account. When completing the new account form, the customer responds to the question "What is your age?" by stating "I am 15 years old." Which statement is TRUE? A The account can be opened in the name of this customer without restriction B The account can be opened in the name of the customer with the permission of the parents C The account can be opened by an adult as custodian for this person D The account can be opened with the brokerage firm as custodian for this person

The best answer is C. Since this customer is not of legal age, he does not have the legal capacity to open the account. A custodian must be present to open the account for the minor. Custodians can only be human beings; brokerage firms cannot be custodians.

Under the Know Your Customer Rule, in order to open and maintain a customer account, each registered representative must: I know "every" fact concerning the customer II know "every essential fact" concerning the customer III follow KYC procedures as part of an effective Anti-Money Laundering (AML) Program IV follow KYC procedures as part of an effective Customer Privacy program A I and III B I and IV C II and III D II and IV

The best answer is C. The Know Your Customer rule is separate from the "Suitability" rule. The KYC rule requires that the essential facts about the customer be collected at account opening, so that the member firm can: effectively service the customer's account; act in accordance with any special handling instructions for the account; understand the authority of each person acting for the customer; and comply with applicable laws and regulations. This is a very general rule regarding collection of customer account information and it applies whether trades are recommended or not in the account. For example, the PATRIOT Act requires that customer citizenship be obtained, because if a non-U.S citizen opens an account, a copy of their foreign passport must be obtained. Thus, citizenship becomes an essential fact in order to "comply with applicable laws and regulations." In contrast, the Suitability rule only applies when recommendations are made.

To open an options account, inquiry must be made into the customer's financial situation and needs in order to: I Make suitable customer recommendations II Determine if it is appropriate to open the account III Determine whether the customer should receive an Options Disclosure Document IV Determine the restrictions, if any, to be placed in the Options Agreement A I and II B III and IV C I, II, IV D I, II, III, IV

The best answer is C. The Options Disclosure Document and Options Agreement are mandatory parts of the option account opening procedure. Inquiry into the customer's financial situation is not made to determine whether the customer gets these. It is made to determine whether the account should be opened and what to recommend.

INCORRECT ANSWER When opening an account to trade stocks and options, which of the following signatures are needed on the new account form(s)? I Registered options principal signature II General principal signature III Registered representative signature IV Customer signature A I and III B II and IV C I, II, III D I, II, III, IV

The best answer is C. The customer's signature is not required on a new account form. It is required on the options agreement, margin agreement and loan consent agreement. The regular new account form for equity securities requires the signature of the registered representative and the general principal. The options new account form, required for options trading, is signed by the registered representative, who is attesting to the fact that the information on the form is true; and must be approved before the account is traded by the registered options principal. The same person can hold both the Series 24 General Principal and Series 4 Registered Options Principal licenses, and could approve both accounts.

Under MSRB rules, to make a suitable recommendation, the registered representative must have sufficient knowledge of the customer. Regarding recommendations to a customer, which of the following statements are TRUE? I If the customer refuses to disclose sufficient financial information, recommendations are still allowed II If the customer refuses to disclose sufficient financial information, recommendations are not permitted III If the customer insists upon executing an unsuitable trade, the registered representative should execute the trade, denote his exception to the trade in his book, and mark the order ticket as "unsolicited" IV If the customer insists upon executing an unsuitable trade, the registered representative must submit the issue to industry arbitration A I and III B I and IV C II and III D II and IV

The best answer is C. The registered representative should inquire as to the customer's "financial background" under MSRB rules, asking information such as income and net worth. The customer may refuse to provide this information, stating that it is an invasion of privacy. The account can still be opened, however when the customer fails to provide sufficient personal information on his financial status or investment objective, no recommendations can be made. If the customer wishes to execute an unsuitable trade, the registered representative should note this and mark the order ticket as "unsolicited" and execute the order. The registered representative is obligated to do what the customer instructs.

A FINRA member firm uses a structure for its wealthy client group where a "team" of registered representatives with differing specializations services those accounts. In order to do this, the member firm must: A have a written agreement signed by all of the representatives in the team that details the compensation sharing arrangement, if any, between the team members B tape the phone conversations of each team member when talking to clients to maintain a record of which registered person made recommendations to that client C maintain a record of the CRD number of each representative assigned to the account D document the role and responsibilities of each member of the team

The best answer is D. As part of the customer account information required by FINRA, the name of the representative assigned to the account must be recorded. This way, FINRA knows who is responsible if there is an "issue" with the account. When a firm uses a "team structure" to service accounts (a very common practice when dealing with very wealthy clients), FINRA requires that: "if multiple individuals are assigned responsibility for the account, a record indicating the scope of their responsibilities with respect to the account" must be maintained by the member firm. Note that this rule (FINRA Rule 4512) only requires the recording of the names of the representative(s) assigned to the account. It does not require the CRD number of the representative as part of the record, though this information is readily available.

To open a margin account: A no signature of the customer is required B a customer signature must be obtained on the hypothecation agreement prior to placing the first order in the account C a customer signature must be obtained on the hypothecation agreement at, or prior to confirmation of the first transaction in the account D a customer signature must be obtained on the hypothecation agreement at, or prior to settlement of the first transaction in the account

The best answer is D. The rule for signing a hypothecation agreement when opening a margin account is interesting - it permits margin accounts to be opened over-the-phone or on line, if the firm chooses to do so! As long as the firm has the signed margin agreement by settlement of the first trade, all is good! So a potential client can be solicited to open a margin account; the representative can take a trade immediately at execute it; and the customer is sent the hypothecation agreement by overnight mail for signature and return with an enclosed overnight envelope. As long as the firm has the signed margin agreement back by settlement, which is T + 2, everything is in order!

Which of the following statements are TRUE if a customer signs a non-durable power of attorney? I The power of attorney continues in effect if the grantor becomes mentally incompetent II The power of attorney ceases if the grantor becomes mentally incompetent III The power of attorney continues in effect if the grantor dies IV The power of attorney ceases if the grantor dies A I and III B I and IV C II and III D II and IV

The best answer is D. A "non-durable" power of attorney ceases if the grantor becomes mentally incapacitated. In contrast, a "durable" power of attorney continues if the grantor is incapacitated or becomes incompetent. However, upon the death of the grantor, any power of attorney (whether durable or non-durable) is void.

When comparing a full power of attorney given in a brokerage account to a limited power of attorney, the person given the: A full power of attorney can draw checks only B full power of attorney can enter orders only C limited power of attorney can draw checks only D limited power of attorney can enter orders only

The best answer is D. A person holding a limited power of attorney in a brokerage account can enter orders but cannot draw checks. A person holding a full power of attorney can do both - but any checks must be drawn to account name - not to the name of the third party.

Which statements are TRUE regarding a customer account with a "full power" third party trading authorization? I Checks drawn on the account can only be made out to the name of the customer, not to the third party II Upon the death of the customer, the power of attorney is revoked III The third party can enter orders in the account A I only B II only C I and II D I, II, III

The best answer is D. All statements are true about full trading authorizations. Any checks must be drawn in the account name (that is the name of the second party - the customer) - not third party name; the power of attorney dies if the customer dies; and the third party can enter orders. It is also true that if the customer so designates (in writing), that confirmations can be sent only to the third party.

Which of the following recommendations are "red-flags" that are usually unsuitable for seniors? I Variable annuities II Structured products III Mortgaging home equity for investment purposes IV Using retirement savings to invest in high-risk investments A I and II only B III and IV only C I, II and IV D I, II, III, IV

The best answer is D. FINRA has stated that it does not prohibit any particular recommendation to a senior citizen as long as it is suitable, however certain types of recommendations are "red-flags" - meaning that the firm must be able to strongly defend such a recommendation to a senior citizen. Included on the list of "no-no's" are recommendations to seniors to: purchase variable annuities, equity indexed annuities, and real estate limited partnerships purchase variable life settlements purchase complex structured products such as CDOs (Collateralized Debt Obligations) mortgage their residence to obtain funds for investment purposes use retirement savings, including early withdrawals from IRAs, to invest in high-risk investments

he FINRA suitability rule requires all of the following EXCEPT: A Reasonable Basis Suitability B Customer-Specific Suitability C Quantitative Suitability D Qualitative Suitability

The best answer is D. FINRA requires that suitability determinations include multiple levels of review. These are:Reasonable Basis Suitability: This is a review of the features, returns, costs and risks of the recommended product or strategy. Only those products with the best combination can be recommended to clients. In essence, this rule requires that firms have an internal "recommended list" that has completed this review. Customer-Specific Suitability: Once the recommendation has completed "reasonable basis" suitability, that does not mean that it can be recommended to all customers. To recommend it to a customer requires that "customer-specific" suitability be determined. Quantitative Suitability: A single recommendation might be suitable for a customer, however a large number of similar recommendations might not be. It all depends of the customer's objectives, needs, and ability to pay for the recommended transactions. There is no such thing as "Qualitative" suitability.

Under FINRA rules, a registered representative must obtain and retain which of the following information relating to the customer's account? I Whether the customer is an officer, director, or 10% shareholder of a publicly traded company II The customer's country of citizenship III Whether the customer is employed by another FINRA member firm IV Customer's financial status A I and II B III and IV C I, II, III D I, II, III, IV

The best answer is D. FINRA rules require that a registered representative ascertain whether the customer is an officer, director, or 10% shareholder of a publicly traded company, since these persons are defined as "insiders" under the Securities Exchange Act of 1934, and their trading in that company's shares is restricted. Country of citizenship is required as well, since if the customer is a non-U.S. citizen, a copy of the customer's passport must be obtained and the customer must have a U.S. tax identification number. If the customer is employed by another FINRA member firm, special procedures must be followed to open the account. Customer financial information must be obtained to perform a suitability determination under the requirements of the "Know Your Customer" rule.

A married couple opens a joint margin account. The brokerage firm will send the Internal Revenue Service Form 1099 (Report of Interest and Dividends Earned) to the: A husband only B wife only C husband on one report; and the wife on another report D person whose social security number was given on the account form

The best answer is D. Form 1099s (Reports of Interest and Dividends Earned) are sent to the customer whose social security number appears on the account. If it is a joint account, then the parties to the account must decide which 1 person's social security number will be used. The Form 1099 is sent to that 1 party in the account. It is up to the joint owners to allocate the proper share of income as shown on that report onto their personal tax returns.

If a tenant in a joint account dies, the decedent's share is excluded from the taxable estate for accounts held as: A Joint Tenants with Rights of Survivorship only B Tenants in Common only C both Joint Tenants with Rights of Survivorship and Tenants in Common D neither Joint Tenants with Rights of Survivorship and Tenants in Common

The best answer is D. If a joint account owned as "Tenancy In Common," then if one person dies, that person's share goes into his estate, and is subject to estate tax. Even though a "Joint Tenancy with Rights of Survivorship" gives each owner a legally undivided interest in an account, if one owner dies, the IRS assigns a portion of the account to that person and taxes it (nothing is so certain in life as death and taxes!) If the owners are married, then the unlimited marital exclusion stops the tax bill from hitting until the second spouse dies.

All of the following are types of joint accounts EXCEPT: A Tenancy in Common account B Joint Tenants with Rights of Survivorship account C Tenants by Entireties account D Omnibus account

The best answer is D. Ownership options for joint accounts are either Tenancy in Common, where each person has a specified ownership interest; or Joint Tenants With Rights Of Survivorship, where each tenant owns 100% of the account. In some states, a "JTWROS" account is termed "Tenants By Entireties." An Omnibus account is an account of pooled customer monies, where there is no specific identification to the broker carrying the account of who the specific customers are. Investment advisers who manage money for many customers often use such accounts.

Which of the following information is NOT required to be verified with the customer every 36 months? A Customer investment objective B Customer address C Net worth D Date of birth

The best answer is D. SEC rules require that the basic customer account information collected at account opening be sent separately to the customer for verification within 30 days of account opening; and this information must be sent for verification and updating (if needed) every 36 months thereafter. The rule states that customer social security number and date of birth are not required to be verified to help protect the customer from potential identity theft.

If a FINRA member firm maintains fee based accounts for customers, the supervisory procedures should include: I Periodic review of fee based accounts to determine whether they remain appropriate for their respective customers II Review of any changes in customer objectives or financial circumstances III Comparison of total asset based fees charged to such accounts to the charges that would have been imposed on a commission basis A I only B I and II C II and III D I, II, III

The best answer is D. The concern of FINRA is that customers may be charged more for fee based accounts than they would have been charged if they simply paid a commission on each trade. Thus, the volume of trading in the account must be high enough to justify a fixed fee charge. Also, FINRA requires that fee based accounts be reviewed periodically to determine that they are appropriate for their respective customers; and to determine if changes in customer objectives or financial circumstances require changing how charges are assessed in the account. Finally, FINRA recommends that firms compare (preferably annually) the charges assessed on a fee basis in customer accounts to the charges that would have been imposed on a per-trade commission basis.

All of the following should be considered when determining the suitability of a municipal bond recommendation EXCEPT the customer's: A state of permanent residence B tax bracket C financial background D formal education level

The best answer is D. The customer's education level is of no relevance in making a securities recommendation (people can be educated smart, and people can be street smart as well!) State of residence is important for a municipal bond recommendation, since if the purchaser is a resident of the issuing state, then the state exempts that issue from state and local tax (in addition to the Federal tax exemption). Tax bracket is important because municipal yields are lower than those of taxable investments; and the customer's tax bracket must be high enough to justify this type of investment. Financial background information such as income, net worth, and other investments, is needed to recommend the right type of municipal bond to the customer.

A registered representative is meeting with an elderly client and believes that this individual is evidencing diminished mental capacity. The father has an adult son, to whom he has given a durable power of attorney over the account. Later that day, the son contacts the representative and tells him to cash out the account and send him the money. What should the representative do? A Follow the son's instructions because he has a valid power of attorney over the account B Contact the client and get his permission to liquidate the account C Schedule a meeting with the client and son to discuss the situation D Go to the principal with the request and have the principal handle the situation

The best answer is D. The elderly client appears to be mentally impaired and the son wishes to liquidate the account. While the son does have a power of attorney, elder abuse is a big potential issue here. This should be handed over to a principal. Under FINRA rules, if there is the reasonable belief of financial exploitation, the firm can place a 15 day hold on the disbursement of funds while the situation is investigated.

Under FINRA rules, all of the following are necessary to open a corporate account EXCEPT: A Corporate Resolution B Corporate Seal C Corporate Charter D Corporate Minutes

The best answer is D. To open a corporate account under FINRA rules, a corporate resolution bearing the corporate seal must be obtained. In addition, a copy of the corporate charter must be obtained as part of the firm's CIP (Customer Identification Program) procedures. There is no requirement to obtain minutes of corporation's Board of Directors meetings.

All of the following are true statements about trust accounts EXCEPT: A a copy of the trust agreement must be obtained prior to opening the account B transactions in the account are limited to the types specified in the trust document C margin transactions are prohibited unless specific authorization to open a margin account is given in the trust document D securities that may be purchased in the account are restricted to those included in that state's "Legal List"

The best answer is D. To open a trust account, a copy of the trust document must be obtained. The document will spell out the types of transactions that are permitted. The account must be opened as a cash account unless the document specifically permits margin transactions. Finally, there is no requirement that investments be limited to that state's "legal list" (these are lists of so-called "prudent" investments that are considered to be conservative, such as government bonds), though this can be the case if only "legal list" investments are authorized in the trust document.

All of the following procedures are required to open an account for an employee of another municipal securities firm EXCEPT: A Prior notice of the opening of the account must be given to the municipal employer B Duplicate trade confirmations must be sent to the municipal employer C Any instructions of the municipal employer must be followed D Duplicate account statements must be sent to the municipal employer

The best answer is D. To open an account for an employee of another municipal securities firm, the MSRB requires that prior notice be given to the employing firm; and that duplicate confirmations of each trade be sent to the employer. There is no requirement to send duplicate statements to the employer. Also, any instructions of the employer regarding the account must be followed - for example, if the employer says "Don't open the account," then those instructions must be followed.

To open an options account, inquiry must be made as to the customer's: I Financial Status II Marital Status III Income IV Liquid Net Worth A I and II only B III and IV only C I, III, IV D I, II, III, IV

The best answer is D. To open an options account, a customer must give detailed financial disclosure. Inquiry must be made as to the customer's investment objective, investment experience, financial situation and financial needs. Inquiry must also be made about the customer's income, net worth, liquid net worth, marital status, and tax status.

A woman in the 15% tax bracket wishes to buy a municipal bond. The registered representative tells her that such an investment is not appropriate. The registered representative can execute the trade: A if the principal approves B if the manager approves C under no circumstances D at the specific direction of the customer

The best answer is D. Under an MSRB interpretation, if a customer directs a registered representative to do a trade that the representative believes is inappropriate, the representative must inform the customer of his or her objections; and if the customer still directs that the trade be performed, then the representative must execute the trade. We call this the MSRB "Do It!" rule.

To determine the suitability of recommendations made to a customer, inquiry should be made about which of the following? I Investment objective II Investment experience III Existing portfolio of investments IV Tax bracket A I only B I and II C III and IV D I, II, III, IV

The best answer is D. When performing a suitability determination for a customer, inquiry should be made as to: Investment Objective, Investment Experience, Financial Situation (e.g., existing portfolio of investments), and Financial Needs. Tax bracket is useful to see if tax exempt municipal bonds are an appropriate investment. In general, in determining suitability, ask about all information that is needed to make a proper recommendation to the customer.

An institutional customer says the following to his broker: "Buy 100,000 shares of ABC stock whenever you think the time is best. This order is good unless I call you to cancel." Which statement is TRUE about the handling of this order? A An executed power of attorney must be obtained from the customer prior to accepting the order B The order must be executed by the close of the market on that trading day C The order can be accepted as given, and can be executed at the discretion of the brokerage firm at any time or day D This order can only be accepted if the customer places it via fax or e-mail

he best answer is C. An exception to the requirement to get a written power of attorney when exercising discretion over price and time in a customer account for longer than 1 day is given to institutional accounts. Since these are sophisticated investors, the member firm can take price and time instructions from them verbally for any time length.