Customer Accounts
Under Regulation T, an extension request that is granted by FINRA typically gives a customer how many additional business days to pay for a securities purchase? A. 2 days B. 4 days C. 7 days D. 10 days
A. 2 days If payment is not received on the 4th business day after trade date, a Regulation T extension may be requested from FINRA. An extension gives another 2 business days. Also note that if FINRA grants a 2 day extension, the member firm may shorten this period of time to the customer.
Under FINRA rules, initial approval of new accounts, in writing, is performed by the: A. General Principal B. Financial and Operations Principal C. Compliance Officer D. Supervisory Analyst
A. General Principal The General Principal (Series 24 license) is the supervisor who can approve accounts, among other responsibilities. The Compliance Officer (Series 14 license) is a FINRA designation for the person responsible for overall compliance matters and overall supervision of accounts. This person typically resides in the home office. The Supervisory Analyst (Series 16 license) is the person who writes or approves research reports. The Financial and Operations Principal (Series 27 license) prepares the firm's financial reports and supervises back office operations.
A registered representative receives an order to sell 100 shares of ABC stock that has been "transferred and shipped" to the customer. Before executing the order, the registered representative must: I Ascertain the location of the stock II Ascertain that the securities can be delivered in 3 business days III Validate that the securities are in "good form" IV Obtain physical possession of the securities A. I and II B. II and III C. IV only D. I, II, III, IV
A. I and II FINRA rules require that orders to sell cannot be accepted unless the firm has reasonable assurance that the securities can be delivered in 3 business days. There is no requirement to obtain physical possession of the securities before placing the sell order, nor is there a requirement to validate the securities as "good for delivery."
In a new margin account, a customer purchases 100 ABC shares at $12 per share as the initial transaction. Which of the following statements are TRUE? I The margin call is for $1,200 II The margin call is for $2,000 III The maximum potential loss is $1,200 IV The maximum potential loss is $2,000 A. I and III B. I and IV C. II and III D. II and IV
A. I and III Even though minimum equity to open a long margin account is $2,000, this does not apply if the securities in the account are fully paid. A customer cannot be asked to deposit more than 100% when buying since this is the maximum potential loss. The customer wants to buy $1,200 of stock, so 100% or $1,200 must be deposited. The equity in the account is $1,200 and the account is fully paid, so this is the maximum potential loss.
Which statements are TRUE about marking securities positions to market? I Long securities positions are marked to market daily II Long securities positions are marked to market weekly III Short securities positions are marked to market daily IV Short securities positions are marked to market weekly A. I and III B. I and IV C. II and III D. II and IV
A. I and III Securities positions held in margin accounts, whether long or short, are marked to market daily, based on the closing price of the security (last reported trade). If the market value of a long position falls too far; or the market value of a short position rises too far; the equity in the account can fall below the FINRA minimum, generating a maintenance call for additional margin.
A customer has opened a margin account and has signed only the hypothecation agreement, but not the loan consent agreement. The brokerage firm can do which of the following with the customer's securities? I Commingle the customer's securities with those of other customers II Lend the stock to another customer who wishes to effect a short sale III Commingle the customer's securities with securities owned by the brokerage firm IV Pledge the customer's securities to a bank for a loan A. I and IV B. II and III C. I, II, IV D. I, II, III, IV
A. I and IV When a customer signs a margin account agreement, he or she allows the brokerage firm to keep the securities in street name; to commingle them with other customers' margin securities; and to pledge those securities to a bank for a loan. The brokerage firm cannot commingle customer securities with its own stock positions. When the loan consent agreement is signed by the customer, the customer allows the securities in the account to be loaned out on short sales. If this document is not signed, then the customer's securities cannot be lent out by the brokerage firm on short sales.
Call loans made by bank to broker-dealers are secured by which of the following? I Customer margin securities II Fully paid customer securities III Firm securities positions IV Customer securities positions in cash accounts A. I only B. II and IV C. II, III, IV D. I, II, IV
A. I only Call loans are secured by customer margin securities. Fully paid customer securities cannot be pledged for these loans - they must be segregated and placed in safekeeping. The loans are not secured by cash nor do firm securities positions collateralize these loans. Loans using firm securities as collateral (proprietary positions) must be kept separate from loans using customer securities as collateral.
Two unrelated persons (Person A and Person B) come into your branch office to open a new account. They tell you that the funds are being deposited by Person A, who will be the owner of the account, and that Person B wants to be able to trade the account. They also tell you that only 1 social security number is to be used on the account. How should the account be opened? A. Individual account in the name of Person A with a Third Party Trading Authorization granted to Person B B. Individual account in the name of Person A with Transfer On Death registration naming Person B as the beneficiary C. Joint Account with Rights of Survivorship in the names of Person A and Person B D. The account should not be opened and you should contact your firm's SAR officer to report suspicious activity
A. Individual account in the name of Person A with a Third Part Trading Authorization granted to Person B Since Person A is the owner of the account, this will be an individual account, using the social security number of Person A for tax reporting. A Third Party Trading Authorization naming Person B as authorized to trade the account, signed by Person A, meets the requirement for Person B to be authorized to trade the account. An Individual Account held TOD does not give Person B trading authority. A Joint Account with Rights of Survivorship gives each person 100% ownership of the account, and this account is only owned by Person A, and not Person B.
A corporation is making a combined primary offering of newly issued shares and secondary offering of shares held by officers, where both issues are offered through a single prospectus. Which statement is TRUE about margin rules on this offering? A. Neither the primary nor secondary offering can be purchased on margin B. Only the primary offering can be purchased on margin C. Only the secondary offering can be purchased on margin D. Both primary and secondary offerings can be purchased on margin
A. Neither the primary nor secondary offering can be purchased on margin Under FRB rules "new" issues are not eligible for margin until 30 days after the offering. The definition of a "new" issue for the purposes of this rule is a prospectus offering. Both the primary and secondary shares are being offered through the prospectus; so no margin is permitted.
Credit on securities extended by brokers to customers is controlled by: A. Regulation T B. Regulation U C. Regulation Q D. Regulation G
A. Regulation T Credit on securities from broker to customer is controlled by Regulation T of the Federal Reserve Board.
A customer places an order to buy 100 shares of ABC stock at $50 per share when the market price of the stock is at $60. The member firm fills the order at $58. By the time the error is discovered the next day, the stock is trading at $48. Which statement is TRUE? A. The customer must be offered the $48 price per share B. The customer must be offered the $50 price per share C. The customer must be offered the $58 price per share D. The customer must be offered the $60 price per share
A. The customer must be offered the $48 price per share This is an example of an error in execution. If an erroneous execution occurs, it is the responsibility of the firm to correct the error. Due to the fact that the error is discovered the next day when the stock is offered at a price ($48) better than the customer's limit price ($50), the customer must be offered the stock at the price at which it is currently trading.
Which of the following is a TRUE statement about managed wrap accounts? The customer is charged: A. a single annual fee based on total assets in the account for account transactions and maintenance B. a commission for each transaction performed C. a commission for each recommendation that results in a transaction D. both a commission on each transaction performed and an annual maintenance fee based on total assets in the account
A. a single annual fee based on total assets in the account for account transactions and maintenance
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
A. at, or prior to, account opening 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.
When opening an account to trade stocks and options, all of the following signatures are needed on the new account form(s) EXCEPT: A. customer signature B. registered representative signature C. general principal signature D. registered options principal signature
A. customer signature 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, and could approve both accounts.
Under FINRA rules, when opening a new account for the customer, the: A. name of the representative servicing the account must be recorded in the account file B. CRD number of the representative servicing the account must be recorded in the account file C. name of the branch manager supervising the account must be recorded in the account file D. CRD number of the branch manager supervising the account must be recorded in the account file
A. name of the representative servicing the account must be recorded in the account file 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. 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.
SEC Regulation SP covers: A. notification to customers of a member firm's privacy policies and practices B. selective disclosure of material non-public information by issuers C. standardization of disclosure of financial and non-financial information by issuers D. registration filings with the SEC by small business issuers
A. notification to customers of a member firm's privacy policies and practices Regulation SP ("Statement of Privacy"), passed in 2000, requires financial institutions to provide customers with a copy of their privacy policies and procedures, including whether customer information is provided to third parties; and requires that customers be given the ability to "opt out" of any such disclosures.
Under the provisions of Regulation T, monies must be collected for securities purchases: A. promptly B. on the business day after trade date C. on the second business day after trade date D. on the fifth business day after trade date
A. promptly Regulation T requires that payments for securities purchases be collected "promptly," but no later than "S + 2" - or no later than industry "regular way settlement" of 2 business days + 2 additional "grace" days; for a maximum time period to collect of 4 business days
Delivery of the privacy notice required under Regulation SP is required for: A. retail customers B. institutional customers C. retirement plan customers D. any of the above
A. retail customers Regulation SP ("Statement of Privacy") requires member firms to provide a privacy notice to retail customers only. Firms cannot divulge non-public information about customers to third parties unless the firm has given notice to the customer that this may happen; and the customer has not elected to opt out of the disclosure. The privacy notice is given at account opening and must be made available annually thereafter.
A customer sells short 1,000 shares of XYZ at $60 in a margin account, regular way settlement. Two days after the trade, XYZ has dropped to $40. The minimum maintenance margin requirement is: A. $10,000 B. $12,000 C. $15,000 D. $18,000
B. $12,000 The minimum maintenance margin requirement for short stock positions is 30% of the current market value = 30% of $40,000 = $12,000. Note that minimum margins are based on the closing market value each day.
A customer purchases $100,000 of municipal bonds at 80% in a margin account. The customer must deposit: A. $7,000 B. $12,000 C. $20,000 D. $40,000
B. $12,000 There is no Regulation T. requirement for municipal bonds because they are exempt securities. The only margins are the minimums set by the exchanges. The minimum maintenance requirement set by FINRA is: the GREATER of 7% of face amount or 15% of market value. The bonds are purchased at 80% of $100,000 par = $80,000. 15% of $80,000 = $12,000. 7% of $100,000 face = $7,000. The greater amount is $12,000.
A customer purchases $100,000 of corporate bonds at 80% in a margin account. The customer must deposit: A. $7,000 B. $16,000 C. $20,000 D. $40,000
B. $16,000 There is no Regulation T requirement for corporate bonds because the Federal Reserve is not "worried" about these. The only margins are the minimums set by the exchanges. The minimum maintenance requirement set by FINRA is the greater of 7% of face amount or 20% of market value. The bonds are purchased at 80% of $100,000 par = $80,000. 20% of $80,000 = $16,000. 7% of $100,000 face = $7,000. The greater amount is $16,000.
A customer is short 1,000 shares of ABC stock at $60 in a margin account. The minimum maintenance margin requirement is: A. $15,000 B. $18,000 C. $30,000 D. $60,000
B. $18,000 The minimum maintenance margin requirement for short stock positions is 30% of the current market value = 30% of $60,000 = $18,000.
A customer buys 100 shares of XYZ at $60 in a margin account regular way settlement. Two days after the trade, XYZ has dropped to $55. The customer will receive a margin call for: A. $2,750 B. $3,000 C. $5,500 D. $6,000
B. $3,000 The initial margin requirement is 50% of the original purchase price. 50% of $6,000 = $3,000. The drop in value has no effect on the initial margin requirement - though if the account keeps on dropping, a call for maintenance margin may be generated.
The minimum maintenance margin requirement for short stock positions is: A. 25% B. 30% C. 50% D. 100%
B. 30% The minimum maintenance margin requirement is set by the exchanges at 30% of the short market value. If the account falls below this level, then a "maintenance call" is sent to bring the account back up to the 30% minimum. Note that Regulation T sets initial margin at 50%. Thus, if the account loses value after the Reg. T amount is deposited, nothing happens unless the account falls below the 30% minimum.
The minimum maintenance margin for short stock positions is set at: A. 25% of the short market value B. 30% of the short market value C. 50% of the short market value D. 100% of the short market value
B. 30% of the short market value The minimum maintenance margin requirement is set by the exchanges at 30% of the short market value. If the account falls below this level, then a "maintenance call" is sent to bring the account back up to the 30% minimum. Note that Regulation T sets initial margin at 50%. Thus, if the account loses value after the Reg. T amount is deposited, nothing happens unless the account falls below the 30% minimum.
Under FINRA rules, a customer complaint that must be handled by the member firm includes: I Written complaints II E-mail complaints III Oral complaints A. I only B. I and II C. II and III D. I, II, III
B. I and II FINRA defines a customer "complaint" as one received in writing (e-mail is written) - screamers don't count.
A customer buys stock in an existing margin account, and fails to meet the Regulation T call within the specified maximum 4 business day limit. The actions that may be taken are: I the broker-dealer can request an extension for payment from the self-regulatory organization II the broker-dealer can sell securities from the account in an amount to satisfy the call III the customer can sell "short against the box" enough securities held in the account to meet the Regulation T call IV the entire account must be liquidated A. IV only B. I and II C. I, II, III D. I, II, III, IV
B. I and II If a customer fails to meet a Reg. T. call in a margin account, the broker-dealer can request an extension for payment, or can sell sufficient securities from the account to satisfy the call and freeze the account for 90 days. The broker-dealer is prohibited from borrowing funds to meet the call; or from selling short another stock to create a credit (against the debit amount of the Reg. T. call) in the account. The amount of a margin call is computed based upon that day's transactions. Please note that if the customer had sold on the same day that the purchase was made, any sale proceeds may be used to meet the call generated by a purchase on that day. The customer cannot use a sale on a subsequent day to offset a previous Reg. T. Call. Finally, it is not required that the broker-dealer liquidate the entire margin account if one position is unpaid. The only requirement is that enough securities be liquidated from the account to meet the Reg. T. call amount.
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
B. I and III only 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.
A customer that discovers an error on his or her account statement must report the error: I promptly II before the next account statement is generated III to the representative servicing the account IV to the member firm maintaining the account A. I and III B. I and IV C. II and III D. II and IV
B. I and IV The issue at hand is that FINRA is concerned about registered representatives that do unauthorized trading in their customer accounts to generate commission income, without the customer knowing about or authorizing the transactions. So FINRA requires that a legend be placed on customer account statements that any errors found must be reported to the member firm promptly. The person to whom the report cannot be made is the registered representative, since if he or she is effecting unauthorized trades, then the report just might get "lost."
A registered representative is allowed to choose which of the following in a transaction without requiring written trading authorization from the customer? I Price of the security to be purchased II The security to be purchased III The amount of the security to be purchased IV The time of trade execution A. I and III B. I and IV C. II and III D. II and IV
B. I and IV A registered representative is allowed to select the price and time of execution without the order being considered as "discretionary." If he or she selects any more, such as the security to be traded or the number of shares, then the order is discretionary and requires a written power of attorney from the customer.
Under the rules of the Options Exchanges, if a customer's financial condition changes materially, then which of the following will be amended? I Options Disclosure Document II Options Agreement III New Account Form Information A. I and II only B. II and III only C. I and III only D. I, II, III
B. II and III only 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. A revised options 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 just makes sense). A new Options Disclosure Document is sent to customers only if the Options Clearing Corporation changes its rules.
Which of the following are types of joint accounts? I Guardian for an incompetent II Custodian for a minor III Tenants in Common IV Joint Tenants with Rights of Survivorship A. I and II B. III and IV C. I, II, III D. II, III, IV
B. III and IV 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; and Joint Tenancy - each person has an undivided interest. Guardian accounts and custodian accounts are not joint accounts - the minor or incompetent is not authorized to trade the account nor can he or she draw checks from the account. Only the Guardian or Custodian can perform these actions.
Regulation T applies to all of the following EXCEPT: A. Corporate bonds traded over-the-counter B. Municipal bonds traded over-the-counter C. Common stocks traded on exchanges D. Preferred stocks traded over-the-counter
B. Municipal bonds traded over-the-counter Reg. T applies to transactions of non-exempt securities only. These are the securities that are NOT exempt from the provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Municipal bonds are exempt securities. Corporate bonds, common stocks and preferred stocks are non-exempt securities, and thus are subject to Regulation T.
Credit from bank to broker is controlled under: A. Regulation T B. Regulation U C. Regulation X D. Regulation Z
B. Regulation U Regulation U controls credit from bank to broker. Regulation T controls credit from broker to customer.
Which of the following are synonymous terms for the "parties" to a brokerage account? A. First Party / Customer B. Second Party / Customer C. Second Party / Broker D. Third Party / Customer
B. Second Party/ Customer The "First Party" to a brokerage account is the brokerage firm; the "Second Party" to a brokerage account is the customer; the "Third Party" to a brokerage account is anyone other than the broker or customer.
A customer places an order to buy 100 shares of ABC at the market. The execution report shows the trade occurring at $45.63. The firm sends out a confirmation which states that the trade occurred at $45.38. Which statement is TRUE? A. The customer will pay $4,538 plus any applicable commissions B. The customer will pay $4,563 plus any applicable commissions C. The customer can DK the trade D. The customer will pay $4,538 and can submit a claim to arbitration for an additional $25.00.
B. The customer will pay $4,563 plus any applicable commissions The customer placed a market order to buy which was executed at $45.63. The firm erroneously reported the trade as occurring at $45.38. If there is an error in confirmation (as happened in this case), the customer gets the actual trade price. All the firm must do is send a corrected confirmation to the customer. If the firm made an error in execution, any loss due to the firm's error must be absorbed by the firm.
A registered representative takes an order from a customer to buy 100 shares of SPQR stock at $40 and writes the order ticket for processing. The registered representative fails to note the execution price on the ticket. Which statement is TRUE? A. The order will be processed as a market order by default B. The order will be returned to the representative for entry of the execution price C. The order will be canceled without any further action taken D. The order will be referred to the member firm's compliance department for resolution
B. The order will be returned to the representative for entry of the execution price Incomplete order information on an order ticket will result in the ticket not being processed. It will be returned to the representative for entry of all of the required information.
A customer wishes to a buy a municipal bond that the registered representative feels is unsuitable for that customer. After explaining this, the registered representative is told by the customer "Just do the trade; let me worry about it." Which statement is TRUE under MSRB rules? A. The trade must be refused B. The trade must be accepted as given C. The matter must be submitted to industry arbitration D. The trade must be approved in advance by the municipal principal
B. The trade must be accepted as given If a customer directs that a specific trade be done, then "Do It!" However, the registered representative should note his exception on both the order ticket and in the customer's account file. Many firms will also tape record the customer authorizing such a transaction as evidence if things go bad. There is no requirement for prior approval of the municipal principal in such a transaction.
If a customer wishes to open an account for a minor without additional documentation, the account must be opened as a: A. guardian account B. cash account C. margin account D. conservator account
B. cash account The "default" setting of the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act is that custodian 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, custodian accounts can only be opened as cash accounts, since this is the rule in most States. No additional documentation is needed for the adult to open the account, as compared to, say opening a trust account, which requires a copy of the trust document.
All of the following statements about margin requirements are true EXCEPT: A. initial margin percentages are the same for both long and short accounts B. maintenance margin percentages are the same for both long and short accounts C. $2,000 equity minimum is the same for both long and short accounts D. payment is required promptly, but no later than 4 business days after trade date, in a long and short account
B. maintenance margin percentages are the same for both long and short accounts Initial margin for both long and short positions is 50% under Reg. T. Minimum maintenance margins set by FINRA are 25% and 30% respectively for long and short positions. Minimum dollar equity in both a long and short account is $2,000, ignoring special situations. Regulation T requires payment "promptly" for both purchases and short sales, but no later than "S + 2," which is 4 business days after trade date.
If there is no trading activity in a customer's account, a statement must be mailed: A. that month B. that quarter C. semi-annually D. annually
B. that quarter If there is no activity in a customer's account, statements are mailed quarterly. However, if trades take place, a statement must be sent for that month.
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
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 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 customer sells short 100 shares of ABC stock at $10 as an initial transaction in a margin account. The customer must deposit: A. $500 B. $1,000 C. $2,000 D. $2,500
C. $2,000 A short account has unlimited risk potential. Because of this, minimum equity is $2,000. The customer is selling short 100 shares of ABC at $10 as the initial transaction. Regulation T only requires 50% or $500. But this is not enough to meet the industry minimum of $2,000 to open an account.
A customer buys 100 shares of ABC stock at $25 as an initial transaction in a new margin account. The customer must deposit: A. $625 B. $1,250 C. $2,000 D. $2,500
C. $2,000 Regulation T initial margin to buy stock is 50% of $2,500 = $1,250. However, since this is a new account, it must meet the minimum initial margin of $2,000 needed to open an account. Therefore, $2,000 must be deposited.
A customer sells short 1,000 shares of ABC stock at $2.75 per share in an initial transaction in a new margin account. The customer must deposit: A. $2,000 B. $2,500 C. $2,750 D. $5,000
C. $2,750 Under the "cheap stock rule," if a customer sells a stock short under $5.00 per share, he or she must put up the GREATER of 100% or $2.50 margin per share. 100% of $2.75 per share x 1,000 shares = $2,750. $2.50 x 1,000 shares = $2,500. The greater amount is $2,750.
A customer sells short 100 shares of ABC at $15 as an initial transaction in a new margin account. The customer must deposit: A. $750 B. $1,500 C. $2,000 D. $2,500
C. $2000 A short account has unlimited risk potential. Because of this, minimum equity is $2,000. The customer is selling short 100 shares of ABC at $15 as the initial transaction. Regulation T only requires 50% or $750. But this is not enough to meet the industry minimum of $2,000 to open an account.
A customer buys 100 shares of ABC stock at $70 as an initial transaction in a margin account. At the end of the day, the stock is worth $80 per share. The customer must deposit: A. $2,000 B. $2,500 C. $3,500 D. $4,000
C. $3,500 Initial margin to buys stocks is 50% of the market value at the time of purchase. 50% of $7,000 is $3,500. The subsequent increase in value that day cannot be used to reduce the deposit amount.
In an existing margin account, a customer sells short 100 shares of ABC at $90. At the end of the day, the stock rises to $100 per share. What is the margin requirement? A. $2,000 B. $3,500 C. $4,500 D. $5,500
C. $4,500 To short stock, Regulation T requires the customer to deposit 50% of the sale amount. 50% of $9,000 = $4,500. The fact that the stock rises to $100 at the end of the day, giving the customer a $1,000 loss, has nothing to do with the margin call amount.
The minimum maintenance margin requirement for a short stock position valued at $9 per share is? A. $2.70 per share B. $4.50 per share C. $5.00 per share D. $9.00 per share
C. $5.00 per share For short stock positions that are valued at $5 per share or more, the minimum maintenance margin is the greater of $5 or 30% of market value. For a $9 stock, the minimum maintenance margin is 30% of $9 = $2.70 or $5.00, whichever is greater. The greater amount is $5 per share.
A customer sells 1,000 shares of ABC "short against the box" at $55 per share. Under FINRA rules, the customer may withdraw how much in funds from his or her account? A. $2,000 B. $2,750 C. $52,250 D. $55,000
C. $52,250 This customer has gone "short against the box" and has established a short position in the stock that equals his long position. Thus, the customer's net position is "0," and there is no further risk of loss, since any loss on one side is balanced by an equal gain on the other. This type of transaction would be performed in an "Arbitrage Account." There is no Regulation T. initial margin requirement because there is no risk to the position. The only margin is the FINRA minimum maintenance, which is set at a low 5% of the long market value because there is no risk. 5% of $55,000 = $2,750 minimum maintenance margin requirement. Thus, against the $55,000 stock position, $52,250 may be withdrawn.
If a customer sells securities and fails to deliver on settlement date, the position must be bought in how many business days later? A. 3 B. 5 C. 10 D. 30
C. 10 If a customer fails to deliver on a sale, this is not known until settlement date. As of settlement, the customer has 10 business days to deliver the stock, or the position will be bought in by the brokerage firm.
Which statement is TRUE about the percentage limit on rehypothecation of customer securities? A. 70% of the debit balance is the maximum amount of customer securities that can be pledged to a bank by a broker B. 70% of the debit balance is the maximum amount of customer securities that can be pledged to a broker by a customer C. 140% of the debit balance is the maximum amount of customer securities that can be pledged to a bank by a broker D. 140% of the debit balance is the maximum amount of customer securities that can be pledged to a broker by a customer
C. 140% of the debit balance is the maximum amount of customer securities that can be pledged to a bank by a broker The maximum amount of customer securities that can be pledged to a bank by a broker is 140% of the customer's debit balance. This amount of securities results in the bank almost exactly funding the amount of money loaned by the broker to the customer. The broker is prohibited from obtaining a higher loan amount from the bank than he actually lends to the customer.
Under Regulation T, an extension for payment may FIRST be requested, under extraordinary circumstances, on the: A. 2nd business day after trade date B. 3rd business day after trade date C. 4th business day after trade date D. 5th business day after trade date
C. 4th business day after trade date Regulation T allows a customer to pay up to 4 business days after trade date ("S + 2" = 2 business days regular way settlement + 2 "grace" days). If the funds are not collected on the 4th day, either an extension must be requested from FINRA; or the position will be sold out and the account frozen for 90 days.
Which TWO of the following securities can be purchased on margin? I Listed stocks II OTCBB stocks III Listed stock options IV Listed warrants A. I and II B. I and III C. I and IV D. III and IV
C. I and IV Regulation T defines the marginable securities as those listed on an exchange or NASDAQ. Over-The-Counter Bulletin Board (OTCBB) issues do not meet NASDAQ listing standards and are not marginable. Listed options are not marginable (unless they are LEAPs), due to the fact that they will expire within 9 months. Listed warrants (which trade alongside the common stock on the same exchange where the stock is listed) are marginable, since they typically have a 5 year life.
Recommendations by a registered representative to a customer about options strategies are unsuitable if the: I customer has not received the Options Disclosure Document II opening of the account has not been approved by the Registered Options Principal III representative is unsure about the client's ability to assume the risk associated with a specific options strategy IV customer has not signed the Options Agreement A. I and III B. I and IV C. I, II, III D. I, II, III, IV
C. I, II, III Recommendations about options should not be made to a customer unless he has received an Options Disclosure Document (ODD); and the account has been approved by the Registered Options Principal; and the registered representative believes that the recommendations are suitable for the customer. The customer must sign and return the Options Agreement no later than 15 days after opening the account. There is no requirement to sign the Agreement prior to any recommendations being made. If the agreement is not returned within 15 days, new opening transactions in the account are prohibited - only closing transactions are allowed.
Which of the following procedures are required for discretionary accounts? I A written power of attorney must be obtained from the customer before discretionary trades are effected II Every discretionary order ticket must be approved promptly by the manager or principal III Every order ticket initiated by the registered representative must be marked "discretionary" IV The customer must be contacted before each discretionary trade is executed A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
C. I, II, III The customer must give a written power of attorney; the principal must approve all discretionary orders "promptly," and every order ticket that is discretionary must be marked as such. There is no requirement to contact a customer before executing each discretionary trade.
Regulation T applies to transactions in which of the following securities? I Convertible corporate bonds II U.S. Government Bonds III American Depositary Receipts IV Warrants A. I only B. III and IV C. I, III, IV D. I, II, III
C. I, III, IV Regulation T applies to transactions in non-exempt securities - these are the securities that are NOT exempt from the provisions of the Securities Act of 1933; and the Securities Exchange Act of 1934. U.S. Government bonds are exempt. Corporate bonds, American Depositary Receipts and warrants are non-exempt.
If an investor does not pay within the time period specified under Regulation T, which of the following statements are TRUE? I The investor must pay cash in advance for additional purchases II No trading is permitted in the account for 90 days III The investor must deliver securities in advance for sales IV The account is frozen for a 90 day period A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV
C. I, III, IV When an account is frozen, this means that the customer did not pay within the maximum time period specified under Regulation T. When an account is frozen, to buy securities, payment must be made in advance; and to sell securities, delivery of the security must be made in advance. The freeze lasts for 90 days
Regarding arbitration agreements between member firms and customers, which statements are TRUE? I FINRA requires each customer to sign an arbitration agreement as part of the account opening process II Each member firm can require each customer to sign an arbitration agreement as part of the account opening process III Industry arbitration is preferred over litigation as a means of settling disputes because it is cheaper and faster IV If an arbitration agreement is signed, a copy must be sent to the customer annually for reconfirmation A. I and III B. I and IV C. II and III D. II and IV
C. II and III
Which of the following statements are TRUE regarding initial and minimum maintenance margins for a long margin account? I Initial margin is 25% II Initial margin is 50% III Maintenance margin is 25% IV Maintenance margin is 50% A. I and III B. I and IV C. II and III D. II and IV
C. II and III Initial margin for a long margin account is set by the Federal Reserve (FRB is the Federal Reserve Board) under Regulation T at 50%. Maintenance margin is set by FINRA at 25%.
Which of following documents are unique to margin accounts? I new account form II margin agreement III loan consent agreement IV credit disclosure statement A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV
C. II, III, IV A new account form must be completed whether an account is set up as a cash or a margin account. The paperwork that is unique to opening margin accounts includes the margin agreement, which the customer must sign, pledging the securities in the account as collateral for the margin loan; the loan consent agreement, which is customarily signed, where the customer permits the securities in the account to be lent out for short sales by others; and the credit disclosure statement, which explains how the loan balance is computed and interest is charged.
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
C. The account can be opened by an adult as custodian for this person 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.
A representative meets a potential client at a convention. The client is interested in an investment giving life-long income, and the representative recommends a variable annuity contract. The customer opens an account and completes the purchase, but 30 days later, the customer calls the representative, telling him that he is not happy and he wants to move to another firm. What action should the representative take? A. The representative should recommend another variable annuity to the client that better meets the customer's needs B. The representative should file a SAR report about the customer C. The representative should talk to the manager to determine if there was a Know Your Customer violation D. The representative should offer the customer a full refund of his investment
C. The representative should talk to the manager to determine if there was a Know Your Customer violation This question is judgmental, but this was a new client that was met at a convention. The client made an investment, and then 30 days later, wants it moved to another firm because he is "not happy." Before an account is opened for a client, the representative is supposed to go through extensive fact-finding to determine that the variable annuity recommended is suitable for the client. Since this client is "not happy" 30 days later with the investment, it appears that the KYC (Know Your Customer) rule was not followed. The situation should be discussed with the manager.
An order ticket is filled out and sent for execution to the NYSE. After being executed on the NYSE, it is discovered that the account number is incorrect. Under FINRA rules, the account number may be changed to the correct one by the: A. Registered Representative B. Specialist (DMM) C. Branch office manager D. Floor Governor
C. branch office manager Under FINRA rules, alterations to order tickets are prohibited, unless the alteration is approved in writing by a "designated person" such as a branch office manager. This person must understand all of the facts surrounding the alteration before approving of the change, and is responsible for the change.
The approval to open a new margin account is given by the: A. customer B. registered representative C. general principal D. margin department of the firm
C. general principal All new customer accounts must be approved by a Branch Office Manager (Series 9/10 license) or General Securities Principal (Series 24 license). If the account will trade options, the approval of a Registered Options Principal (Series 4 license) is needed. If the account will trade municipal securities exclusively, approval can be performed by either a Municipal Principal (Series 53 license) or a General Securities Principal (Series 24 license).
The purpose of OFAC (Office of Foreign Assets Control) is to: A. set higher margin requirements for foreign nationals that wish to invest in the United States B. monitor the activities of foreign investors in the U.S. markets C. impose economic sanctions against hostile foreign countries and groups D. monitor foreign currency inflows into the U.S. markets
C. impose economic sanctions against hostile foreign countries and groups The Department of Treasury's Office of Foreign Assets Control (OFAC) maintains a list of named countries, organizations, and individuals with whom anyone in the U.S. is prohibited from doing business. The "SDN" (Specially Designated Nationals) list includes such countries as Iran and North Korea and such organizations as the Al-Qaeda, as well as specified individuals associated with these countries and organizations. The intent is to place economic pressure on these groups by stopping U.S. investment in them. The SDN list must be checked before opening an account for a foreigner or foreign entity.
All of the following may be purchased on margin EXCEPT: A. Listed stocks B. Listed bonds C. Listed stock options D. Listed LEAP stock options
C. listed stock options Listed stocks, listed bonds, and LEAPs (long term options with initial lives of 30 months for equity LEAPs and 36 months for index LEAPs) may all be purchased on margin. Listed options (9 month maximum life) are not marginable. When a LEAP is within 9 months of expiration, payment in full is required - the LEAP is no longer marginable and is treated like a regular stock option.
In order to open a discretionary cash account, all of the following procedures are required EXCEPT: A. signature of manager on new account form B. signed trading authorization C. signed customer's agreement D. completed customer new account form
C. signed customer's agreement 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.
If a customer requests in writing and no specific reason is given, that customer's mail can be held for a maximum of: A. one month B. two months C. three months D. six months
C. three months FINRA does not allow a customer's mail to be held unless the customer requests in writing. As long as the request does not exceed 3 months, no other information is needed. However, if the customer wants the mail held for more than 3 months, then a valid reason must be given in the request, such as safety or security concerns.
A customer makes a purchase of $22,100 of ACME Income Fund in her margin account. The customer must deposit: A. $5,525 B. $6,630 C. $11,050 D. $22,100
D. $22,100 Mutual fund shares are new issues sold with a prospectus, and as such, require that 100% of the purchase amount be paid. Once the position has been held in the account for 30 days, it becomes marginable and has loan value.
A customer sells short 1,000 shares of ABC stock at $3.00 per share in an existing margin account. The customer must deposit: A. $1,500 B. $2,000 C. $2,500 D. $3,000
D. $3,000 Under the "cheap stock rule," if a customer sells a stock short under $5.00 per share, he or she must put up the greater of 100% or $2.50 margin per share. 100% of $3 per share x 1,000 shares = $3,000. $2.50 x 1,000 shares = $2,500. The greater amount is $3,000.
A customer is short 1,000 shares of ABC stock, valued at $6 per share. The minimum maintenance margin requirement is? A. $1.50 per share B. $1.80 per share C. $2.50 per share D. $5.00 per share
D. $5.00 per share The minimum maintenance margin requirement for short stock positions worth $5 or more is the greater of $5 per share or 30%. Thus, a short stock position valued at $6 per share requires a minimum margin under FINRA rules of $5 per share (30% of $6 = $1.80 per share, which is not enough since $5 is the minimum). For stocks valued under $5, the minimum is the greater of 100% or $2.50 per share.
Under Regulation T, the maximum time period to collect monies owed by a customer prior to an extension request is: A. the same business day B. the next business day C. 2 business days D. 4 business days
D. 4 business days Regulation T of the Federal Reserve Board requires that customers pay for securities purchases "promptly" but no later than 2 business days past settlement date. Since regular way settlement is 2 business days after trade date, monies must be collected by the 4th business day. If payment is not received on the 4th business day, under extraordinary circumstances, a Reg. T extension may be requested from the exchange where the security trades. This extension gives another 2 business days for collection. If no payment is made, the unpaid position must be liquidated and the account "frozen" for 90 days. When the account is frozen, the customer must pay in advance for purchases.
Interest charges on customer debit balances are based on the: A. Prime rate B. Federal Funds rate C. Treasury Bill rate D. Broker Loan rate
D. Broker Loan rate Brokers borrow from banks using customer securities as collateral at the Broker Loan rate, also termed the Call Loan rate. The interest charged to customers on loans made by brokers is based on this rate (e.g., the interest rate charged might be "Broker Loan Rate + 1/2%").
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. I, II, III, IV A social security number or tax identification number is needed to open any brokerage account. This is really an Internal Revenue Service requirement, since the brokerage firm is required to report any income received to the IRS under the number.
Which statements are TRUE regarding a customer account with a "full power" third party trading authorization? I The third party can enter orders in the account II Checks drawn on the account can only be made out to the customer, not to the third party III Upon the death of the customer, the power of attorney is revoked IV The customer can designate that confirmations be sent only to the third party A. I and II B. I, III, IV C. II, III, IV D. I, II, III, IV
D. I, II, III, IV All statements are true about full trading authorizations. The third party can enter orders; any checks must be drawn in the account name - not third party name; the power of attorney dies if the customer dies; and the customer can designate that confirms go to the third party only (this must be done in writing).
If an investor wishes to open a margin account, which of the following paperwork is customarily completed? I New Account Form II Hypothecation Agreement III Loan Consent Agreement IV Credit Agreement A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
D. I, II, III, IV To open any account, the new account form must be completed. In addition, if the account is a margin account, then the customer must sign a hypothecation agreement (where the customer pledges the securities to the broker in return for the margin loan); the customer is asked to sign a loan consent agreement, allowing the broker to lend out the customer's securities for short selling by other customers of the firm; and the customer must sign a credit disclosure agreement, which explains how the loan balance is computed and how interest will be charged on the loan.
In order to open a discretionary margin 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 IV only B. II and III only C. I, II, IV D. I, II, III, IV
D. I, II, III, IV Every new account must have a new account form, which is approved by the manager. A signed customer's agreement is required for a margin account, as this is the case with this account (the customer's agreement is the hypothecation agreement). To open a discretionary account, the customer must provide a signed trading authorization to the firm (first party trading authorization) allowing discretionary trades.
Which statements are TRUE when comparing a full power of attorney given in a brokerage account to a limited power of attorney? I The individual given a full power of attorney can draw checks only II The individual given a full power of attorney can enter orders and draw checks III The individual given a limited power of attorney can draw checks only IV The individual given a limited power of attorney can enter orders only A. I and III B. I and IV C. II and III D. II and IV
D. II and IV 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.
Under the Uniform Gifts To Minors Act, which of the following statements are TRUE? I Only adults related to the minor may open a custodian account II Any adult can open a custodian 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
D. II and IV Any adult can open a custodian 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.
Which TWO of the following instruments are typically used in money laundering activities? I Stock certificates II Money orders III Money market instruments IV Traveler's checks A. I and III B. I and IV C. II and III D. II and IV
D. II and IV Money laundering is typically characterized by extensive deposits or withdrawals of cash, money orders, traveler's checks and wire transfers - especially to overseas accounts in countries with tight bank secrecy laws. Money market instruments such as Treasury Bills and Commercial Paper are issued in registered form and thus are not good vehicles for money laundering purposes.
Under FINRA rules, if a member suspects that a senior citizen is being financially exploited: A. a freeze can be placed on all disbursements from the account for up to 10 business days B. a freeze can be placed for up to 10 business days on suspicious disbursements from the account, but not on other non-suspicious disbursements C. a freeze can be placed on all disbursements from the account for up to 15 business days D. a freeze can be placed for up to 15 business days on suspicious disbursements from the account, but not on other non-suspicious disbursements
D. a freeze can be placed for up to 15 business days on suspicious disbursements from the account, but not on other non-suspicious disbursements 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. Also note that the temporary hold only applies to disbursements that are suspicious and not to other disbursements from the account.
All of the following information is required to open an account under FINRA rules EXCEPT: A. the country of citizenship of the customer B. whether the customer is employed by another financial services firm C. the customer's birthdate D. a letter of reference for the customer
D. a letter of reference for the customer Under FINRA rules, to open a new account for a customer, the country of citizenship must be obtained 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. Whether the customer is employed by another financial services firm must be ascertained, since special procedures are required to open such an account. The customer's birthdate is a required piece of information to open an account. There is no requirement for a letter of reference about the customer.
Two brothers wish to open an account at a broker-dealer. One brother will contribute $100,000 for a 25% interest and the other brother will contribute $300,000 for a 75% interest. They have stated that if one should die, then that person's share will go to a designated beneficiary. What kind of account should be opened? A. individual account B. partnership account C. joint account with rights of survivorship D. joint account with tenants in common
D. joint account with tenants in common In an account opened "Tenants in Common," each person has a specified ownership interest. If one participant dies, that share in the account goes to the estate.
All of the following transactions can be performed in a Cash Account EXCEPT the: A. sale of a covered call B. sale of a cash covered put C. sale of a long position D. sale "against the box"
D. sale "against the box" A sale "against the box" is a short sale against a long position to lock in a gain. This is performed in an arbitrage account - short sales are not allowed in cash accounts. A call can be sold against a fully paid long stock position in a cash account (covered call). A "cash covered" put can be sold in a cash account. In this case, the full amount of the potential loss is on deposit in the account. Finally, long positions in a cash account can always be sold.
