Customer Accounts: Opening Procedures For Other Account Types

Which of following documents is NOT unique to margin accounts? A new account form B margin agreement C loan consent agreement D credit disclosure statement Review

The best answer is A. 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.

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 non-durable power of attorney. Upon the death of Jack Jones, the power of attorney: A is void B continues because it was given to an immediate family member 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 who has granted a non-durable power of attorney becomes mentally incapacitated, then that power of attorney becomes void. If an individual who has granted a durable power of attorney becomes mentally incapacitated, the power of attorney continues in effect.

What type of account can be opened as a margin account? A Investment Adviser account B Custodial account C Guardian account D Executor for an Estate account

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).

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.

What is one of the benefits of a prime brokerage account? A Consolidated account statement B Consolidated trade execution C Separated account positions D Separated stock loans on short positions Review

The best answer is A. Sophisticated institutional investors, such as hedge funds, open accounts called "prime brokerage accounts." The "prime broker" is a firm that caters to institutional clients, such as Goldman Sachs, J. P. Morgan or Merrill Lynch. The main advantage of using a "prime broker" is that the hedge fund can route its trades to different executing brokers other than the "prime broker." In return for sending its trades to different executing brokers and paying them commissions, the hedge fund gets research and other valuable market information from the executing brokers. The trades done through the executing brokers "roll up" to the prime broker. The prime broker holds all of the positions, arranges for stock loans on short positions taken, provides financing (margin loans) on positions taken, and provides consolidated account statements, among other services. Because all positions taken are consolidated, the loan amounts against them are larger and result in lower interest rates than if the positions were held separately at different brokerage firms.

The MSRB requires that if an employee of another municipal broker-dealer wishes to open an account at your firm: A duplicate copies of each confirmation must be sent to the employer B duplicate copies of each confirmation must be sent to the MSRB C the employer must approve each trade before execution D the municipal principal must approve each trade before execution

The best answer is A. The MSRB requires that duplicate confirmations of each trade be sent to the employer if an employee of another municipal firm opens an account at your firm. In contrast, FINRA requires that confirmations and/or statements be sent only if the employer requests in writing. Also note that approval of the principal is not required prior to execution of each trade. The principal is responsible for "prompt" review and approval of transactions in municipal accounts -meaning by the end of the day.

If an investor wishes to open a margin account, which paperwork is typically NOT required? A ACATS Form B Hypothecation Agreement C Loan Consent Agreement D Credit Agreement

The best answer is A. 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 - it is customary, not mandatory, for the customer to sign this. The customer must receive credit disclosure agreement, which explains how the loan balance is computed and how interest will be charged on the loan (basically, this is a "truth in lending" document. ACATS is the acronym for the Automated Customer Account Transfer System. The ACATS Form is used to transfer customer positions from one brokerage firm to another.

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.

Your customers wish to give a gift of securities to their friend's child. Which statement is TRUE? A The gift can be given in a custodial account without restriction B The gift can be given in a custodial account only with the prior approval of the parents C The gift can be given in a custodial account only with the prior approval of the child D The gift cannot be given in a custodial account

The best answer is A. Any adult can open a custodial account for a minor; and any adult can donate into a custodial account.

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.

A husband and wife have a joint account with a member firm. The wife calls the registered representative with instructions to liquidate their 500 share position of ABC stock. The registered representative should: A accept and execute the order as given B execute the order only after the branch manager approves C execute the order only after the husband approves orally D execute the order only after the husband approves in writing

The best answer is A. In a joint account, any one of the owners can enter trades in the account. In addition, any one of the owners can authorize that checks be drawn on the account, however all checks must be drawn to full account name.

All of the following are allowable joint accounts EXCEPT: A father and 12-year old son B father and 25-year old son C husband and wife D two partners in a business

The best answer is A. Joint accounts can only be opened between adults. Accounts for a minor can only be opened as fiduciary accounts such as a Guardian account or Custodial account. These 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. A 12-year old person is a minor; a 25-year old person is an adult.

Acme Securities, a FINRA member, must follow special procedures for accounts being opened by all of the following EXCEPT: A employees of Acme Securities B employees of another broker-dealer C the spouse of an employee of another broker-dealer D the child of an employee of another broker-dealer Review

The best answer is A. There is no requirement for a brokerage firm to follow special procedures to open an account for an employee of that firm. However, if an employee of another firm wishes to open an account, then prior approval of the employer is needed. This is also true for any account in which the employee has a "financial interest" or discretionary authority. Thus, accounts for the employee's children or immediate relatives fall under the rule (unless it can be demonstrated that the employee does not have a financial interest in such an 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.

In which instance will a power of attorney NOT be voided? A When the grantor of a non-durable power of attorney becomes mentally incapacitated B When the grantor of a durable power of attorney is incarcerated C When the grantor of a durable power of attorney dies D When the grantor of a non-durable power of attorney is adjudicated in a court of law to be incompetent and the court appoints a guardian

The best answer is B. An incarcerated person is someone who is in jail - and even though a person is in jail, he or she still has some legal rights. That individual can give a power of attorney to someone else to manage his or her financial affairs while in jail. A power of attorney, whether durable or not, becomes void upon the death of the grantor (the POA dies with the grantor!). If someone is mentally incapacitated, a durable power of attorney is not voided - that is the whole point of a durable power of attorney - if the grantor becomes mentally incapacitated, there is someone to take care of his or her affairs. If a court appoints a guardian over an individual because of incompetency, that individual has no more legal rights. Any power of attorney granted by that individual becomes void and the guardian assumes control.

All of the following statements are true regarding discretionary accounts EXCEPT: A the account must be approved by a general principal or branch office manager B an account can be opened once a customer has guaranteed that a written power of attorney has been placed in the mail C each order ticket must be marked "discretionary" D every order ticket must be approved promptly by a general principal or branch office manager

The best answer is B. Discretionary accounts must be approved by a general principal or branch office manager. The account can be opened only if a written power of attorney (first party trading authorization) is received from the customer. It is not sufficient for the customer to promise that it is "in the mail." Every discretionary order ticket must be marked as such and must be approved by the manager "promptly," meaning by the end of the day. There is no requirement that it be approved before entry. The reason why "end of day" approval is OK is that settlement does not occur for 2 business days, and if the trade is unsuitable, the manager still has time to take it out of the customer's account.

Under FINRA rules, a written power of attorney is NOT required for a registered representative to choose which of the following order related items? A Security to be traded B Time of execution C Dollar amount of the order D Share Size of the order

The best answer is B. A registered representative can always pick the time and price of execution of an order - this is the same as a "Not Held" order. If any more than price or time is selected, the trade is "discretionary" and requires a written power of attorney from the customer.

A member or associated person is allowed to select all of the following relating to a customer transaction without requiring a written trading authorization EXCEPT: A Price of the security to be purchased B The security to be purchased C The trading venue in which the security will be purchased D The time of trade execution

The best answer is B. A registered representative is allowed to select the price and time of execution without the order being considered as "discretionary." Firms routinely select the trading venue and this too does not require written authorization - the rule here is that the firm must send the order to the trading venue offering the best price. If the security to be traded or the number of shares is determined by the registered representative, then the order is discretionary and requires a written power of attorney from the customer.

All of the following statements are true regarding joint accounts EXCEPT: A mailing of account statements may be directed to any single party B checks drawn on the account may be made out in the name of any single party C orders may be entered into the account by any single party D open unexecuted orders may be canceled by any single party

The best answer is B. Any checks that are drawn on an account must be made out to the name of the account. Thus, if an account name is "John and Mary Jones," any checks drawn must be made out in both names - not just in one of the names. The other statements are true - mailing of account statements can be directed to any single party in the account; orders can be entered by any single party; and open orders can be canceled by any single party.

A husband and wife wish to open an account that allows either party to trade or draw checks; and that becomes the property of the surviving spouse if one should die. The proper ownership form is: A Tenants in Common B Joint Tenants with Rights of Survivorship C Separate Individual accounts D Joint Partnership account

The best answer is B. Any party to a joint account can enter orders for the account; and can draw checks in the full account name. In a joint account with rights of survivorship, if one participant in the account dies, the decedent's share will go directly to the other participant, avoiding probate. In a joint account with tenants in common, if one dies, his or her percentage ownership goes into the estate and is bequeathed to a beneficiary in the will.

When a custodial account is opened under UTMA (Uniform Transfers to Minors Act), the assets in the account must be: A transferred to the new adult at legal age B transferred to the new adult at the age specified by the custodian C liquidated when the new adult reaches legal age and the proceeds given to the new adult D transferred into a trust if no action is taken by the new adult at legal age

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). Review

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.

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. Review

Two business partners open a joint account at a broker-dealer as Tenants in Common, with each one owning 50% of the account. If one of the business partners dies, what claim, if any does his wife have on the account? A The wife will be the beneficiary of the deceased owner's 50% interest in the account B The wife will be the beneficiary of the deceased owner's 50% interest if he bequeathed it to her in his will C The wife will be the beneficiary of the deceased owner's 50% interest only if the other business partner in the joint account disclaims his interest D The wife will not be the beneficiary of the deceased owner's 50% interest, since the account must be closed upon death one of the owners

The best answer is B. When one party dies in a Tenants in Common account, his or her ownership interest in the account goes into his or her estate and is passed by will. If the customer dies, the wife will get the 50% ownership interest only if the husband bequeathed it to her in his will.

In order to open a discretionary cash account, all of the following 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

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. New account forms are not required to be signed by the customer. However, the customer must provide a signed trading authorization to the firm (first party trading authorization) allowing discretionary trades because this is a discretionary cash account.

Which one of the following orders requires specific customer authorization? A "Buy 100 shares of ABC at the best price available" B "Sell 100 shares of ABC at the market" C "Buy 100 shares of any computer stock priced at under $40" D "Sell 100 shares of ABC at $40 if it gets to that level" Review

The best answer is C. A written power of attorney is required only if a registered representative chooses more than price and/or time of execution in a customer transaction - translated, this means that the registered representative either selects the security to be traded or selects the size of the transaction. In Choices A, B, and D, the customer specifies the size and security, so no power of attorney is needed. In Choice C, the choice of the security is left to the registered representative, so a power of attorney is required.

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

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; Joint Tenancy With Rights of Survivorship (JTWROS) - each person has an undivided interest with each owning 100% of the account; or Tenants by Entireties - only allowed in some states, it is similar to JTWROS, however if a single tenant is sued, the assets of the joint account cannot be claimed. 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 statement is TRUE regarding a customer account with a "limited power" third party trading authorization? A The third party cannot enter unsolicited orders in the account B The third party can draw checks on the account C Upon the death of the customer, the power of attorney is revoked D The third party must sign a limited partnership agreement with the customer

The best answer is C. The individual granted a third party trading authorization with a limited power of attorney can enter orders (it makes no difference if they are solicited or unsolicited), but cannot draw checks on the account (that requires a full power of attorney). Any power of attorney - either limited or full - dies when the customer dies. A limited power of attorney has nothing to do with being a limited partner!

How must an account opened under the Uniform Gifts to Minors Act be titled? A In the name of the custodian only B In the name of the minor only C In the name of the custodian for the minor D In the name of the minor for the custodian

The best answer is C. Under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), any adult can open a custodial account for any minor. The account must be titled in the name of the custodian for the minor - so both names are there. Also note that the social security number of the minor is used on the account, not the social security number of the custodian.

A registered representative is allowed to choose which of the following in a transaction without requiring written trading authorization from the customer? A Quantity and price B Security and time C Price and time D Security and price

The best answer is C. 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.

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

The 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.

A custodial account is established under UTMA in a state with a transfer age of 21. Legal age in the state is 18. At age 19, the beneficiary leaves college to go into business setting up a software company. The beneficiary wishes to use the assets in the UTMA account as "seed money" for the business. Which statement is TRUE? A The beneficiary can use the account assets immediately without restriction B The beneficiary has no access to the account assets until he or she reaches age 21 C The beneficiary can use the account assets only with the approval of the custodian D The beneficiary can use the assets only with the approval of the state administrator

The best answer is C. If this were an UGMA (Uniform Gifts to Minors Act) account, the beneficiary gets control over the assets at legal age in the state and the answer would be Choice A. Since this is a UTMA (Uniform Transfers to Minors Act) account, the custodian sets the transfer age, up to the maximum transfer age permitted in the state. This custodian set a transfer age of 21. The beneficiary, who is now 19, cannot get control of the funds unless the custodian resets the transfer age.

All of the following procedures are required for discretionary accounts EXCEPT: A every order ticket initiated by the registered representative must be marked "discretionary" B every discretionary order ticket must be approved by the manager or principal C the customer must be contacted before each discretionary trade is executed D a written power of attorney must be obtained from the customer before discretionary trades are effected

The best answer is C. There is no requirement to contact a customer before executing each discretionary trade. The customer must give a written power of attorney; every order ticket that is discretionary must be marked as such; and the principal must approve all discretionary orders "promptly" (meaning by the end of that day).

A customer wishes to give a gift of securities to her nephew under the Uniform Gifts To Minors Act. Which statement is TRUE? A The account cannot be opened because only parents are permitted to be custodians B The account can be opened only with the written permission of the minor C The securities can only be donated if they are included on that state's "legal list" D The account can be opened without further documentation

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. Financial institutions and trusts are often limited to the type of investments that they can make because the state can restrict investment to those securities included on its "legal list." Legal list securities are generally Treasuries and investment grade municipal and corporate bonds. Legal list requirements are not imposed on custodial accounts. Since the minor is not of legal age, the minor is in no position to give permission to open the account.

All of the following statements are true regarding Trust Accounts EXCEPT: A The trust agreement will specify the transactions that the trustee is allowed to perform B A copy of the trust agreement must be obtained before any transactions are allowed C The account will be a cash account unless the trust agreement authorizes the opening of a margin account D Options trading is prohibited in trust accounts

The best answer is D. The trust agreement will specify what transactions are allowed. A copy of the trust agreement must be obtained before any transactions are allowed. As a general rule, fiduciary accounts must be cash accounts. A trust account will be opened as a cash account unless the agreement specifically authorizes the opening of a margin account. Options trading is permitted in a trust account - one of the most conservative options strategies is the sale of covered calls against stock positions held to generate income in a flat market. And covered call writing can be done in a cash account against fully paid stock positions.

Under FINRA rules, all of the following are necessary to open a corporate account EXCEPT: A New Account Form B Corporate Charter C Corporate Resolution with Embossed Corporate Seal D Evidence of Domicile

The best answer is D. To open a corporate account under FINRA rules, a new account form must be filled out, a copy of the corporate charter must be obtained (for proof of corporate identity), and an authorizing resolution must be completed by the corporation. The resolution authorizes the opening of the account, names the persons who are authorized to trade, and is signed and sealed by the Secretary of the corporation. There is no requirement to obtain a proof of domicile (a document that shows under which State's laws the corporation operates)

All of the following paperwork is customarily needed to open a margin account EXCEPT: A Customer's agreement B Loan consent agreement C Credit agreement D Trading authorization

The best answer is D. To open a margin account, the customer must sign a margin agreement (also known as the customer's agreement), which pledges the securities in the account as collateral for the margin loan. The credit agreement explains how interest is charged on the loan. The loan consent agreement permits the broker to lend out the customer's securities for short selling by other customers of the firm. These three documents are needed to open the account. A third party trading authorization is signed by the customer only if he or she wishes to allow someone else to trade the account.

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 a margin account for a partnership, all of the following documentation is required EXCEPT: A New account form B Customer's agreement C Partnership agreement D Joint account agreement

The best answer is D. To open any account, a new account form must be completed. To open a margin account, the customer's agreement (margin agreement) must be signed, pledging the securities purchased in the account as collateral for the margin loan. In addition, to open a partnership account, a copy of the partnership agreement must be obtained. Joint account agreements are only used when individuals who are not part of a larger "business entity" wish to pool their monies in a single account.

Which of the following accounts can be opened by a minor? A Custodial account B Joint tenants with rights of survivorship account C Uniform Gifts To Minors account D A minor cannot open an account

The best answer is D. A minor cannot open an account, nor does the minor have legal capacity to participate in any joint account. The acceptable method of opening such an account is an adult custodian opening an account for the benefit of the minor.

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

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. Review

All of the following transactions are permitted in a custodial account EXCEPT the: A purchase of mutual fund shares B purchase of warrants C sale of pre-emptive rights D short sale of common stock

The best answer is D. 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. Review

Which statement is TRUE regarding joint accounts? A If a party in a Joint Tenants With Rights of Survivorship account dies, that person's share is excluded from his or her taxable estate B If a party in a Joint Tenants With Rights of Survivorship account dies, that person's share passes tax free to the beneficiary C If a party in a Tenancy in Common account dies, that person's share is excluded from his or her taxable estate D If a party in a Tenancy in Common account dies, his or her share is included in his taxable estate

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 or her 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.

Which statement is FALSE regarding a customer account with a "full power" third party trading authorization? A The third party can enter orders in the account B Checks drawn on the account can only be made out to the customer, not to the third party C Upon the death of the customer, the power of attorney is revoked D The customer cannot designate that confirmations be sent only to the third party

The best answer is D. In an account with a third party trading authorization, the third party can enter orders; any checks must be drawn to the account name - not third party name; and the power of attorney dies if the customer dies. Note that the customer can designate that confirms go to the third party only, but this must be done in writing.

A customer wishes to give a gift of securities to her nephew under the Uniform Transfers To Minors Act. Which statement is TRUE? A When the minor reaches legal age in that state, the custodian can continue in that capacity with the express permission of the minor B When the minor reaches legal age in that state, the account must be transferred into the name of the minor C At legal age, the account must be liquidated and the proceeds paid to the new adult D The transfer age is set by the custodian, up to the maximum age permitted by the state

The best answer is D. 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).

Under FINRA rules, all of the following are necessary to open a corporate account EXCEPT: A New account form B Corporate charter C Shareholder approval D Corporate resolution

he best answer is C. To open a corporate account under FINRA rules, a new account form must be filled out, a copy of the corporate charter must be obtained (for proof of identity), and an authorizing resolution must be completed by the corporation. The resolution authorizes the opening of the account, names the persons who are authorized to trade, and is signed and sealed by the Secretary of the corporation. There is no requirement to obtain a proof of domicile (a document that shows under which State's laws the corporation operates).

Which statement is TRUE regarding joint accounts? A Orders can be given severally B Orders must be entered jointly C Accounts must be owned 50/50 D Checks can only be drawn severally

The best answer is A. Any party in a joint account can enter orders. "Severally" means individually, so Choice A is a true statement. However, any checks drawn on the account must be made out to all names on the account. Joint accounts do not have to be owned 50/50 - they may have disproportionate ownership.

When completing a new account form, you discover that the customer is an accounting supervisor at another broker-dealer. Under FINRA rules, which procedures are required? A Prior to opening the account, approval of the employing member must be obtained B Each transaction must be approved by the employing member firm prior to execution C Electronic duplicate confirmations and statements must be sent to the employing member firm's COO by end of day D Annual account summaries of all activity must be sent to the employer

The best answer is A. FINRA requires that if an employee of another FINRA member firm (whether registered or unregistered) wishes to open an account: 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. Note that the rule applies to "associated persons" of a member firm opening an account at another member - and an associated person is either an officer or a registered or unregistered employee of the member firm, with an exception given to anyone who only performs clerical or ministerial duties. Not only does the rule apply to accounts opened at other member firms by associated persons, it also applies to securities accounts opened at non-member financial institutions such as banks and investment advisers.

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

The best answer is A. 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 (not the CBOE). 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.

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

Custodial accounts can be opened as a: A cash account only B margin account only C either a cash or margin account D either a joint cash or margin account

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.

Stock held in the custodial account is the subject of a rights offering. All of the following actions by the custodian are appropriate EXCEPT: A letting the rights expire unexercised B selling another security in the account and using the proceeds to exercise the rights C donating the funds required to exercise the rights D selling the rights and reinvesting the proceeds

The best answer is A. The custodian cannot let the rights expire unexercised, since this is the same as "throwing away" money and is not in the best interests of the account. All the others would be considered appropriate actions.

All of the following statements are true about discretionary accounts EXCEPT: A the power of attorney continues until the customer revokes it in writing or the customer dies B each discretionary order ticket must be approved by the principal prior to entry C each order ticket must be marked as "discretionary" D a power of attorney must be obtained in writing from the customer before discretion can be exercised

The best answer is B. Every discretionary order ticket must be marked as such and must be approved by the manager "promptly," meaning by the end of the day. There is no requirement that it be approved before entry. The reason why "end of day" approval is OK is that settlement does not occur for 2 business days, and if the trade is unsuitable, the manager still has time to take it out of the customer's account. 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.

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.

In a custodial account which statement is TRUE? A Either the custodian or a parent can enter orders into the account B Only the custodian can enter orders into the account C The custodian can give trading authorization to another third party in the account D The custodian can return gifts from the account

The best answer is B. Technically, the custodian is the Third Party on a custodial account, with the minor being the Second Party. The custodian can enter orders and can draw checks, but the funds must used be for the minor's benefit. Only the custodian can enter orders, since the Second Party (the minor customer) is not yet of legal age. The custodian, since he or she already is the Third Party in the account, cannot give trading authorization to another Third Party in the account. All gifts to custodial accounts are irrevocable.

All of the following are types of joint accounts EXCEPT: A Tenants by Entireties B Custodian for a minor C Tenants in Common D Joint Tenants with Rights of Survivorship

The best answer is B. The joint account ownership options are: Tenants in Common - each person has a divided interest with a specified ownership percentage for each party; Joint Tenancy With Rights of Survivorship (JTWROS) - each person has an undivided interest with each owning 100% of the account; or Tenants by Entireties - only allowed in some states, it is similar to JTWROS, however if a single tenant is sued, the assets of the joint account cannot be claimed. Custodial accounts are not joint accounts - the minor is not authorized to trade the account nor can he or she draw checks from the account. Only the custodian can perform these actions.

An individual is declared incompetent in a court proceeding. What type of account can be opened for this person with appropriate documentation? A Cash account B Guardianship account C Joint account D An account may not be opened

The best answer is B. A Guardianship account can be opened if the court order appointing the guardian over the incompetent or minor is given to the brokerage firm.

Which of the following BEST describes a guardianship account? A An account for an individual who is an employee of a financial institution B An account for an individual declared incompetent in a court proceeding C An account for an individual who works for a life insurance company D An account for the benefit of a minor

The best answer is B. A Guardianship account is used to protect the assets of a person who is declared incompetent, or a minor child who has no immediate family, such as an orphan. A court must appoint a legal guardian. If the court order is presented to the brokerage firm, then a guardian account can be opened.

Which statement is TRUE about opening a numbered account at a broker-dealer? A Numbered accounts cannot be opened at broker-dealers B Numbered accounts can only be opened if the firm obtains an attestation from the customer of account ownership C Numbered accounts can only be opened if the firm maintains an AML program D Numbered accounts can be opened without restriction

The best answer is B. A customer can request that his or her account be identified within a firm only by number - with no actual name shown on the account. This is often requested by celebrities and famous individuals. This is permitted as long as the firm get a signed letter from the customer stating that he or she is the actual owner of the account.

A nephew has been given a durable power of attorney over his uncle's brokerage account. Upon the death of the uncle, the power of attorney: A remains in force B is terminated C transfers to the executor of the uncle's estate D transfers to the registered representative servicing the uncle's account

The best answer is B. Any power of attorney, durable or non-durable, is terminated when a customer dies. The distinction between a durable and a non-durable power of attorney is that a non-durable power of attorney terminates if the grantor is mentally incapacitated whereas durable power of attorney remains in force if the grantor is mentally incapacitated.

If a retail customer gives a market-not held order: A the order is treated as a "good-til-canceled" (GTC order) B the order is treated as a "day" order C a written power of attorney must be on file from that customer to accept the order D the order cannot be handled manually and must be executed via an electronic system Review

The best answer is B. Market-Not Held orders give discretion to the broker over price and time of execution. These orders must be executed that day if given verbally. If discretion is to last longer than 1 day, written authorization of the customer is required.

What is an acceptable way to open a brokerage account for an Investment Adviser? A A partnership account, with the adviser being the general partner and the adviser's clients being the limited partners B Separate client accounts with a power of attorney given by each client to the broker dealer who will then oversee the investment adviser C Joint account with tenancy in common for all of the investment adviser's clients D Joint account with rights of survivorship for all of the investment adviser's clients

The best answer is B. One way for an Investment Adviser account to be opened is for each client to open an account at a brokerage firm, with the client giving the investment adviser Third Party power of attorney. The account is held in the name of the Second Party - that is, the customer.The other way for an investment adviser to open an account is on an Omnibus basis. In this situation, the Investment Adviser is the Second Party, opening a "group account." The names of the individual customers in the account are not known to the brokerage firm. From the brokerage firm's standpoint, the customer is the Adviser. Investment advisers are prohibited from opening joint accounts containing many different clients, nor can they open partnerships accounts with many different clients. Under federal and state law, investment advisers must either keep customer monies segregated in separate accounts or must be able to account for each customer's positions separately within a "master" account - that is, an Omnibus account.

All of the following statements are true regarding a custodial account EXCEPT: A tax liability is the responsibility of the minor B tax liability is deferred until the minor reaches adulthood C any income is reported to the IRS each year D the minor's social security number is on the account

The best answer is B. Tax liability in a custodial account is the responsibility of the minor and each year any income is reported to the IRS using the minor's social security number. Tax is due on that income in the year it was received - this is not a tax-deferred account.

What is NOT a fiduciary account? A Custodial Account B UGMA Account C Partnership Account D Trust Account

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

All of the following statements are true regarding joint accounts EXCEPT: A opening a joint account requires new account information on each account participant B if a party in a Tenancy in Common account dies, his or her share of the account is included in his taxable estate C if a party in a Joint Tenants With Rights of Survivorship account dies, his or her share is excluded from his taxable estate D any party in the account can authorize trades or withdraw funds

The best answer is C. Even though a "Joint Tenancy" gives each owner an undivided interest in an account, if one owner dies, the IRS assigns a portion of the account to that person and taxes it. If the owners are married, then the marital exclusion stops this from happening. The other statements are true - in a joint account, any party can trade or draw checks; new account information is needed for each party to the account; and if the account is Tenancy in Common and one person dies, that person's share goes to his or her estate

A wealthy customer is very satisfied with her registered representative. She approaches the representative to ask him if he would like to be appointed as trustee over a trust account that she is establishing for her 2 grandchildren. If he accepts, he would be paid a trustee fee. Which statement is TRUE about this? A The registered representative cannot act as the trustee because he already manages another account for the customer B The registered representative cannot act as the trustee because he cannot accept a trustee fee C The registered representative cannot act as the trustee because of the conflict of interest D The registered representative can act as the trustee without restriction

The best answer is C. 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 a registered representative handling an account to act as the trustee over that account. As an example of the potential conflict, is the representative effecting trades in the account to benefit the beneficiaries or is the representative effecting trades to generate personal commission income? Typically, a trustee is a bank or an investment adviser, both of whom are already under a fiduciary obligation. 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"), most brokerage firms have an internal policy of prohibiting their representatives from being trustees in any accounts that they oversee.

When referring to a client account that has a trading authorization, the "third party" in the account is the: A Customer B Broker C Named person other than the customer D Clearing corporation

The best answer is C. 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 else named by the customer as authorized to trade the account.

Which statement is TRUE regarding fiduciary accounts? A Margin accounts can be opened without restriction B Margin accounts can only be opened with the permission of the beneficiary C No margin accounts are allowed unless the authorizing documents permit D No margin accounts are permitted under any circumstances

The best answer is C. The basic "default" setting for fiduciary accounts is that they cannot be opened as margin accounts - only as cash accounts. However, if the authorizing document specifically authorizes the opening of a margin account, then this is allowed.

Many years ago, a father opened a UGMA account for his young son. The son has just turned 17 and the father believes that the son is now old enough to start handling the account. The father wants to give trading authorization to the son and asks his representative over the phone to do this. What should the registered representative do? A Since the father is the custodian of the account and makes all decisions in the account, the registered representative must follow the customer's verbal instructions B The registered representative can only follow the father's instructions if the father completes a written power of attorney naming the son as authorized to trade the account C The registered representative must get approval from the branch manager to give the son trading authorization D The registered representative should decline the transaction

The best answer is D. Because the kid is not of legal age (he is only 17), he cannot be given a power of attorney over the account. Kids have no legal authority to make decisions, and the registered representative should decline the request.

In a joint tenants with rights of survivorship account: A a specific percentage ownership is assigned to each party B each party owns a divided interest in the account C if one party dies, that person's interest goes to his beneficiary or estate D if one party dies, the other party wholly owns the account Review

The best answer is D. In a joint tenants with rights of survivorship account, each party owns an undivided interest in this account, that is, legally each tenant 100% owns the account. If one person dies, the other party wholly owns that account, avoiding probate. This is the typical ownership for an account for a married couple.

All of the following statements are true about opening a new margin account for the customer of an investment adviser EXCEPT: A The customer must sign an advisory agreement with the adviser B The customer must sign a power of attorney, giving trading authorization to the adviser C The customer must sign a margin agreement D The investment adviser must sign a margin agreement Review

The best answer is D. To open an investment adviser account as a margin account, the customer must have a written agreement with the adviser; the customer must give third party trading authorization to the adviser; and the customer must sign a margin agreement. Basically, this is the customer's margin account, with the customer giving the adviser third party trading authorization in the account.

All of the following are true statements about managed wrap accounts EXCEPT: A a single annual fee is charged for account maintenance B no separate commission charges are imposed for each transaction performed in the account C no separate charges are imposed for safekeeping of securities in the account D no options transactions are permitted in such account types

The best answer is D. Wrap accounts are a type of customer account, where all services performed by the broker are "wrapped" into a single account; and a single annual fee based as a percentage of assets under management is charged. There is no commission charge for each transaction performed in such an account nor are charges imposed for safekeeping of securities. All services are covered in the single "wrap" fee. There is no prohibition on performing options transactions in such accounts.Also note that "wrap" accounts, because they charge a flat annual fee and not commissions, are defined as investment adviser products. These must be sold through an investment adviser subsidiary of a broker-dealer, and the representatives that sell them must be registered as "IARs" - Investment Adviser Representatives - in each state where they offer the product.