finals - customer accounts

A customer has opened a NMFBA but is not trading very much and the cost of the account is higher than if the account was based on a per trade commission charge. Which statement is TRUE? A) The account can be maintained as a NMFBA if the customer places a high value on aligning his interests with those of the broker B) The account can be maintained as a NMFBA if the customer receives a disclosure document that explains how the account fees are charged C) The account must be converted to one that charges a per trade commission D) No action can be taken unless the customer initiates a conversation about the relevant costs and services provided in the account

A) The account can be maintained as a NMFBA if the customer places a high value on aligning his interests with those of the broker A NMFBA is a "Non-Managed Fee Based Account." This type of account charges a flat annual fee for all trading, but the annual fee does not include recommendations or asset management. Typically, such an account is only suitable for an active trader. However, a customer that trades infrequently can still be suitable for such an account, if the customer places a high value on aligning his or her interests with those of the broker. (This means that the customer is happy to pay the flat annual fee because he knows that the broker does not have an incentive to churn the account!)

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

A) duplicate copies of each confirmation must be sent to the employer 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.

A customer has a margin account that shows the following: Long Market Value: $50,000 Debit Balance: $30,000 SMA: $5,000 The customer wants to buy $10,000 of marginable stock in the account. How much must the customer deposit?

$0 This account has $5,000 of SMA. This can be withdrawn as cash, or it can be used to buy marginable securities. With $5,000 of cash, $10,000 of marginable securities can be purchased. Therefore, the customer need not make a deposit for the additional purchase. Note that an account that is below 50% margin can still have SMA. SMA is created when the account goes above 50% initial margin; but if the market value falls after the SMA is created, the SMA amount locks and is not taken away (strange, but true). $50,000 - $30,000 = $20,000 (40%); sma= $5K (+ $10,000) + ($10,000) = $60,000 - $40,000 = $20,000 (33%), sma= 0 As long as the purchase does not bring the account below the 25% minimum, it is permitted.

Long Margin Account Market Value: $200,000 Debit Balance: $80,000 If the customer buys $20,000 of listed stocks and sells $16,000 of listed stocks on the same day, the customer must deposit:

$0 Margin is computed on net purchases for the day. The customer purchased $20,000 of stock and sold $16,000 of stock, for a net purchase of $4,000. To buy $4,000 of stock, the customer must deposit $2,000 of cash. Since the customer has $20,000 of SMA available, no cash need be deposited in this account. The SMA is computed as follows: The customer can borrow 50% of the $200,000 securities position = $100,000 that can be borrowed. Since the customer has already borrowed $80,000, another $20,000 is available to be borrowed from SMA.

A customer buys 100 shares of ABC stock at $10 as an initial transaction in a margin account. The customer must deposit: $1,000 $2,000 $2,500 $3,000

$1,000 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 $1,000 of stock, so 100% or $1,000 must be deposited.

A customer is short 1,000 shares of ABC stock at $50 in a margin account. The minimum maintenance margin requirement is:

$15,000 The minimum maintenance margin requirement for short stock positions is 30% of the current market value = 30% of $50,000 = $15,000.

A customer purchases $100,000 of corporate bonds at 80% in a margin account. The customer must deposit:

$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.

On the same day in a margin account a customer: Buys 100 shares of ABC @ $52 Sells 1 ABC Jan 50 Call@ $5 The customer must deposit:

$2,100 To buy the stock in a margin account, Regulation T margin is 50% of $5,200 = $2,600. No margin is required to sell the call since it is covered by the long stock position. Since $500 of premiums are received from selling the call, the deposit is $2,600 - $500 = $2,100.

A customer sells short 1,000 shares of ABC stock at $1.50 per share in an initial transaction in a new margin account. The customer must deposit: $750 $1,500 $2,000 $2,500

$2,500 Under the "cheap stock rule," if a customer sells a stock short under $5.00 per share, he must put up the greater of 100% or $2.50 margin per share. 100% of $1.50 per share x 1,000 shares = $1,500. $2.50 x 1,000 shares = $2,500. The greater amount is $2,500. More money can be required than the sale amount because the loss potential is unlimited.

A customer's short margin accountshows the following balances: Credit Balance: $90,000 SMV: $50,000 SMA: $15,000 What would the adjusted SMA balance be in the account after a short coverof 100 shares of MMM stock at $100 in the account?

$20,000 $90,000 - $50,000 = $40,000 If there is a short cover of 100 shares of MMM stock at $100 in the account, then $10,000 of this stock is being purchased (a debit to the account). After this transaction, the account will show: $80,000 - $40,000 = $40,000 To compute SMA, the question that must be asked is "What is the equity required to support a $40,000 market value at 50% margin?" 50% of $40,000 market value = $20,000 equity requirement. Since the actual equity is $40,000, there is $20,000 of SMA.

Short Positions 100 ABC @ $60 200 XYZ @ $50 Credit = $40,000 SMA = $16,000 Reg. T = 50% What is the equity in the account?

$24,000 $40,000 - $16,000 = $24,000 (150%)

An existing short margin accountshows the following: Credit Balance: $40,000 Short Market Value: $15,000 Equity: $25,000 SMA: $17,500 If the market value goes to $10,000, what is the new SMA balance?

$25,000 As the account currently stands, with a short market value of $15,000, only 50% equity is required, or $7,500. Since there is $25,000 of equity in the account, the excess equity (SMA) is $17,500 as shown. This amount can be borrowed from the account. If the market value declines to $10,000, the account would show the following: $40,000 - $10,000 = $30,000 The required equity is 50% of the current market value of $10,000 = $5,000. Since there is equity of $30,000, the excess equity is $25,000. This is the SMA amount and can be borrowed.

A customer wishes to buy $3,000 of call options as the initial transaction in a new margin account. The customer must deposit: $1,500 $2,000 $2,500 $3,000

$3,000 Listed option contracts are not marginable - they must be paid in full. 100% of $3,000 = $3,000 deposit.

A customer opens a margin account by purchasing: 100 shares ABC Common @ $50 200 shares PDQ Common @ $80 100 shares XYZ Common @ $20 The customer deposits the required margin amount. Subsequently, ABC stock increases to $60; PDQ to $100; and XYZ to $40. The SMA in the account is? $1,750 $3,500 $7,000 $11,500

$3,500 $23,000 - $11,500 = $11,500 (50%) After the increase in market value, the ABC position is worth $6,000; PDQ is worth $20,000; and XYZ is worth $4,000. The account now shows: $30,000 - $11,500 = $18,500 (62%) ; sma= $3,500 The SMA can be computed in either of 2 ways. The additional amount that can be borrowed is 1/2 of the market value increase. 1/2 of $7,000 = $3,500. Or, 1/2 of the current market value can be borrowed in total. 1/2 of $30,000 = $15,000. Since the existing debit is $11,500, an additional $3,500 can be borrowed.

On the same day in a margin account, a customer: Buys 100 shares of ABC @ $80 Sells 1 ABC Jan 80 Call @ $4 The customer must deposit:

$3,600. To buy stock in a margin account, Regulation T margin is 50% of $8,000 = $4,000. No margin is required to sell the call since it is covered by the long stock position. Since $400 of premiums are received from selling the call, the deposit is: $4,000 - $400 = $3,600.

A customer is long 1,000 shares of fully paid XYZ stock, valued at $75 per share. The customer sells "short against the box" another 1,000 shares of XYZ. The minimum maintenance margin requirement is:

$3,750 The margin in an arbitrage account is 5% minimum maintenance on the long side under FINRA rules. There is no Regulation T requirement, since the customer has no risk - his net position = "0." Since the market value of the securities is $75,000, the minimum margin is 5% = $3,750. The customer can borrow the remaining $71,250.

Long Market Value: $48,000 Short Market Value: $18,000 Debit: $25,000 Credit: $25,000 SMA: $3,000 The equity in the account is:

$30,000. To compute equity in the combined account, compute the long and short accounts separately. long: $48,000- $25,000 = $23,000 short: $25,000- $18,000 = $7,000 The combined equity is $23,000 + $7,000 = $30,000.

A customer sells 1 ABC Jan 50 Put@ $2 and buys 1 ABC Jan 60 Put @ $5 when the market price of ABC is $58. The customer must deposit:

$300 The customer has created a debit spread: Sell 1 ABC Jan 50 Put@ $2 Buy 1 ABC Jan 60 Put@ $5 = $3 Debit The debit represents the maximum potential loss, so this is the deposit. (The customer has a maximum gain potential of 10 points on the contracts = $1,000 net of $300 paid in premiums = $700).

A customer buys 100 shares of ABC stock in a margin account at $84 and sells 1 ABC Jan 85 Call@ $2 on the same day. The customer must deposit: $4,000 $4,150 $4,200 $4,250

$4,000 To buy the stock, the customer must deposit 50% of the purchase price of $8,400 or $4,200 in a margin account. There is no margin requirement on the short call because it is covered by the stock position. Since $200 of premiums is credited to the account from selling the call, the customer must deposit $4,000 ($4,200 - $200).

A customer sells short1,000 shares of ABC stock at $4 in a margin account. The customer must deposit: $2,000 $2,500 $4,000 $5,000

$4,000 Under the "cheap stock rule," if a customer wishes to short a stock under $5 a share, he or she must put up the greater of 100% or $2.50 per share. 100% of $4 per share x 1,000 shares = $4,000. $2.50 x 1,000 shares = $2,500. The greater amount is $4,000.

An investor sells short 100 shares of ABC stock at $86 and sells 1 ABC Jan 85 Put @ $2 on the same day in a margin account. The customer must deposit: $4,100 $4,250 $4,300 $8,600

$4,100 To sell short stock, initial margin is 50%. 50% of $8,600 = $4,300. No margin is required on the short puts since they are covered by the short stock position. The $200 of premiums received from writing the puts is applied against the margin requirement of $4,300 for a deposit of $4,100.

A customer buys 10 OEX Feb 600 Calls with 24 months to expiration @ $6 in a margin account when the OEX is at 601. The customer must deposit: $450 $600 $4,500 $6,000

$4,500 The margin requirement to buy LEAP options with over 9 months to expiration is 75%. 75% of $600 premium per contract = $450 margin requirement per contract x 10 contracts = $4,500 deposit.

A customer buys 100 shares of ABC at $90, depositing the Regulation T requirement. She holds the position for two months, during which $100 of interest is charged on the debit balance. What is the adjusted debit balance at the end of the two month period? $4,400 $4,500 $4,600 $8,900

$4,600 Since the customer bought $9,000 worth of stock, she deposited $4,500 with margin at 50% and borrowed $4,500 (the debit). Interest is charged on the debit, just as interest is charged on a Mastercard loan. The interest is added to the loan amount, reducing the equity in the account. Since $100 of interest was charged, the new debit balance is $4,600.

On the same day in a cash account, a customer buys 100 shares of PDQ stock at $49 and sells 1 PDQ Jan 50 Call@ $2. To establish the positions, the customer must deposit:

$4,700. To buy the stock in a cash account, the customer must deposit 100% of $4,900 = $4,900. To sell the call on that stock, no margin is required because the long stock position covers the call. Since $200 is received from the sale of the call, the net amount to be deposited by the customer is $4,900 - $200 = $4,700.

A customer margin account shows: 100 shares of ABC @ $50 300 shares of DEF @ $80 200 shares of PDQ @ $30 Debit = $6,000 SMA = $11,500 Reg. T = 50% What is the minimum maintenance marginrequirement?

$8,750. Minimum maintenance margin for a long account is 25% of the market value. 25% of $35,000 = $8,750. Since this account has equity of $29,000, it is well above the minimum requirement.

A customer is short 400 shares of ABC stock at $50 per share in a margin account. The customer wishes to sell 4 ABC Jan 50 Puts@ $5. The customer must deposit: 0 $500 $2,000 $20,000

0 The existing short stock position covers the sale of the puts. The customer does not deposit anything to sell the puts; as a matter of fact, he or she can take the $500 received per contract x 4 contracts = $2,000 total premium received for selling the puts from the account. Please note, however, that the short stock position must be properly margined.

A customer has an existing margin account and wants to write five covered callsagainst 500 shares of stock in the account. The margin requirement to write the calls is: 0 5% of the market value of the stock plus the premium minus any out the money amount 10% of the market value of the stock plus the premium minus any out the money amount 20% of the market value of the stock plus the premium minus any out the money amount

0 The sale of the calls is covered by the ownership of the stock. The margin requirement to sell the calls is "0" since there is no risk on the short calls.

Long option contracts have a loan value of: 0% 25% 50% 100%

0% Long option contracts have a loan value of 0. They cannot be borrowed against because they expire in the near future (within 9 months).

Customer fails to deliver must be bought in:

10 business days after settlement date 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.

As the initial transaction in a new short margin account, a customer sells 1,000 ABC @ $24 per share. The stock then rises to $25. After the market rise, the customer's equity in the account is:

11,000 (24,000 + 12,000) - 24,000 = 12,000 (50%) If the market value rises to $25,000, the account will show: $36,000 - $25,000 = $11,000 (44%)

A customer has sold short 100 shares of ABC stock in a margin account. ABC declares and pays a 10% stock dividend. How many shares must be purchased to close out the short position? 90 100 105 110

110 Because the shares that were sold have been "borrowed," they must be replaced. The former owner (lender) of the shares has no idea that they are gone. The lender has received dividends on the stock because the short seller has paid them to him. The lender will also receive the stock dividend he deserves because the short seller pays this to him as well. The short seller must deliver 110 shares when he or she buys in the position.

The maximum amount of customer securities that can be rehypothecated by a broker is: 50 % of the debit balance 70 % of the debit balance 100% of the debit balance 140% of the debit balance

140% of the debit balance 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.

What are the minimum maintenance marginsfor stock positions in longand short margin accounts? 50 / 50 50 / 25 50 / 30 25 / 30

25 / 30 The minimum maintenance margin for stock positions in a long account is 25%; in a short account is 30%.

The minimum maintenance margin requirement for short stock positions is:

30% of the closing price of the security that day 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.

A customer receives an initial Regulation T call for $10,000 and wishes to pay by depositing fully paid marginable stock, currently trading at $50 per share. The customer must deposit: 50 shares 100 shares 200 shares 400 shares

400 shares The customer has received a margin call for $10,000. To meet the call, he can either deposit $10,000 in cash or $20,000 of a fully paid marginable stock (the loan value on the stock is 50% or $10,000). $20,000 stock / $50 price per share = 400 shares to be deposited.

A customer margin account shows the following: 100 shares ABC Common @ $50 100 shares PDQ Common @ $80 100 shares XYZ Common @ $20 Debit Balance: $8,000 SMA: $500 The equity in the account is:

7,000 $15,000 - $8,000 = $7,000 (47%) (Note: The SMA of $500 must be accepted at face value. SMA cannot be computed once an account is established and moves up and down)

A customer's short margin account shows the following balances: Credit Balance: $60,000 SMV: $40,000 SMA: $0 What would the adjusted SMAbalance be in the account after a short coverof 100 shares of MMM stock at $60 in the account?

=$3,000 $60,000 - $40,000 = $20,000 If there is a short cover of 100 shares of MMM stock at $60 in the account, then $6,000 of this stock is being purchased (a debit to the account). After this transaction, the account will show: $54,000 - $34,000 = $20,000 To compute SMA, the question that must be asked is "What is the equity required to support a $34,000 market value at 50% margin?" 50% of $34,000 market value = $17,000 equity requirement. Since the actual equity is $20,000, there is $3,000 of SMA.

When providing a Form CRS along with other documentation to a new client, the Form CRS: can be included anywhere in the ordering of documents presented must be packaged separately from the other documents presents must be the first among any documents delivered can be included by reference to its availability on the firm's website

=must be the first among any documents delivered Regulation BI went into effect in mid-2020. It requires that customers receive a 2-page document at account opening called Form CRS - Customer Relationship Summary. Form CRS details: Whether the firm is acting as a broker-dealer in the relationship, where it can charge commissions; or if the firm is acting as an investment adviser in the relationship, where is can only charge fixed fees; That the firm must adhere to a suitability standard when making recommendations as a broker-dealer; and that the firm must adhere to a tougher fiduciary standard when acting as an investment adviser; The fees and costs that the customer will pay; Any conflicts of interest that the firm may have in providing its services to the client; and Whether the firm or its associated persons has had any reportable disciplinary events. The rule actually requires that the Form CRS be delivered to customers at the earliest of recommending an account type; recommending a transaction; placing an order; account opening; or implementation of an investment strategy. If the firm presents a client with a package of documents at account opening, the Form CRS must be on the top. It must also be posted prominently on the firm's website.

Which of the following statements is TRUE regarding a customer who wishes to write a put in a cash account? A) A customer cannot write a put in a cash account B) 50% of the strike price must be deposited C) 100% of the strike price must be deposited D) 100% of the strike price plus 100% of the premium must be deposited

C) 100% of the strike price must be deposited Since the maximum loss when writing a put is limited to buying the stock at the strike price, short puts can be written in a cash account if 100% of the potential loss (that is, the strike price) is deposited. Note that short calls cannot be covered with cash, since the potential loss is unlimited on these positions.

When an account is frozen, which statement is TRUE? A) No trades are permitted in the account for 90 days B) Only liquidating trades are permitted in the account for 90 days C) Payment in advance is required for purchases occurring in the next 90 days D) Payment by the regular way settlement date is required for purchases occurring in the next 90 days

C) Payment in advance is required for purchases occurring in the next 90 days 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.

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.

What paperwork is required for trades to be effected in an account for a deceased person who held an individual account at a brokerage firm? Court order or executor's authorization certificate Names of the beneficiaries of the estate Social security number and date of death of the decedent Approval of the attorney for the estate

Court order or executor's authorization certificate When the holder of an individual account dies, the account is frozen and no more trading can occur. The account assets go to that individual's estate, which must go through probate. A probate court clerk issues an "executor's letter," signed by a judge, which authorizes the named individual to act on behalf of the estate as the executor. Another name for this document is "letters testamentary." This letter must be presented to the brokerage firm by the executor so that the assets can be transferred into an account for the estate, which is controlled by the executor. Also note that the executor's letter is used to obtain a Tax Identification Number for the account.

On Monday, April 5th, a customer places an order to buy 100 shares of ABC at $60 in a cash account. On April 6th, the stock rises to $80 and the customer sells. Which statement is TRUE? A) No payment is required because the sale proceeds can be used to pay for the original purchase B) No payment is required because the customer sold the position at a profit C) If payment is not received by Friday, April 9th, barring an extension request, the account must be liquidated D) If payment is not received by Friday, April 9th, barring an extension request, the account must be frozen

D) If payment is not received by Friday, April 9th, barring an extension request, the account must be frozen If a customer does not pay for a purchase within 4 business days after trade date, barring an extension, the account must be frozen for 90 days. Four business days from April 5th is April 9th. The fact that there was a profit on the position does not affect the amount that the customer must pay; nor does it affect the date by which payment is due.

A FINRA member firm uses a structure for its wealthy client group where a "team" of registered representatives with differing specializations services those accounts. This is: A) prohibited under FINRA rules B) permitted only if a written agreement is signed by all of the representatives in the team C) permitted only if a record is maintained of the CRD number of each representative assigned to the account D) permitted only if the firm documents name, role, and responsibilities of each member of the team

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

Which of the following are synonymous terms for the "parties" to a brokerage account? First Party/ Customer Second Party/ Broker First Party / Broker Third Party/ Customer

First Party / Broker 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.

Which of the following affect SMA in a short margin account? I A decrease in market value II An increase in market value III A short sale in the account IV A purchase in the account

I A decrease in market value III A short sale in the account IV A purchase in the account An increase in market value does not affect SMA in a short account. SMA stays locked as the equity in the account declines in a rising market. Decreases in market value add to equity and hence add to available SMA. An additional short sale in the account uses SMA, while a covering purchase in the account increases SMA. This is the exact opposite of what happens in a long margin account.

Initial approval of options accounts is performed by the: I Branch Office Manager II General Principal III Registered Options Principal IV Financial and Operations Principal

I Branch Office Manager III Registered Options Principal Initial approval of each options account is either performed by the Branch Office Manager (Series 9/10 license - the Series 9 covers options rules) or the Series 4 Registered Options Principal. The General Principal (Series 24 license) cannot approve options accounts - there is no options content on that exam. The Financial and Operations Principal (Series 27) is for the firm's supervising accountant.

Which statements are TRUE regarding SMA in a margin account that is at 50% margin? I Every increase in market value in a long account results in a 50% increase in SMA II Every increase in market value in a long account results in a 150% increase in SMA III Every decrease in market value in a short account results in a 50% increase in SMA IV Every decrease in market value in a short account results in a 150% increase in SMA

I Every increase in market value in a long account results in a 50% increase in SMA IV Every decrease in market value in a short account results in a 150% increase in SMA If a long account increases in value above 50%, SMA will increase by $.50 for every dollar increase. If a short margin account decreases in value, SMA will increase by $1.50 for every dollar decline.

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

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

When comparing a margin accountto a cash account, which of the following statements are TRUE? I Margin accounts have greater leverage than cash accounts II Margin accounts have the same leverage as cash accounts III Margin accounts have greater price volatility than cash accounts IV Margin accounts have the same price volatility as cash accounts

I Margin accounts have greater leverage than cash accounts IV Margin accounts have the same price volatility as cash accounts Margin accounts have greater leverage than cash accounts because a portion of the purchase price is borrowed. The greater leverage in a margin account gives a greater percentage return on cash invested. The price volatility of a security held in either a cash or margin account is the same.

Which of the following statements are TRUE? I Regulation T requires payment for purchases no later than 4 business days after trade date II Regulation T applies to both exempt and non-exempt securities III Regulation T applies to both listed and unlisted securities IV Regulation T sets both initial and maintenance margins

I Regulation T requires payment for purchases no later than 4 business days after trade date III Regulation T applies to both listed and unlisted securities Regulation T requires payment for securities purchases promptly, but no later than "S + 2," which is 4 business days after trade date (2 business days regular way settlement + 2 grace days). Regulation T only applies to non-exempt securities. It does not apply to exempt securities since it is part of the Securities Exchange Act of 1934, of which only the anti-fraud provisions apply to exempts. Regulation T margins apply to both listed and unlisted securities. The Federal Reserve only allows exchange listed and NASDAQ securities to be margined. OTCBB and Pink Sheet securities cannot be margined. Regulation T only sets initial margins; maintenance margins are set by FINRA.

Which of the following are types of joint accounts? I Tenancy by Entireties account II Tenancy in Common account III Joint Tenants with Rights of Survivorship account IV Partnership account

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

A customer that wishes to open a portfolio margin account must: I receive a copy of the risk disclosure statement describing the risks and nature of portfolio margining at, or prior to, the initial transaction in a portfolio margin account II receive a copy of the risk disclosure statement describing the risks and nature of portfolio margining, within 15 days of opening a portfolio margin account III sign an acknowledgment attesting that he or she has read and understands the disclosure document at, or prior to, the initial transaction in a portfolio margin account IV sign an acknowledgment attesting that he or she has read and understands the disclosure document within 15 days of opening a portfolio margin account

I receive a copy of the risk disclosure statement describing the risks and nature of portfolio margining at, or prior to, the initial transaction in a portfolio margin account III sign an acknowledgment attesting that he or she has read and understands the disclosure document at, or prior to, the initial transaction in a portfolio margin account FINRA requires that a portfolio margin account be opened as an options account that is qualified for naked options writing. This requires a more-detailed suitability determination and requires not only branch manager approval, but also separate approval of the designated Registered Options Principal (this is the "main office" ROP in charge of compliance as opposed to a regular branch manager-ROP). The customer must be provided with a portfolio margin risk disclosure document at, or prior to, the initial transaction in the account and must sign an acknowledgment that he or she has read and understands the disclosure document prior to the initial transaction in the account. Note that this is a more stringent requirement than the procedure for opening a regular options account, where the Options Agreement must be signed and returned within 15 days of account opening.

Approval of new accounts for FINRA member firms can be performed by the: I Registered Representative II Branch Office Manager III Financial and Operations Principal

II Branch Office Manager ONLY Under FINRA rules, new accounts must be approved, in writing, by a Branch Office Manager (Series 9/10 license). Registered representatives cannot approve the opening of new accounts. The Financial and Operations Principal (Series 27 license) is responsible only for the firm's financial reporting and back office operations.

Brothers Joe and John have a joint account with tenants in common. Which of the following statements are TRUEregarding the activities in the account? I Checks drawn on the account may be made out to Joe only or John only II Checks drawn on the account must be made out to both Joe and John jointly III Orders may be entered into the account by Joe only or John only IV Orders must be entered into the account by Joe and John jointly

II Checks drawn on the account must be made out to both Joe and John jointly III Orders may be entered into the account by Joe only or John only Any checks that are drawn on a joint account must be made out to the full name of the account - in this case checks are made out to both Joe and John. Orders in joint accounts can be entered by any single party - so Joe can enter an order or John can enter the order - they don't have to do this together.

Which of the following signatures must appear on the New Account Form when a customer is opening a cash account? I Customer II Registered Representative III Manager or Principal

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

Portfolio margining: I is suitable for unsophisticated investors II is suitable for sophisticated investors III requires a minimum account equity of $2,000 IV requires a minimum account equity of $100,000

II is suitable for sophisticated investors IV requires a minimum account equity of $100,000 The minimum equity to open a portfolio margin account for an individual customer is $100,000. This compares to the minimum equity requirement of $2,000 for a regular margin account. Portfolio margin can only be used by institutional or wealthy sophisticated individual customers. To open a portfolio margin account, the account must be qualified for naked options writing, which requires a more-detailed suitability determination showing that the customer is sophisticated and able to bear loss. Such an account requires not only branch manager approval, but also separate approval of a designated Registered Options Principal.

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

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

All of the following paperwork is customarily needed to open a margin account EXCEPT: Margin agreement Loan consent agreement Joint account agreement Credit agreement

Joint account agreement To open a margin account, the customer must sign a margin agreement (this can also be termed the customer's agreement or 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. Joint account agreements are only signed if there will be more than 1 person owning the account.

All of the following are types of fiduciary accounts EXCEPT: Trust Account Custodial Account Executor of Estate Account Partnership Account

Partnership Account Trust accounts, Custodial accounts, Executor of Estate accounts are all types of fiduciary accounts, where a third party is designated to manage the account in the best interests of the account owner. Partnership accounts are directly managed by those partners authorized to trade in the account.

Under the requirements of the USA PATRIOT Act, if a member firm suspects that an account is engaging in money laundering, the firm is obligated to file a(n): FOCUS 10K SAR 13d

SAR If a member firm suspects that a customer is engaging in money laundering, a Suspicious Activities Report ("SAR") must be filed with FinCEN - the Financial Crime Enforcement Network.

Which statement is TRUE regarding a cash dividend received in a restricted margin account? The customer may remove 50% of the dividend within 30 days The customer may remove 75% of the dividend within 30 days The customer may remove 100% of the dividend within 30 days The customer may not remove the dividend since the account is restricted

The customer may remove 100% of the dividend within 30 days Cash dividends received in a margin account are applied against the debit balance (reducing the loan to the customer) and are simultaneously credited to SMA for 30 days. During the 30 day period, the customer can reborrow the dividends, restoring the loan balance to its original amount. After 30 days, the dividends are removed from SMA and represent a permanent reduction of the debit. This treatment of dividend receipts does not vary if the account is restricted; or unrestricted.

TOD account registration stands for:

Transfer on Death of customer Transfer on death is a relatively new 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.

Which documents are completed when opening a margin account? I new account form II margin agreement III loan consent agreement IV credit disclosure statement

all 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.

The Broker Loan Rate is best described as the rate at which: brokers loan money to banks which then purchase securities brokers borrow from banks using customer securities as collateral customers charge brokers for borrowing their securities for stock loans the Federal Reserve charges member banks for overnight loans

brokers borrow from banks using customer securities as collateral Brokers borrow from banks using customer securities as collateral at the Broker 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%").

Custodial accounts can be opened as a: cash account only margin account only either a cash or margin account either a joint cash or margin account

cash account only 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.

When opening an account to trade stocks and options, all of the following signatures are needed on the new account form(s) EXCEPT: customer signature registered representative signature general principal signature registered options principal signature

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.

A customer opens a short margin account by selling short 300 shares of XYZ stock at $80 per share and deposits the required margin. If the stock increases in value by 25%, the customer's equity in the account will: remain unchanged decrease by 12.5% decrease by 25% decrease by 50%

decrease by 50% (24K + 12K) =36K total credit balance = $36,000 - $24,000 = $12,000(50%) If the market value increases by 25%, the new market value will be 125% of $24,000 = $30,000. The account will now show: $36,000 - $30,000 = $6,000 (20%) The equity has decreased from $12,000 to $6,000 - a 50% decrease.

A broker-dealer executes a large purchase transaction for an institutional customer. The institution directs that the securities be shipped to its custodian bank, who is authorized to pay on settlement. This is known as a: delivery versus payment transaction when, as, and if issued transaction buyer's option settlement transaction regular way settlement transaction

delivery versus payment transaction Regulation T does not cover "delivery versus payment" transactions. These are specified by mutual funds when they purchase securities. The fund specifies that the securities be delivered to the fund's custodian bank, which is authorized to pay upon delivery. FINRA requires that the funds to pay be on deposit at the custodian bank "promptly" (the same as the wording of Regulation T) and also requires that the transaction be settled no later than 35 days from trade date.

A customer directs a registered representative to execute a trade which the representative believes is unsuitable for the customer. After explaining this, the customer directs that the trade be performed. The representative should: refuse the order obtain the manager's written approval before entering the order execute the order, but note his exception in the customer account file close the account

execute the order, but note his exception in the customer account file If the customer tells you to do something, do it! It's his account, not yours. Since you don't agree with the customer's decision, cover your actions by documenting your exception to the trade in the customer file.

The greater the leverage in a long margin account, the: greater the percentage increase in equity as market prices rise greater the percentage increase in equity as market prices fall lesser the percentage increase in equity as market prices rise lesser the percentage increase in equity as market prices fall

greater the percentage increase in equity as market prices rise The greater the leverage in a long margin account, the greater the percentage increase in equity as market prices rise.

A customer wishes to give a gift of securities to her nephew under the Uniform Gifts To Minors Act. The registration on a custodial account is: one custodian for one minor up to two custodians for one minor one custodian for up to two minors any number of custodians for any number of minors

one custodian for one minor The registration on a custodial account is one custodian for one minor. There can not be more than one of each on an account.

Under FINRA rules, order tickets must be prepared: prior to entry of the order by the close of business on the day the order was entered by the close of business on the last day of that week that the order was entered by the date that the transaction settles

prior to entry of the order Under FINRA rules, order tickets (which are now electronic) must be prepared in writing prior to entry. Once an order has been executed, no alterations are permitted to the ticket unless a manager approves in writing.

A tender offer has been made for PDQ common shares. The brokerage firm department that would handle the tendering of shares is the: margin department purchase and sales department reorganization department order department

reorganization department The reorganization department of a brokerage firm handles corporate reorganizations such as tender offers and takeovers.

All of the following long positions are marginable EXCEPT: corporate bonds preferred stock common stock stock options

stock options Long options have an initial deposit requirement of 100% and have no loan value. Common stock, preferred stock, and bonds are all marginable.