Series 7 Part one Qbank

All of the following are fiduciary accounts except A) transfer on death (TOD) accounts. B) trust accounts. C) guardian accounts. D) estate accounts.

A Explanation A TOD account is an individual account in which, upon the death of the account owner, the assets pass to a designated beneficiary.

Which of the following types of business organizations do not protect owners' personal assets from losses incurred by the business? General partnership Sole proprietorship S corporation C corporation A) III and IV B) I and II C) II and III D) I only

B Explanation Corporations, whether organized as C or S corporations, afford their owners limited liability, which is the protection of their personal assets from losses incurred by the businesses. General partnerships and sole proprietorships subject their owners to personal liability for losses of the business.

Qualified distributions from Roth IRAs are A) 100% taxable. B) tax free. C) tax deferred. D) taxable only to the extent of earnings.

B Explanation If a withdrawal from a Roth IRA is a qualified distribution, the withdrawal is tax free. A qualified distribution is made after a five-year holding period and after the taxpayer has reached age 59½.

Before making any recommendations to a client, basic client suitability information must be gathered. Many suggest beginning with a family balance sheet. Which of the following would be found on that document? A) Salary B) Net worth C) Expenses D) Goals

B Explanation The balance sheet includes the client's assets and liabilities. From these, the net worth is determined. It is the income statement that contains the salary and expenses. Goals are a nonfinancial consideration.

According to the USA PATRIOT Act of 2001, account identification and verification procedures should be applied to which of the following? New individual accounts New business accounts Existing individual accounts Existing business accounts A) I and IV B) I and II C) II and IV D) III and IV

B Explanation The procedures required by the USA PATRIOT Act of 2001 for the verification and identification of customer accounts should be applied to all new customers—whether individuals or businesses.

Minimum distributions from a traditional IRA must begin A) once the owner retires. B) as soon as the owner turns 72. C) by April 1 of the year after the owner turns 72. D) a year after the owner turns 59½.

C Explanation Minimum distributions from a traditional IRA must begin by April 1 of the year after the owner turns 72.

Prime brokerage accounts are most often used by A) investment advisers. B) broker-dealers. C) investment bankers. D) Institutions.

D Explanation Although any of these could use prime brokerage accounts, their primary users are institutional investors.

An IRA account at a broker-dealer must be set up as a _____ account?

IRAs can only be cash accounts

Which of the following types of retirement plans would be most beneficial to a young employee of a corporation? A) Defined contribution pension plan B) Profit-sharing plan C) Keogh plan D) Defined benefit pension plan

A Explanation The most beneficial corporate pension plan for a younger employee would be the defined contribution plan. The employee has many years in the workforce, so the investments made with the defined contributions will have a maximum amount of time to grow.

Which of the following is a tax-qualified retirement plan for employees of nonprofit organizations? A) 403(b) B) 401(k) payroll deduction plan C) Keogh plan D) SEP IRA

A Explanation Under Section 403(b) of the Internal Revenue Code, employees of nonprofit organizations (such as hospitals and schools) may make tax-deductible contributions from their paychecks into a retirement plan operated through their employer.

It is common for an employer offering an ERISA-qualified retirement plan to match contributions made by employees. The plan documents state the matching percentage. When matching is part of the plan, another important item in those documents is the length of time before those matching contributions become the property of the employee. This is known as A) the vesting schedule. B) the eligibility requirements. C) the participation schedule. D) the nondiscrimination requirements.

A Explanation Vesting defines when an employer contribution to a plan becomes the employee's money. The vesting schedule lets the employees know when they will become fully vested. There are several different acceptable methods, but we have heard nothing about them being tested. The participation information is the eligibility requirements, such as minimum age and hours worked. Nondiscrimination rules are in force to ensure that all eligible employees are treated impartially through a uniformly applied formula.

Which of the following forms of business is preferred when the goal is raising a significant amount of capital? A) C corporation B) LLC C) S corporation D) General partnership

A Explanation When there is a need for significant capital, it is the C corporation that is the form to use.

All of the following statements concerning IRA contributions are true except A) you may make contributions for the past year after April 15, provided you have filed an extension on a timely basis. B) between January 1 and April 15, you may make contributions for the current year, the past year, or both. C) if you file your taxes on January 15, you may deduct your IRA contribution even if it is not made until April 15. D) you may contribute to this year's IRA from January 1 of this year until April 15 of next year.

A Explanation You may contribute to an IRA only until the first tax filing deadline (April 15) even if you filed an extension.

Which of the following are qualified plans? Payroll deduction Deferred compensation Defined benefit Defined contribution A) I and III B) III and IV C) I and II D) II and IV

B Explanation Defined benefit and defined contribution plans are funded with pretax contributions, and are thus qualified plans. Payroll deduction and deferred compensation plans are funded with after-tax contributions and thus are nonqualified plans.

Which of the following documents must an existing customer sign to establish a discretionary account? A) Options agreement B) Trading authorization C) New account application D) Customer's agreement

B Explanation To establish a discretionary account, the agent must receive written authorization from the customer(s) in whose name(s) the account has been established. An existing customer has already completed the new account application and signed any required customer agreements.

An institutional customer would like to use one broker dealer to handle the administration of the account, but would like to use various other broker-deals to execute trades for certain types of securities. Which types of account would meet the customer's needs? A. An advisory account B. Prime brokerage C. Fee based D. A DVP account

B. Prime (institution selects one member firm prime broker to provide custody)

Which of the following circumstances must be met for a fiduciary to trade options in a trust account? Special circumstances are determined by the broker-dealer. The trust agreement states the trustee has the power to trade options. The trust's investment objectives are determined to be compatible with options trading. Only covered options may be traded by a fiduciary. A) II and IV B) I and IV C) II and III D) I and III

C Explanation A fiduciary account may only trade options if expressly authorized to do so and if suitable for the beneficial owner of the account.

Which of the following accounts are billed a single fee annually for a group of services? A) Cash account B) Margin account C) Wrap account D) Option account

C Explanation Wrap accounts are accounts for which firms registered as both broker-dealers and investment advisers provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. Wrap accounts are generally investment advisory accounts.

A registered representative sits down with a new customer to complete the customer account form. During this time, the customer expresses being comfortable with some risk to her initial investment in exchange for potentially higher returns. After the registered representative explains that the willingness to accept some risk may allow the account to keep pace with inflation, but that it also means the account could lose value, the customer acknowledges that she understands. This customer's risk tolerance would best be defined as A) conservative. B) aggressive. C) speculative. D) moderate.

D Explanation An investment risk tolerance in which the customer is willing to accept some risk to the initial principal sum invested and the potential loss of the funds in exchange for the opportunity to earn higher returns is best defined as moderate.

To avoid tax and a penalty, an IRA may be rolled over A) each quarter by the end of the calendar quarter. B) every five years by the end of the calendar year. C) every three years within 90 days. D) no more than once every 12 months within 60 days of the distribution.

D Explanation IRA rollovers, which must be completed within 60 days, may be done no more often than once every 12 months.

Which of the following investment activities are suitable for an individual retirement account? Writing uncovered calls Writing covered calls Buying puts on stock held long Writing naked puts A) II and IV B) I and II C) I and IV D) II and III

D Explanation Writing uncovered calls and writing naked puts subject the investor to a high degree of risk and are considered unsuitable activities.

Several investors open an account as tenants in common. For suitability purposes, financial information is required on which of the following investors? A. Most of the investors B. The largest investor only C. Only the one authorized to trade the account D. All of the investors

D. All for suitability recommendations, financial info should be obtained on all of the account owners

A margin account may not be used A) for retirement accounts. B) to purchase listed stocks. C) to purchase corporate bonds. D) when opening a fee-based account.

A Explanation Investors cannot open a margin account for retirement plans. There are other restrictions on margin accounts, including accounts for minors. Listed and many OTC stocks and corporate bonds can be purchased on margin.

All of the following qualified plans are covered by ERISA guidelines except A) public sector plans. B) profit-sharing plans. C) 401(k) plans. D) private sector plans.

A Explanation Public sector plans are not covered by ERISA guidelines. Corporate and certain union retirement plans are subject to ERISA guidelines.

One of your customers has a JTWROS account and an individual account. The individual account is the one approved for options trading. The customer wishes to make a large options trade and asks you to transfer a substantial sum from the cash balance in the joint account to the individual account. To do this, A) you need the authorization of the customer. B) the check would have to be made payable in the name of all the owners of the JTWROS account. C) you need the authorization of both parties on the account and the approval of a designated principal. D) you need the approval of a designated principal.

B Explanation Look at this question as if the client making the request asked for a check in their name only to be sent from the joint account. We know that any certificates or checks issued must be in the names of all the joint account holders.

A customer wishing to open a numbered account must be informed that A) he must supply proof of U.S. citizenship and reside permanently in the United States. B) he must supply a written statement attesting to his ownership of the account. C) the account may only be opened with prior permission from the SEC. D) numbered accounts are restricted to cash accounts.

B Explanation Numbered—or symbol—accounts require that a written statement, which is signed by the client and acknowledges ownership, be kept on file.

Which of the following statements regarding savings incentive match plans for employees (SIMPLEs) is not true? A) Employee contributions are pretax. B) Employers cannot make matching contributions for employees. C) Catch-up contributions for those age 50 and older are permitted. D) SIMPLEs are retirement plans for small businesses with fewer than 100 employees.

B Explanation SIMPLEs are retirement plans for businesses with fewer than 100 employees that have no other retirement plan in place. The employee makes pretax contributions into a SIMPLE up to an annual contribution limit, which can include catch-up contributions for those age 50 and older. The employer is permitted to make matching contributions for employees.

Responding to the student loan crisis, the SECURE Act now permits qualified withdrawals from Section 529 plans to include payments of A) student loan principal up to an annual maximum of $10,000 per child. B) student loan interest up to a lifetime maximum of $10,000 per child. C) student loan interest up to a maximum of $10,000 per family. D) student loan interest up to a maximum of $10,000 per year.

B Explanation The lifetime limit is $10,000 of interest or principal per child. If the child who is the beneficiary of the plan does not use all the money by graduation, the remaining funds can be used to pay the interest or principal (subject to the standard limits) for other siblings.

A customer wishes to open a new account but refuses to provide suitability information. Under FINRA rules, the member A) may open the account but must limit recommendations to U.S. government securities. B) must not open the account. C) may open the account, but any recommendations must be limited to suitability information the firm has on the customer. D) may open the account but must limit recommendations to investment-grade securities.

C Explanation A recommendation may be made if the firm has a reasonable basis to believe it is suitable. This can be based on information that the firm knows about the customer. For example, you do know the customer's age and occupation. You do have the customer's home address. In the real world, firms rarely rely solely on this, but for test world purposes, limited recommendations may be made.

Which of the following types of business organizations does not protect owners' personal assets from losses incurred by the business? A) LLC B) C corporation C) S corporation D) Sole proprietorship

D Explanation Corporations, whether organized as C or S corporations, and LLCs (limited liability companies), afford their owners limited liability. That means they have protection of their personal assets from losses incurred by the businesses. Sole proprietorships subject their owners to personal liability for losses of the business.

Which of the following plans requires an actuary's services? A) Defined contribution B) 401(k) C) Profit-sharing D) Defined benefit

D Explanation In a defined benefit plan, the payout is established, and employers must contribute annually to assure payment of the benefit amount. An actuary must calculate the annual contribution amount necessary to meet the benefit requirement.

An agent may open a joint account for which of the following? Lee and his 13-year-old son, Tom Mary and Kelley, two adult college roommates Jerry and Mark, friends and partners in business for more than 20 years Melinda and her minor nephew, John, for whom she is guardian A) I and III B) I and IV C) II and IV D) II and III

D Explanation Joint account owners share ownership of the account and must be adults. A minor may not legally exercise control over an account and may not be an owner of record of an account.

Two friends would like to open a joint account but have the tax filed under the name of the nonemployed individual. That could be done in A) a JTWROS account with the Social Security number of the designated person used. B) an account opened as a partnership. C) a tenants in common account with the percentage ownership in the name of the designated person. D) a joint account with a TOD designation.

A Explanation In a JTWROS account, the assets are considered jointly owned. Only one tax identification number (Social Security number) is placed on the account. If it is the number of the nonemployed individual, the Form 1099 will go to that person and that is whom the IRS will expect to pay the taxes. That might be the correct answer to a test question. In the real world, it might not satisfy the IRS that the one in the lower tax bracket is being credited with all the income and gains. If the IRS audits the account and sees that the funds came from the working individual, there could be tax issues. However, the exam does not always deal with the real world and we won't either on this one.

All of the following characteristics describe a joint tenants with right of survivorship (JTWROS) account except A) orders may be given only by the party listed first on the account. B) in the event of the death of one of the tenants, the surviving party assumes control of the entire account. C) mail may be sent to either party with the permission of the other party. D) checks must be made out in the name of the account.

A Explanation In a JTWROS account, when the surviving party assumes control of the entire account in the event one of the tenants dies, any party named on the account may enter orders for the account. While distributions from the account must be sent in the names of all of the owners, mail could be sent to one party only, with permission from all other parties to the account.

A customer, without giving written authorization, may permit a registered representative to exercise his discretion as to the security. the price at which to enter the order. the amount of shares. when to enter the order. A) II and IV B) I and II C) I and III D) III and IV

A Explanation Registered representatives may choose the price or timing of an order without having discretionary authority.

Which of the following would be considered an inappropriate investment for your client's traditional IRA? A) A unit investment trust whose portfolio consists solely of tax-free municipal bonds B) A taxable municipal bond C) A valuable collection of rare postage stamps D) A mutual fund whose portfolio consists solely of shares of over-the-counter stocks

A Explanation Tax-free bonds, whether purchased individually or through a mutual fund or UIT, are considered inappropriate investments because the tax-free benefit is lost. On the other hand, taxable municipal bonds benefit from the tax deferral offered in an IRA. What about the stamp collection? That is an ineligible investment, not merely inappropriate.

All of the following people could open a joint account except A) a mother and 22-year-old daughter. B) a father and 10-year-old son. C) a married couple. D) two business partners.

B Explanation Joint accounts can only be opened between adults.

Under ERISA, a plan trustee wishing to write uncovered calls may do so A) without restriction. B) if explicitly allowed in the plan document. C) under no circumstances. D) if approved by the IRS in writing.

C Explanation ERISA prohibits retirement plan trustees from making investments that are excessively speculative; an uncovered call writer has unlimited risk.

A joint account could be opened for any of the following except A) three business associates. B) two partners in a limited partnership. C) a corporation. D) a parent and minor child.

D Explanation Minor children cannot be a party to any account except an UGMA or UTMA.

All of the following statements about SEP IRAs are true except A) SEP IRAs are established for small-business owners and their employees. B) there are no minimum earning requirements to be an eligible participant. C) the retirement account is usually set up at a bank or other financial institution. D) SEP IRAs allow employers to make contributions.

B Explanation Eligibility to participate in a SEP IRA is limited to employees who have earned a minimum of $600 for the year in question.

When a broker-dealer sends a communication to its customers that the sweep account used for customer credit balances will be changed from one money market fund to a different one, the communication must include A) a detailed explanation of the reason for the change. B) a tabular comparison of the nature and amount of the fees charged by each fund. C) a statement that the change will not take place until at least 45 days after the communication was sent. D) a description of the objectives of the new fund and its prospectus.

B Explanation The only one of these meeting FINRA's requirement when a negative response letter is sent is the tabular comparison. While a description of the new fund and its prospectus is required, the communication must also include a comparison of the objectives of the two funds. The minimum time is 30 days (not 45) and there is no requirement to include an explanation.

Which of the following regarding a Roth IRA are true? The contributions are nondeductible. Contributions must cease at age 72. Withdrawals must begin at age 72. Withdrawals after age 59½ can be tax free. A) II and IV B) I and IV C) II and III D) I and III

B Explanation With a Roth IRA, the contributions are not deductible from current income. Withdrawals after age 59½ are tax free, provided the account has been open for at least five years. There is no age at which withdrawals must begin or contributions must cease.

Which of the following statements regarding a member firm's handling of a discretionary account is true? A) The registered representative may not effect transactions excessive in size or frequency in view of the customer's resources. B) Margin may not be used in a discretionary account. C) A principal must approve each discretionary order before execution. D) The registered representative must obtain written authorization from the customer before placing each order.

A Explanation A discretionary account allows the registered representative to place orders without consulting the customer. It does not relieve him of the obligation to execute only suitable orders.

If a customer wishes to open a cash account, who must sign the new account form? A) Only the principal B) Only the registered representative C) Only the customer D) The customer, the registered representative, and the principal

A Explanation Neither the customer's signature nor the registered representative's signature is required to open a cash account. A principal must review and accept the new account by signing the form.

As the poet Robert Burns wrote, "The best-laid plans of mice and men often go awry." The same could be said for investment plans. The term used to describe those things that can have an impact on the ability of our plans to reach fulfillment is A) investment goals. B) investment decisions. C) investment constraints. D) investment conditions.

C Explanation Investment constraints are those things that stand in the way of having our investment objectives reach their goals. Can bad decisions or unusual conditions do that? Yes, but those are not financial industry terms used on the exam.

Which of the following securities is the least suitable recommendation for a qualified retirement account plan account? A) Blue-chip common stock B) A-rated corporate bond C) Investment-grade municipal bond D) Treasury bill

C Explanation Municipal bonds provide tax-exempt interest payments and, consequently, offer lower yields. Because earnings in a qualified retirement plan account grow tax deferred, the municipal bond is not a suitable investment. In addition, they will be fully taxed upon withdrawal.

Which of the following statements regarding nonqualified deferred compensation plans is not true? A) Employees have a limited claim to plan benefits if the business fails. B) Board members are not eligible for these plans, as they are not considered employees. C) Plans must be nondiscriminatory and cannot favor employees serving in certain capacities. D) Benefits payable to employees at retirement are taxable.

C Explanation Needing no IRS approval, nonqualified deferred compensation plans may be discriminatory and offered only to certain employees such as key executives. A typical deferred compensation plan is an agreement between a company and an employee in which the employee agrees to defer some income until retirement, the benefits payable at retirement would be taxable at that time. Board members are not considered to be employees, and therefore, are not eligible for these plans. Because these plans are rarely funded, business failure places the employee in the role of a general creditor.

The child of one of your recently deceased clients comes to your office with several properly signed stock certificates inherited from a parent. The child does not have an account and wishes to sell the securities. An account is opened for the purpose of the liquidation. Regulation S-P would refer to this child as A) a customer. B) a beneficiary. C) a consumer. D) a covered person.

C Explanation Regulation S-P makes a distinction between consumers and customers. That is important because it makes a difference when it comes to annual reporting. A consumer is basically a "one-shot" client, as in this case. After the liquidation, this account will be closed and you probably won't ever hear from the child again. A customer has an ongoing relationship and requires annual privacy notices—the consumer does not.

Your customer opens a Coverdell ESA for his niece. To meet qualified education expenses of $9,000, she takes a distribution of $10,000. The amount of the distribution in excess of her education expenses that represents earnings in the account will be A) nontaxable to either party. B) taxable to the uncle, the donor to the plan. C) automatically reinvested back into the plan. D) taxable to the niece, the beneficiary of the plan.

D Explanation Any excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution.

The type of brokerage account that does not pass assets to other participants at the death of a participant is A) tenants in common. B) transfer on death. C) community property. D) joint tenants with rights of survivorship (JTWROS).

A Explanation At the death of a participant in a tenants in common account, the decedent's assets do not pass to the other members. Rather, they pass to the estate of the deceased. With JTWROS, at the death of a participant, the assets are distributed equally to the surviving members. In those states where community property is the law, upon the death of a spouse, the assets in the account generally pass to the surviving spouse. Transfer on death is simply a designation that allows an account to avoid probate court. It is not available with tenancy in common.

On March 1, an individual, age 40, wants to open and fund a Roth IRA at the maximum permitted level. She earns less than the adjusted gross income level that would limit her contribution. What is the maximum amount that she may place in a new Roth IRA? A) $12,000 B) $14,000 C) $6,000 D) $7,000

A Explanation Based on her age (less than 50), her maximum contribution would be $12,000, specified as $6,000 for two separate years of contributions. Because she is opening the account on March 1, she would be permitted to make contributions for the prior tax year (up until the April 15 tax filing deadline), as well as for the current tax year.

Which of the following is not true in jurisdictions that recognize the marital property designation known as community property? A) Community property applies to property that was owned individually before the marriage and is now joint property once the marriage has occurred. B) There may be tax implications regarding the dissolution of community property at the time of a divorce, marriage annulment, or death. C) Community property laws do not apply to inheritances. D) Community property laws do not apply to gifts.

A Explanation Community property applies to property obtained during a marriage but does not apply to property owned individually by one spouse before the marriage. In addition, it does not apply to inheritances or gifts. There can be federal tax implications for property designated as community property, and laws in states that recognize community property ownership differ from jurisdiction to jurisdiction.

All of the following are true regarding nonqualified deferred compensation plans except A) employees may use accumulated funds as collateral for a bank loan. B) income taxes on compensation are not due until constructive receipt. C) IRS approval is not needed for deferred compensation plans. D) the plans need not be offered to all employees.

A Explanation Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary upon retirement. The employee has no right to the money until retirement, death, or disability, and thus cannot use it as collateral.

f a member firm suspects exploitation in the account of a specified adult, proceeds from sales may be put on temporary hold for A) 15 business days. B) 15 calendar days. C) until the need for the hold ends. D) one month.

A Explanation FINRA Rule 2165 permits a member that reasonably believes that financial exploitation has occurred, is occurring, has been attempted, or will be attempted, to place a temporary hold on the disbursement of funds or securities from the account of a "specified adult" customer. The maximum length of the hold is 15 business days. Do we expect the exam will ask you to choose between 15 business and 15 calendar days? No, that is not FINRA's style, but we do want you to know the correct count.

An investor, age 40, earns $65,000 annually and contributes 3.5% to his employer's 401(k) plan. With the 401(k), his only retirement savings, he wants to do more for retirement and hopes to invest in such a way as to have some tax-free income when he takes distributions later in life. Which of the following is the most suitable given the investor's goals and objectives? A) Roth IRA B) A nonqualified variable annuity C) Municipal bonds D) Traditional IRA

A Explanation Given the investor's current age (40), a safe assumption is that the investor will have owned the Roth IRA for at least five years before any distributions would be taken. Roth IRAs allow for tax-free distributions when owned for five years and the recipient is age 59½ or older, while traditional IRAs do not. Municipal bonds offer tax-free interest but do not grow tax deferred, and variable annuities should be used only after contributions to employer-sponsored plans and IRAs are maxed out.

For which of the following business structures is the income taxed to the business? A) A C corporation B) A general partnership C) A limited partnership D) An S corporation

A Explanation Partnerships, limited or general, and S corporations do not pay income tax. Any income earned by the business flows through to the owners. On the other hand, C corporations are taxable entities and must pay tax on their income before they can distribute dividends to shareholders.

When an individual associated with another FINRA member firm wishes to open up an investment account at another member firm, the executing member must A) receive permission from the employer member before the initial transaction may take place. B) provide duplicate statements and confirmations if requested by the employer member. C) obtain a copy of the individual's Form U4 to verify registration status. D) notify the employer member of the associated person's intent to open the account.

B Explanation FINRA Rule 3210 requires that an executing member shall, upon written request by an employer member, transmit duplicate copies of confirmations and statements. The associated person is the one who must notify the employer member of the intent to open the account and receive written consent to do so. Furthermore, the associated person is required to give written notice to the executing member that the individual is associated with the employer member.

For individual retirement accounts, the IRS mandates that if distributions do not begin by April 1 of the year after the individual turns age 72, a 50% insufficient distribution penalty applies. The amount to be withdrawn each year is based on IRS life expectancy tables. These IRA distribution concepts are known as a required beginning date (RBD). a required minimum distribution (RMD). lockup provisions. vesting. A) III and IV B) I and II C) II and IV D) II and III

B Explanation For individual retirement accounts, the IRS mandates that distributions must begin by April 1 of the year after the individual turns age 72. This is known as the RBD. The amount to be withdrawn each year is based on IRS life expectancy tables. This is known as the RMD.

What can a broker-dealer do if it suspects tampering with the account of a senior investor? A) Close the account and send the funds and securities to the customer B) Place a temporary hold on disbursements of cash or securities from the account C) Sell investments to cover any losses caused by the tampering D) Assess an investigation fee to the account

B Explanation If a broker-dealer suspects exploitation occurring in the account of a senior investor, it may put a temporary hold on disbursements of cash or securities from the account. The hold cannot be longer than 15 days, and it can be put in place if the broker-dealer believes the tampering is about to occur. Suspected tampering is not a reason for the broker-dealer to close the account, assess any fees, or sell investments of the senior to cover losses caused by the tampering.

A wealthy individual has established a trust and named you as the trustee. If you wish to establish an account that permits the trust to engage in margin transactions, which of the following statements regarding margin trading is true? A) It is permitted if the fiduciary observes the prudent investor rule. B) It is permitted if provided for in the underlying documentation. C) It is not permitted. D) It is permitted if the fiduciary shares in the profits or losses.

B Explanation Margin trading in a trust account is permitted only if it is specifically provided for in the trust agreement.

Broker-dealers who reserve the right to disclose nonpublic private information about their customers to unaffiliated third parties must provide notice to customers at the time of the account opening. provide notice to customers each time a transaction occurs within the account. provide reasonable means for customers to opt out of such disclosures. require that customers wishing to opt out send a written request with signature witnessed by a notary. A) I and II B) I and III C) II and III D) II and IV

B Explanation Regulation S-P requires that if a broker-dealer reserves the right to disclose nonpublic personal information to third nonaffiliated parties, it must notify the customer at the time of the account opening and annually thereafter. Means to opt out of the disclosures must be reasonable and easy. Requiring a written request to opt out would not be considered reasonable means under the regulation.

An agent taking which of the following actions would be committing a violation? A) Buying securities in a joint account at the request of one party only B) Selling securities from a minor's custodial account without the custodian's consent but with the beneficial owner's consent C) Selling securities from a corporate account by using limited power of attorney trading authority for the account D) Buying securities in a cash account with the consent of the customer

B Explanation The custodian—not the beneficial owner (minor)—is the person who has the authority to make investment decisions for an account. Any tenant in a joint account may give instructions for the account.

A new client turns in the new account form. While reviewing the information on the form, the registered representative handling the account notices that the space for listing the Social Security number is blank. Under the provisions of the USA PATRIOT Act of 2001, A) the account cannot be opened until the number has been received. B) the account can be opened if the client has already applied for a number. C) the account can be opened if the client assures you that an application will be filed. D) the account can be opened without the number if at least two pieces of government ID are presented.

B Explanation The customer identification program (CIP), a part of the USA PATRIOT Act of 2001, requires a Social Security or tax identification number included on the new account form. The firm can open the account if the number has been applied for. In this instance, the firm must obtain the number within a reasonable period and the account card must be marked applied for.

A customer would like to set aside some money for his grandson's college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is true? A) The maximum contribution permitted is $3,000 annually. B) The funds must be distributed by the time the grandchild reaches age 30 unless they are rolled over. C) The customer may take a deduction for the amount contributed. D) The customer may make annual contributions until the grandson graduates from college.

B Explanation The maximum annual contribution to an ESA is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Any unused balance must be rolled over or distributed by the time the beneficiary reaches age 30. Amounts not used for one child may be rolled over tax free to the account of another child of the same family only once during any 12-month period.

Regulation BI contains four key component obligations. Which two of them apply to registered representatives? Disclosure Obligation Care Obligation Conflict of Interest Obligation Compliance Obligation A) III and IV B) I and II C) I and III D) II and III

B Explanation The obligation to disclose all material information and to exercise reasonable diligence, care, and skill in making any recommendation apply to both the member firm and the registered representative. The Conflict of Interest Obligation and the Compliance Obligation belong to the firm. That does not mean you do not have an obligation to disclose any conflicts of interest. That is part of the disclosure obligation. The specified Conflict of Interest Obligation includes the written supervisory procedures and training the firm must provide. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

One of your customers with a JTWROS account contacts you to remove the other tenant and put the account into the customer's own name. This can be done only A) if the customer has a full power of attorney over the account. B) if the change has been authorized by a qualified and registered principal designated by the member. C) upon the death of the other tenant. D) if you contact the other tenant and get their approval.

B Explanation Under FINRA rules, no change in any account name(s) can be made unless the change has been authorized by a qualified and registered principal designated by the member. This principal must, before giving her approval of the account designation change, be personally informed of the essential facts relative thereto and indicate her approval of such change in writing. The essential facts relied upon by the person approving the change must be documented in writing and preserved with the customer account records. One of those facts is approval of the other tenant, but that approval goes to the principal, not to you, the registered representative. Even in the case of death of the other tenant, the principal needs to see the proper documentation, such as a death certificate.

An employee of a firm registers to open an account at another member firm. Under FINRA rules, all of the following statements are true except A) the employee must receive prior written permission from the employing member firm. B) FINRA must receive duplicate statements and confirmations for each transaction. C) the employing member firm must receive duplicate statements and confirmations if requested in writing. D) the employing member firm must be notified, in writing, of the intent to open the account.

B Explanation Under FINRA rules, the employing member must be notified, in writing, of the prospective account and must give prior written approval before the account can be opened. It must be provided with duplicate statements and confirmations only if it makes a written request. There is no requirement that FINRA be either notified or provided with duplicate statements and confirmations.

One of your clients is an active investor using a tactical asset allocation strategy. As such, the client engages in numerous transactions every month. With each transaction, the client pays a separate transaction fee. Your firm has just begun offering an account to its clients whereby the client can pay one flat fee to cover all the trades in that account. You immediately bring this news to the client and suggest making the change. What type of account is this? A) A wrap-fee account B) A fee-based account C) A pattern day trading account D) A margin account

B Explanation With a fee-based account, the customer pays one fee that covers all transactions in an account. This account is most suitable for active, rather than passive investors. A wrap-fee account is one where a fee, usually based on assets under management, is charged to a customer to cover various services provided by a firm. Those services would include portfolio management and transaction fees. Firms that offer wrap-fee accounts are required to be registered as investment advisers as well as broker-dealers.

When opening an options account, the customer must be provided with A) the options arbitration agreement. B) the options prospectus. C) the options disclosure document (ODD). D) the options risk disclosure document.

C Explanation Any prospective or new options customer must receive a copy of a booklet titled "Characteristics and Risks of Standardized Options." In every day usage (and on the exam), it is referred to as the options disclosure document (ODD). It serves the purpose of a prospectus and discloses the risks of investing in options. This is another case where you must select the most accurate choice.

Under what circumstances would the fiduciary of a qualified corporate retirement plan be permitted to write covered calls on the securities in the portfolio? A) If specifically approved by the SEC B) If specifically approved by the covered employees C) If this strategy is consistent with the objectives of the plan D) Under no circumstances

C Explanation As covered calls are not considered to be a speculative option strategy, they would be permitted as long as the strategy is deemed prudent and is consistent with the objectives of the plan. No outside approval is required.

What is the latest date that an IRA participant may make an IRA deposit for the current year? A) December 31 of the current year B) July 15 of the following year, if extensions have been filed C) April 15 of the following year D) April 15 of the current year

C Explanation Contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made.

Which of the following statements regarding Coverdell ESAs is true? A) Contributions are not tax deductible, and distributions for any reason are tax free. B) Contributions are tax deductible, and distributions are always taxable. C) Contributions are not tax deductible, and distributions are tax free when used for qualified educational expenses. D) Contributions are tax deductible, and distributions for any reason are tax free.

C Explanation Coverdell ESAs offer after-tax contributions of up to $2,000 per student, per year for children under age 18. Distributions are tax free as long as the funds are used for education.

A person legally responsible for the handling of the financial assets of another, such as an executor or guardian, is usually called A) an investment adviser. B) a trustee. C) a fiduciary. D) a custodian.

C Explanation Fiduciary is the term that describes the legal position of trustees, custodians, and most investment advisers. This is a case where you choose the most complete response.

Compared to defined contribution plans, defined benefit plans give the highest return to employees who are highly compensated. receive lower compensation. have fewer years until retirement. have many years left until retirement. A) II and III B) I and IV C) I and III D) II and IV

C Explanation Highly compensated employees who have fewer years until retirement will experience advantages over other employees with this type of plan. Their retirement benefits are predefined and generally linked to the compensation level they attained while employed. After a short time with the company, a person may qualify for benefits comparable to those it would have taken many years to attain under a defined contribution plan.

A distribution was made from a Coverdell Education Savings Account for $12,000 when the educational expenses were only $10,000. The amount distributed beyond the educational expenses will be A) taxable to the donor on any portion of the excess representing earnings. B) completely taxable to the donor. C) taxable to the beneficiary on any portion of the excess representing earnings. D) a tax-free distribution.

C Explanation If a distribution exceeds education expenses, a portion representing earnings will be taxable to the beneficiary and may be subject to an additional 10% penalty tax.

A customer and her spouse own shares in the ABC Fund as joint tenants with right of survivorship (JTWROS). If the customer dies, what happens to the shares in the account? A) Half of the shares would belong to the spouse, and the remaining half would be distributed to the customer's estate. B) The account would be frozen until the estate was settled. C) The spouse would own all the shares. D) Ownership of the shares must be determined by probate court.

C Explanation In a JTWROS account, securities pass to the surviving owner. The account does not have to be frozen but can continue to enter orders.

Which of the following investment strategies would be permitted in your customer's IRA? A) Buying stock on margin B) Selling uncovered put options C) Writing covered call options D) Taking short positions on a stock

C Explanation The covered call option is considered an appropriate investment strategy for an IRA and ERISA-compliant corporate plans as well. The risk is actually less than simple ownership of the underlying stock, and that is what makes it an eligible strategy. Margin (buying on credit) or selling short (unlimited potential loss) are never permitted in an IRA. The sale of uncovered options is another strategy considered too risky for an IRA.

When dealing with suitable recommendations to clients, it is important to distinguish between investment objectives and investment constraints. Which of the following would be an investment objective rather than a constraint? A) Need for liquidity B) Time horizon C) Capital appreciation D) Tax considerations

C Explanation The objective is the route you wish to take. The constraints are what might keep you from getting there. The client who has capital appreciation (growth) as an objective needs to consider the potential obstacles (constraints) in the way. The longer the time horizon, the more aggressive the growth investor can be. The same is true when the need to liquidity is low. Taxes are another potential roadblock to overcome.

A businessowner pays himself a salary of $80,000 per year. He employs his spouse and pays her $45,000 per year. What is the maximum contribution they may make to their traditional IRAs? A) No traditional IRA contributions can be made by businessowners or their spouses. B) They can contribute 100% of the lower income to one IRA only. C) They can each contribute 100% of earned income or the maximum allowable limit, whichever is less, to their individual IRAs. D) They cannot make contributions because their joint incomes are too high.

C Explanation They both may make annual contributions of 100% of earned income up to the maximum allowable limit, whichever is less, to their own respective IRAs.

It is generally understood that the least complicated employer-sponsored retirement plan is the Savings Incentive Match Plan for Employees (SIMPLE). These plans tend to have certain restrictions. Among them are the restriction that A) the catch-up provision for those 50 and older is limited to $1,000. B) employer matching contributions are made with after-tax funds. C) the business cannot have another retirement plan in place. D) there must be fewer than 100 employees who earned at least $5,000 during the preceding calendar year.

C Explanation To institute a SIMPLE plan, the business cannot have any other retirement plan in place. The limit is 100 or fewer, not fewer than 100. The catch-up provision is $3,000, and both employee and employer contributions are made with pre-tax funds.

Lindsey Wolfe, a public school teacher, has been contributing to a 403(b) TSA plan for the past 20 years. Contributions total $50,000 and the current value is $200,000. Wolfe is still teaching full time for the school system. When does Wolfe have to begin taking required minimum distributions? A) Required minimum distributions are never required for annuities B) At age 72 C) At age 72 or when no longer working for the school system, whichever is later D) At age 59½

C Explanation Wolfe is invested in a qualified annuity. Therefore, the minimum distribution requirements are the same as for any qualified account. RMDs must begin at age 72 but can be postponed as long as continuously employed by the same employer. Unless qualifying for an exception, any withdrawals from a qualified annuity before reaching age 59½ are taxed as ordinary income with the additional 10% penalty.

You have two customers who are a couple. Each person has an individual account. They also have a JTWROS account in both names. One of the customers asks you to transfer funds from the other person's individual account in order to meet a margin call in the requesting customer's margin account. To do this. A) because they are both signatories on the joint account, you need the authorization of this customer only. B) you need the approval of a designated principal. C) you need the authorization of both parties on the account and approval of a designated principal. D) you need the authorization of both customers.

D Explanation Because the customer asking for the transfer is not a signatory on the other customer's individual account, you need the authorization of both of them. As long as both consent, there is no need for authorization by a principal. However, in the real world, your firm may want to look at transfers of this type. Just remember, we are teaching the test world.

Someone considering saving for retirement in a Roth IRA could correctly be told that contributions are made with pretax dollars. earnings accumulate tax free. distributions are not taxable if a holding period is satisfied. cost basis is always taxable at the time of distribution. A) II and IV B) I and II C) I and III D) II and III

D Explanation Contributions to Roth IRAs are made with after-tax dollars, and distributions are received tax free (both cost basis and earnings) if holding period requirements are met.

All of the following must meet the nondiscrimination provisions of the Employee Retirement Income Security Act (ERISA) except A) profit-sharing plans. B) defined benefit plans. C) 401(k) plans. D) deferred compensation plans.

D Explanation Deferred compensation plans are nonqualified, and therefore, do not have to meet the nondiscrimination provisions of ERISA.

The primary purpose for creating ERISA was to A) establish a means for self-employed persons to provide for their own retirement. B) promote a retirement fund for government employees. C) provide all employees, both government and nongovernment, with an additional source of retirement income in the event that the Social Security system defaults. D) protect employees from the mishandling of retirement funds by corporations and unions.

D Explanation ERISA was created to protect the retirement funds of union members and employees of large corporations. ERISA guidelines state that all qualified retirement plans must be in writing, segregate funds from corporate or union assets, make prudent investments, report to participants annually, and not be discriminatory. All of these activities are audited under ERISA.

A businessman owns a small incorporated manufacturing company. Comfortable with the risks associated with the equity markets, the owner lays out an objective to save for retirement and provides a plan in which employees can contribute to save for retirement as well. Which of the following options is the best choice to suitably meet the objective? A) Section 529 plan B) 403(b) plan C) Traditional IRA D) 401(k) plan

D Explanation For a company incorporated in the private sector, a 401(k) (a defined contribution) plan will meet the objective. 403(b) plans (tax-sheltered annuities) are used in the public sector (i.e., educational institutions, tax-exempt organizations, and religious organizations), and therefore, are not suitable here. IRAs are plans that individuals can set up for retirement saving, and Section 529 plans are specifically designed to allow for education saving.

All of the following statements regarding a qualified pension plan are true except A) it must comply with nondiscrimination rules. B) it must cover all of its eligible employees. C) it requires advance approval from the IRS. D) growth in the account is tax free.

D Explanation Growth in qualified pension plans, as well as other qualified plans, is tax deferred, not tax free. All growth is taxable at the time of distribution.

A hedge fund has contracted with your broker-dealer to handle all of its clearing functions and provide all back-office support functions while it is executing transactions through numerous other broker-dealers with whom your broker-dealer will have agreements. This type of account is known as A) a custodial account. B) a joint account. C) a numbered account. D) a prime brokerage account.

D Explanation In a prime brokerage account, a customer contracts with one broker—the prime broker—to provide a list of support services, such as clearing and settlement of transactions, while contracting with numerous other brokers for executions services.

Your customer, age 29, makes $42,000 annually and has $10,000 to invest. Although he has never invested before, he wants to invest in something exciting. Which of the following should you suggest? A) A balanced fund because when the stock market is declining, the bond market will perform well B) A growth and income fund because the customer has never invested before C) An aggressive growth fund because the customer is young and has many investing years ahead D) Customer should provide more information before you can make a suitable recommendation

D Explanation It is necessary to get more information about this customer and his definitions of an exciting investment opportunity before making any recommendations. A suitability and risk-tolerance analysis should be performed before a recommendation is made.

Which of the following accounts allow ownership of real estate? A) A margin account B) An UGMA account C) A cash account D) An UTMA account

D Explanation One of the primary differences between UTMA and UGMA is the investment flexibility. Real property can be transferred into an UTMA, while no such provision exists with UGMA. Brokerage accounts, cash or margin, are used to trade securities. Real estate is not a security (REITs and RELPs are, but that is not direct ownership of the real estate). There is nothing to stop an investor from depositing fully paid-for marginable securities into a margin account and using the margin loan to purchase real estate. However, that purchase is done outside of the margin account.

Which of the following is not a benefit gained by using a TOD account? A) Percentage allocations can be changed at any time. B) Probate is avoided. C) Beneficiaries can be changed at any time. D) Estate taxes are reduced.

D Explanation The TOD (transfer on death) designation offers many benefits, but reducing estate taxes is not one of them. The assets in the account are included in the decedent's estate. However, the hassles of probate are avoided, and without any legal impediments, the owner of the account can make changes at will.

As a registered representative, if you are assigned to an existing account that was previously handled by another registered representative who has since left your firm, which of the following actions should you take first? A) Liquidate the portfolio for immediate reinvestment in stocks you are currently recommending B) Suggest the customer buy one of the stocks you are currently recommending C) Require the customer to sign a trading authorization, naming you as the party with authority D) Verify the account information

D Explanation The first action to take would be to verify and update the customer's information to make suitable investment recommendations.

All of the following statements regarding a Coverdell Education Savings Account (ESA) are true except A) the beneficiary may be the contributor's child or grandchild, or child of a friend of the contributor. B) the maximum annual contribution is $2,000 per beneficiary. C) a beneficiary's unused balance may be rolled over to an ESA account for another child. D) unused balances may be used for any purpose the beneficiary chooses.

D Explanation The maximum contribution permitted for any beneficiary is $2,000 per year. The beneficiary need not be related to the contributor(s). ESA accounts may be rolled over to change investment vehicles or to change beneficiaries. Account balances may be used for education only.

Sally Williams is a customer of your FINRA member firm. Sally was recently married and wishes to change the name on her individual account to her new last name. To do this, A) the name change must be authorized by Sally's spouse. B) Sally must close the old account and open a new one in the new name. C) the name change must be authorized by a court of competent jurisdiction. D) the name change must be authorized by a qualified registered principal designated by the member.

D Explanation The name change requires approval of a designated principal of the member firm. The principal will want to see evidence of the change in status, such as a marriage certificate, before granting the approval.

When an investor opens a new account at a member firm, FINRA rules require A) the applicant's signature. B) the applicant's date of birth. C) the applicant's Social Security number. D) the signature of the principal signifying that the account has been accepted.

D Explanation The only signature required on the new account form for an individual client is the signature of the partner, officer, or manager (a registered principal) denoting that the account has been accepted in accordance with the member's policies and procedures for acceptance of accounts. It is the customer identification program (CIP) that requires the date of birth and Social Security or tax ID number. All FINRA requires is a statement that the applicant is of legal age. FINRA states that each member shall also make reasonable efforts to obtain, prior to the settlement of the initial transaction in the account, the applicant's Social Security or tax ID number. Please notice that the question is differentiating between what is "need to know" and what is "nice to know."

Which of the following are governed by the prudent investor rule? Trustee Executor Custodian Registered representative who has been granted discretionary authority A) III and IV B) I and II C) II and III D) I, II, III, and IV

D Explanation The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. With these accounts, the fiduciary must act prudently. A registered representative who has been granted discretionary authority is acting in a fiduciary capacity.

A schoolteacher has a 403(b) tax-qualified deferred retirement plan into which she has deposited $100,000 over a 12-year period. At retirement, if the teacher withdraws the total value of the account (now $220,000), how much of the withdrawal will be subject to taxation as ordinary income? A) $120,000 B) $100,000 C) $0 D) $220,000

D Explanation The retirement plan is qualified, which means that contributions were made with pretax dollars. The teacher must pay taxes on the total value of the account when withdrawn.

One of your customers, age 52, wishes to open an IRA. His annual income is more than $200,000 and consists entirely of income from rental real estate and income from a trust fund. What amount may your customer contribute to his IRA this year? A) $7,000 B) $6.000 C) $5,500 D) $0

D Explanation To open an IRA, a person needs earned income. Income from rental real estate is passive income, while income from a trust fund is portfolio income. This customer has no earned income.

While interviewing a person to fill out the new account form, a registered representative asks the potential new client a number of questions. Information regarding which of the following would not be required on the form? A) Physical address B) Social Security number or tax ID number C) Name D) Educational background

D Explanation When opening a new account, the registered representative must obtain the name, date of birth, physical address, and Social Security number. Information such as educational background may be inquired about and useful to know, but is not required to open the account.