SIE U6 - Learning Checks, Checkpoints, etc.

Your customer purchases 200 shares of ABC stock at $9 a share in a cash account. The customer is expected to deposit how much to pay for the trade? A) $1,800 B) $450 C) $2,000 D) $900

A) $1,800. This is a cash account—100% of the trade must be paid for by the customer.

Individual retirement accounts allow a catch-up contribution of $1,000 to be made into the account for those who are A) 50 years old or over. B) 59½ years old or over. C) over 72 years old. D) over 50 years old.

A) 50 years old or over. Catch-up contributions are for those ages 50 and over (not over 50).

The customer must agree to three specific elements of a trade before the trade's execution for the trade to be nondiscretionary. Which of the following is not required? A) Allowance B) Amount C) Asset D) Action

A) Allowance. Action, asset, and amount are the three elements. Allowance has no meaning in this context. It was just a good distracting word that starts with A.

A married couple have equal 50% ownership interests in a tenants in common account (TIC). If one party to the account dies, what happens to the shares in the account? A) Half, or 50% of the shares, would belong to the remaining party and the balance would be distributed to the estate of the deceased party. B) The deceased party's interest is transferred to the remaining party. C) Ownership and distribution of all shares would be determined by probate court. D) All the shares are distributed to the heirs named in the estate of the deceased party.

A) Half, or 50% of the shares, would belong to the remaining party and the balance would be distributed to the estate of the deceased party. In a tenants in common (TIC) account, securities owned by the decedent pass to the decedent's estate—in this case, 50% of the assets. The other 50% is retained by any remaining living parties to the account.

A customer of a broker-dealer sells 300 shares of stock at $50 per share and leaves the proceeds in the account. The proceeds are I. a credit to the cash balance. II. a debit to the cash balance. III. available to the customer on demand. IV. available for withdrawal after 30 days. A) I and III B) II and III C) II and IV D) I and IV

A) I and III. Proceeds from a sale that are not reinvested and are held in the account at the broker-dealer are called a free credit balance. The free means that the funds are available to the customer on demand (freely available).

In a defined benefit plan I. the benefit amount is fixed. II. the benefit amount is variable. III. the contribution amount is fixed. IV. the contribution amount can vary. A) I and IV B) II and IV C) II and III D) I and III

A) I and IV. In a defined benefit plan, the employee is promised a certain amount at retirement and the employer has to put in enough money to meet that promise. Changing rates of return can require changing deposits to meet the promised amounts at retirement.

Which of these features does the Roth IRA include? I. There are no minimum required distributions after age 73 with a Roth IRA. II. There are higher contribution limits to a Roth IRA than to a traditional IRA. III. Withdrawal of earnings in the Roth IRA may be made without any taxation as long as a Roth IRA has been open for a minimum of one year and the participant is age 59. IV. There is the ability to contribute to both a Roth IRA and a traditional IRA. A) I and IV B) II and I C) I and III D) II and III

A) I and IV. One of the primary benefits to the Roth IRA is that reaching age 73 does not trigger the required minimum distributions found in other retirement plans. Probably the biggest benefit is that all earnings grow tax deferred, and may be withdrawn free of any tax, as long as there has been an open Roth IRA for at least 5 years AND the participant is at least 59½. One may contribute to both types of IRA, but the combined contribution may not exceed that annual maximum for a single plan.

Roth IRAs have no minimum required distributions at any age. have higher contribution limits than those allowed for a traditional IRA. allow the withdrawal of earnings tax free as long as the account has been opened for two years. can be contributed to in the same year as a traditional IRA. A) I and IV B) I and III C) II and III D) II and IV

A) I and IV. Roth IRAs have no minimum required distributions at any age. All earnings grow and may be withdrawn tax free as long as there has been an open Roth IRA for at least five years and the participant is at least age 59½. One may contribute to both a Roth and a traditional IRA in the same year, but the combined contribution may not exceed the annual maximum for any plan.

Which of the following are true of qualified plans but not true of nonqualified plans? I. Contributions are not tax deductible II. Contributions are tax deductible III. Plan needs IRS approval IV. Plan does not need IRS approval A) II and III B) II and IV C) I and III D) I and IV

A) II and III. Qualified plans require IRS approval, and the contributions are tax deductible. Because nonqualified plans' contributions are not deductible, they do not require IRS approval.

Many investors like to put a transfer on death (TOD) designation on their brokerage accounts. Which of these are benefits of doing so? I. The TOD designation avoids estate taxes. II. The TOD designation avoids probate. III. The account holder is relieved of decision making in the account. IV. There is flexibility to change beneficiaries as conditions dictate. A) II and IV B) II and III C) I and IV D) I and III

A) II and IV. The transfer on death (TOD) designation allows the account holder to name a specific beneficiary (or beneficiaries) to receive the account's assets upon death. Those named persons may be changed whenever the account holder wishes. Although this bypasses probate, it does not avoid estate taxes. TOD has nothing to do with giving investment discretion.

Which if the following may not be purchased on margin but can be used as collateral for a margin loan after being held for 30 days? A) Mutual funds B) Equities C) Options D) Warrants

A) Mutual funds. Neither mutual funds nor new issues can be purchased on margin. However, both may be used as collateral for a margin loan after being held for 30 days. Options are not marginable securities, but equities, bonds, and warrants are.

All of the following are exempt from Regulation T except A) NYSE-listed securities. B) GNMAs. C) T-bills. D) New York City bonds.

A) NYSE-listed securities. Stocks that trade on the NYSE are subject to Regulation T. Municipals, treasuries, and agencies are exempt.

A registered representative placing trades in a customer account must have discretionary authority if they choose which of the following aspects of the trade? A) The action to be taken, the asset to be traded, or the amount of the trade B) The action to be taken and the asset to be traded C) The asset to be traded and the amount of the trade D) The action to be taken, the asset to be traded, and the amount of the trade

A) The action to be taken, the asset to be traded, or the amount of the trade. In order for a trade to be considered discretionary the representative needs to choose any one or more of the three aspects of the trade (asset, action, or amount). It does not require more than one aspect, so the best response to the question is Action, Asset, or Amount. Any response that includes "and" suggests more than one of the "A"s needs to be controlled and is not accurate.

If a 40-year-old customer earns $85,000 a year and his 38-year-old spouse earns $140,000 a year, how much may they contribute to individual retirement accounts (IRAs)? A) They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less. B) They may not contribute because their combined income is too high. C) They may contribute up to the maximum annual allowable dollar limit, split evenly between both accounts. D) Only the higher wage earner may contribute to an IRA.

A) They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less. No matter how much income individuals or couples receive, they may contribute to their IRAs if they have earned income. Each is entitled to contribute 100% of earned income up to the maximum allowed. However, if either or both of them are covered under a qualified plan, limits may exist on the deductibility of the contributions.

Borrowing money to buy securities is prohibited in all of the following accounts except A) a margin account. B) an individual IRA. C) a custodial account. D) a Roth IRA.

A) a margin account. Borrowing money to buy securities can only be done in a margin account. Retirement accounts and custodial accounts do not allow margin.

A retirement plan that requires a formula-based payment for the retiree's life is A) a pension plan. B) a money purchase plan. C) a 401(k) plan. D) a defined contribution plan.

A) a pension plan. Pension plan is another name for a defined benefit plan. A defined benefit plan pays a benefit to the retiree for life. The payment is based on a formula that defines the amount of the benefit.

Two weeks ago, Representative Pete introduced his customer Neil to the Windmill Growth Fund in response to Neil's interest in growth funds. Today the customer called Pete to place a trade to invest $10,000 in the Windmill Growth Fund. This is A) a solicited trade. B) an unsolicited trade. C) an unclassified trade. D) a discretionary trade.

A) a solicited trade. Because the representative introduced the security to the customer, this is a solicited trade. The customer provided the three key elements of the order (action, asset, amount); it is not a discretionary trade.

When opening a new brokerage account that will allow for margin trading, all of the following forms are required except A) consent to loan agreement. B) hypothecation agreement. C) credit agreement. D) account application.

A) consent to loan agreement. The consent to loan agreement is not a regulatory requirement, it is optional.

Sam Malloy owns a small business and has built a substantial estate both with his business success and his early career as a pro athlete. He wants to set up his estate in a way that he will control the assets until he passes away or becomes incapacitated. Once that time comes, he wants control to transfer easily and he wants to avoid probate. Sam should A) establish a revocable living trust. B) establish an irrevocable living trust. C) place his assets in a transfer on death account. D) create a last will and testament

A) establish a revocable living trust. A revocable living trust will accomplish his goals for his estate. An irrevocable trust takes away his control of his assets. The business cannot be placed in a transfer on death account. A will must go through probate.

When a broker-dealer pledges customer securities to a bank as collateral for a margin loan, the pledge is known as A) rehypothecation. B) loan consent. C) hypothecation. D) credit agreement.

A) rehypothecation. By signing the margin agreement, a customer hypothecates (pledges) the securities to the broker-dealer who then rehypothecates (pledges) them to the bank as collateral for the margin loan.

All of the following statements about securities purchases are true except A) securities may not be purchased with borrowed money. B) in a cash account, the customer pays in full for securities. C) in a long margin account, customers borrow money for securities purchases. D) in a short margin account, customers borrow securities for short sales.

A) securities may not be purchased with borrowed money. Borrowing is a perfectly acceptable practice when buying and selling securities, whether it is cash that is borrowed for purchases or securities that are borrowed, chiefly from other investors who have signed a loan consent agreement, allowing their securities to be borrowed for short sales.

If the beneficiary of a custodian account dies, the securities in the account pass to A) the minor's estate. B) the Securities Investor Protection Corporation (SIPC) trustee's account. C) the parents. D) the custodian's estate.

A) the minor's estate. A) the minor's estate.

Each of the following investments and practices are deemed ineligible for an IRA or any other retirement plan except A) variable annuities. B) collectible fine art. C) life insurance. D) margin account trading.

A) variable annuities. Annuities are eligible for IRAs. However, FINRA deems them generally unsuitable. The tax-deferred nature of a variable annuity comes with some cost. Placing this tax-deferred vehicle inside a tax-deferred account (like an IRA) will be hard to justify.

A 75-year old client in the 25% income tax bracket withdraws $20,000 from her traditional IRA. Based on her life expectancy, the withdrawal should have been $30,000. How much will she owe the IRS when she withdraws the additional amount needed to meet her required minimum distribution? A) $7,500 B) $ 5,000 C) $12,500 D) $10,000

B) $ 5,000. Failure to meet the required minimum distribution results in a 25% penalty on the shortfall. In this case, she took $20,000 when she should have taken $30,000 so there will be a 25% tax on the $10,000 difference ($2,500 penalty). In addition to that penalty, the ordinary income tax on the total amount that should have been withdrawn must also be paid (25% × $10,000 = $2,500). Total tax liability on the withdrawal equals $5,000 ($2,500 penalty plus $2,500 ordinary income tax).

As the first purchase in a new margin account, your customer purchases 200 shares of ABC stock at $9 per share. The customer is expected to deposit how much to pay for the trade? A) $450 B) $1,800 C) $2,000 D) $900

B) $1,800. In a margin account, the minimum deposit is the higher of 50% of the purchase price (Regulation T) or the FINRA requirement of $2,000 or 100% of the purchase price if less than $2,000. In this case, the 200 shares at $9 is $1,800, below $2,000, so no borrowing is allowed.

Your Client, Sven, has an extensive portfolio of stocks and bonds. Last year, he had an income of $36,000, of which $200 a month was from a part-time job and the rest from his portfolio. How much can he contribute to a ROTH IRA for the previous year? A) $2,400, which is deductible from his ordinary income B) $2,400, which is not deductible from his ordinary income C) The indexed maximum, which is not deductible from his ordinary income D) The legal maximum, which is deductible from his ordinary income

B) $2,400, which is not deductible from his ordinary income. You may only contribute earned income to an IRA, not investment income. The most he may contribute is $2,400, based on his earned income from the part-time job. ROTH IRA contributions are not deductible.

A client and his spouse own shares in the KAPCO Fund as tenants in common. He has a 60% ownership interest in the account and the spouse has the balance. If the client dies, what happens to the shares in the account? A) Ownership of the shares would be determined by probate court. B) 40% of the shares would belong to his spouse and the remaining balance would be distributed to his estate. C) 50% of the shares would belong to his spouse and the remaining half would be distributed to his estate. D) His interest would automatically be transferred to the spouse.

B) 40% of the shares would belong to his spouse and the remaining balance would be distributed to his estate. In a TIC account, securities owned by the decedent pass to the deceased owner's estate—in this case, 60% of the assets. The 40% belonging to the spouse is retained by the spouse.

Which of the following is an acceptable investment for an IRA? A) A universal variable life insurance contract B) A mutual fund specializing in speculative bonds C) Gold coins minted in Switzerland but sold in the U.S. D) A collection of medieval manuscripts and art

B) A mutual fund specializing in speculative bonds. Investments in an IRA are limited to cash and securities. This would include gold coins if they are from a U.S. mint. Collectibles and insurance are not acceptable IRA investments.

Alan and Barbara Collins have three minor children: Dan, Ellen, and Frank. Which of the following UTMA accounts could be opened? A) Frank Collins as custodian for Dan Collins B) Barbara Collins as custodian for Ellen Collins C) Alan Collins as custodian for Dan and Frank Collins D) Alan and Barbara Collins as custodians for Ellen Collins

B) Barbara Collins as custodian for Ellen Collins. In an UTMA account, one adult is custodian for one minor. There is no such thing as joint custodians or joint beneficiaries.

Your customer, Cleveland Brown, would like you to be able to place trades in his account as and when you think best. In order to trade on a discretionary basis in Brown's account, you will need authorization from which of these? I. FINRA II. A principal III. The customer IV. The state administrator A) I and II B) II and III C) I and IV D) I and III

B) II and III. Adding discretion to an account requires written authorization from the customer and a firm principal.

A margin account allows a customer to borrow a portion of the funds needed to complete a trade. Currently, the required minimum is 50%. Which regulator sets the requirement? A) The OCC B) The FRB C) FINRA D) The SEC

B) The FRB. The Federal Reserve Board sets the Regulation T requirement.

When opening an account for a corporation, one of the required documents is a corporate resolution. Who makes the resolution? A) The federal government B) The board of directors C) The state of incorporation D) The chief executive officer

B) The board of directors. The corporate resolution is a resolution of the board of directors of the corporation.

One difference between an UTMA account and an UGMA account is A) a UGMA account is tax deferred, and a UTMA account is not. B) a UTMA account has a wider set of allowed investments. C) UTMA assets are considered an irrevocable gift, while a UGMA account allows the custodian to reclaim the assets. D) a UTMA account transfers at the age of majority, while a UGMA account can go until the beneficiary turns 30 year of age.

B) a UTMA account has a wider set of allowed investments. UTMA accounts allow real estate holdings; a UGMA account does not. Neither account is tax deferred and both accounts are irrevocable. The UGMA transfers at the age of majority; the UTMA may transfer as late as age 25.

A corporation opening a brokerage account must present all of the following documents except A) a new account form. B) an authorization from the state department of corporations. C) a copy of the corporate charter. D) a resolution of the board of directors.

B) an authorization from the state department of corporations. A corporation does not (normally) need authorization from the state to open an account.

An individual opens an account with your firm. She tells you that upon her death, she wants any assets in the account to be divided equally among her three children. She also wants the ability to change the allocation in the event that conditions change and one of the children is in greater need than the others, but she does not want to incur any significant legal expense. You would suggest that the account be opened A) as a joint account with right of survivorship. B) as an individual transfer on death (TOD) account. C) as a joint account with tenants in common. D) under a discretionary power.

B) as an individual transfer on death (TOD) account. An individual account with a TOD designation would be best for this customer. A joint account would make the children owners of the account, and a discretionary power does not accomplish the owner's desire to transfer the account on her death.

In order to contribute to both a traditional IRA and a Roth IRA in the same year, a customer must have sufficient A) portfolio income. B) earned income. C) ordinary income. D) passive income.

B) earned income. An IRA contribution must come from earned income.

Sam Malloy owns a small business and has built a substantial estate both with his business success and his early career as a pro athlete. He would like to begin to move assets out of his estate in a way that will allow him to benefit from the assets, but also allows for an easy transfer to his heirs when he dies. He needs to lower the size of his estate before he passes and hates the idea of a public hearing that is part of probate. Sam should A) create a last will and testament. B) establish an irrevocable living trust. C) place his assets in a transfer on death account. D) establish a revocable living trust.

B) establish an irrevocable living trust. An irrevocable living trust will accomplish his goals. The assets in a revocable trust remain part of his estate as do the assets in a TOD account and a will. Also, a will must be probated.

A registered representative is discussing fee-based and commission-based accounts with a customer. All of the following are true except A) a fee-based account charges a single annual fee that can be a fixed dollar amount or a percentage of assets under management. B) fee-based accounts are most suitable for those who do very little trading during the course of the year. C) disclosure of what services the fees cover in a fee-based account must be made to the customer before the account is opened. D) a commission based account bills for each transaction separately.

B) fee-based accounts are most suitable for those who do very little trading during the course of the year. Fee-based accounts charging a fixed dollar amount or a percentage of assets under management are more suitable for those doing at least a moderate amount of trading. Commission based accounts charging for each transaction on the other hand are better suited for those who do fewer transactions each year. For fee-based accounts full disclosure of what is covered by the annual fee must be made before the account can be opened.

Distributions from IRAs are taxed at A) long-term capital gains rate on the full amount of the distribution. B) ordinary income tax rates on the full amount of the distribution. C) ordinary income tax rates on the amount of the distribution that exceeds the amount contributed. D) long-term capital gains rate on the amount of the distribution that exceeds the amount contributed.

B) ordinary income tax rates on the full amount of the distribution. Because no taxes were paid on the amount deposited, the full amount is taxable at distribution, and even though some of the distribution is from capital gains, the whole amount is taxed at the ordinary income tax rate.

Under the Uniform Transfers to Minors Act (UTMA) a custodian has control over the account and can do each of the following except A) liquidate, trade, or hold securities. B) sell short and write uncovered call options. C) buy or sell securities. D) exercise right or warrants.

B) sell short and write uncovered call options. Selling short and writing uncovered options may only be effected in a margin account. The UTMA forbid the establishment of a margin account. Furthermore, these investment strategies, though legal and appropriate in other settings, provides unlimited risk and is inappropriate in an account held for a minor and therefore not permitted.

If three individuals have a tenants in common (TIC) account with your firm and one individual dies, then A) the account is converted to joint tenants with right of survivorship. B) the two survivors continue as cotenants, along with the decedent's estate. C) the account must be liquidated and the proceeds split evenly between the two survivors and the decedent's estate. D) trading is discontinued until the executor names a replacement for the deceased.

B) the two survivors continue as cotenants, along with the decedent's estate. In a TIC, the estate replaces the decedent tenant. Eventually, the decedent's portion of the account will be distributed to the estate's beneficiaries.

A customer has an account with a broker-dealer who provides a group of services, such as asset allocation, portfolio management, trade executions, and administration, for a single fee. This is known as a A) margin account. B) wrap account. C) discretionary account. D) commission-based account.

B) wrap account. Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee rather than charging commissions for individual transactions. Wrap accounts are generally investment advisory accounts and can be cash accounts, margin accounts, discretionary accounts, or nondiscretionary accounts.

The minimum initial requirement when buying 100 shares at $15 in a new account would be A) $375. B) $750. C) $1,500. D) $2,000.

C) $1,500. The FINRA minimum initial deposit for a long purchase in a margin account is $2,000 or 100%, whichever is less.

Your customer purchases 200 shares of Seabird Airlines (the ticker is SBRD) at $30 a share in a cash account. Under Regulation T, the Federal Reserve has set the initial margin requirement at 50%. How much does your customer need to deposit for this trade? A) $1,500 B) $3,000 C) $6,000 D) $2,000

C) $6,000. This is a cash account. There is no margin borrowing, so 100% of the trade's value must be deposited. 200 shares at $30 = $6,000.

A FINRA maintenance call will occur in a short margin account if the equity drops below A) 25% or $2,000. B) 50% or $2,500. C) 30% or $2,000. D) 35% or $2,500.

C) 30% or $2,000. In a short margin account, equity must be maintained at 30% or $2,000 whichever is greater.

A broker-dealer may extend credit under Regulation T for which of these transactions? A) A variable annuity purchase B) The purchase of an IPO that went public 25 days ago C) A closed-end investment company purchased on the NYSE D) A mutual fund purchase

C) A closed-end investment company purchased on the NYSE. Regulation T governs customer payment and the extension of credit to clients in margin accounts. A closed-end fund is an existing listed security and is eligible for purchase on credit. IPOs and other new issues, such as mutual fund purchases, may only receive loan value (and credit) after 30 days from issuance. Variable annuity may not be purchased with margined funds. These products are hybrid insurance and investment contracts that must be fully funded at time of purchase.

Which of the following must be opened as a cash account? Custodial accounts Individual retirement accounts Joint accounts Partnership accounts A) III and IV B) I and III C) I and II D) II and IV

C) I and II. Certain accounts, such as IRAs, corporate retirement accounts, and custodial accounts, must be opened as cash accounts as opposed to margin accounts. For individual accounts, joint accounts, and corporate and partnership accounts, there is no such requirement, though the final decision on them is up to the broker-dealer carrying the account.

Which of the following are characteristics of a revocable living trust? I. It is established before the grantor dies II. The grantor can change beneficiaries III. The grantor can add or remove items from the trust IV. The grantor is not subject to tax on income that remains in the trust A) I, II, III, and IV B) I and II C) I, II, and III D) I only

C) I, II, and III. In a revocable living trust the grantor has complete control over the trust while alive, and because of this, the grantor is also subject to any tax implications of the trust.

The trade would need to be placed in a discretionary account if the registered representative chooses which of the following? I. The time of execution of the trade II. Which security to buy III. How much of the security to buy IV. At what price to execute the trade A) I and IV B) I and II C) II and IV D) II and III

C) II and IV. If the registered representative chooses the asset, the action, or the amount, it must be placed in a discretionary account. The registered representative can choose the time or price without the needing to place the trade in a discretionary account.

Which of the following accounts would allow the assets of a single father's account to go directly to his daughter while avoiding probate but not let her have access while he is alive? A) Joint tenants with rights of survivorship (JTWROS) B) Individual with power of attorney (POA) C) Individual with transfer on death (TOD) D) Tenants in common (TIC)

C) Individual with transfer on death (TOD). Individual with TOD exactly meets his requirements. JTWROS and TIC and individual with POA would all allow the daughter access to the account while he is still alive.

Regarding the Regulation T requirement, which of the following is true? A) It is currently 30% and must remain unchanged unless mandated by Congress. B) It is currently 25% but can be changed at any time by the FRB. C) It is currently 50% but can be changed at any time by the Federal Reserve Board (FRB). D) It is currently 50% and must remain unchanged unless mandated by Congress.

C) It is currently 50% but can be changed at any time by the Federal Reserve Board (FRB). The Regulation T initial margin requirement is currently 50%. While it has been so for many decades, it can be changed by the Federal Reserve Board anytime it deems appropriate to do so.

Which of the following is a benefit of 529 plans but not Coverdell Education Saving Accounts? A) Available for use for K-12 B) Can be transferred to a sibling if not used by the original beneficiary C) No income restrictions D) Withdrawals are tax free if used for qualified education expenses

C) No income restrictions. Coverdell plans have income restrictions; 529 plans do not.

Your customer, Jim, wants to deposit money into a 529 college savings plan for his great-niece Penelope. He states four reasons why he likes the 529 plan. Unfortunately, you need to tell him he is incorrect on one point. Which of his following points is not considered a feature of a 529 college savings plan? A) The growth can be tax free if used for qualified education expenses. B) If she gets into a good prep school the money can be used for that as well as college. C) She has to use the money by the time she turns 30, so she will not be able to put it off too long. D) The money grows tax deferred.

C) She has to use the money by the time she turns 30, so she will not be able to put it off too long. 529 plans grow tax deferred and the funds may be withdrawn tax free if used for qualified education expenses. These plans may be used to fund secondary education (pre-college). There is no age limit on when the funds must be used.

A 40-year-old individual is not covered by a retirement plan at work. What is the maximum contribution this individual can make to a traditional IRA this year? A) The current maximum allowed by the IRS, and none of the contribution will be deductible. B) Nothing, because this individual has no retirement plan at work. C) The current maximum allowed by the IRS, which will all be deductible. D) The current maximum allowed by the IRS plus the catch-up amount, and none of the contribution will be deductible.

C) The current maximum allowed by the IRS, which will all be deductible. While the exact annual contribution limit numbers are not likely to be tested, students should know that for those not covered by a retirement plan at work, the maximum contribution allowed by the IRS would be permitted and can be deducted on one's tax return. The deduction, however, would be phased out above a certain income level for those who do have a retirement plan at work. The catch-up provision only applies to those age 50 or older.

Regarding purchases on margin, which of the following is true? A) Rights can be purchased on margin, but warrants cannot. B) Neither rights nor warrants can be purchased on margin. C) Warrants can be purchased on margin, but rights cannot. D) Warrants and rights can both be purchased on margin.

C) Warrants can be purchased on margin, but rights cannot. Warrants are marginable securities, but rights are not.

The income level of a donor A) will not affect contributions into a Coverdell Education Savings Account (ESA) or a section 529 plan. B) may affect contributions into both Coverdell ESA's and Section 529 plans. C) may affect contributions into a Coverdell ESA. D) will affect contributions into a Section 529 plan.

C) may affect contributions into a Coverdell ESA. Contributions into a Coverdell Education Savings Account (ESA) are phased out at high income levels for a donor, whereas the income level of a donor has no impact on contributions made into a Section 529 plan.

A registered representative suggests a trade to a customer which the customer agrees is suitable given their investment objectives. The order is entered. This transaction is A) solicited but the order ticket need not be marked in any special way. B) unsolicited and the order ticket should be marked unsolicited. C) solicited and the order ticket must be marked solicited. D) either solicited or unsolicited and the order ticket should be marked as neither.

C) solicited and the order ticket must be marked solicited. A transaction initiated by an agent or registered representative is known as a solicited transaction. Unsolicited transactions are those initiated by the customer. Order tickets should always be marked solicited or unsolicited.

The minimum initial requirement when purchasing 100 shares at $30 in a new account would be A) $375. B) $1,500. C) $750. D) $2,000.

D) $2,000. The requirement is normally 50% but not less than $2,000, unless the purchase price is less than $2,000; then, only 100% of the purchase price would be required.

What is the penalty for not taking the required minimum distribution (RMD) for the year? A) 10% of the amount that should have been taken B) 50% of the annual contribution limit C) 10% of the annual contribution limit D) 25% of the amount short of what should have been taken

D) 25% of the amount short of what should have been taken. There is a 10% penalty for early withdrawal. The penalty for missing a RMD is 25% of the amount missed.

Which of the following is not needed when opening a partnership account? A) The partnership agreement B) A new account form C) A resolution authorizing those who can make transactions in the account D) A new account form signed by all the partners

D) A new account form signed by all the partners. The new account form must be signed by those partners authorized to trade, not by all the partners. The others listed here are requirements.

Which of the following statements are true of an irrevocable trust? I. The grantor may change the terms of the trust II. The grantor must give up ownership of items placed in the trust III. The structure of the trust may reduce estate taxes IV. The grantor may retain ownership of items placed in the trust A) I and II B) I and IV C) II and IV D) II and III

D) II and III. The grantor may be able to avoid some of the tax consequences because he gives up ownership of items in the trust and cannot change the terms of the trust once established.

A customer desires to open a brokerage account and deposit checks from their business into the account. They are the only owner of the non-incorporated business. The best account to open is which of the following? A) Limited partnership B) Partnership C) Corporation D) Sole proprietor

D) Sole proprietor. With one owner and no corporate structure, this is most likely a sole proprietor.

Which of the following securities are most likely deemed marginable by either the Federal Reserve Board (FRB) or regulatory bodies such as Financial Industry Regulatory Authority (FINRA) and the NYSE? A) Rights certificates B) Listed options that expire in 9 months C) Exchange-listed stock currently being offered to the public by prospectus D) Treasury bonds

D) Treasury bonds. Although Treasury securities are exempt from FRB Regulation T, they are OTC securities approved by the FRB as being good collateral for loans.

Which of the following investments would not be allowed in a custodial account? A) Small-company stocks from an emerging market B) Blue-chip stocks C) Covered call options D) Uncovered call options

D) Uncovered call options. Uncovered call options with their inherent (unlimited) risk are not appropriate for a custodial account. Covered calls are allowed, as are most common stocks.

Your customer retired two years ago at age 68. He recently took a job with a golf course cleaning carts. He would like to contribute to a retirement plan to accumulate additional money with the view to leave something to his grandchildren. You would most likely advise him to open A) an annuity. B) a mutual fund. C) a traditional IRA. D) a Roth IRA.

D) a Roth IRA. The Roth IRA would require after-tax (nondeductible) contributions but would allow earnings to accumulate tax deferred as in any retirement plan. Roth IRA distributions need not begin at age 72, and if holding period requirements are satisfied, all distributions are tax free.

A trust formed during the grantor's lifetime that may be modified only by the original grantor is normally called A) a life insurance trust. B) an A-B trust. C) an irrevocable living trust. D) a revocable living trust.

D) a revocable living trust. If a grantor forms and funds a trust in their lifetime, it is a living trust. If anyone has the power to modify the trust, it is a revocable trust. An A-B trust is a type of revocable living trust used for estate planning purposes and is not expected to appear on the exam except, as you see here, as a distraction.

Representative Pete received a call from his client, Neil, to place a trade. He wanted to buy 200 shares of the Starshine Entertainment Company. Pete asked Neil a few questions about the trade before placing it. This is A) an unclassified trade. B) a solicited trade. C) a discretionary trade. D) an unsolicited trade.

D) an unsolicited trade. As the representative did not introduce the trade to the customer, this is an unsolicited trade. The customer provided the three key elements of the order (Action, Asset, Amount), so it is not a discretionary trade.

Your customer calls and requests that you purchase 300 shares of Seabird Coffee Company. He recently read an article online about the company's new collaboration with Sorag coffee makers and likes the prospects of Seabird. This is an example of A) a suggested trade. B) a solicited trade. C) a discretionary trade. D) an unsolicited trade.

D) an unsolicited trade. The customer chose this trade and placed it without prompting from the firm or a representative, making it an unsolicited trade.

A fiduciary would be best described as A) a beneficial owner of an individual cash or margin account. B) a guardian designated by the courts to act on behalf of those investors who are unable or unwilling to satisfy a margin call. C) a voting board member of the Federal Deposit Insurance Corporation (FDIC). D) any person legally appointed and authorized to represent another person, act on that person's behalf, and make whatever decisions are necessary to the prudent management of the account.

D) any person legally appointed and authorized to represent another person, act on that person's behalf, and make whatever decisions are necessary to the prudent management of the account. A fiduciary is a person legally appointed to represent another person, and make whatever decisions are necessary to prudently manage owner's account. The investments exist for the owner's beneficial interest, yet the owner has little or no legal control over them. The fiduciary makes all of the investment, management, and distribution decisions and must manage the account in the owner's best interests.

Chris Perez began contributing $3,000 a year to a Roth IRA account 10 years ago when he was 50 years old. The account value today has grown to $60,000. He withdraws $5,000 from the account. Perez will owe taxes on A) the entire amount of the withdrawal. B) the gains plus a 10% penalty for premature distribution. C) the principal portion of the withdrawal. D) none of the withdrawal.

D) none of the withdrawal. Perez meets the requirements of a qualified distribution from his Roth IRA. He is over 59½ (he started 10 years ago at the age of 50, so he is now 60). He has had the account for more than 5 years (about 10 years). There are no taxes for this distribution.

Marsha, Jane, Cynthia, Craig, Jim, and Robert are owners of an account JTWROS. If Craig, Jim, and Robert pass away, then their interest in the account A) is divided in half, and one half of the account is distributed evenly to the decedent's beneficiaries. B) is identified and distributed with the decedent's estate. C) is distributed through the probate process. D) remains in the account and is now the property of the surviving tenants.

D) remains in the account and is now the property of the surviving tenants. In a joint tenants with rights of survivorship (JTWROS), the assets of the decedent simply remain in the account and become the property of the survivors. There is no probate process for these assets, but they are still a part of the decedent's estate for tax purposes.

The primary use for a revocable living trust is to A) avoid tax consequences for the grantor. B) prevent the grantor from liquidating his estate prior to death. C) limit the grantor access to items in the estate. D) use as a substitute for a will.

D) use as a substitute for a will. While the grantor is alive he has full control of the trust. It is mainly used in place of a will.