UNIT #18: Type of Client

One of your longtime advisory clients has been critically injured in an automobile accident. The client is in the ICU at the local hospital, unable to communicate. You would be able to accept orders for the account A) from the client's lawyer B) from the client by getting a squeeze of the hand for a "yes" C) from the client's spouse D) from a person who has a written durable power of attorney over the account

D *When a client is incapacitated, agents may transact business in the account only when they receive instructions from someone with proper authorization, in this case, a durable power of attorney.

A registered broker-dealer would not be able to open an account for A) a deceased individual. B) the sovereign government of Poland. C) the American Cancer Society. D) a convicted felon.

A *An account may only be opened in the name of a legal person. Deceased individuals are not considered legal persons - the account would have to be opened in the name of the estate. Governments meet that description as do charitable organizations. Although there are potential restrictions against convicted felons gaining employment in the securities industry, there are no specific prohibitions against opening an account for one.

Which of the following accounts can only be opened by spouses? A) Tenants in the entirety B) TOD accounts C) Tenants with right of survivorship D) Tenants in common

A *

Which of the following types of business organizations do not protect owners' personal assets from losses incurred by the business? 1. General partnership 2. Sole proprietorship 3. S corporation 4. C corporation A) I and II B) III and IV C) I only D) II and III

A *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.

Which of the following are fiduciaries? 1. Executor of an estate 2. Administrator of a trust 3. Custodian of an UGMA account 4. Investment adviser representative granted with discretionary authority over the account A) I, II, III and IV B) I and II C) II, III and IV D) I, II and III

A *Each of these persons is in a relationship of trust to the customer and is therefore a fiduciary.

A deceased individual with 2 surviving children and a spouse, had established a trust for his family. The trust document appointed both children as co-trustees. The surviving spouse is to receive current income, and his 2 children will receive equal shares of the remaining principal upon the spouse's death. As the adviser to the account, you A) follow the instructions of the trustees B) attempt to generate reasonable income while keeping the principal intact for the children C) focus on increasing principal for the children D) focus on generating income for the spouse

A *The responsibility of following the trust's instructions is that of the trustee(s). Should they attempt to deviate from that, the adviser should inform them that they face potential liability under trust law. However, in all cases, the adviser must follow the direction of the trustees. As a practical matter (not tested), if the trustees appear to violate the trust's instructions, many advisers would terminate their relationship to avoid any potential liability.

Obtaining all of the following complies with the regulations regarding customer identification programs (CIPs) EXCEPT A) name B) a PO Box, instead of a physical address, if it is the primary mailing address C) date of birth D) taxpayer identification number

B *A PO Box is never acceptable without a physical address.

In a trust account, the person who makes the account management decisions is A) the investment adviser representative B) the trustee C) the beneficiary D) the nontrustee custodian

B *A trust is a legal entity that designates a person (the trustee) to manage the trust's assets for the benefit of another person (the beneficiary or beneficial owner).

A major benefit of a revocable trust is that A) the settlor cannot also be the beneficiary. B) the grantor retains control of the assets. C) the grantor saves on income taxes. D) the assets are not included in the grantor's estate.

B *Among the benefits of a revocable trust is that the grantor (settlor) retains all control over the assets. There are no tax benefits, and the grantor can be the beneficiary (and trustee) if the trust is set up that way.

Which of the following pieces of customer information must an agent attempt to obtain when opening a new account? Emergency contact person Financial condition Investment objective Education A) I and II B) II and III C) I and IV D) II and IV

B *When opening a new account, the agent normally would request information about the customer's financial condition, investment objectives, and other relevant personal information.

Your client recently sold his business for $5 million. He is 55 and feels that he is too young to retire. He plans to start a new business venture and will be funding the $250,000 start-up costs with his own funds. With substantial personal assets, he could limit his personal exposure by using any of the following business structures EXCEPT A) a C corporation B) a limited liability company C) a sole proprietorship D) an S corporation

C

Gloria wishes to set up a trust where income must be annually distributed to her daughter. She wants her daughter to pay any income taxes because she is in a lower tax bracket than Gloria is. What should Gloria do? A) Use a complex trust with her daughter as revocable beneficiary B) Use a complex trust with her daughter as irrevocable beneficiary C) Use a simple trust with her daughter as irrevocable beneficiary D) Use a simple trust with her daughter as revocable beneficiary

C *Simple trusts must annually distribute income to the beneficiaries. Complex trusts do not. If Gloria makes the beneficiary revocable, the trust is subject to grantor trust rules and the income will be taxed to Gloria.

Which of the following would likely be stressed in a socially responsible fund? A) Higher-than-average returns B) Avoidance of foreign securities C) Ethical and moral investing D) Lower than average expenses

C *Socially responsible investing (SRI) is an impact investment strategy which seeks to consider both financial return and social good. In general, socially responsible investors encourage highly ethical corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity.

Agatha has an account with her aunt, Sally, which is registered as TIC. If Sally predeceases Agatha, the assets in the account go to A) Sally's spouse B) the person designated under the laws of escheat in her state C) Agatha D) Sally's estate

D *

An investment adviser could enter into an advisory contract with any of the following EXCEPT A) the custodian for a minor B) a political subdivision C) an LLC D) a person declared mentally incompetent

D *

A customer and his spouse own shares in the ABC Fund as joint tenants with rights of survivorship. If the customer dies, what happens to the shares in the account? A) Half 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) Ownership of the shares must be determined by probate court. D) The spouse would own all the shares.

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

When opening an account for a trust, which of the following sets of terms are synonymous? A) Beneficiary—trustee B) Grantor—trustee C) Trustee—settlor D) Settlor—grantor

D *The settlor, sometimes referred to as the grantor, is the person who establishes the trust. The trustee administers the trust and could be the grantor but does not have to be.

A wealthy individual has set up a GRAT. Should she die during the time the trust is active, how are the remaining assets in the trust taxed? A) No tax is due if the grantor should die during the term of the trust. B) The original value plus any appreciation is taxed as part of the grantor's estate. C) The original value plus any appreciation passes to the beneficiaries but is subject to gift tax. D) The original value plus any appreciation passes to the beneficiaries and is taxed as ordinary income.

B *One of the risks in setting up a GRAT is that if the grantor dies during the term of the trust (usually 3-10 years), the assets put in the GRAT, plus any appreciation, are included in her estate.

A married couple wishes to open up an account at your firm. Which choice of registration should would you recommend if they insist that no trading be done without the consent of both of them? A) Joint tenancy B) Tenants in the entirety C) Tenants with right of survivorship D) Tenants in common

B *Tenants in the entirety is unique in that it is the only common form of account registration requiring the consent of both parties prior to any activity taking place in the account. With the other forms, any party to the account can initiate trading activity.

An agent may open a joint account for which of the following? 1. Lee and his 13-year-old son, Tom 2. Mary and Kelley, 2 adult college roommates 3. Jerry and Mark, friends and partners in business for more than 20 years 4. Melinda and her minor nephew, John, for whom she is guardian A) I and III B) I and IV C) II and III D) II and IV

C *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. Remember that a joint account is owned by 2 or more persons and, under both state and federal law, a minor is not a person.

If a trust has been established under which the father is to receive income for life, and his son is to receive the trust principal on the father's death, which of the following statements is TRUE? A) The trustee is not required to notify the son when an income distribution is made to the father. B) The trustee can withhold income distributions to the father to preserve principal to the son. C) The trustee must notify the son each time an income distribution is made to the father. D) The trustee does not need to keep records of the income distribution to the father.

A *

A client is completing a new account form that contains questions about the investor's investing experience and knowledge. More than likely, what type of account is being opened? A) Margin B) Retirement C) Options D) Discretionary

C *One question asked on a new options account form that is not required on a normal brokerage account opening is investment experience and knowledge (e.g., number of years, size, frequency, and type of transactions) for options, stocks and bonds, commodities, and other financial instruments.

One of your clients approaches you about setting up a trust. If your client assumes the role of grantor, what additional roles may be taken? A) Trustee B) As the grantor, no other roles may be taken C) Trustee and beneficiary D) Beneficiary

C *Under trust law, the grantor of a trust, sometimes referred to as the settlor, may also be the beneficiary and the trustee.

Which of the following types of businessowners has unlimited liability for the business's debts? A) Owner of a sole proprietorship B) Member of a limited liability company (LLC) C) Shareholder of a corporation D) Limited partner

A *The owner of a sole proprietorship has unlimited personal liability for the debts of the business, and this is one of the main disadvantages of sole proprietorships. Limited partners, members of limited liability companies, and shareholders of corporations are not personally liable for the debts of the business.

A form of business organization that offers flow-through of income and loss while providing the owner(s) with limited liability is a sole proprietorship an LLC a C corporation an S corporation A) II and IV B) I and III C) I and IV D) II and III

A *Only an LLC or an S corporation allows for direct participation in the income or losses of the business while offering limited liability. The sole proprietorship has flow-through, but unlimited liability. The C corporation limits liability but has no flow-through.

An investment adviser registered with the SEC could have all of the following as advisory clients EXCEPT A) the DEF Life Insurance Company B) the XYZ Growth Fund C) the ABC Unit Investment Trust D) Mildred, an accredited investor

C *

An investment adviser registered in 4 states would be permitted to enter into an advisory contract with all of the following prospective clients except A) a bank. B) a trust. C) a minor. D) an insurance company.

C *Because minors are not considered legal persons, advisory (or brokerage) accounts cannot be opened for them. Unit 24 discusses the UTMA accounts for minors.

The president of a business entity opens an account in the name of the business. When determining the suitability of recommendations to the account, knowing the president's personal financial condition is necessary for each of the following forms of business structure EXCEPT A) a C corporation B) an LLC C) an S corporation D) a sole proprietorship

A *Only in the case of the C corporation are the income and losses of the investment account taxed at the corporate level rather than passed through to the owners.

When does a customer have to receive the OCC Options Disclosure Document? A) At or prior to the time the account is approved for options trading B) Within 5 business days of the first options trade C) With the confirmation of his first options transaction D) Within 15 days of account approval

A *Before opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options at or prior to the time of account approval, the broker-dealer satisfies the risk disclosure requirements.

Keisha has 3 married children, each with children of their own. She wishes to leave equal shares of her estate to each of her children. What happens if 1 of those children dies before Keisha? A) The estate is divided equally between the 2 surviving children and the children of the deceased child B) The share belonging to the deceased child is distributed per stirpes C) The estate is divided on a per capita basis D) The estate is divided equally among the 2 surviving children

B *Unless specified otherwise, assets in an estate are distributed per stirpes (sometimes called in stirpes). Stirpes is a Latin word meaning "branches" and, in this context, it is used to determine how the "next generation" receives a share in an estate when their parent pre-deceases the grandparent. As an example, if Mrs. Killingsworth had child A, B and C, and C died having 2 living children, the estate would be divided as follows:Child A gets 1/3rd, Child B gets 1/3rd and the two children of Child C receive 1/6th each. If you selected, "the estate is divided equally between the two surviving children and the children of the deceased child", that would mean that everyone would receive 1/4th and that is not the way it is done

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 3 children. She also wants the ability to change the allocation in the event that conditions change and 1 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 tenants in common B) as a joint account with right of survivorship C) as an individual TOD account D) under a discretionary power

C *

Which of the following statements about S corporations is NOT correct? A) Stockholders of S corporations are taxed on the net profits of the corporation, even if they do not receive taxable dividends. B) An S corporation may have only 1 class of stock. C) An S corporation may have no more than 100 shareholders. D) S corporation status offers greater opportunity for raising additional capital than do other forms of business structure.

C *

A registered broker-dealer would not be able to open an account for A) the estate of a deceased individual. B) two unrelated individuals. C) a person deemed mentally incompetent. D) the CEO of a company whose stock is NYSE-traded. Explanation

C *A broker-dealer can only open an account with a legal person. Those deemed mentally incompetent are not persons under the law. Deceased individuals are not persons either, but their estate is so an account may be opened in the name of the estate. Although the CEO's account would have to be monitored for any hint of insider trading, one's position in a listed company is not an impediment to opening a brokerage account. There is no legal requirement that the owners of a joint account be related; friends are fine as are business partners.

Although all new accounts must be approved by a designated supervisor before any trading activity may take place, there is one type of account that must be approved by a specially qualified supervisor. That would be A) a discretionary account B) an IRA C) an options account D) a margin account

C *Because trading options (puts and calls) generally involves a higher degree of risk than stocks, bonds, or mutual funds, a designated supervisory person with knowledge about options must approve the account opening.

One of your clients dies. You could legally take instructions regarding the individual's estate from A) the spouse of the deceased B) a person with durable power of attorney C) the administrator in intestacy D) a CPA who prepared the deceased's tax return

C *If an individual dies without a will (intestate), the state will appoint an administrator in intestacy who, just as an executor for one who had a will, has control over the deceased's assets. A durable power of attorney, just like any other power, expires upon the death of either party to the power.

Ms. Abbot has a joint account with her sister. She enters a sell order in the account and instructs that the proceeds check be made out to her only. If your firm sends the check but makes it payable to both Ms. Abbot and her sister, this is an example of A) not following instructions, a prohibited practice under the Uniform Securities Act B) an unlawful practice because the transaction was unauthorized C) the proper joint account procedure D) an unfortunate error that can be reconciled with the broker-dealer through a process called reclamation.

C *In joint accounts, either party may act. However, by law, all checks must be made payable to all owners, so the firm is following required procedure.

Samantha Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. She is looking for favorable tax treatment of earnings and losses. She also wants to limit the number of investors, but is willing to share control of the enterprise with others to attract them. What business form do you advise to her? A) S Corporation B) Limited Partnership C) General Partnership D) C Corporation

C *Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. While an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.

Tax considerations are frequently an important factor when determining appropriate recommendations for advisory clients. In which of the following accounts is the tax status of the individual a critical factor? 1. An account opened in the name of the XYZ Corporation, organized as a C corporation, by their chief investment officer 2. An account opened by a sole proprietor in the name of the company 3. An account opened in the name of ABC Corporation, an S corporation by one of its shareholders 4. An account opened in the name of the GHI Fund, a regulated investment company, by the fund's portfolio manager A) I and II B) III and IV C) II and III D) I and IV

C *Sole proprietorships and S corporations have their income and losses pass through to the owners. Therefore, an account opened in the name of the business will create tax consequences for the owners. Regular, or C corporations, pay taxes on their earnings and, even though a regulated investment company passes through at least 90% of its earnings to shareholders, the tax situation of each individual shareholder of the fund is of no consideration when making recommendations to the fund's portfolio manager.

If the Smiths want to open a joint account at AAA Securities Corporation and have their securities transferred to their 3 daughters upon the death of the last surviving account holder, their agent should recommend that the Smiths open A) a tenants in common account B) a joint tenancy account with right of survivorship C) a joint tenancy account with right of survivorship and execute a transfer on death (TOD) registration form D) individual accounts in the name of each daughter

C *The agent should recommend that the Smiths open a joint account with right of survivorship and complete a transfer of death registration form. The joint tenancy account gives the Smiths joint ownership in the securities in the account. The surviving joint tenant immediately becomes the owner of the whole property upon the death of the other joint tenant (right of survivorship). The transfer upon death registration identifies the beneficiaries to receive the securities upon the death of the last joint tenant. Only individual and JTWROS accounts may be opened with a TOD provision.

As with all investors, it is important that trusts have an investment policy statement (IPS). If the beneficiary of a trust requests that the trustee use trust assets to enter an order that is considered a prohibited transaction under the IPS, the trustee should A) follow the beneficiary's instructions. B) contact the grantor of the trust. C) amend the IPS and process the order. D) follow the trust's IPS and refuse the order.

D *A trustee is the classic example of a fiduciary - one responsible for handling the assets of another person. Construction of the IPS for a trust is generally done with the consent of the grantor of the trust to make sure that the grantor's wishes are met. Therefore, it would be considered imprudent for the trustee to engage in any transaction specifically prohibited by the IPS.