Unit 2: Obtain Necessary Suitability Information and Approvals

Q. Which of the following is properly referred to as an investment goal, rather than objective?

- current income = endowing a scholarship at your alma mater - conservative growth - speculation == goals are what you hope to have the money for. Objectives are the way to get there. Remember the triangle for G, I, and S (pg. 52) The S is for stability. The opposite of stability is speculation, and that is another one of the objectives.

A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) loan out the customer's margin securities. B) hypothecate securities in the account. C) lend the customer money. D) commingle the customer's securities with securities owned by the firm.

A) Explanation A signed loan consent agreement permits a firm to loan out a customer's margin securities; this is considered another way to finance a customer's debit balance. LO 2.g

You have been given the name of a new potential client who responded to a marketing piece sent out by your broker-dealer. Which of the following would be the most appropriate way to obtain information about the client's objectives and investment constraints? A) A face-to-face meeting at the client's home B) Monitoring the client's tweets C) The client's LinkedIn page D) An interview with the client's neighbors

A) Explanation There are a number of ways to gather information about your client's financial resources, but it is highly unlikely that a social media page would be one of them. Privacy laws would make interviewing a client's neighbors unethical. LO 2.d

A charge of churning would likely be brought against a registered representative who was found to have disregarded the FINRA rule on A) customer-specific suitability. B) investment goal suitability. C) quantitative suitability. D) reasonable-basis suitability.

C) Explanation FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. One of those obligations is quantitative suitability. Churning is generally defined as excessive trading in a customer's account. The registered representative, having control over a customer account, has to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together. LO 2.f

When comparing investment alternatives, all of the following must be considered except A) the differences in risk exposure between the two companies. B) the relative after-tax returns, when appropriate. C) the state of incorporation of the companies. D) the relative time period of returns on investment.

C) Explanation The state of incorporation is generally not a relevant factor when comparing investments. LO 2.e

You are reviewing an investor's balance sheet. Which of the following items would be found on a balance sheet and help you determine the client's net worth? 401(k) balance Credit card balance Monthly income Electric bill A) III and IV B) I and IV C) II and III D) I and II

D) Explanation The balance sheet reflects a person's net worth by comparing assets and liabilities. A 401(k) balance is an asset and credit card debt is a liability. Income and monthly bills, such as the electric bill, are found on the income statement. LO 2.a

Fiduciary Accounts

If you do Cherie is one who has the legal power to act on behalf of another person. Common examples are: -a trustee named to administer a trust, -and executed designated in a descendants will to manage the affairs of the estate, I am an administrator appointed by the courts to liquidate the estate of a person who died into state (without a will), -a guardian designated by the courts to handle miners affairs until the minor reaches the age of majority or to handle in incompetence persons affairs, - a custodian of a uniform gift to minors account (UGMA) Or a uniform transfer to minors account UTMA), - A receiver in a bankruptcy, and - conservator for an incompetent person.

Reasonable-basis suitability

The register representative has to have a reasonable basis to believe that a recommendation is suitable for at least some investors. You must recognise the potential risks and rewards associated with recommended security strategy. If you can't explain the risks when recommending a security or strategy, you are violating the suitability report..

Investment Constraints

= limitations or restrictions that are specific to your client. Investment constraints include —among others — liquidity needs, time horizon, and personal ethical choices (no tobacco or alcohol stocks).

Q. Before making a recommendation to a client, a registered representative is:

= required to perform a reasonable-basis suitability analysis. = required to perform a customer-specific suitability analysis. == FINRA requires members and their registered representative who wish to make recommendations from both a reasonable basis suitability analysis and a customer specific suitability analysis.

When reviewing a client's account, your supervisor notices that although each recommendation appears to be suitable based on that client's profile, there is a concern regarding the frequency of activity in the account. This is an example of A) quantitative suitability. B) reasonable-basis suitability. C) customer-specific suitability. D) qualitative suitability.

A) Explanation Quantitative suitability requires a member firm who has control over a customer account to believe that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together. LO 2.f

Identifying a discretionary order

An order is discretionary if any one of the three As is missing: - Activity - Amount, and - Asset.

An investor wants to open an account designated by number, not by name. In addition to the normal account-opening requirements, the registered representative A) can open this account without additional documentation. B) can open the account with a written statement of ownership from the customer. C) cannot open the account in this manner. D) can open this account with a written statement of ownership and approval from FINRA.

B) Explanation For numbered accounts, there is an additional requirement that the customer must sign a document attesting to ownership. LO 2.g

Regulation T controls the extension of credit from A) bank to broker-dealer. B) broker-dealer to customer. C) bank to customer. D) broker-dealer to broker-dealer.

B) Explanation Regulation T controls the extension of credit from broker-dealer to customer, with customer securities providing the collateral for such loans. LO 2.g

Numbered Accounts

B/D may open account for customer using only numbers or a symbol to identify account -Must have statement signed by customer attesting to ownership. - celebrities sometimes use numbered accounts to preserve anonymity.

Risk Disclosure

Before opening a margin account, you must provide customers with a risk disclosure document. This information must also be provided to margin customers on an annual basis. The document discusses the risks associated with margin trading, some of which are shown in the following. -Customers are not entitled to choose which securities can be sold if a maintenance call is not met. -Customers can lose more money than initially deposited. -Customers are not entitled to an extension of time to meet a margin call. -Firms can increase their in-house margin requirements without advance notice.

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

C) Explanation A TOD account is an individual account in which, upon the death of the account owner, the assets pass to a designated beneficiary. LO 2.g

A firm must provide a risk disclosure document to a customer before opening which of the following accounts? A) Transfer on death B) Partnership C) Margin D) Custodial

C) Explanation All customers opening margin accounts must receive a risk disclosure document describing the risks associated with trading on margin (e.g., that a customer could lose more than the initial investment, or that the firm could sell out securities in the account to meet a maintenance call without providing prior notice to the customer). This document must also be provided to customers on an annual basis. LO 2.g

Tax Deferral

Contributions to an IRA, qualified retirement plan, or TSA may be tax deductible and are not taxed until withdrawn. this gives two benefits to the investor: Firstly, the investments are made with pre-tax money. secondly, there are no tax on the income and growth on top of money is paid out period that is the power of deferring taxes.

Complying with the suitability rules involves evaluating all of the following except A) reasonable-basis suitability. B) customer-specific suitability. C) quantitative suitability. D) qualitative suitability.

D) Explanation Under FINRA Rule 2111, there are three main obligations: reasonable-basis suitability, customer-specific suitability, and quantitative suitability. There is no such thing as qualitative suitability. LO 2.f

Uniform Prudent Investor Act (UPIA)

Fiduciaries are obligated to follow the uniform prudent investor act princes UPIA).

Discretionary Accounts

In a discretionary account, The customer has authorised the broker dealer or registered representative to make investment decisions in the account. Discretion is defined as the authority to decide: -which Security, -the number of shares or units, or -whether to buy or sell. Normally, in order to buy or sell security is at the discretion of the client, generally via a telephone call or online. Many clients prefer the convenience of letting mask you're just professional "call the shots." Being able to determine the trading activity in a clients account presents a potential conflict of interest. In the case of broker dealers and agents, their compensation is transaction based. The more trading in the account, the more income.

Rule 2111

Rule 2111, which became effective in 2011, is composed of three main obligations: - reasonable-basis suitability, - customer-specific suitability, and - quantitative suitability.

Quantitative Suitability

The registered representative, having control over a customer account, has to have a reasonable basis for believing that series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together. No single test defines excessive activity; however, factors such as the commissions generated, the profits-to-cost ratio, and the use of in-and-out trading in a customers account may provide a basis for finding that a member or registered representative has violated the qualitative suitability obligation.

Investment Objectives

- growth (can be aggressive, moderate, or even conservative) - income (can be current, future, or high risk) - preservation of capital (safety)

Risk Tolerance Levels

- if you see low risk — conservative - if you see some risk — moderate - if you see more than average risk — moderately aggressive - if you see high risk - aggressive

Q. Remember fun wishing to verify the accredited investor status of client would be least likely to ask for:

= a current pay heck stub == Because we need to see income for the past two years, current pissed up there's not provide sufficient information.

A registered representative of a FINRA member broker-dealer is gathering information from a prospective customer. When the representative uses the information to prepare a financial profile, which of the following would not be included? A) The individual's risk tolerance B) Cash value in life insurance policies C) Outstanding credit card balances D) Current value of any IRAs

A) Explanation The financial profile includes items with numbers. While risk tolerance is one of the most important aspects of information gathering, it cannot be quantified in the manner that debts, cash value, and IRA accounts are. LO 2.b

A person wishing to grant a registered representative the right to make investment decisions for her account does so by A) providing a limited power of attorney giving discretionary powers. B) providing a letter from an attorney. C) calling the representative each time she wants to place an order. D) providing a full power of attorney to someone other than the registered representative who will then instruct the representative as to investment decisions.

A) Explanation A discretionary account always requires prior written authorization from the customer in the form of a limited power of attorney (trading authorization). LO 2.g

Which of the following client statements describes an investment objective rather than an investment constraint? A) "I want to maximize my income." B) "I want my investments to be liquid." C) "See how much in taxes you can save." D) "I will not invest in any polluter of the atmosphere."

A) Explanation Income is an objective. Liquidity, tax considerations, and personal attitudes are investment constraints. LO 2.e

A new client of yours indicates that they remember hearing stories from grandparents who lived through the Great Depression of the 1930s. Those relatives lost almost everything they had in the stock market, and the client is not interested in seeing a repeat of the family history. When doing your information gathering, this would be an indication of the client's A) level of risk tolerance. B) net worth. C) employment stability. D) values.

A) Explanation Risk tolerance is one of the primary nonfinancial considerations that must be addressed. Those who do not wish to lose money in investments must be presented with recommendations offering a higher level of capital preservation. Values are more likely to be expressed by indicating industries not to be included (or the opposite). If the client's reference to the 1930s dealt with unemployment, then perhaps employment stability would be a correct choice. LO 2.b

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

B) 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. LO 2.f

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 decisions. B) investment goals. 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. LO 2.e

Your client informs you that a signed discretionary account form is in the mail. Before receiving the form, and unable to contact the client, you notice that one of her stocks is dropping sharply on adverse news. You A) can enter a discretionary order with written permission of a principal of the broker-dealer. B) can enter a discretionary order with written documentation of the situation. C) can enter a discretionary order with instructions that the order is not held. D) cannot enter a discretionary order.

D) Explanation A discretionary order cannot be entered until the signed discretionary account form has been received. LO 2.g

All of the following are investment constraints except A) time horizon. B) investor preferences. C) liquidity. D) growth of capital.

D) Explanation Growth of capital is an investment objective. The other choices represent obstacles (constraints) that might keep the investor from fulfilling that objective. LO 2.e

When discussing a client's finances, which of the following would be of least importance when planning to make a lump-sum investment? A) Expected inheritance B) Year-end bonus C) Winning the lottery D) Current salary

D) Explanation Salary enables the registered representative to determine the funds available for periodic investment. A lump-sum investment could be made with money from an inheritance, a year-end bonus, or lottery winnings.

Certain investments are available only to those who meet the SEC's definition of an accredited investor. Which of the following qualify? A) An individual who has joint income with that person's spouse in excess of $200,000 in each of the previous two years and has a reasonable expectation of reaching the same income level in the current year B) An individual with earnings of $200,000 in the previous year with a reasonable expectation of reaching the same income level in the current year C) An individual with net worth in excess of $1 million, inclusive of the equity in a primary residence D) An individual with net worth in excess of $1 million, exclusive of the equity in a primary residence

D) Explanation Those using the net worth standard to qualify as an accredited investor must exclude the equity in their primary residence. Those using the income standard must reach levels in excess of $200,000 as individuals and in excess of $300,000 when combining with the income of a spouse. Those earnings must have been achieved in the previous two years along with an expectation of similar earnings for the current year. LO 2.c

A customer wants to buy ABC bonds, and as his representative, you have advised him that the trade is unsuitable. If he decides to go ahead with the purchase, you must A) execute the trade only if the customer has previous trading experience in similar securities. B) execute the trade if FINRA approves. C) not execute the trade. D)

D) execute the trade specifically as the customer has directed you to do but mark it unsolicited. Explanation If a customer wishes to purchase a security that the registered representative feels is unsuitable, the trade may be executed if the customer specifically directs it. The ticket should be marked unsolicited. LO 2.b

Tax-Free Income

Municipal bonds pay interest that is free from federal taxation. There are cases where the income would be taxed on the state level; that will be covered in unit six. Municipal bonds generally pay interest of lower rate than taxable bonds. That is because the interest is tax free. Depending on the investors tax bracket, the municipal bond may result in higher returns on an after-tax basis. As covered in unit one, it is also possible to generate tax-free income using a Roth IRA and the Coverdale ESA. In unit six will discuss the section 529 plan--another way to provide tax-free income.

Customer-specific suitability

The registered representative has to have a reasonable basis to believe that the recommendation is suitable for specific customer. The recommendation will be based on that customers investment profile. For example, you have an elderly person who, in the past, was relatively sophisticated. Now, he shows signs of diminished capacity. This would require a different basis recommendations.

Understanding a Customer's Attitude for Investment

To understand a customer's attitude for investment, the representative should ask questions similar to the following: -what kind of risks can you afford to take? -How liquid must your investments be? -How important are tax considerations? -Are you seeking long-term or short-term investments? -What is your investment experience? What type of investments do you currently hold? -How would you react to a lot of 5% of your principal? 10%? 50%? - What level of return do you consider a good? Poor? Excellent? -What combination of risks and returns do you feel comfortable with? -What is your investment temperament? -do you get bored with stable investments? -Can you tolerate market fluctuations? -How stable is your income? -Do you anticipate any financial changes in the future?

Q. Which of the following is an investment constraint?

- retirement. - income. - college education = time horizon == One of the most important investment constraints is the investors time horizon. If you start saving for retirement (a goal) at age 55, you don't have much time to accumulate funds. A short time horizon limits how aggressive the portfolio can be. Paragraph if you started at age 25, with that long a time horizon, there are many more investment options available. Income is an objective college education is a goal. It is much better to start saving for college when a child is very young. You don't want to wait until the teenage years.

Q. All of the following are financial considerations in a customer profile except:

- the balance in the 401(k) plan. = wanting to retire at age 65. - annual income. - the remaining balance on the home mortgage. == wanting to retire at age 65 is a goal and a non financial consideration. Financial investment considerations can be expressed as a sim of money (total liabilities, for example) or as a numerical cash flow (gross income of $160,000 per year, for example).

Q. Which of the following would be considered non financial considerations on a customer profile?

- total fixed assets. = attitude toward risk. - monthly income available for investment. - amount saved in a 401(k) plan. == non-financial investment considerations of those that cannot be expressed as a concrete sum of money or as a specific monthly, yearly, or weekly cash flow. Attitude toward risk cannot be expressed in numbers at all.

Q. In designing an investment portfolio for a new client, one of the first things to do is determine the client's:

= RISK TOLERANCE. One can't adequately present any investment recommendations without having an understanding of the client's risk tolerance. Home address and social security numbers are legal requirements for opening the account, but they don't enter into the decision-making process for portfolio design. Yes, you will want to know the beneficiary of any IRAs or qualified plans, but that has little to do with the nature of your recommendations. TAKE NOTE: A registered representative Jarvis to assist customers are meeting there financial objectives. responsible Reps must learn all about the customers financial situations. securities laws prohibit unsuitable recommendations.

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) I and II B) II and III C) III and IV D) I and III

A) 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. LO 2.f

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) moderate. C) aggressive. D) speculative.

B) 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. LO 2.b

A registered representative is opening both cash and margin accounts for a corporation. Which of the following documents will he need? I_ The corporation's charter and bylaws II) A copy of the corporation's most recent balance sheet III) The corporation's last three profit and loss statements IV) The name(s) of natural persons authorized to trade the account A) II and III B) I and IV C) I and III D) II and IV

B) Explanation Corporate accounts are generally those established by the officers of a corporation. Such accounts require a copy of the corporate resolution naming the authorized person(s) and account trading limits (if any). If it is to be a margin account, a copy of the corporate charter and a signed margin agreement are also required. LO 2.g

Which of the following circumstances would not cause a registered representative to be identified as a fiduciary? A) A registered representative holds himself out as a fiduciary for ERISA plans and pensions. B) A registered representative names one of his customers the executor of his estate C) A registered representative receives discretionary authorization from a client D) A registered representative becomes a member of the board of directors of a charitable foundation.

B) Explanation Executors of an estate are included in the definition of a fiduciary. However, in this choice, the customer is the executor, not the registered representative. That customer has a fiduciary responsibility to the representative's heirs (when that time comes). The granting of discretionary authority over the account of a client is a form of having fiduciary responsibilitythe registered representative is in control of the customer's money. Being a board member of a foundation, or holding oneself out as a fiduciary for an ERISA plan, will generally find themselves being defined as a fiduciary. LO 2.g

A customer asks his registered representative to purchase $10,000 worth of shares in any pharmaceutical company that looks promising. Which type of account allows the registered representative to act in accordance with this instruction? A) Custodial B) Discretionary C) Special cash D) Margin

B) Explanation If the registered representative may decide the specific security, the transaction requires discretionary authority, and therefore, must be done in a discretionary account. Determining the time or price does not require discretionary authority. LO 2.g

It is important for a registered representative to be able to distinguish between a client's investment objectives and investment constraints. Which of the following is an example of an investment constraint? A) Retirement income B) Time horizon C) Capital growth D) Educational funding

B) Explanation Of the choices, time horizon is an example of an investment constraint while the others are investment objectives. Remember, an objective is where you want to go; a constraint is what is keeping you from getting there. If your time horizon is very short, you might not be able to reach any of the objectives listed here. LO 2.e

SEC Regulation Best Interest (BI) focuses on A) customer transaction costs. B) recommendations to customers. C) ensuring broker-dealer profitability. D) ensuring that customers receive the highest possible interest on their cash balances.

B) Explanation Regulation BI became effective on June 30, 2020, and states, "When making such a recommendation to a retail customer, you must act in the best interest of the retail customer at the time the recommendation is made, without placing your financial or other interest ahead of the retail customer's interests." **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback. LO 2.f

Each of the following can create activity in a customer's account except A) the holder of a full power of attorney. B) the trusted contact person. C) the registered representative granted discretionary authorization. D) the holder of a limited power of attorney.

B) Explanation The trusted contact person has no trading authority over the account. The purpose of this person being named is to assist the member firm when there is suspicion of possible senior exploitation. A registered representative who has been granted discretionary power is able to make buy and sell decisions without contacting the client. The only difference between a limited and a full POA is that the person with a full POA can access funds as well as make trades. LO 2.g

If a registered representative receives a call from a custodian wishing to buy shares of a new issue security, she should A) accept the order only if it is placed in a margin account. B) discuss and review suitability. C) refuse to accept an order. D) talk the investor into buying another stock.

B) Explanation There are no restrictions that specifically apply to the purchase of new issues in a custodial account, provided the registered representative has discussed and reviewed the suitability of the investment. LO 2.f

Determining a client's investment objectives is an important function of being a registered representative. A customer who identifies as having a conservative investment posture would probably avoid A) income. B) speculation. C) preservation of capital. D) growth.

B) Explanation Those with a conservative outlook on investing are unlikely to be willing to engage in speculation. Preservation of capital is generally the most conservative, followed by income and growth. LO 2.c

Regulation BI established a new standard of conduct under the Securities Exchange Act of 1934 for broker-dealers and associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer. All of the following are examples of account recommendations except A) opening an UTMA account for a grandchild. B) opening a margin account to go along with an existing cash account. C) changing the asset allocation in an existing account. D) taking a distribution from an employer-sponsored plan and executing a rollover into a self-directed IRA.

C) Explanation Account recommendations include recommendations of securities account types generally (e.g., to open an IRA or margin account), as well as recommendations to roll over or transfer assets from one type of account to another (e.g., a workplace retirement plan account to an IRA). It has nothing to do with changing the strategy in an existing account. Rather, the desired result of an account recommendation is a new account. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback. LO 2.f

If a customer wishes to open a new account but declines to provide all of the financial information the member firm requests, which of the following statements are true? The member firm may open the account and make recommendations without meeting any other criteria. The member firm may open the account if it has determined (by other means) that the customer has the financial resources to carry the account and that trading is suitable. The member firm may not recommend any transactions unless the representative is able—through the information available—to make a suitability determination. The member firm may not allow trades in the account until the requested information is received. A) II and IV B) I and III C) II and III D) I and IV

C) Explanation If a customer refuses to provide financial information, the member firm may use whatever information is available to decide whether to open the account. Any recommendation made to a customer must be suitable, taking into account the customer's investment objectives, financial situation, and any other relevant information. If the information is not provided, the account may be opened, but no investment recommendations may be made. LO 2.b

A customer, age 75, who is retired and on a fixed income wants to invest $50,000 in speculative stocks in an account set up as joints tenants with right of survivorship (JTWROS) with a spouse. As a registered representative (RR), you feel the transactions are unsuitable for the customer. Therefore, you should A) refuse the trade as unsuitable. B) require documentation from the other party to the JTWROS account showing they agree with the proposed transactions. C) discuss with the customer why speculative stocks might not be appropriate, given the circumstances as you know them before entering any orders. D) enter the trade without question or discussion.

C) Explanation If an RR feels the proposed transactions might not be suitable for the customer, by industry rule, there is no obligation to refuse the trade, but there is a responsibility to provide an explanation to them before entering any orders. In a JTWROS account, either party may enter trades without the prior consent of the other party. LO 2.b

There are certain securities offerings that are limited to those who meet the definition of accredited investor. The SEC requires that the issuer shall take reasonable steps to verify that purchasers of securities sold in those offerings are accredited investors. One way in which this may be accomplished for natural persons is obtaining a written confirmation from certain persons or entities that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the prior three months and has determined that such purchaser is an accredited investor. Confirmation from which of the following would not meet the SEC's requirements? A) A registered broker-dealer B) A licensed attorney who is in good standing under the laws of the jurisdictions in which he or she is admitted to practice law C) An investment adviser registered and in good standing under the laws of the state of its principal office D) A certified public accountant who is duly registered and in good standing under the laws of the place of his or her residence or principal office

C) Explanation It is only investment advisers registered with the SEC, not the state(s), for whom the written confirmation of their accredited investor status is acceptable. LO 2.c

Opening a margin account involves a number of different documents. The document describing how the interest on the margin debt is calculated is generally known as A) the hypothecation agreement. B) the risk disclosure document. C) the credit agreement. D) the loan consent agreement.

C) Explanation It is the credit agreement, sometimes referred to as the margin agreement, that describes the creditor-debtor relationship. This includes the method of computing interest on the debit balance (the amount owed). The hypothecation agreement allows the broker-dealer to maintain possession of the margined securities as collateral for the loan, and the loan consent agreement allows the broker-dealer to lend out the client's margined securities. The risk disclosure document is provided to make sure the client understands the risks of margin trading. LO 2.g

Which the following statements regarding customer accounts is not true? A) Many states publish a legal list of securities approved for fiduciary accounts. B) The customer who opens a numbered account must sign a statement attesting to ownership. C) Margin trading in a fiduciary account does not require any special documentation. D) Stock held under joint tenants with rights of survivorship (JTWROS) goes to the survivor in the event of the death of one of the tenants.

C) Explanation Trading on margin is prohibited in fiduciary accounts except with the appropriate documentation. Numbered accounts are permitted with a letter signed by the customer. Stock held under JTWROS passes to the survivor(s) in the event of death of one of the tenants. LO 2.g

A power of attorney is not required for a registered representative to choose which of the following order instructions? I) Security to be bought or sold II) Number of shares to be bought or sold III) Time of execution IV) Price of execution A) I and II B) III and IV C) I and III D) II and IV

D) Explanation If a registered representative chooses price or timing of an order only, that order is not a discretionary order, and a power of attorney is not required. The order is a not held order. To be discretionary, the representative must choose one or more of the following: the action (buy or sell), the security, or the amount (number of shares). LO 2.g

In a discretionary account where the investment objective is preservation of capital with moderate income, all of the following practices are unsuitable except A) frequent and profitable short-term trading in volatile stocks. B) marking order tickets solicited or unsolicited when discretion is used. C) marking the investment objective on the new account form as high risk. D) maintaining a fixed asset allocation mix, which includes some underperforming sectors.

D) Explanation In some test questions, the best way to select the correct choice is when three of the four options are clearly wrong. This is an example of that case. Preservation of capital is certainly not a high-risk objective and does not call for frequent trading in any stock, volatile or not. Orders in a discretionary account are not considered unsolicited (the client is not the one placing the orders). Allocating the portfolio to fixed-income assets (bonds and preferred stock) would seem to be the most appropriate step to take. LO 2.g

When evaluating a client's suitability, which of the following would be considered a nonfinancial consideration? A) Debt B) Salary C) Net worth D) Attitude

D) Explanation Nonfinancial considerations are those which cannot be quantified. The client's salary, debt, and net worth can be described numerically, but attitudes cannot. LO 2.b

A customer calls the brokerage firm and turns in an order to buy 400 shares of Oscillate Pharmaceuticals, Inc. The instructions are for the firm to use its best judgement as to the right time to place the order. Which of the following are true about this order? A) It requires written discretionary authorization. B) It may be executed at any price or any time the broker-dealer feels is best. C) It cannot be accepted without a price being specified. D) It is good only for the day entered.

D) Explanation This is a time or price order and is excluded from the definition of discretion. One of the characteristics of this type of order is that, unless written instructions to the contrary have been received, it is effective only the day entered. LO 2.g

Customer Profile: Non-financial Investment Considerations

In non-financial investment consideration is one that cannot be expressed as a sum of money or a numerical cash flow (risk tolerance, or tax bracket, for example). -Age -marital status -number and ages of dependence -employment -employment of family members -current and future family educational needs -current and future family health care needs -risk tollerance -attitudes and values, such as ESG investing -tax status