Customer Accounts
Which statements are TRUE regarding a customer account with a "limited power" third party trading authorization? I The third party can enter orders in the account II The third party can draw checks on the account III Upon the death of the customer, the power of attorney is revoked IV Upon the death of the customer, the power of attorney remains in force A I and III B I and IV C II and III D II and IV
The best answer is A. The third party trading authorization with a limited power of attorney can enter orders but cannot order that checks be drawn. Any power of attorney dies when the customer dies.
If there is no trading activity in a customer's account, a statement must be mailed: A that month B that quarter C semi-annually D annually
The best answer is B. If there is no activity in a customer's account, statements are mailed quarterly. However, if trades take place, a statement must be sent for that month.
Credit from bank to broker is controlled under: A Regulation T B Regulation U C Regulation X D Regulation Z
The best answer is B. Regulation U controls credit from bank to broker. Regulation T controls credit from broker to customer.
An officer of a trust wishes to open a margin account with your firm. This is allowed: A if the trust agreement specifically authorizes the opening of a margin account B as long as the new account form has been properly completed C if an officer of the trust provides a letter of guarantee D only with the prior approval of the branch manager
The best answer is A. As a general rule fiduciary accounts must be cash accounts. A trust account will be opened as a cash account unless the agreement specifically authorizes the opening of a margin account.
The principal reason for an institutional investor to open a prime brokerage account is: A consolidation of account positions with one broker B lower commission costs on trade executions C direct access to execution venues D simplified reporting for tax purposes
The best answer is A. Hedge fund investors typically use a "prime broker" to consolidate all of their positions with one brokerage firm. In a prime brokerage agreement, the institutional investor can use different executing brokers for its trades, but all of these trades are settled by the "prime broker" who maintains custody of the positions, and most importantly, provides margin financing on these positions and arranges for stock loans on short stock positions. The hedge fund, in return for sending trades to different executing brokers at full commission rates, gets valuable research and recommendations in return. By using a prime broker to consolidate all positions, the hedge fund gets lower financing costs on borrowed funds and "front of the line" status when it wishes to borrow securities to effect short sales.
Long option contracts have a loan value of: A 0% B 25% C 50% D 100%
The best answer is A. Long option contracts have a loan value of 0. They cannot be borrowed against because they expire in the near future (within 9 months).
Your customer has been declared legally incompetent and his son has presented the proper legal papers appointing him as the guardian. Which of the following statements are TRUE? I The account will be transferred from the customer's name to a guardian account II The account will be transferred from the customer's name to a custodial account III All instructions regarding the account can be taken only from the son IV All instructions regarding the account can be taken from either the customer or the son A I and III B I and IV C II and III D II and IV
The best answer is A. Since the customer is legally incompetent, when the son presents the proper court papers, the account will be transferred from the customer's name to a guardian account, with the son acting as trustee. No instructions can be taken from the customer, since he does not have legal capacity to make decisions. All instructions regarding the account can only be taken from the guardian - who is the son.
When opening an account to trade stocks and options, all of the following signatures are needed on the new account form(s) EXCEPT: A customer signature B registered representative signature C general principal signature D registered options principal signature
The best answer is A. The customer's signature is not required on a new account form. It is required on the options agreement, margin agreement and loan consent agreement.The regular new account form for equity securities requires the signature of the registered representative and the general principal (Series 24 license). The options new account form, required for options trading, is signed by the registered representative, who is attesting to the fact that the information on the form is true; and must be approved before the account is traded by the registered options principal (Series 4 license). The same person can hold both the Series 24 General Principal and Series 4 Registered Options Principal licenses, and could approve both accounts.
What paperwork is required for trades to be effected in an account for a deceased person who held an individual account at a brokerage firm? A Court order or executor's authorization certificate B Names of the beneficiaries of the estate C Social security number and date of death of the decedent D Approval of the attorney for the estate
The best answer is A. When the holder of an individual account dies, the account is frozen and no more trading can occur. The account assets go to that individual's estate, which must go through probate. A probate court clerk issues an "executor's letter," signed by a judge, which authorizes the named individual to act on behalf of the estate as the executor. Another name for this document is "letters testamentary." This letter must be presented to the brokerage firm by the executor so that the assets can be transferred into an account for the estate, which is controlled by the executor. Also note that the executor's letter is used to obtain a Tax Identification Number for the account.
In order to recommend a structured product to a customer, all of the following statements are true EXCEPT: A The member firm must perform a "reasonable basis" suitability determination evaluating the characteristics of the product to be recommended against competing products B Completion of the "reasonable basis" suitability determination means that the structured product can be recommended to all the firm's customers C The member firm must perform a "customer specific" suitability determination prior to recommending a structured product to a customer D The registered representative offering the product must understand the product's features and risks and be able to communicate these to the customer
The best answer is B. Because of the complexity of structured products, this is where FINRA first came up with its "3 Level" suitability rule (Reasonable basis suitability; Customer-specific suitability; and Quantitative suitability). It proved so successful that FINRA applied the same rule to all recommendations, but, of course, they did not rescind the separate rule for this product! FINRA describes the typical structured product as a a zero-coupon "synthetic bond" that gives a return tied to a market index such as the NASDAQ 100 Index or the Standard and Poor's 500 Index; and which has a maturity based on an embedded option; FINRA requires that the member firm perform a "reasonable basis" suitability determination to evaluate the product's potential rewards and risks (relative to other similar structured products offered by other firms). Once a "reasonable basis" suitability determination has been completed, then the member firm can offer the structured product only to its customers that are suitable for that investment. This is "customer specific" suitability. It cannot be recommended to all customers, since a specific suitability determination is required for each recommendation. Furthermore, any representative recommending the product must understand the product's features and risks and be able to communicate these to customers.
The regulator that is responsible for enforcing the Bank Secrecy Act of 1970 is: A SEC B FinCEN C FINRA D FDIC
The best answer is B. FinCEN is part of the Department of Treasury and stands for the Financial Crimes Enforcement Network. While FinCEN itself was not created until 1990, the Department of Treasury was given responsibility for tracking large cash deposits over $10,000 under the Bank Secrecy Act of 1970 (BSA). At the time, this was intended as an "anti-Mafia" regulation to stop the mob from doing large transactions in cash. The BSA required the filing of CTRs (Currency Transaction Reports) with the Department of Treasury for deposits or withdrawals of cash that exceeded $10,000. These reports identify the individual, so that FinCEN can investigate if it wants. FinCEN's mission was expanded under the PATRIOT Act of 2001 to stop terrorist money laundering. If a financial institution is suspicious about customer transactions, this Act requires the filing of an SAR - Suspicious Activities Report with FinCEN.
Which statements are TRUE regarding SMA in a margin account that is at 50% margin? I Every increase in market value in a long account results in a 50% increase in SMA II Every decrease in market value in a long account results in a 50% increase in SMA III Every increase in market value in a short account results in a 150% increase in SMA IV Every decrease in market value in a short account results in a 150% increase in SMA AI and III BI and IV CII and III DII and IV
The best answer is B. If a long account increases in value above 50%, SMA will increase by $.50 for every dollar increase. For example, assume an account shows: Long Market Value - Debit = Equity % SMA $20,000 $10,000 $10,000 50% 0 If the market value increases to $30,000, the account will now show: Long Market Value - Debit = Equity % SMA $30,000 $10,000 $20,000 66% $5,000 With $30,000 of stock, 50%, or a total of $15,000 can be borrowed. Since this customer has only borrowed $10,000, another $5,000 can be lent to the customer - this is the SMA. Thus, for an account that increased $10,000 in market value, SMA increased by $5,000 (or 50%). If a short margin account decreases in value, SMA will increase by $1.50 for every dollar decline. For example, assume an account shows: Credits - Short Market Value = Equity % SMA $60,000 $40,000 $20,000 50% 0 If the market value decreases to $30,000, the account will now show: Credits - Short Market Value = Equity % SMA $60,000 $30,000 $30,000 100% $15,000 With $30,000 of stock, 50% or $15,000 is the required equity to support the position. Since there is $30,000 of equity in the account, there is $15,000 of excess equity. This is the SMA amount that can be borrowed. Thus, for a short account that decreased $10,000 in market value, SMA increased by $15,000 (or 150%).
Two brothers wish to open an account at a broker-dealer. One brother will contribute $100,000 and the other brother will contribute $300,000. They have stated that if one should die, then that person's share will go to the remaining brother. What kind of account should be opened? A partnership account B joint account with rights of survivorship C joint account with tenants in common D 2 separate individual accounts
The best answer is B. In a joint account with rights of survivorship, if one participant in the account dies, the decedent's share will go directly to the other participant, avoiding probate. In a joint account with tenants in common, if one dies, his or her percentage ownership goes into the estate and is bequeathed to a beneficiary in the will.
Which of the following positions would receive the greatest benefit of reduced margin requirements from portfolio margining? A Short naked call B Long stock/Long put C Short stock/Short put D Long call/Long put
The best answer is B. Portfolio margin is based on the risk of a portfolio, rather than applying a fixed margin percentage to each security position. When a stock position is hedged by an option, as is the case with a long stock/long put position, then the maximum loss on the stock position is reduced to approximately the premium paid for the put (net of any difference between the stock cost and the put strike price). Thus, portfolio margin results in a much lower margin requirement for stock positions that are hedged by options.
The extension of credit under Regulation T is prohibited for all of the following purchases EXCEPT: A Open end management company B Closed-end management company C Variable annuity D Common stock IPO (Initial Public Offering) that was first offered 20 days ago
The best answer is B. Regulation T controls the extension of credit (margin) on securities purchased in the secondary market. The primary market (new issues) does not come under Regulation T. New issues must be paid in full - once they have seasoned in the market for 30 days, they become marginable.
When opening a custodial account, the social security number to be used on the account is that of: A the custodian B the minor C the parent D either the parent or the minor
The best answer is B. Since custodial account property is considered to be "owned" by the minor, the social security number of the minor (not the custodian) is used on the account. The custodian does not have to be the father or mother of the minor!
A customer's margin account is restricted by $1,000. To eliminate the restriction, all of the following actions are appropriate EXCEPT: A sell $2,000 of marginable stock in the account B transfer $1,000 from SMA C deposit $2,000 of fully paid marginable stock to the account D deposit $1,000 cash to the account
The best answer is B. Since the account is restricted by $1,000, equity in the account is $1,000 below initial margin. If $2,000 of marginable stock is sold out of the account, the proceeds are used to reduce the debit, and this eliminates the restriction. If $2,000 of fully paid securities are deposited, the market value increase eliminates the restriction. If $1,000 of cash is deposited, the debit is reduced by $1,000 (which increases equity by $1,000). This eliminates the restriction. SMA cannot be used to reduce the restriction. Using SMA means that additional funds will be borrowed, increasing the restriction.
Shares are purchased in a custodial account, and are later sold at a profit. Tax liability rests with the: A custodian B minor C minor at the age of majority D custodian at the age of majority
The best answer is B. Tax liability in a custodial account is the responsibility of the minor - it is the minor's social security number that is on the account. Thus, all income is reported to the IRS on the minor's number. Tax is due on income reported each year - there is no waiting until the minor reaches adult age (the IRS wants its money now!)
Which statements are TRUE about stock dividends on short stock positions? I The lender of the securities receives the stock dividend II The lender of the securities pays the stock dividend III The borrower of the securities receives the stock dividend IV The borrower of the securities pays the stock dividend A I and III B I and IV C II and III D II and IV
The best answer is B. The borrower of securities must pay any dividends declared on that stock to the person from whom the stock was borrowed. Thus, the borrower of the securities must pay any dividends to the lender of those securities.
A customer buys 100 shares of XYZ at $60 in a margin account regular way settlement. Two days after the trade, XYZ has dropped to $55. The customer will receive a margin call for: A $2,750 B $3,000 C $5,500 D $6,000
The best answer is B. The initial margin requirement is 50% of the original purchase price. 50% of $6,000 = $3,000. The drop in value has no effect on the initial margin requirement - though if the account keeps on dropping, a call for maintenance margin may be generated.
Under the requirements of the USA PATRIOT Act, when opening a new account for a non-resident alien, which of the following must be obtained from the customer? A Social security number B Passport number C Driver's license number D Major credit card number
The best answer is B. When opening a customer account for a non-resident alien, the customer's foreign passport number must be obtained. In addition, the customer must have a U.S. tax identification number.
Long Margin Account Market Value: $80,000 Debit Balance: $30,000 The "Buying Power" in this account is: A $10,000 B $20,000 C $40,000 D $50,000
The best answer is B. With a market value of $80,000, the customer can borrow 50% or $40,000. Since the debit balance is only $30,000, the customer can borrow an additional $10,000 from the account. Thus, there is $10,000 of SMA. With $10,000 of SMA, the customer can buy $20,000 of marginable stocks. Buying Power refers to the amount of stocks that can be purchased without depositing cash.
All of the following are needed to open a cash account for a customer EXCEPT: A Customer tax I.D. number B Name of employer C Signature of customer D Customer address
The best answer is C. A customer signature is not needed to open a cash account (thus accounts can be opened over the phone). A signature is required for margin accounts only, since such an account requires that the customer pledge all the securities in the account to the brokerage firm in return for a margin loan. To open a cash account, the registered representative must complete a new account form which includes the Social Security number of the customer (tax I.D. number), the customer's address, and occupation and employer. The registered representative and the manager (principal) must sign the form. By signing, the registered representative indicates that the information is written as stated by the customer; and the manager is signing that the information has been reviewed prior to accepting the account for the firm. (Also note that this is very much a "test world" question. In the real world, pretty much every brokerage firm, as part of the new account form, has an embedded arbitration agreement and has the customer sign it when opening the account. However, this is a firm requirement and not an SEC or FINRA legal requirement. If a brokerage firm wanted to open a customer cash account without the customer signing an arbitration agreement, it could.)
A registered representative is allowed to choose which of the following in a transaction without requiring written trading authorization from the customer? A Quantity and price B Security and time C Price and time D Security and price
The best answer is C. A registered representative is allowed to select the price and time of execution without the order being considered as "discretionary." If he or she selects any more, such as the security to be traded or the number of shares, then the order is discretionary and requires a written power of attorney from the customer.
A customer of yours is going on an extended vacation and requests that her mail be held for 8 weeks. Which statement is TRUE about honoring this request? A Because customer mail cannot be held for more than 30 days, this request cannot be honored B It should be suggested to the customer that he or she use a temporary address while on vacation C The request can be honored if the customer makes it in writing D Holding of a customer's mail is prohibited under FINRA rules because the customer must always be informed about his or her account
The best answer is C. FINRA does not allow a customer's mail to be held unless the customer requests in writing. As long as the request does not exceed 3 months, no other information is needed. However, if the customer wants the mail held for more than 3 months, then a valid reason must be given in the request, such as safety or security concerns.
When comparing fixed fee accounts to those that charge a per trade commission charge accounts: I Fixed fee accounts are considered to be a brokerage product II Fixed fee accounts are considered to be an advisory product III Per trade commission charge accounts are considered to be a brokerage product IV Per trade commission charge accounts are considered to be an advisory product A I and III B I and IV C II and III D II and IV
The best answer is C. Fixed fee accounts are considered to be "advisory products." Per trade commission charge accounts are brokerage products. If a firm offers fixed fee accounts, it must do so through a registered Investment Adviser subsidiary; and its representatives must be licensed as "IARs" - Investment Adviser Representatives.
A customer has a proprietary position in an account that he wishes to transfer. He would be notified that the account: A transfer will take longer because of the proprietary position B cannot be transferred because of the proprietary position C proprietary position must either be liquidated or retained at the carrying firm D assets must be liquidated and the proceeds used to establish new positions
The best answer is C. If the assets are held in proprietary products of the carrying firm, these cannot be transferred - since they are only offered by the carrying firm. The customer would have to liquidate these positions and transfer the money proceeds of the liquidation; or the customer could retain the proprietary positions at the carrying firm.
When providing a Form CRS along with other documentation to a new client, the Form CRS: A can be included anywhere in the ordering of documents presented B must be packaged separately from the other documents presents C must be the first among any documents delivered D can be included by reference to its availability on the firm's website
The best answer is C. Regulation BI went into effect in mid-2020. It requires that customers receive a 2-page document at account opening called Form CRS - Customer Relationship Summary. Form CRS details: Whether the firm is acting as a broker-dealer in the relationship, where it can charge commissions; or if the firm is acting as an investment adviser in the relationship, where is can only charge fixed fees; That the firm must adhere to a suitability standard when making recommendations as a broker-dealer; and that the firm must adhere to a tougher fiduciary standard when acting as an investment adviser; The fees and costs that the customer will pay; Any conflicts of interest that the firm may have in providing its services to the client; and Whether the firm or its associated persons has had any reportable disciplinary events. The rule actually requires that the Form CRS be delivered to customers at the earliest of recommending an account type; recommending a transaction; placing an order; account opening; or implementation of an investment strategy. If the firm presents a client with a package of documents at account opening, the Form CRS must be on the top. It must also be posted prominently on the firm's website.
Which TWO of the following securities can be purchased on margin? I Listed stocks II OTCBB stocks III Listed stock options IV Listed warrants A I and II B I and III C I and IV D III and IV
The best answer is C. Regulation T defines the marginable securities as those listed on an exchange or NASDAQ. Over-The-Counter Bulletin Board (OTCBB) issues do not meet NASDAQ listing standards and are not marginable. Listed options are not marginable (unless they are LEAPs), due to the fact that they will expire within 9 months. Listed warrants (which trade alongside the common stock on the same exchange where the stock is listed) are marginable, since they typically have a 5 year life.
A customer buys 100 shares of ABC stock at $30 as an initial transaction in a margin account. The customer must deposit: A $750 B $1,500 C $2,000 D $3,000
The best answer is C. Regulation T initial margin to buy stock is 50% of $3,000 = $1,500. However, since this is a new account, it must meet the minimum initial margin of $2,000 needed to open an account. Therefore, $2,000 must be deposited.
A customer opens a new margin account by purchasing 1,000 shares of ABC stock at $20, and deposits the required margin. If the market value increases to $50, which statements are TRUE? I The equity in the account is $30,000 II The equity in the account is $40,000 III The SMA in the account is $15,000 IV The SMA in the account is $30,000 A I and III B I and IV C II and III D II and IV
The best answer is C. The account initially sets up as: Long Market Value - Debit = Equity % SMA $20,000 $10,000 $10,000 50% 0 After the increase in market value to $50,000, the account will show: Long Market Value - Debit = Equity % SMA $50,000 $10,000 $40,000 80% $15,000 The SMA can be computed in either of 2 ways; it is 50% of the market value increase of $30,000 = $15,000 of SMA (that is, 1/2 of the market value increase can be borrowed); or the total borrowing permitted is 1/2 of the current market value = 1/2 of $50,000 = $25,000. Since the debit is $10,000, another $15,000 may be borrowed.
Under FINRA rules, to ascertain which investments are suitable for the customer, the registered representative would inquire about which of the following? I Investment objective II Financial situation and needs III Tax status IV Other security holdings A I only B II and III C I, II, IV D I, II, III, IV
The best answer is D. "Suitability" means that securities which are recommended to a customer are appropriate for that customer. To ascertain which investments are suitable for the customer, FINRA states that the basis for making the recommendation are the facts disclosed by the customer about his other security holdings and financial situation and needs. Inquiry should be made as the customer's investment objective, tax status, and financial status.
All of the following are shown on periodic account statements EXCEPT: A cost basis B current market value C gain or loss on each position D commission charged for each trade execution
The best answer is D. A trade confirmation shows the detail of each transaction that is effected for a customer - whether it is a buy or a sell, the security, the amount, commission charged if applicable, and the transaction price. The periodic account statement shows the positions in the customer account and shows cost basis (which includes any commission charge, but this is not detailed separately), current market value, and gain or loss on the position.
Which statements are TRUE regarding a customer account with a "full power" third party trading authorization? I Checks drawn on the account can only be made out to the name of the customer, not to the third party II Upon the death of the customer, the power of attorney is revoked III The third party can enter orders in the account A I only B II only C I and II DI, II, III
The best answer is D. All statements are true about full trading authorizations. Any checks must be drawn in the account name (that is the name of the second party - the customer) - not third party name; the power of attorney dies if the customer dies; and the third party can enter orders. It is also true that if the customer so designates (in writing), that confirmations can be sent only to the third party.
A branch manager "gives" 5 accounts of a departing registered representative to another registered representative in that office. The registered representative that receives the accounts should do all of the following EXCEPT: A contact each customer immediately to update the information on the new account form B review the suitability information received from each customer C review the securities positions that are being held by the member firm for each customer D solicit an order from each customer
The best answer is D. If a registered representative receives an account from a retiring, departing, or deceased registered representative, he or she should contact each customer immediately to update the information on the new account form, review the suitability information received from each customer, and review the securities positions that are being held by the member firm for each customer. By doing this, the registered representative that receives the account will "know their customer."
A customer holds shares of ABC stock in a long margin account. ABC declares and pays a stock dividend. After the distribution is received in the account, the: I equity in the account will be decreased II equity in the account remains the same III market value of ABC stock in the account will be decreased IV market value of ABC stock in the account will be the same A I and III B I and IV C II and III D II and IV
The best answer is D. If a stock dividend is "paid," the stockholder gets additional shares. However, each share is now worth proportionately less (and the price in the trading market is reduced on "ex" date to reflect this). Thus, in aggregate, the shareholder has the same share value. For a position held in a margin account, the number of shares will increase, but the aggregate market value will remain the same. The debit is unchanged, as is the equity in the account.
Which TWO of the following instruments are typically used in money laundering activities? I Stock certificates II Money orders III Money market instruments IV Traveler's checks A I and III B I and IV C II and III D II and IV
The best answer is D. Money laundering is typically characterized by extensive deposits or withdrawals of cash, money orders, traveler's checks and wire transfers - especially to overseas accounts in countries with tight bank secrecy laws. Money market instruments such as Treasury Bills and Commercial Paper are issued in registered form and thus are not good vehicles for money laundering purposes.
A short margin account shows the following balances: Credit = $104,000 SMV = $70,000 At what market value will the account be at the minimum maintenance margin level set by the self-regulatory organizations? A $21,000 B $31,200 C $72,800 D $80,000
The best answer is D. The formula to find the market value at which a short margin account is at the 30% maintenance level is: $104,000 1.3 = $80,000 Market Value At Maintenance If the account rises to this market value, it would look as follows: Credits - Short Market Value = Equity % $104,000 $80,000 $24,000 30% $24,000 $80,000 = 30%
To open a margin account: A no signature of the customer is required B a customer signature must be obtained on the hypothecation agreement prior to placing the first order in the account C a customer signature must be obtained on the hypothecation agreement at, or prior to confirmation of the first transaction in the account D a customer signature must be obtained on the hypothecation agreement at, or prior to settlement of the first transaction in the account
The best answer is D. The rule for signing a hypothecation agreement when opening a margin account is interesting - it permits margin accounts to be opened over-the-phone or on line, if the firm chooses to do so! As long as the firm has the signed margin agreement by settlement of the first trade, all is good! So a potential client can be solicited to open a margin account; the representative can take a trade immediately at execute it; and the customer is sent the hypothecation agreement by overnight mail for signature and return with an enclosed overnight envelope. As long as the firm has the signed margin agreement back by settlement, which is T + 2, everything is in order!
A customer's margin account shows the following: LMV - ABC Common - $24,000 Debit - $14,000 ABC declares and pays a $600 dividend. How much of the dividend may be withdrawn from the account? A 0 B $150 C $300 D $600
The best answer is D. This margin account is restricted, since it is below 50% margin. However, this does not affect the treatment of dividends received in the account. Any dividends received in the account are used to pay down the debit and are 100% credited to SMA. They may be withdrawn in full for 30 days, restoring both the debit and SMA to their prior balances. After 30 days, the dividends cannot be withdrawn, and the SMA balance is reduced to reflect this.