Series 66 Chapter 18

A client of yours is getting older and is concerned about having her wishes met relating to medical issues when she is no longer capable of communicating them. The most appropriate vehicle for her would be A) a life support will B) a living will C) an incapacitation will D) a joint and survivors will

B

A form of business structure that exposes all personal assets of the owner to creditors is A) the limited partnerships B) the sole proprietorship C) the C corporation D) the LLC

B

Which of the following individuals may NOT open a joint account? A) Three sisters B) Two spouses C) Parent and a minor D) Business colleagues

C Any 2 or more persons can have a joint account, but a minor is specifically excluded from the definition of a person.

A feature of which of the following business entities is limited liability for owners, as well as flow-through of income? A) General partnership B) C corporation C) Sole proprietorship D) Limited partnership

D

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

A

According to the USA PATRIOT Act of 2001, account identification and verification procedures should be applied to which of the following? New individual accounts New business accounts Existing individual accounts Existing business accounts

1, 2

Which of the following are fiduciaries? Executor of an estate Administrator of a trust Custodian of an UGMA account Investment adviser representative granted with discretionary authority over the account

1, 2, 3, 4

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

2, 4

If a client wishes the assets in her account to pass directly to specific beneficiaries after her death, her account should be titled A) TOD B) testamentary account C) JTWROS D) TIC

A TOD (transfer on death) provides that, upon the death of the account holder, the assets pass to the named beneficiary or beneficiaries without going through probate.

Which of the following items is NOT required under the customer identification program (CIP)? A) Physical address B) Sex C) Date of birth D) Visa details for non-citizens

B

A client with a sizable estate would probably find it most efficient to pay estate taxes with A) proceeds from the liquidation of a tax-deferred retirement plan B) proceeds from a life insurance policy C) cash D) proceeds from the liquidation of a diversified portfolio

B In general, people with estates where there is a potentially large estate tax liability find that the most efficient way to pay those taxes is through a life insurance policy.

A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use? A) Charitable remainder trust B) Complex trust C) Simple trust D) Charitable lead trust

B Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are.

One respect in which an LLC differs from an S corporation is that A) an LLC can be formed with as little as a single investor B) there is more favorable tax treatment afforded to members of an LLC C) there is no statutory limit on the number of investors in an LLC D) not only income, but losses, if generated, pass through to investors in an LLC

C

A corporation organized as a C corporation is taxed on the corporate level and then again to its shareholders when dividends are paid is limited to a maximum of 100 shareholders provides limited liability to its owners may not have any trusts as shareholders

1, 3 C corporations are taxable on the corporate level and then again to the shareholder when income is distributed in the form of dividends. Shareholders' liability is limited to the amount of their investment. The S corporation is limited to 100 shareholders. Trusts may own shares of both C and S corporations.

Which of the following accounts could be opened with a TOD designation? Individual Joint tenants in common Joint tenants with rights of survivorship UTMA

1, 3 The only types of accounts that may have the Transfer on Death (TOD) designation are individual and JTWROS. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased's estate.

A grantor retained annuity trust (GRAT)would not be used to reduce estate taxes. gift taxes. income taxes.

3

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

A

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

D 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.

When advisory clients wish to structure their portfolios to support companies that engage in social or environmental policies that they agree with, it is known as A) asset allocation B) engineered investing C) program-related investing D) impact investing

D Impact investing can be defined as the intentional allocation of capital to generate a positive social or environmental impact.

Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative can A) have funds withdrawn from the account at the direction of the beneficiary B) arrange to have the trust's funds pledged to support a loan for the trustee C) place the securities in the trust fund in a noncustodial brokerage account D) have a check drawn on the account payable to the trustee for expenses

D The trustee can be reimbursed for expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can withdraw funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial or trust accounts, not in noncustodial accounts.

Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits? 150 new investors buy into the corporation during the year. 1 new member is a nonresident alien. 50% of the corporation's income is derived from passive investments in limited partnerships. The corporation issues several classes of stock.

1, 2, 3, 4 S corporations must not have more than 100 stockholders, and each stockholder must be a citizen or resident of the United States. The corporation can only have 1 class of stock, and no more than 25% of the corporation's income can come from passive activities. If you were not sure of this last fact, a useful test-taking technique is recognizing that all the other choices are correct and there is no way to select them without this one.

One of your clients is in the process of forming a new business venture with a friend and is considering whether to operate as a general partnership or a C corporation. Among the advantages of operating as a general partnership are ease of dissolution ease of raising additional capital flow-through of income or loss limited liability

1, 3 Unlike a C corporation, operating income or losses of a general partnership flow through directly to the partners. There are several easy ways to dissolve a partnership. However, they do not offer the limited liability protection of a corporation. The corporate form of business is generally the most suitable for raising additional capital.

Sam Jones has been a successful businessman and is concerned that his youngest daughter will not be able to live within her means. To protect this from happening, Jones places a certain sum of money into a trust for the benefit of the daughter. Because Jones knows he won't live forever, he arranges for the Fidelity Bank and Trust Company to have control over the assets. In this case, Sam Jones is the grantor Sam Jones is the trustee Fidelity Bank and Trust Company is the trustee Sam Jones's daughter is the beneficiary

1, 3, 4

A trust document's investment policy emphasizes that the fiduciary must follow SRI. When you are asked by the trustee to explain what that means, you would reply, A) socially responsible investing. B) systemic responsible investing. C) sustainable reasonable investing. D) safe responsible investing.

A

All the following information must be obtained from new individual customers EXCEPT A) educational background B) date of birth C) physical address D) Social Security number

A

In a trust, the person who establishes the trust and decides on its terms is A) the grantor B) the trustee C) the beneficiary D) the fiduciary

A

One of the portions of the USA PATRIOT Act of 2001that affects the opening of an account for a new customer is A) the customer identification program B) the Transportation Security Administration (TSA) C) the "know-your-customer rule" D) the requirement to obtain suitability information

A

One of the ways in which a simple trust differs from a complex trust is that simple trusts A) must distribute their distributable net income each year. B) may make distributions from the corpus of the trust. C) may retain income. D) are easier to prepare.

A

Mr. and Mrs. Williams are a retired couple receiving most of their income from a diversified portfolio of high-quality bonds and preferred stock. One of the reasons that life insurance might be a useful addition to their overall planning is that A) upon the death of the insured, the insurance provides liquidity to preserve income-producing assets from having to be liquidated to cover death expenses B) the premiums can be paid directly from their brokerage account C) dividends received on a life insurance policy are tax free D) the proceeds of a life insurance policy are free of income tax

A Even for those whose estate is not large enough to incur estate tax, life insurance proceeds provide liquidity to cover the expenses incurred at death without having to sell assets out of the portfolio. It is true that the proceeds are free of income tax, but that is not the major reason to own life insurance.

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) the proper joint account procedure B) an unlawful practice because the transaction was unauthorized C) an unfortunate error that can be reconciled with the broker-dealer through a process called reclamation D) not following instructions, a prohibited practice under the Uniform Securities Act

A 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.

Your clients, a married couple, are trying to decide whether to open an account as joint tenants with right of survivorship or tenants by the entirety. You might point out to them that one of the differences to consider is that: A) a JBE account requires the consent of both parties to make a trade. B) only the JBE account avoids probate upon the death of the first tenant. C) any 2 people can open a JBE account, while JTWROS accounts are limited to married couples. D) a JTWROS account requires the consent of both parties to make a trade.

A One of the unique characteristics of the joint by the entirety (JBE) account is that the consent of the other party is necessary in order for one of the parties to enter a trade. With a JTWROS account, either party can enter trades independently. Both JTWROS and JBE avoid probate and the JBE is limited to married couples only.

Under industry rules, customers who wish to trade options must receive a copy of the options disclosure document (ODD) A) at or before the mailing of the next monthly statement B) at or before account approval C) at or before the mailing of the confirmation representing the first options trade D) within 15 days of account approval

B

Which of the following documents would aid an investment adviser in its responsibility to fully understand the needs of a client when making investment recommendations? A) A restricted list. B) An investment policy statement. C) A proxy voting policy. D) A communications agreement.

B

A broker-dealer would not be able to open an account for A) a trust. B) a deceased person C) the estate of a deceased person. D) a city.

B Broker-dealers can only open accounts for those who are persons, as defined in the Uniform Securities Act. There are three nonpersons: minors, deceased persons, and those declared mentally incompetent. Remember, the term "person" is very broad and includes political subdivisions such as cities and states. Even though the deceased individual is not a person, that individual's estate is.

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

C

One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that A) the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts B) the CIP requires a residence address for individuals while the regulatory bodies will accept a PO Box C) the CIP requires date of birth while the regulators only require proof of legal age D) the CIP requires a statement of the customer's goals while the regulators only require current financial information

C The CIP requires the actual date of birth, not just proof of legal age. The CIP has no interest in the goals of the investor, just the identity. In both cases, a PO Box may only be used after supplying a physical residence address and both the CIP and the rules of the regulators apply to retail and institutional accounts.

All of the following statements relating to an account registered as tenants in common are true EXCEPT A) each cotenant has an undivided interest in the entire account B) this form of registration is less common for married couples than JTWROS C) upon the death of one of the cotenants, that individual's share of the account passes to the survivor(s) D) cotenants can own unequal percentages of the assets in the account

C Unlike an account registered JTWROS, when a cotenant in a TIC account dies, that individual's share of the account passes to the individual's estate, not the other cotenant(s). That would be the case with JTWROS (which is why that form is far more popular with married couples instead of TIC). In a TIC account, each cotenant has an undivided interest (specific securities in the portfolio are not designated to each cotenant—they share ownership in the entire portfolio). This is not to be confused with the fact that the ownership interests can be unequal. For example, one investor can own 40% of the account and the other 60%.

Alvin's spouse is a trustee of a trust established by Henrietta Flood, which directs income from the trust be paid to Alvin, for as long as he lives. Alvin's son, Floyd, will receive the principal upon Alvin's death. Floyd would like to receive some of the principal before Alvin's death, and Alvin does not object. How should his spouse, the trustee, act in this situation? A) Distribute part of the income to Floyd. B) Distribute part of the principal to Floyd. C) Distribute all of the principal to Floyd. D) Follow the trust terms, continuing to distribute the income to Alvin and the principal to Floyd upon Alvin's death.

D A trustee must follow the terms of the trust. Nothing in the question implies that the trustee has any discretionary powers.

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) Limited Partnership B) C Corporation C) S Corporation D) General Partnership

D 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.

A feature of which of the following business entities is limited liability but no flow-through of earnings or losses? A) Limited partnership B) LLC C) Sole proprietorship D) Corporation

D The corporation (always assume C corporation unless it says different on the test) offers limited liability to its shareholders, but there is no flow-through of income or loss. LLCs and limited partnerships offer both and the sole proprietorship has unlimited liability.

In an account opened by 2 individuals as joint tenants with rights of survivorship, all of the following are true EXCEPT A) in the event of death, the other party assumes full ownership of the account B) stock certificates may be delivered in the name of either party C) orders may be entered by either party D) mail may be directed to the joint owner agreed upon by both parties to the account

B In a JTWROS account, each party has an equal, undivided interest in the account. Upon the death of 1 party in a 2-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account.

If an investment adviser's client wishes to save current income taxes by placing certain investments in a charitable trust, ethically, the investment adviser should A) urge the client to consult with an attorney who pays a referral fee to the investment adviser B) recommend the client consult with a qualified attorney C) refuse to discuss the trust with the client because the adviser is not an attorney D) help the client draft the appropriate documents following a discussion of the advantages of the arrangement

B Presuming the adviser is not a licensed attorney, he should recommend the client see a qualified attorney. However, it is ethical to discuss the nature of a charitable trust with the client.

Which of the following types of business organizations do not protect owners' personal assets from losses incurred by the business? General partnership Sole proprietorship S corporation C corporation

1, 2

Limited liability is a characteristic of being an owner of a general partnership an interest in a limited partnership shares of an S corporation a sole proprietorship

2, 3 Limited partnerships and any corporate form of ownership offer limited liability. Such is not the case with a general partnership and certainly not the case with a sole proprietorship.

Small corporations that satisfy certain criteria can elect not to pay income tax at the corporate level but instead pass their earnings through to their shareholders. These corporations are known as A) S corporations B) R corporations C) Q corporations D) C corporations

A

Among the differences between C corporations and S corporations is the liability assumed by the shareholders the number of allowable shareholders the tax treatment of the corporation's earnings residency requirements of shareholders

2, 3, 4

Which of the following actions should be taken by an agent when a client decides to open an options account? A) Assure that an options agreement has been signed prior to the first trade taking place B) Review with the client the risks involved when trading options before the first options trade C) Obtain approval from the designated options supervisor to open the account no later than 1 business day after the first options trade D) Provide an options disclosure document no later than 15 days after the first trade

B It is imperative that suitability and risk be addressed with the client before allowing option trading to take place. The ODD must be delivered no later than with account opening, and the options agreement must be returned no later than 15 days after the account opening. An options account must be approved by a designated supervisor prior to any trading takes place in the account.

Increasingly, many institutional investors, especially those in the philanthropic arena, are using ESG factors when considering where to invest their funds. Those factors are most accurately described as A) earnings, systematic, and governmental. B) exchange, sensitivity, and growth. C) environmental, social, and governance. D) exchange, sales, and general.

C

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) Discretionary B) Margin C) Retirement D) Options

D 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.

Which of the following would be used to provide end-of-life instructions once a person becomes incapacitated? A) Living trust B) Incapacitated will C) Living will D) Durable power of attorney

C

The distributable net income (DNI) of a simple trust would not include A) interest received on municipal bonds. B) dividends received. C) reinvested capital gains. D) interest received on corporate bonds.

C It is capital gains that are reinvested in the corpus (body) of a simple trust which are not part of DNI. Although the interest on municipal bonds in not taxable, it is still included as part of the DNI.

An estate account is opened with Family Asset Protectors (FAP) a registered investment adviser. Management decisions regarding the account must be made at the direction of the A) estate creditors B) attorney with guardianship over the surviving children C) estate's executor or administrator D) investment adviser

C Only the estate executor (or administrator when the individual dies intestate) can make investment management and distribution decisions. This does not mean that the executor must make the investment decisions for the account, only that decisions as to who will do the management are within his purview. A guardian with authority over the children does not necessarily have power over the estate unless the guardian is also the administrator or the executor of the estate.

Under the provisions of the Internal Revenue Code, which of the following business forms is not required to file a separate tax return? A) LLC B) Limited partnership C) S corporation D) Sole proprietorship

D In the case of a sole proprietorship, any tax consequences (income or loss) are reported on the owner's personal Form 1040, Schedule C. The other entities file either a Form 1065 (limited partnership and LLC) or a Form 1120S (S corporation). Although a one member LLC is treated like a sole proprietorship, unless that was stated as a choice, the LLC has multiple members.

A woman wants to buy from an agent who is not registered in her state. She decides to use a friend's address in the state in which the agent is licensed. This action is A) acceptable as long as she has her friend's permission to use the address B) not acceptable because there are no circumstances under which you are permitted to use someone else's address as yours C) not acceptable because the other party does not know you are using the address D) acceptable because the agent can do business only with those who have a residence address in those states in which he is registered

B

Suzie McQueen has a very successful interior design shop she has run as a sole proprietorship. She has just celebrated her 60th birthday and has been giving thought to an eventual sale of the business. She wants your opinion on whether she should incorporate or change to a partnership. You might respond that A) the partnership form of business structure would enable Suzie to maximize her sale price B) the corporate form of business structure would be the least expensive to form C) the corporate form of business structure would be the easiest for ultimate transfer of ownership D) the partnership form of business structure would be the easiest for ultimate transfer of ownership

C

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) contact the grantor of the trust. B) amend the IPS and process the order. C) follow the trust's IPS and refuse the order. D) follow the beneficiary's instructions.

C 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.

During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from A) the spouse B) the person with a durable power of attorney C) the person appointed as administrator of the estate D) the person named as executor of the estate

C Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased. Only when there is a will is there an executor, and a durable power of attorney is canceled upon the death of either party to the power. Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority.

An investment constraint that is unique to private foundations is the requirement to A) have an investment policy statement. B) have a board of directors. C) invest 5% of its assets each year in qualifying investments. D) distribute 5% of its assets each year as qualifying distributions.

D Under Section 4942 of the Internal Revenue Code, a private foundation must pay out each year an amount equal to 5% of its net investment assets in "qualifying distributions". There is no legal requirement on how much must be invested each year, and having an investment policy statement is not unique to foundations. Likewise, there is nothing unique about the requirement to have a board of directors and that isn't an investment constraint.

If a businessowner's goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate? A) A sole proprietorship B) A general partnership C) A limited liability company (LLC) D) An S form of corporation

C If a businessowner's goal is ease in raising capital, the limited liability company (LLC) is preferable because it has no restrictions on the number or nationality of investors. While the regular or C corporate form is also preferable, the S form of corporation is limited to a maximum of 100 potential shareholders, none of whom may be a nonresident alien.

One of the situations that investment adviser representatives may encounter is the death of a client. When that happens, orders may be accepted from A) the deceased client's children. B) the deceased client's spouse. C) the trustee in intestacy. D) an individual with a durable power of attorney.

C

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

C

Mr. Hawkins sets up a revocable trust for the benefit of his adult daughter, Madeleine. His wife may draw from it only if she needs to. Income on the trust will be taxed to A) Mrs. Hawkins as the contingent beneficiary B) Madeleine as the primary beneficiary C) Mr. Hawkins as the donor D) the trust because it is a separate legal entity

C Because Mrs. Hawkins has an economic interest, this is a grantor trust. Thus, all income will be taxed to the donor, Mr. Hawkins.

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes name verbal assurance that the customer is of legal age a street address, unless the primary mailing address is a PO Box located in the state of residence a taxpayer identification number

1, 4 Mere verbal assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A PO Box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired driver's license or passport.

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? An account opened in the name of the XYZ Corporation, organized as a C corporation, by their chief investment officer An account opened by a sole proprietor in the name of the company An account opened in the name of ABC Corporation, an S corporation by one of its shareholders An account opened in the name of the GHI Fund, a regulated investment company, by the fund's portfolio manager

2, 3 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.

All of the following actions must be completed prior to customers entering their first option trade EXCEPT A) receipt of a completed options agreement B) delivery of the options disclosure document (ODD) C) approval by a designated options supervisor D) completion of the new account form

A

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

C

Which type of individual account allows for investments held in that account to go straight to a named beneficiary outside of probate? A) Testamentary account B) Account titled JTWROS C) TOD account D) Advisory account

C A simple way for an individual account owner to ensure that the assets in the account pass directly to the named beneficiary is to use the Transfer on Death (TOD) option. Although the assets in a JTWROS account pass to the survivor without probate, the question specifies an individual, not a joint account.

A customer has just died. If his wife asks you what amount of federal estate tax will be imposed on the transfer of their personal property to her name, which of the following responses would be best? A) The amount of tax will depend on the size of the estate to be transferred. B) The amount of tax will depend on your late husband's tax bracket. C) Consult a qualified tax specialist. D) The amount may be prorated over the next 4 years.

C Specific tax advice should be referred to a qualified tax adviser such as an accountant or tax attorney. No federal estate tax is imposed as a result of the marital exclusion as long as the spouse is a U.S. citizen.

With respect to taxation, an investment adviser representative should NOT A) consider tax implications as a way of improving a client's after-tax returns B) discuss the tax implications of investments C) explain the taxable status of particular investments D) draft tax and estate documents to ensure compliance with current law to provide substantial after-tax returns

D An investment adviser representative must not draft legal documents; they should only be drafted by an attorney because doing so constitutes practicing law. An investment adviser representative should, however, discuss all relevant tax implications of recommended investments, including how the recommended investments might improve a client's after-tax returns.

If a new joint tenants with rights of survivorship account is opened by two related individuals, all of the following statements are true EXCEPT A) checks may be drawn in the name of either party B) mail may be sent to either party (with the permission of each party) C) in the event of death, the decedent's interest in the account goes to the other party D) orders may be given by either party

A

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) The spouse would own all the shares. B) Ownership of the shares must be determined by probate court. C) Half the shares would belong to the spouse, and the remaining half would be distributed to the customer's estate. D) The account would be frozen until the estate was settled.

A

An advantage of structuring a business operation as an S corporation rather than a C corporation would be A) avoiding double taxation B) simplicity when raising capital through a public offering C) limited liability D) the C corporation is limited to a maximum of 100 shareholders while no such limit exists for the S corporation

A

A living will is used to A) avoid the cost and time of probate. B) express the author's end-of-life wishes. C) ensure that the author's assets are properly distributed after death. D) eliminate, or at least reduce, estate taxes.

B

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 options account C) a margin account D) an IRA

B

Among the clients of a broker-dealer could be A) an individual declared mentally incompetent. B) a foundation. C) a deceased individual. D) a minor.

B

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 trust. B) a minor. C) an insurance company. D) a bank.

B

As a registered investment adviser, you have managed $10 million of a customer's funds for several years. The customer asks you to prepare a trust for his children, to transfer $3 million of his funds into the trust, and to trade the trust with the same objectives as the existing account. You should A) explain to the customer that trusts cannot be traded B) refer the customer to an attorney that can set up the trust C) prepare the trust, transfer funds, and begin investing D) tell the customer to contact a tax specialist

B

If a customer who has granted a durable power of attorney to her son dies, which of the following statements regarding the power of attorney is TRUE? A) It remains in effect until the executor of the estate cancels it. B) It is canceled on the death of either principal. C) It remains in effect until the son cancels it. D) It remains in effect only if the son is the sole heir to the estate.

B

One of your clients has named you as the trustee for a trust he has established. The beneficiary of the trust approaches you with a request for a disbursement that is contrary to the provisions of the trust document. In accordance with the provisions of the Uniform Prudent Investor Act, you should A) do nothing B) follow the terms of the trust C) contact the grantor D) follow the wishes of the beneficiary

B

The federal legislation that requires broker-dealers to verify the identity of any person opening an account is A) the Securities Exchange Act of 1934 B) the USA PATRIOT Act of 2001 C) the Uniform Securities Act of 1956 D) the Insider Trading and Securities Fraud Enforcement Act of 1988

B

Two sisters might wish to open an account as tenants in common (TIC) rather than JTWROS in order to A) allow the spouse of each sister to have access to the account. B) ensure that their respective shares go to their heirs instead of the surviving sister. C) limit the right of each party to withdraw assets from the account. D) provide for an undivided interest in the assets of the account.

B

One of your customers has a substantial savings account at the local S&L. The customer has several grandchildren and wants the flexibility of being able to change the beneficiary allocations as their financial conditions change. You should recommend that the customer investigate the use of A) a durable power of attorney (POA). B) a Totten trust. C) an irrevocable trust. D) a Uniform Transfers to Minors Act (UTMA) account.

B A Totten trust allows for the transfer of ownership of a bank account to a beneficiary or beneficiaries after the owner's death. It is the predecessor of today's POD (pay on death) and TOD (transfer on death) accounts. Beneficiary names and/or percentages can be changed at will. An irrevocable trust can't be changed; there is no flexibility. In an UTMA account, once the money is allocated, the decision is irrevocable (and who says the grandchildren are minors). The durable POA gives a designated person the authority to manage the affairs of the account, and this customer wants the control.

Which of the following is NOT a characteristic of a corporation? A) Ownership interests are evidenced by shares of stock. B) Existence terminates when an owner dies. C) Owners have no personal liability for corporate debts. D) It is considered an entity apart from its owners.

B A corporation is an entity that has an existence separate from its owners. Therefore, the existence of a corporation does not terminate when an owner dies. Also, because the owners and the corporation are distinct entities, the owners are not personally liable for the corporation's debts.

A man is planning to start his own glass-sculpturing business. He wants to be able to deduct his anticipated losses for the first 2 years. He anticipates that the enterprise will borrow money from lenders and is willing to personally guarantee the debt. He also wants to attract other investors but does not want to give up control of the day-to-day business decisions. What business form do you recommend? A) S corporation B) Limited partnership C) General partnership D) C corporation

B A limited partnership with him as general partner would allow for additional investment capital without giving up management control. C corporations do not allow deductibility of losses; S corporations do not allow guaranteed debt to be included in the taxpayer's basis. General partnerships could allow the other partners to more easily control the day-to-day operations than a limited partnership, in which the other investors (presumably limited partners) would not be permitted to take a role in the running of the business.

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

D

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

D

An S corporation is characterized by A) limited lifetime B) more than 100 shareholders C) unlimited personal liability D) flow-through tax treatment

D

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) Beneficiary C) As the grantor, no other roles may be taken D) Trustee and beneficiary

D

One of your existing clients wishes to open a new account in the name of his spouse and enter orders on her behalf. A) The agent could be liable if the stock declines in value. B) This practice is ordinary and acceptable. C) This action is prohibited unless the customer signs a trading authorization on behalf of his spouse. D) This action is prohibited unless the spouse signs a trading authorization.

D

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 spouse B) from the client by getting a squeeze of the hand for a "yes" C) from the client's lawyer D) from a person who has a written durable power of attorney over the account

D

The type of trust created by a will that becomes operative at death is A) a living trust B) a revocable trust C) a Q-tip trust D) a testamentary trust

D

When does a customer have to receive the OCC Options Disclosure Document? A) With the confirmation of the first options transaction B) Within 5 business days of the first options trade C) Within 15 days of account approval by the firm's designated options supervisor D) Before accepting the customer's first order to trade options covered by the ODD

D

Which of the following is among the items of information that must be entered on a new account form? A) Names and addresses of at least 2 of the prospective customer's neighbors as personal references B) Names of other broker-dealer firms already holding accounts for the prospective customer C) What educational degree(s) the accountholder has earned D) Names of all persons who will have access to the account

D

Your advisory client is an 86-year-old woman who is presently in the hospital, unable to communicate due to a severe stroke. For the past 6 years, she has followed the practice of making annual gifts of stock to her children and grandchildren on her birthday. Because her 87th is coming up later this month, her oldest son approaches you and asks you to continue the policy. A) You should go to the hospital and see if she can blink her eyes to indicate yes or no. B) You may only follow the provisions of her will. C) With 6 years of prior history, you know this is what she would want you to do so you go ahead as in previous years. D) Without a proper durable power of attorney being produced, you cannot do anything.

D

Which of the following are governed by the prudent investor rule? Trustee Executor Custodian Agent who has been granted discretionary authority

A

When a trustee is managing the trust assets, which of the following is the most important consideration? A) The purposes, terms, distribution requirements, and other circumstances of the trust B) Preservation of capital C) Reasonable income D) Minimizing expenses

A Although there certainly is a case for preservation of capital, reasonable income, and minimizing expenses, the most important consideration is to follow the design and objectives of the trust.

Which of the following business accounts does not require considering the suitability of the owners? A) C corporation B) General partnership C) Sole proprietorship D) S corporation

A Because the C corporation is an entity separate from its shareholders, suitability for a C corporation account is based solely on the company itself. All of the others provide flow-through of income and loss to the individual owners so it is important to view the collective suitability of the individual owners (or single owner in the case of the sole proprietorship).

The type of business organization in which one person owns the entire business and there is no legal distinction between that individual and the business is A) a general partnership B) a sole proprietorship C) a corporation D) a limited partnership

B A sole proprietorship is the simplest form of business organization, because one person owns the entire business and there is no legal distinction between the owner and the business. This means that the owner is personally responsible for the business's debts. A partnership always requires 2 or more owners. Although 1 person can own an entire corporation, a corporation is a legal entity separate and distinct from its owner(s).

An agent may open a joint account for which of the following? Lee and his 13-year-old son, Tom Mary and Kelley, 2 adult college roommates Jerry and Mark, friends and partners in business for more than 20 years Melinda and her minor nephew, John, for whom she is guardian

2, 3

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

2, 3

Which of the following statements regarding an S corporation owner and an owner of an LLC are TRUE? Creditors have very limited recourse rights to the owners. They may not be nonresident aliens. They both are considered stockholders. Both receive the tax benefit of owning flow-through entities.

1, 4 Creditors don't have recourse to the owners of either entity unless the owners have specifically allowed it. Both are flow-through or conduit entities. Owners of S corporations are stockholders, whereas those in an LLC are members. Nonresident aliens may not own an S corporation.

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 joint tenancy account with right of survivorship and execute a transfer on death (TOD) registration form B) individual accounts in the name of each daughter C) a joint tenancy account with right of survivorship D) a tenants in common account

A 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.

When comparing a private equity fund to a public one, it would be incorrect to state that the private fund has A) stronger governance. B) less liquidity. C) higher risk. D) lower reporting costs.

A The first step is to notice that the question is looking for the statement that is not correct. Corporate governance is an area where public shareholders look to ensure that the management is performing in ways that not only maximize operating results, but also represent high standards of business ethics. In the case of private funds, there are very few shareholders and they generally take less of an interest in ESG (environment, social, and corporate governance) matters. Private funds are not liquid and because they are private, they do not have the costs of regular reporting to the SEC. In general, private funds are considered a higher-than-average risk investment.

If 150 investors want to form a corporation to limit their financial liability to the amount of money they invest and do not want to be responsible for any debt that the corporation incurs, they would most likely form A) a C corporation B) an S corporation C) a proprietorship D) a general partnership

A The investors would form a C corporation. The advantages of the C corporation are that stockholders are not liable for corporate debt; that it is easier to raise money by issuing stock; that it is easier to transfer ownership; and that unlike a partnership or a proprietorship, a C corporation has a continuous life because it does not terminate on the death of shareholders, officers, or directors. An S corporation is limited to 100 investors.

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) The original value plus any appreciation passes to the beneficiaries but is subject to gift tax. 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 and is taxed as ordinary income. D) No tax is due if the grantor should die during the term of the trust.

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 grantor retained annuity trust is a planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize A) income taxes. B) property taxes. C) excise taxes. D) estate taxes.

D

Among the advantages of forming an S corporation rather than a C corporation for a new business enterprise is A) the ease in raising substantial amounts of capital. B) shareholders' losses are limited to the amount of their investment C) any losses flow through to the investors D) unlike the C corporation, which is limited to 100 investors, there is no such limit for an S corporation

C

An investment adviser would be able to enter into an advisory contract with all of the following except A) a philanthropic foundation. B) three brothers in a joint account. C) a minor. D) a closed-end investment company.

C

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

C

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

C

When a will calls for property to be distributed per stirpes, it means that A) the property is divided into as many equal shares as there are surviving children of the designated ancestor, with nothing going to surviving descendants of deceased children B) the property is divided into as many equal shares as there are surviving children and grandchildren of the designated ancestor C) the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants D) all living descendants of the ancestor receive equal shares in the property remaining after all estate expenses are paid

C

Which of the following is most commonly used when the author wants to express end of life wishes? A) A living trust B) A testamentary trust C) A living will D) A revocable trust

C

There are many different legal ways to structure a new business entity. One of these is the general partnership. Among the benefits of using this structure would be A) limited liability B) substantial capital can be raised with little effort and low cost C) ease of formation D) the 50% dividends received exclusion

C Compared with a corporation, it is generally easier to form (and dissolve) a partnership. General partners have full liability and there is no 50% dividends received exclusion for partnerships; that only applies to corporations. C corporations are the entity for raising a lot of capital.

In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account, is A) revocable trust B) demand deposit account (DDA) C) Totten trust D) passbook savings account

C The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. The account owner is the trustee, in control of money that will eventually go to the trust beneficiary, and could change beneficiaries as desired. But whether the arrangement is called a Totten trust or a POD account, the result is the same.

Which of the following would be used to provide end-of-life instructions once a person becomes incapacitated? A) An incapacitated will B) A durable power of attorney C) A living trust D) A living will

D The purpose of a living will is to give clear instructions regarding end-of-life decisions, such as organ donation or when to "pull the plug." There is no such thing as an incapacitated will. A living trust deals with how assets are distributed, and a durable power of attorney grants authorization to a person to legally act on behalf of someone who cannot do so.

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 single parent. B) a charitable foundation. C) a university endowment fund. D) a registered investment company.

D This is a bit sneaky. In order for an investment adviser to enter into an advisory contract with an investment company, the adviser must be SEC registered (federal covered). Federal covered investment advisers are never registered in any states.