Types of Client Unit 18

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 proxy voting policy. B) A restricted list. C) A communications agreement. D) An investment policy statement.

D) An investment policy statement. The IPS is the key document that defines an investor's risk and return objectives and any constraints for their investment.

The customer identification program (CIP) requires that certain information relating to new customers be obtained. Included in that requirement for individual clients who are citizens of the United States are all of the following EXCEPT A) date of birth B) Social Security number C) a physical address D) current employment status

D) current employment status The 4 primary requirements of the CIP are the individual client's name, physical address, DOB, and SSN. Although current employment status would be asked as part of opening a new account, that is not a CIP requirement.

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

A) General Partnership 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

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

A) draft tax and estate documents to ensure compliance with current law to provide substantial after-tax return 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.

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

C) II, III, and IV Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. At the time of this printing, that maximum is 100, none of whom may be a nonresident alien (C corps have no residency restrictions). The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid.

Which of the following accounts could be opened with a TOD designation? Individual Joint tenants in common Joint tenants with rights of survivorship UTMA A) I and II B) I and III C) II and IV D) I, III and IV

B) I and III 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.

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) the 50% dividends received exclusion C) substantial capital can be raised with little effort and low cost D) ease of formation

D) ease of formation 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.

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

D) have a check drawn on the account payable to the trustee for expenses 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.

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

A) This action is prohibited unless the spouse signs a trading authorization. Effecting transactions without specific written authority from the beneficial owner of the account is prohibited. This customer cannot sign trading authorization on behalf of his spouse. The spouse must sign the authorization.

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) any 2 people can open a JBE account, while JTWROS accounts are limited to married couples. C) only the JBE account avoids probate upon the death of the first tenant. D) a JTWROS account requires the consent of both parties to make a trade.

A) a JBE account requires the consent of both parties to make a trade. 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.

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

A) there is no statutory limit on the number of investors in an LLC There is no limit to the number of investors (members) in an LLC, while current regulations limit the number of investors (shareholders) in an S corporation to 100. The tax treatment is the same, and both can be formed with a single owner.

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

B) I and II Corporations, whether organized as C or S corporations, afford their owners limited liability, which is the protection of their personal assets from losses incurred by the businesses. General partnerships and sole proprietorships subject their owners to personal liability for losses of the business.

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 easiest for ultimate transfer of ownership C) the corporate form of business structure would be the least expensive to form D) the partnership form of business structure would be the easiest for ultimate transfer of ownership

B) the corporate form of business structure would be the easiest for ultimate transfer of ownership In general, the corporate form of business leads to the easiest transfer of ownership. Because Suzie would probably own 100% of the stock, all she would have to do is sell that stock to a new purchaser and the corporation could continue just as before. If Suzie wanted to reorganize as a partnership, she would have to bring in at least one additional individual, ending her total ownership of the business. Even then, a partnership interest is not as easy to sell as stock.

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) in the event of death, the decedent's interest in the account goes to the other party B) orders may be given by either party C) checks may be drawn in the name of either party D) mail may be sent to either party (with the permission of each party)

C) checks may be drawn in the name of either party While either party may enter an order, any money or securities delivered out of the account must be in the names of both owners.