Ch 1: Building an Investor Profile
What three suitability obligations does FINRA impose on broker-dealers?
1) Reasonable basis 2) Customer specific 3) Quantitative
What is the maximum tax rate for long-term capital gains tax?
20%
A broker-dealer wants to create a sales contest for its registered representatives (RRs) based on the sale of a proprietary variable annuity that the firm is launching. For the winner of the contest, the firm will donate a specified amount of money to the RR's charity of choice. Is this type of sales contest permitted? A) No, since the contest is based on the sale of a specific product. B) No, since the contest permits the RR to choose the charity. C) Yes, since the contest will reward a charity and not the RR. D) Yes, it's permitted regardless of whether the reward will be allocated to a charity.
A) No, since the contest is based on the sale of a specific product. According to FINRA rules and Regulation Best Interest (Reg BI), a sales contest is permitted as long as it's based on total products sold or asset growth. However, sales contests, bonuses, and non-cash compensation cannot be based on the sale of specific products or specific types of securities.
To determine suitability, what information must be obtained to complete an investor's profile?
Age, current investments, tax rate, objectives, investment experience, time horizon, liquidity, needs, risk tolerance
Under Regulation BI, which of the following forms is required for a broker-dealer to disclose the relationship it maintains with its clients? A) Form U4 B) Form CRS C) Form 3 D) S-1
B) Form CRS Form CRS (Customer Relationship Summary) is required under Regulation BI and is used to provide retail investors with information about the nature of their relationship with their financial professional. Form CRS is written in a simple, easy-to-understand format. Form U4 is filed with FINRA and is used to registered individuals as registered representatives. Form 3 is filed by insiders at SEC reporting companies. Form S-1 is used to register the stock of an initial public offering.
What is not pertinent when opening an account, a client's educational or financial background?
Educational background
A investor has been writing covered calls and now wants to begin writing uncovered calls. If the new approach is permitted, the investor's registered representative should update the investor's profile to show the objective to be: A) Capital appreciation B) Speculation C) Balanced D) Growth
Speculation Writing uncovered calls is considered one of the most speculative investment strategies since the investor is assuming potentially unlimited risk. If the new approach is permitted, the investor's objective should be identified as speculative. (17041)
Which of the following factors is the MOST important to consider when analyzing the investment portfolio of a client who has retirement as her primary investment objective? A) Age B) Net worth C) Education level D) Previous investment history
A) Age When analyzing a client's existing portfolio to determine how it affects recommendations you might make, it is important to consider a client's investment objectives and the length of time available to try to meet those objectives. When retirement is the primary objective, it is very important to know the client's age. The other items mentioned are also valuable for an RR to know, but they are not as critical as knowing the client's age.
A customer's investment profile would include all of the following information, EXCEPT the: A) Amount of taxes paid by the customer B) Investment experience of the customer C) Risk tolerance of the customer D) Other investments held by the customer
A) Amount of taxes paid by the customer Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for recommending a transaction based on information obtained from the customer concerning his investment profile. This would include the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. The tax status is a component of an investor's investment profile, but not the amount of taxes paid.
When a registered representative makes a recommendation to a customer involving a leveraged exchange-traded fund (ETF), he will consider which TWO of the following factors to be MOST important? I. The security may be recommended to at least some investors II. The security may be able to produce a profit over a long period III. The security may be able to be sold quickly IV. The security may be a good investment for a specific customer A) I and III B) I and IV C) II and III D) II and IV
B) I and IV Although all of the choices are important factors for determining the suitability of a recommendation, the FINRA suitability rule has listed three main suitability obligations. 1) The reasonable-basis obligation requires a member firm and an RR to have a reasonable basis to believe that the recommendation is suitable for at least some investors. If the firm or its RRs do not understand the product, it should not be recommended to customers. 2) The customer-specific obligation requires the member firm and an RR to have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer's investment profile. A customer's investment profile would include, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives and experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose. Even though a customer is not obligated to provide all of this information, the RR should try to obtain the information necessary to make a suitable recommendation. 3) The quantitative obligation requires the member firm and an RR to have a reasonable basis for believing that a series of recommended transactions, even if suitable for a customer, are not excessive when taken together in light of the customer's investment profile.
Which of the following is MOST important when opening an account and making a recommendation to a customer? A) That the recommendation is suitable B) That the recommendation is in the customer's best interest C) That the recommendation has been approved by a principal D) That no recommendations are made in a newly opened account until three months have elapsed
B) That the recommendation is in the customer's best interest In general, suitability is the primary factor when making a recommendation. However, under Regulation Best Interests (Reg BI), the most important factor is that the recommendation is in the customer's best interest. Keep in mind, some recommendations may be suitable, but they may not necessarily be in the customer's best interest.
When determining whether a recommended transaction is suitable, which of the following factors is LEAST important? A) The customer's age B) The customer's liquidity needs C) The level of education the customer achieved D) The tax status of the customer
C) The level of education the customer achieved Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for recommending a transaction based on information obtained from the customer concerning her investment profile. This would include the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. The educational level of the customer or what type of degree she has would be the least important factor listed.
A broker-dealer's suitability obligation is: A) To protect the customer against a loss B) A requirement by a broker-dealer to avoid conflicts of interest C) To make sure the recommended security fits the customer investment objectives D) To make sure a customer does not invest in risky securities
C) To make sure the recommended security fits the customer investment objectives Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for recommending a transaction based on information obtained from the customer concerning his investment profile. This would include the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. A broker-dealer may assist a customer in limiting a loss but not guarantee a customer against a loss. Conflicts of interest must be disclosed, but do not need to be avoided. A firm may recommend that a small amount of a customer's portfolio be invested in riskier securities if they fit into an overall investment strategy.
A customer wants to purchase a speculative security in her account based on a friend's recommendation. The customer's investment objectives are growth and income, but not speculation. What's the BEST course of action for the customer's RR to take? A) Refuse to accept or execute the customer's order. B) Mark the order ticket "unsolicited," but have the order approved by a principal prior to execution. C) Mark the order ticket "unsolicited" and execute the order immediately. D) Inform the customer that this trade is not suitable; however, if the customer persists, mark the order ticket "unsolicited" and execute the transaction.
D) Inform the customer that this trade is not suitable; however, if the customer persists, mark the order ticket "unsolicited" and execute the transaction. The best course of action is to first inform the customer that this trade is not suitable. If the customer still wants to purchase the security, the RR should mark the order ticket "unsolicited" and execute the transaction. The RR is should not refuse to accept the order.
True or False: There are no suitability requirements for institutional investors.
False. Although they differ from retail requirements, suitability requirements do apply to institutional investors.
True or False: A BD has no responsibility to determine suitability for institutional investors.
False; A BD is never relieved of its suitability obigation
What is the formula for calculating an individual's personal discretionary income?
Income - Expenses = Discretionary Income
Income and estate tax are examples of a ___________ or __________ tax.
Income and estate tax are examples of a progressive or graduated tax.
List some important considerations when determining the suitability of recommendations made to customers.
Investment objectives, financial situation, risk tolerance, tax status
Why is a client's profession relevant when determining suitability?
It may indicate the client's level of sophistication and the potential need for liquidity
What is some of the important information to obtain when opening a new client's account?
Name, address, age, occupation, SSN, citizenship, income, net worth, objectives, risk tolerance, investment experience
When dealing with institutional client suitability, what are two important considerations?
The client's ability to evaluate independently the risk and the extent to which they are exercising that ability.
In making a suitability determination for an institution, what are some concerns a BD may have?
The institution's ability to evaluate investments; use of its own judgment in the past; its use of an outside adviser
True or False: BDs are responsible for determining client suitability and providing best execution.
True
True or False: FINRA's suitability rules for institutions are less stringent when compared to the rules for retail investors.
True
True or False: Suitability rules do not apply when clients makes their own investment decisions.
True
What should an agent consider when determining suitability for an institutional client?
Whether the client is acting independently and has the capability to understand the risks
Is a gift of $16,000 per person, per year, exempt from gift tax?
Yes
Is a gift of $32,000 per married couple, per year, exempt from gift tax?
Yes
How is an individual's net worth calculated? a) The individual's total assets minus the individual's total liabilities b) The individual's annual income from both earned and unearned sources minus the individual's total annual expenses C) The individual's annual income from only earned income sources minus the individual's total annual expenses D) The ratio of an individual's total assets to the individual's total liabilities
a) The individual's total assets minus the individual's total liabilities An individual's net worth represents his total assets minus his total liabilities (i.e., Net Worth = Assets - Liabilities). An individual's net income represents his annual income from all sources minus his total annual expenses.
How large can a gift be between spouses and remain exempt from the gift tax?
an unlimited amount
An owner of utility stocks, preferred stocks, and bonds would be most concerned about changes in ______________.
changes in interest rates
Regressive taxes are also referred to as _______ taxes.
flat taxes
Progressive taxes are also referred to as ____________ taxes.
graduated taxes
Sales tax is an example of a _____________________ tax.
regressive/flat tax
