Customer Accounts

A customer buys 100 shares of ABC stock at $10 as an initial transaction in a margin account. The customer must deposit: A) $1,000 B) $2,000 C) $2,500 D) $3,000

A) $1,000 Even though minimum equity to open a long margin account is $2,000, this does not apply if the securities in the account are fully paid. A customer cannot be asked to deposit more than 100% when buying since this is the maximum potential loss. The customer wants to buy $1,000 of stock, so 100% or $1,000 must be deposited.

A customer has an existing margin account with the following positions: Long: 1,000 XYZ CmnMkt Value: $20,000Long: 10 PDQ Jan 50 Calls Mkt Value: $5,000 Debit Bal: $15,000 SMA: $1,000 How much cash can the customer withdraw (borrow) from the account? A) 0 B) $500 C) $1,000 D) $2,000

A) 0 For purposes of computing equity in a margin account, long option positions should be excluded since they must be fully paid. Think of long options as being purchased in a cash account with no loan value. LMV - Debit = Equity % Stock: $20,000 - $15,000 = $5,000 25% This account is at minimum maintenance margin. If the SMA of $1,000 were borrowed from the account, the margin would fall below minimum maintenance. Therefore, no borrowing is permitted. SMA can only be borrowed if the account is above minimum maintenance margin - and it can only be borrowed in an amount that brings the account to maintenance - not below maintenance.

Which of the following parties of an account can give trading authorization to another party? A) A second party can give trading authorization to a first party B) A first party can give trading authorization to a second party C) A third party can give trading authorization to a second party D) A first party can give trading authorization to a third party

A) A second party can give trading authorization to a first party The parties to an account are: First Party: Brokerage FirmSecond Party:CustomerThird Party:Someone Other Than the Broker or CustomerSince only Second Parties can open accounts, only a Second Party can give trading authorization to either a First Party (a discretionary account) or to a Third Party (a Third Party trading authorization).

All of the following are affected when securities are sold in a restricted margin account EXCEPT: A) Equity B) Long Market Value C) SMA D) Debit Balance

A) Equity If securities are sold in a restricted margin account (one that is below 50% margin), the long market value must decline. The proceeds of the sale are used to reduce the debit balance, therefore the debit balance will decrease. When securities are sold from a restricted account, 50% of the proceeds may be withdrawn. This is accomplished by crediting 50% of the proceeds to SMA. Thus, this amount can be borrowed. The only choice that does not change is Equity - this stays the same. Equity will be affected only if the market value rises or falls - or if cash is paid into, or borrowed from, the account.

A registered representative receives an order to sell 100 shares of ABC stock that has been "transferred and shipped" to the customer. Before executing the order, the registered representative must: I Ascertain the location of the stock II Ascertain that the securities can be delivered in 2 business days III Validate that the securities are in "good form" IV Obtain physical possession of the securities A) I and II B) II and III C) IV only D) I, II, III, IV

A) I and II FINRA rules require that orders to sell cannot be accepted unless the firm has reasonable assurance that the securities can be delivered in 2 business days. There is no requirement to obtain physical possession of the securities before placing the sell order, nor is there a requirement to validate the securities as "good for delivery."

FINRA defines a "customer complaint" as one that is received by the member firm: I in writing by mail II by e-mail III verbally over the telephone IV verbally in person A) I and II only B) II and III only C) I, II and IV D) I, II, III, IV

A) I and II only FINRA defines a customer "complaint" as one received in writing (e-mail is written - screamers don't count).

Which statements are TRUE regarding a custodial account? I Tax liability is the responsibility of the minor II Tax liability is the responsibility of the custodian III The minor's social security number is on the account IV The custodian's social security number is on the account A) I and III B) I and IV C) II and III D) II and IV

A) I and III 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.

= Which of the following statements are TRUE regarding maintenance margin calls? I Maintenance margin calls must be met promptly II Maintenance margin calls must be met within 5 days of receiving the call III If the maintenance call is not met, enough securities will be sold out of the account to satisfy the maintenance call IV If the maintenance call is not met, the entire account will be liquidated A) I and III B) I and IV C) II and III D) II and IV

A) I and III Calls for maintenance margin must be met "promptly." If the monies are not deposited "promptly," enough securities will be sold out of the account to satisfy the maintenance call.

Call loans made by bank to broker-dealers are secured by which of the following? I Customer margin securities II Fully paid customer securities III Firm securities positions IV Customer securities positions in cash accounts A) I only B) II and IV C) II, III, IV D) I, II, IV

A) I only Call loans are secured by customer margin securities. Fully paid customer securities cannot be pledged for these loans - they must be segregated and placed in safekeeping. The loans are not secured by cash nor do firm securities positions collateralize these loans. Loans using firm securities as collateral (proprietary positions) must be kept separate from loans using customer securities as collateral.

Approval of new accounts for FINRA member firms can be performed by the: I Registered Representative II Branch Office Manager III Financial and Operations Principal A) II only B) II and III C) I and III D) I, II, III

A) II only Under FINRA rules, new accounts must be approved, in writing, by a Branch Office Manager (Series 9/10 license). Registered representatives cannot approve the opening of new accounts. The Financial and Operations Principal (Series 27 license) is responsible only for the firm's financial reporting and back office operations.

A customer has opened a NMFBA but is not trading very much and the cost of the account is higher than if the account was based on a per trade commission charge. Which statement is TRUE? A) The account can be maintained as a NMFBA if the customer places a high value on aligning his interests with those of the broker B) The account can be maintained as a NMFBA if the customer receives a disclosure document that explains how the account fees are charged C) The account must be converted to one that charges a per trade commission D) No action can be taken unless the customer initiates a conversation about the relevant costs and services provided in the account

A) The account can be maintained as a NMFBA if the customer places a high value on aligning his interests with those of the broker A NMFBA is a "Non-Managed Fee Based Account." This type of account charges a flat annual fee for all trading, but the annual fee does not include recommendations or asset management. Typically, such an account is only suitable for an active trader. However, a customer that trades infrequently can still be suitable for such an account, if the customer places a high value on aligning his or her interests with those of the broker. (This means that the customer is happy to pay the flat annual fee because he knows that the broker does not have an incentive to churn the account!)

Which of the following is a TRUE statement about managed wrap accounts? The customer is charged: A) a single annual fee based on total assets in the account for account transactions and maintenance B) a commission for each transaction performed C) a commission for each recommendation that results in a transaction D) both a commission on each transaction performed and an annual maintenance fee based on total assets in the account

A) a single annual fee based on total assets in the account for account transactions and maintenance Wrap accounts are a type of customer account, where all services performed by the broker are "wrapped" into a single account; and a single annual fee based as a percentage of assets under management is charged. There is no commission charge for each transaction performed in such an account; all services are covered in the single "wrap" fee.Also note that "wrap" accounts, because they charge a flat annual fee and not commissions, are defined as investment adviser products. These must be sold through an investment adviser subsidiary of a broker-dealer, and the representatives that sell them must be registered as "IARs" - Investment Adviser Representatives - in each State where they offer the product.

A copy of the member firm's Business Continuity Plan must be provided to each customer: A) at account opening B) on each trade confirmation C) on each account statement D) every 36 months

A) at account opening Each member firm must prepare a Business Continuity Plan that addresses the possibility of significant business disruptions and how the member plans to respond to events of increasing severity. Customers must be given a summarized version of the BCP at account opening. Additionally, the BCP must be posted on the member firm's Web site and must be mailed to customers on request.

In order to recommend a fee based account to a customer, under FINRA rules, the customer must be provided with a(n): A) disclosure document, at or prior to, account opening B) disclosure document within 15 days of account opening C) investment adviser brochure, at or prior to, account opening D) investment adviser brochure within 15 days of account opening

A) disclosure document, at or prior to, account opening FINRA requires that, if a fee based account is recommended to a customer, the customer must receive a disclosure document that details all services provided and costs involved, at, or prior to, account opening.

Delivery of the privacy notice required under Regulation SP is required for: A) retail customers B) institutional customers C) retirement plan customers D) any of the above

A) retail customers Regulation SP ("Statement of Privacy") requires member firms to provide a privacy notice to retail customers only. Firms cannot divulge non-public information about customers to third parties unless the firm has given notice to the customer that this may happen; and the customer has not elected to opt out of the disclosure. The privacy notice is given at account opening and must be made available annually thereafter.

A customer opens a long margin account with 1 position, consisting of 100 shares of ABC stock valued at $20 per share. There is no debit balance in the account. If the customer buys 100 shares of XYZ at $50 per share, the margin call will be: A) $1,000 B) $1,500 C) $2,000 D) $3,000

B) $1,500 Prior to making the new purchase, the margin account held 100 shares of ABC at $20, fully paid, for equity of $2,000 in the account. There is $1,000 of SMA from this position that cannot be used currently, since minimum margin to open an account is $2,000 of equity or the account being "fully paid," whichever is less. Now the customer wishes to buy another $5,000 of stock, which would generate a Regulation T call of $2,500. Since there is $1,000 of SMA in the account, the customer need only deposit $1,500. After all this, the account will show: LMV - Debit = Equity $2,000 - $0 = $2,000 $5,000 - $3,500 = $1,500 -------- ------- -------- $7,000 $3,500 $3,500

A customer has a restricted margin account with $2,500 of SMA. The customer wishes to buy $10,000 of a marginable listed stock. The customer must deposit: A) $0 B) $2,500 C) $5,000 D) $7,500

B) $2,500 A restricted margin account is one that is below the 50% Regulation T initial margin requirement. Restriction has no effect on purchases in the account. To buy a marginable security, the customer must deposit the Regulation T requirement. To buy $10,000 of a marginable stock, the customer must deposit $5,000 (50% Regulation T requirement). The existing $2,500 of SMA can be used to meet part of this requirement, leaving the customer to deposit the remaining $2,500.

A customer has a long margin account with $36,000 of stock and a $18,000 debit balance. At which market value will the account be at minimum maintenance? A) $30,000 B) $24,000 C) $20,000 D) $16,000

B) $24,000 Long margin accounts have a minimum equity requirement of 25% of market value. Since the debit balance remains fixed for purposes of exam computations, at maintenance, the debit is equal to 75% of market value, with equity being equal to 25%. To find the market value at which the account is at maintenance, the formula is:$18,000.75= $24,000 Market ValueIf the market value declines to $24,000, the account is at maintenance. With $24,000 of market value, and a $18,000 debit, equity will be $6,000. $6,000 equity / $24,000 market value = 25% margin.

A customer is long 400 shares of fully paid XYZ stock, valued at $150 per share. The customer sells "short against the box" another 400 shares of XYZ. XYZ is listed on the New York Stock Exchange. The minimum maintenance margin requirement is: A) 0 B) $3,000 C) $57,000 D) $60,000

B) $3,000 The margin in an arbitrage account is 5% minimum maintenance on the long side under FINRA rules. There is no Regulation T requirement, since the customer has no risk - his net position = "0." Since the market value of the securities is $60,000, the minimum margin is 5% = $3,000. The customer can borrow the remaining $57,000.

In an existing margin account, a customer wishes to buy 400 shares of ABC stock at $20 per shares and 10 PDQ Nov 25 Calls @ $4. The customer wishes to deposit fully paid common shares which have a current market value of $80 per share. How many shares of the stock must be deposited? A) 100 shares B) 200 shares C) 300 shares D) 1,000 shares

B) 200 shares The customer needs to deposit 50% of the purchase price to buy the stock and 100% of the purchase price to buy the calls. To buy $8,000 of stock, the Regulation T requirement is $4,000. To buy $4,000 of options, the Regulation T requirement is $4,000. Therefore, the margin call is for $8,000. Since the customer wishes to deposit fully paid marginable stock, twice the amount must be deposited or $16,000 worth (since the stock has a loan value of 50% or $8,000). $16,000 of stock / $80 per share = 200 shares to be deposited.

Which of the following statements are TRUE? I Regulation T requires payment for purchases no later than 4 business days after trade date II Regulation T applies to both exempt and non-exempt securities III Regulation T applies to both listed and unlisted securities IV Regulation T sets both initial and maintenance margins A) I only B) I and III C) II, III, IV D) I, III, IV

B) I and III Regulation T requires payment for securities purchases promptly, but no later than "S + 2," which is 4 business days after trade date (2 business days regular way settlement + 2 grace days). Regulation T only applies to non-exempt securities. It does not apply to exempt securities since it is part of the Securities Exchange Act of 1934, of which only the anti-fraud provisions apply to exempts. Regulation T margins apply to both listed and unlisted securities. The Federal Reserve only allows exchange listed and NASDAQ securities to be margined. OTCBB and Pink Sheet securities cannot be margined. Regulation T only sets initial margins; maintenance margins are set by FINRA.

Which of the following statements are TRUE if a customer signs a durable power of attorney? I The power of attorney continues in effect if the grantor becomes mentally incompetent II The power of attorney ceases if the grantor becomes mentally incompetent III The power of attorney continues in effect if the grantor dies IV The power of attorney ceases if the grantor dies A) I and III B) I and IV C) II and III D) II and IV

B) I and IV A "durable" power of attorney continues if the grantor becomes mentally incapacitated. In contrast, a "non-durable" power of attorney ends if the grantor is incapacitated or becomes incompetent. However, upon the death of the grantor, any power of attorney (whether durable or non-durable) is void.

Which of the following securities are marginable? I Exchange listed common stock II Pink Sheet listed common stock III Limited partnership units IV U.S. Government bonds A) I only B) I and IV C) II and III D) I, II, III, IV

B) I and IV Any security listed on an exchange or on NASDAQ is marginable under Reg. T. Pink Sheet (non-NASDAQ OTC issues) are too small and thinly traded to be marginable. The market for limited partnership units is illiquid, so these are not marginable either. Regarding exempt securities such as U.S. Governments, Agencies, and Municipals - these are marginable securities - however, Regulation T. does not apply because they are exempt. Rather, the margins for exempt securities are set by FINRA.

For an employee of another firm to open an options account, which of the following statements are TRUE? I Prior written approval must be obtained from the employing firm to open the account II No prior written approval of the employer is needed to open the account III Prior written approval of the employer is needed before executing each trade IV No prior written approval of the employer is needed before executing each trade A) I and III B) I and IV C) II and III D) II and IV

B) I and IV For an employee of another firm to open an options account, prior written approval of the employer is required and duplicate confirmations of all trades must be sent to the employer. There is no requirement to get employer approval prior to executing each trade.

When comparing a margin account to a cash account, which of the following statements are TRUE? I Margin accounts have greater leverage than cash accounts II Margin accounts have the same leverage as cash accounts III Margin accounts have greater price volatility than cash accounts IV Margin accounts have the same price volatility as cash accounts A) I and III B) I and IV C) II and III D) II and IV

B) I and IV Margin accounts have greater leverage than cash accounts because a portion of the purchase price is borrowed. The greater leverage in a margin account gives a greater percentage return on cash invested. The price volatility of a security held in either a cash or margin account is the same.

Which statements are TRUE when comparing a custodial account is opened under UTMA (Uniform Transfers to Minors Act) to one opened under UGMA (Uniform Gifts to Minors Act)? I Under UGMA, assets in the account are transferred to the new adult at legal age II Under UGMA, assets in the account are transferred to the new adult at the age specified by the custodian III Under UTMA, assets in the account are transferred to the new adult at legal age IV Under UTMA, assets in the account are transferred to the new adult at the age specified by the custodian A) I and III B) I and IV C) II and III D) II and IV

B) I and IV The main difference between UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) is that while the assets in an UGMA account transfer to the new adult at legal age, and an UTMA account, the custodian sets the transfer age (up to the maximum age set by that state - in most states, the maximum age is 21, a few have a maximum age of 25).

Under the rules of the Options Exchanges, if a customer's financial condition changes materially, then which of the following will be amended? I Options Disclosure Document II Options Agreement III New Account Form Information A) I and II only B) II and III only C) I and III only D) I, II, III

B) II and III only The rules of the options exchanges require that if a customer's financial condition changes materially, the options agreement signed by that customer must be amended to reflect the change. A revised options agreement must be sent to the customer, and must be signed and returned within 15 days. At the same time, customer account information would also be updated (which just makes sense). A new Options Disclosure Document is sent to customers only if the Options Clearing Corporation changes its rules.

Under FINRA rules, a written power of attorney is NOT required for a registered representative to choose which of the following order related items? I Security to be traded II Size of the order III Price of execution IV Time of execution A) I and II B) III and IV C) I, II, III D) I, II, III, IV

B) III and IV A registered representative can always pick the time and price of execution of an order - this is the same as a "Not Held" order. If any more than price or time is selected, the trade is "discretionary" and requires a written power of attorney from the customer.

Question Which statement is TRUE? A) Real estate is a permitted asset that can be held in a UGMA account B) Real estate is a permitted asset that can be held in a UTMA account C) Real estate is a permitted asset that can be held in both UTMA and UGMA accounts D) Real estate is a prohibited asset in both UTMA and UGMA accounts

B) Real estate is a permitted asset that can be held in a UTMA account UGMA (Uniform Gifts to Minors Act) is the "older" legislation covering custodial accounts. It has been replaced is most states by UTMA - Uniform Transfers to Minors Act (the holdout states are Vermont and South Carolina, which still only have UGMA). One of the differences between them is that UTMA permits donations of real estate and artwork into the account, while UGMA does not.

A new customer wants to open an account at your firm. When you ask him for a street address, he tells you that he will be moving soon to a different apartment complex and wants to use his business address. Which statement is TRUE about this? A) The only address to be used for Customer Identification purposes is the client's residence address and the account cannot be opened B) The business address can be used for Customer Identification purposes and the account can be opened C) If a residence address is not available, the address to be used for Customer Identification purposes is a P.O. Box D) The account cannot be opened

B) The business address can be used for Customer Identification purposes and the account can be opened One of the critical pieces of information that must be obtained at account opening is the customer's address - either residence or business street address. Also acceptable is the residence or business address of a next of kin.

A client wants to transfer her account from one brokerage firm to another brokerage firm. How would she initiate the process? A) The customer must complete and sign an ACATS form at the delivering firm B) The customer must start the transfer process by completing and signing a TIF at the receiving firm C) The customer must initiate the transfer process by accessing the BrokerCheck website D) The customer must initiate the transfer process by using the DTCC portal

B) The customer must start the transfer process by completing and signing a TIF at the receiving firm FINRA attempts to make it as seamless as possible for a customer to transfer his or her account to another broker-dealer. The electronic system that processes the transfer is "ACATS" - the Automated Customer Account Transfer System - run by Depository Trust and Clearing Corporation (which actually holds all customer securities positions for broker-dealer firms). The scenario works likes this: A customer comes into you firm saying she no longer wants to work with her old broker and wants to transfer her account to you. No problem! You ask her for a copy of her most recent account statement from her old broker and enter those positions onto a "TIF" (Transfer Initiation Form), which the customer signs and then your firm guarantees the signature. This is sent to the carrying firm immediately. Upon receipt, the carrying firm must freeze the account and then the carrying firm has 1 business day to validate the positions and another 3 business days to physically complete the transfer.

Which procedure is NOT required in order to open a new account for an individual customer? A) The member firm must independently verify the customer's identity by matching customer provided information against government issued documents or a database B) The member firm must independently verify the validity of supporting government issued documents provided by the customer to prove identity C) The member firm must check the customer's name against a government watch list of known or suspected terrorists D )The member firm must give notice to the customer that it will be requesting information to help fight funding for terrorism or money laundering activities

B) The member firm must independently verify the validity of supporting government issued documents provided by the customer to prove identity The best answer is B. When opening an account for a customer, the customer's name, address, birthdate and social security number must be independently verified by the member firm. If this is done by matching the information against a government issued I.D. such as a driver's license or passport, there is no requirement for the member firm to prove the validity of those documents. When opening a new account, the PATRIOT Act requires that the customer name be matched against the federally maintained terrorist watch list; and the customer must be given notice that this will occur.

A customer has completed an account transfer instruction form at broker-dealer "B," instructing that his account be transferred from broker-dealer "A." Broker-dealer "A" has validated the positions, but has not yet completed the physical transfer. If the customer wishes to sell any of his securities positions prior to the physical transfer, which statement is TRUE? A) The sell order must be placed with broker-dealer "A" B) The sell order must be placed with broker-dealer "B" C) The sell order cannot be placed until the physical transfer is completed D) The sell order can be placed with either broker-dealer, but must be marked as a "short sale"

B) The sell order must be placed with broker-dealer "B" Once a customer has completed an account transfer instruction at a "new" broker-dealer ("B"), this form is sent by that firm to the old broker-dealer ("A"). Broker-dealer "A" must verify the positions on the form within 1 business day and complete the transfer within another 3 business days. Upon receipt of the transfer form, carrying broker-dealer "A" must freeze the account and cancel all open orders. Any new orders must be placed through the new receiving broker-dealer "B."

All of the following statements are true regarding discretionary accounts EXCEPT: A) the account must be approved by a general principal or branch office manager B) an account can be opened once a customer has guaranteed that a written power of attorney has been placed in the mail C) each order ticket must be marked "discretionary" D) every order ticket must be approved promptly by a general principal or branch office manager

B) an account can be opened once a customer has guaranteed that a written power of attorney has been placed in the mail Discretionary accounts must be approved by a general principal or branch office manager. The account can be opened only if a written power of attorney (first party trading authorization) is received from the customer. It is not sufficient for the customer to promise that it is "in the mail." Each order must be marked as discretionary and each order must be approved promptly by the manager after execution. There is no requirement for order approval prior to execution.

A customer has an existing cash account that holds many different positions in blue chip stocks. The customer has an investment objective of moderate growth and income. The customer contacts his representative, stating that "I think the market will be flat for a while, but I don't want to see my portfolio return drop." The registered representative recommends that the customer sell covered calls against some of the stocks held in the customer account. The representative: A) can do so without any additional documentation as long as options positions taken do not exceed 15% of account value B) cannot do so unless the account is qualified to trade options C) cannot do so unless the stock positions are transferred to a margin account and the customer signs a margin agreement D) can do so without restriction because covered call writing is a conservative strategy that is permitted in a cash account

B) cannot do so unless the account is qualified to trade options This customer has a cash account holding blue chip stocks. The customer can only sell covered call options against those stock positions if the account is qualified to sell them. This means that the options new account form must be completed; the customer must be delivered the ODD (Options Disclosure Document); and the customer must be sent an Options Agreement for signature and return within 15 days of the first options transaction in the account.

If a customer wishes to open an account for a minor without additional documentation, the account must be opened as a: A) guardian account B) cash account C) margin account D) conservator account

B) cash account The "default" setting of the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act is that custodial accounts can only be opened as cash accounts. They can be opened as margin accounts only if the state permits it in its version of the law (which some states do, most do not). For the exam, custodial accounts can only be opened as cash accounts, since this is the rule in most states.No additional documentation is needed for the adult to open the account, as compared to, say opening a trust account, which requires a copy of the trust document.

All of the following statements are true about discretionary accounts EXCEPT: A) the Power of Attorney continues until the customer revokes it in writing or the customer dies B) each discretionary order ticket must be approved by the principal prior to entry C) each order ticket must be marked as "discretionary" D) a Power of Attorney must be obtained in writing from the customer before discretion can be exercised

B) each discretionary order ticket must be approved by the principal prior to entry There is no requirement to renew a power of attorney annually with the customer. The power continues until the customer revokes it in writing or the customer dies. Discretionary order tickets must be approved by the manager "promptly," meaning by the end of the day. Every discretionary order ticket must be marked as such, and a written power of attorney from the customer is required before discretion can be exercised. There is no requirement that the orders be approved before entry.

An account is opened for three individuals as "Tenants in Common". If one of the individuals dies, the: A) account must be liquidated to facilitate the division of assets among the surviving tenants and the deceased's estate B) estate assumes the tenancy of the deceased individual in the account C) account becomes the property of the two remaining survivors as Tenants in Common D) account becomes the property of the two remaining survivors as Joint Tenants with Rights of Survivorship

B) estate assumes the tenancy of the deceased individual in the account In an account opened "Tenants in Common," if one participant dies, that person's share in the account goes to the estate. The disposition of the deceased person's interest is handled by the estate. There is no requirement to liquidate the account, nor does the account become the sole property of the remaining tenants. (This would be the case if the account were owned as "Joint Tenants with Rights of Survivorship.")

All of the following statements about margin requirements are true EXCEPT: A) initial margin percentages are the same for both long and short accounts B) maintenance margin percentages are the same for both long and short accounts C) $2,000 equity minimum is the same for both long and short accounts D) payment is required promptly, but no later than 4 business days after trade date, in a long and short account

B) maintenance margin percentages are the same for both long and short accounts Initial margin for both long and short positions is 50% under Reg. T. Minimum maintenance margins set by FINRA are 25% and 30% respectively for long and short positions. Minimum dollar equity in both a long and short account is $2,000, ignoring special situations. Regulation T requires payment "promptly" for both purchases and short sales, but no later than "S + 2," which is 4 business days after trade date.

The sending of customer account statements and confirmations by e-mail is: A) prohibited B) permitted if the customer submits a valid e-mail address C) permitted if the customer makes the request verbally D) permitted only if the branch manager approves

B) permitted if the customer submits a valid e-mail address Customer mailings can be sent by e-mail instead of through the physical mail system if the customer provides a valid e-mail address. This is done by the customer e-mailing the request for electronic mailings.

A customer has completed an account transfer form at broker-dealer "B," requesting that his account be transferred from broker-dealer "A." The form has been received by broker-dealer "A," and that firm has verified the positions and is acting on the transfer instructions. The customer now wishes to place an order to sell 100 shares of ABC out of the account. To comply with exchange rules, you should advise the customer to: A) place the order with broker-dealer "A" for immediate execution B) place the order with broker-dealer "B" for immediate execution C) wait until he has been advised that the transfer is completed; until then, no orders can be accepted D) sell short the ABC position in another account until the transfer is completed

B) place the order with broker-dealer "B" for immediate execution This customer has gone to a "new" brokerage firm ("B"), and has completed an Account Transfer Form. On this form, he lists all of his securities positions held at his "old" carrying firm ("A"), and authorizes the transfer of those positions to the new receiving firm ("B"). Once this form has been received by the "old" carrying firm ("A"), that firm must cancel all open orders and cannot execute any new orders for the customer under FINRA rules. The firm is obligated to validate those positions listed on the transfer form within 1 business day; and complete the transfer in another 3 business days.

Custodial accounts opened by parents for their minor children that have substantial dividend or interest income are: A) not taxable until the child reaches the age of majority B) taxable at the parent's tax bracket C) taxable at the minor's tax bracket D) taxable at the trust and estate tax bracket

B) taxable at the parent's tax bracket If a custodian account is opened by a parent for a minor who is age 18 or under; and if the income exceeds $2,200 in 2021; then the income is taxed at the parent's tax rate - which is typically much higher. This tax rule is attempting to stop parents from shifting income to their children, who would typically have less income and thus would be taxed at lower rates.

When comparing a "Convenience Account" to Transfer on Death (TOD) registration: A) opening a Convenience Account does not require a court order while a Transfer on Death account does B) the named person in a Convenience Account has no ownership rights upon the owner's death, while the named person in a TOD account does C) the named person in a Convenience Account has access to account funds only upon the death of the account owner, while the named person in a TOD account has access to account funds at will D) opening a Convenience Account requires a smaller minimum deposit than the opening of a Transfer on Death account

B) the named person in a Convenience Account has no ownership rights upon the owner's death, while the named person in a TOD account does A Convenience Account is a "newer" type of account registration that is designed for an elderly parent who has many adult children. The elderly parent needs help managing his or her finances and wants one of the children to do this. The Convenience Account allows the elderly parent to name a person to use the funds in the account for the parent's benefit only. The "convenience" signer is simply an agent who can write checks from the account. There is no right of survivorship, so upon the parent's death, the funds in the account go to the estate. The "convenience signer" has no ownership rights, so all of the adult children know that the "convenience" signer, who is their sibling, will not have access to the funds in the account upon the parent's death. The funds will then be distributed according to the parent's will. In contrast, a TOD account names a beneficiary to whom the account assets are to be transferred upon the owner's death. The named beneficiary would only have the ability to trade the account or draw funds from the account while the owner is alive if the owner gave a written third party trading authorization to that person.

A customer opens a new margin account with the following position: Market Value: $100,000Debit Balance: $50,000 If the market value goes up to $120,000, how much is there in SMA, if any? A) 0 B) $5,000 C) $10,000 D) $20,000

C) $10,000 For every $1 increase in market value in a long margin account, the SMA goes up by $.50. If the market value rises to $120,000, the account will show: LMV - Debit = Equity % SMA $120,000 - $50,000 = $70,000 58% $10,000 Against $120,000 of market value, 50% can be borrowed, or $60,000. Since the debit is $50,000, an additional $10,000 can be borrowed. This is the SMA.

A customer wishes to buy 100 shares of PDQ "when issued" stock at $40 as the initial transaction in a cash account. The customer must deposit: A) $0 B) $1,000 C) $2,000 D) $4,000

C) $2,000 The purchase of when issued stock is treated the same as if the security were already issued and trading. However, the customer is not required to put up 100% to purchase when issued securities in a cash account. Instead, the customer must maintain equity as if the position were in a margin account. (Once the security is issued, it must be paid in full). Thus, the minimum is the greater of 50% or $2,000 of equity in the account. Since this is the initial transaction, the customer buying $4,000 of "when issued" stock must deposit $2,000 to meet the minimum equity requirement.

A customer sells short 100 shares of ABC stock at $10 as an initial transaction in a margin account. The customer must deposit: A) $500 B) $1,000 C) $2,000 D) $2,500

C) $2,000 A short account has unlimited risk potential. Because of this, minimum equity is $2,000. The customer is selling short 100 shares of ABC at $10 as the initial transaction. Regulation T only requires 50% or $500. But this is not enough to meet the industry minimum of $2,000 to open an account.

Long Margin Account Market Value: $200,000Debit Balance: $80,000 If the customer buys $100,000 of listed stocks and sells $20,000 of listed stocks on the same day, the customer must deposit: A) 0 B) $10,000 C) $20,000 D) $40,000

C) $20,000 Margin is computed on net purchases for the day. The customer purchased $100,000 of stock and sold $20,000 of stock, for a net purchase of $80,000. To buy $80,000 of stock, the customer must deposit $40,000 of cash. Since the customer has $20,000 of SMA available, this covers $40,000 of the $80,000 purchased. Thus, $20,000 more must be deposited to purchase $40,000 more of the stock.

A customer buys 1,000 shares of XYZ at $60 in a margin account, regular way settlement. Two days after the trade, XYZ has risen to $80. The minimum maintenance margin requirement is: A) $15,000 B) $18,000 C) $20,000 D) $24,000

C) $20,000 The minimum maintenance margin requirement for long stock positions is 25% of the current market value = 25% of $80,000 = $20,000. Note that minimum margins are based on the closing market value each day.

A customer's short margin account shows the following balances: Credit Balance: $90,000 SMV: $50,000 SMA: $15,000 What would the adjusted SMA balance be in the account after a short cover of 100 shares of MMM stock at $100 in the account? A) $10,000 B) $15,000 C) $20,000 D) $25,000

C) $20,000 This short margin account sets up as follows: Credits - SMV = Equity $90,000 - $50,000 = $40,000 If there is a short cover of 100 shares of MMM stock at $100 in the account, then $10,000 of this stock is being purchased (a debit to the account). After this transaction, the account will show: Credits - SMV = Equity $80,000 - $40,000 = $40,000 To compute SMA, the question that must be asked is "What is the equity required to support a $40,000 market value at 50% margin?" 50% of $40,000 market value = $20,000 equity requirement. Since the actual equity is $40,000, there is $20,000 of SMA.

A customer buys 100 shares of ABC at $30 as the initial transaction in a new margin account. Subsequently, ABC rises to $40 per share in the market. What is the account's equity after the change in market value? A) $2,000 B) $2,500 C) $3,000 D) $3,500

C) $3,000 Initial margin to buy stock is 50% - in this case 50% of $3,000 = $1,500 initial margin requirement. However, since this is the initial transaction in a new account, the account must meet the FINRA minimum dollar equity requirement of $2,000. Thus, $2,000 is the initial margin requirement, not $1,500. The account sets up as:Long Market Value-Debit=Equity$3,000 $1,000 $2,000If the market value rises to $40 per share ($4,000 total), there is a 10 point per share gain on the stock. Thus, equity is increased by $1,000 to $3,000. The account now shows:Long Market Value-Debit=Equity$4,000 $1,000 $3,000

A customer's margin account shows: Long 200 XYZ @ $50Debit: $2,500 The "Buying Power" in the account is: A) $0 B) $2,500 C) $5,000 D) $7,500

C) $5,000 The market value of securities in the account is $10,000, against which $5,000 can be borrowed. The current loan amount is $2,500 and so there is $2,500 of SMA. With $2,500 of SMA, $5,000 of marginable securities can be purchased (with Reg. T. initial margin at 50%).

A customer is short 1,000 shares of ABC stock, valued at $5 per share. The minimum maintenance margin requirement is? A) $1.50 per share B) $2.50 per share C) $5.00 per share D) $7.50 per share

C) $5.00 per share The minimum maintenance margin requirement for short stock positions worth $5 or more is the greater of $5 per share or 30%. Thus, a short stock position valued at $5 per share requires a minimum margin under FINRA rules of the greater of $5 per share; or 30% of $5 = $1.50 per share. $5 per share is greater than $1.50 per share, the minimum margin is $5. For stocks valued under $5, the minimum is the greater of 100% or $2.50 per share.

A pattern day trading account has a high market value during the day of $200,000 and has a "0" position at the end of the day. The minimum maintenance margin requirement is: A) 0 B) $25,000 C) $50,000 D) $100,000

C) $50,000 Regular margin rules do not apply to pattern day trading accounts. If regular margin rules were applied, because there are no positions in the account at the end of the day, the Regulation T margin would be "0." FINRA sets a minimum margin equal to the greater of $25,000 or 25% of the intra-day high market value. Since this account had a high market value for the day of $200,000 x 25% = $50,000, this is the minimum requirement.

Which of the following individuals cannot legally grant a power of attorney over his or her account to a third party? A) 22-year old who has joined the armed forces and is being deployed overseas for a 2-year period B) 56-year old who has been diagnosed with congestive heart failure and must undergo bypass surgery C) 33-year old who has been diagnosed with a psychotic disorder and is adjudicated incompetent D) 47-year old who has recently remarried and wishes to give a power of attorney to his new much younger wife over the objections of his adult son

C) 33-year old who has been diagnosed with a psychotic disorder and is adjudicated incompetent In order to give a power of attorney, the grantor must be legally competent. Thus, the grantor cannot be a minor, since minors have no legal capacity. Additionally, the grantor cannot have been legally adjudicated as incompetent in a court of law - typically due to mental incapacitation - in which case a guardian or conservator is appointed to manage that person's affairs. An individual would consider granting a power of attorney (durable) if he or she was going overseas to a dangerous place for an extended period of time, and also if that individual was in a situation that was life threatening, such as undergoing serious surgery. Regarding the recently remarried husband, he can give a power of attorney to whomever he wants (regardless of his son's objections). The only requirement is the person who is granted the power of attorney be legally competent.

A customer that wishes to open a new account is asked by the registered representative for a government issued photo identification. The customer gives the representative a copy of his driver's license, which the representative notes has expired 3 months ago. Which statement is TRUE? A) Because the identification document was government issued, it can be used to verify the customer's identity B) As long as the identification has not expired more than 6 months ago, it can be used to verify the customer's identity C) As long as another non-documentary method is used to verify the customer's identity, the account can be opened D) This account cannot be opened unless the customer renews his or her driver's license and presents it to the member firm

C) As long as another non-documentary method is used to verify the customer's identity, the account can be opened To open an account for a new customer, 4 critical pieces of information must be obtained before the account can be opened - customer name, mailing address, social security number, and birthdate. This information must be used to independently verify the customer's identity within a reasonable time after account opening. This verification can be done either by matching the 4 critical pieces of information to a valid government issued identification (which cannot be expired) or by using a database service to perform the match. (Regarding the expired driver's license in the question, the reason it cannot be expired is simple. Let's say that you were issued a new driver's license because your old one expired, so you toss the old one in the trash. The garbage man sees the old expired license, takes it and sells it to a person who specializes in identity theft. That thief would attempt to use the expired license to open accounts in your name! It's a nasty world out there!)

An order ticket is filled out and sent for execution to the NYSE. After being executed on the NYSE, it is discovered that the account number is incorrect. Under FINRA rules, the account number may be changed to the correct one by the: A) Registered Representative B) Specialist (DMM) C) Branch office manager D) Floor Governor

C) Branch office manager Under FINRA rules, alterations to order tickets are prohibited, unless the alteration is approved in writing by a "designated person" such as a branch office manager. This person must understand all of the facts surrounding the alteration before approving of the change, and is responsible for the change.

What is the best way to ensure that a broker-dealer has an effective AML program? A) By providing AML training to the representatives in each office B) By making sure that SAR and CTR reports are filed in a timely fashion C) By following Know Your Customer procedures that are risk-based D) By arranging for another member firm to review that firm's AML procedures

C) By following Know Your Customer procedures that are risk-based The FINRA rule on creating a firm's AML (Anti-Money Laundering) policy is quite generic, however their interpretations state that the AML Policy should include "KYC" (Know Your Customer) procedures that permit the firm to make a reasonable risk-based determination as to its customers, its customers' sources of income, and expected activity. Also part of the AML procedures are the requirement for an annual outside independent audit; and for ongoing AML training. However, the key part of the interpretation is "KYC" - and this is the best answer.

Which statement about SEC rules covering customer account information is FALSE? A) The customer must be sent a copy of the collected information for verification within 30 days of account opening B) Collected suitability information must be sent for verification, including income and net worth C) CIP (Customer Identification Procedures) information must be sent for verification, including date of birth and social security number D) The customer account profile must be resent to the customer every 36 months for reverification

C) CIP (Customer Identification Procedures) information must be sent for verification, including date of birth and social security number SEC rules require that the basic customer account information collected at account opening be sent separately to the customer for verification within 30 days of account opening; and this information must be sent for reverification and updating (if needed) every 36 months thereafter. Any collected suitability information must be included, however the rule states that customer social security number and date of birth are not required to be verified to help protect the customer from potential identity theft.

The purchase of what type of investment company security is marginable? A) Unit investment trust B) Open end management company C) Closed end management company D) Common stock IPO (Initial Public Offering)

C) Closed end management company 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. To be marginable, a security must be exchange listed, and closed end funds are exchange traded funds. Open end funds are mutual funds, sold under a prospectus. They must be paid in full and the shares do not trade - they are redeemable only. Unit investment trusts are fixed portfolios of securities that are transferred into trust and sold to investors, typically in $1,000 units (hence the name). They are new issues sold with a prospectus, so they must be paid in full.

Which of the following transactions are subject to Regulation T? A) Customer borrowing from a bank using securities as collateral B) Broker borrowing from a bank using securities as collateral C) Customer borrowing from a broker using securities as collateral D) Broker borrowing from another broker using securities as collateral

C) Customer borrowing from a broker using securities as collateral Regulation T of the Federal Reserve Board controls the extension of credit on securities from broker to customer. Regulation U of the Federal Reserve Board controls the extension of credit on securities by banks.

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

C) I and IV 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.

Which of the following are types of joint accounts? I Tenancy by Entireties account II Tenancy in Common account III Joint Tenants with Rights of Survivorship account IV Partnership account A) I and IV B) II and III C) I, II, III D) I, II, III, IV

C) I, II, III In a joint account, each owner can trade the account and can draw checks in the account's name. The joint account ownership options are Tenants in Common - each person has a divided interest with a specified ownership percentage for each party; and Joint Tenancy With Rights of Survivorship - each person has an undivided interest with each owning 100% of the account (another name for such an account is "Tenants by Entireties"). Partnership accounts are not joint accounts - only the designated partner(s) authorized in the partnership agreement can trade the account and draw checks - each individual partner is not permitted to do so.

Stock held in the custodial account is the subject of a rights offering. Which of the following actions by the custodian are appropriate? I Selling the rights and reinvesting the proceeds II Donating the funds required to exercise the rights III Selling another security in the account and using the proceeds to exercise the rights IV Letting the rights expire unexercised A) I and III B) II and IV C) I, II, III D) I, II, III, IV

C) I, II, III The custodian can sell the rights or exercise the rights. The custodian cannot let the rights expire unexercised, since this is the same as "throwing away" money and is not in the best interest of the account.

Under FINRA rules, which of the following are necessary to open a corporate account? I New Account Form II Corporate Charter III Corporate Resolution with Embossed Corporate Seal IV Evidence of Domicile A) I only B) II and III C) I, II, III D) I, II, III, IV

C) I, II, III To open a corporate account under FINRA rules, a new account form must be filled out, a copy of the corporate charter must be obtained (for proof of identity), and an authorizing resolution must be completed by the corporation. There is no requirement to obtain a proof of domicile (a document that shows under which State's laws the corporation operates).

Which statements are TRUE about opening a new margin account for the customer of an investment adviser? I The customer must sign an advisory agreement with the adviser II The customer must sign a power of attorney, giving trading authorization to the adviser III The customer must sign a margin agreement IV The investment adviser must sign a margin agreement A) I and II only B) III and IV only C) I, II, III D) I, II, III, IV

C) I, II, III To open an investment adviser account as a margin account, the customer must have a written agreement with the adviser; the customer must give third party trading authorization to the adviser; and the customer must sign a margin agreement. Basically, this is the customer's margin account, with the customer giving the adviser third party trading authorization in the account.

A customer has opened a margin account and has signed both the hypothecation agreement and the loan consent agreement. The brokerage firm can do which of the following with the customer's securities? I Commingle the customer's securities with those of other customers II Lend the stock to another customer who wishes to effect a short sale III Commingle the customer's securities with securities owned by the brokerage firm IV Pledge the customer's securities to a bank for a loan A) I and III B) II and IV C) I, II, IV D) I, II, III, IV

C) I, II, IV When a customer signs a margin account agreement, he or she allows the brokerage firm to keep the securities in street name; to commingle them with other customers' margin securities; and to pledge those securities to a bank for a loan. The brokerage firm cannot commingle customer securities with its own stock positions. When the loan consent agreement is signed by the customer, the customer allows the securities in the account to be loaned out on short sales.

Which of the following are provisions of Regulation T? I Payment is required promptly but no later than 4 business days after trade date II Minimum maintenance margin requirement is $2,000 per account III Retention requirement is 50% in restricted accounts IV Initial margin requirement is 50% on stocks A) I and IV only B) II and III only C) I, III, IV D) I, II, III, IV

C) I, III, IV Provisions of Regulation T include the following: payments for purchases must be made promptly but no later than 4 business days after the trade date; initial margin requirement of 50% on stock transactions; and 50% of the proceeds of sales in restricted accounts must be retained ("the retention requirement"). Minimum maintenance margins are set by FINRA.

Which of the following transactions can be performed in a cash account? I Sale "against the box" II Sale of a covered call III Long sale of a security IV Short sale of a security A) III only B) I and IV C) II and III D) I, II, III, IV

C) II and III A sale "against the box" is a short sale against a long position to lock in a gain. This is performed in an arbitrage account - short sales are not allowed in cash accounts. Long positions in a cash account can always be sold in a cash account. A call can be sold against a fully paid long stock position in a cash account (covered call).

Regarding arbitration agreements between member firms and customers, which statements are TRUE? I FINRA requires each customer to sign an arbitration agreement as part of the account opening process II Each member firm can require each customer to sign an arbitration agreement as part of the account opening process III Industry arbitration is preferred over litigation as a means of settling disputes because it is cheaper and faster IV If an arbitration agreement is signed, a copy must be sent to the customer annually for reconfirmation A) I and III B) I and IV C) II and III D) II and IV

C) II and III FINRA does not require arbitration agreements between customers and member firms. However, each member firm can require this (and usually does). FINRA does require that if a customer signs an arbitration agreement as part of the account opening process, then the customer must be sent a separate "stand alone" copy of the agreement and must sign an acknowledgement of receipt within 30 days of account opening. Note that there is no requirement to resend the customer a copy of the arbitration agreement annually. Industry arbitration is preferred over litigation as a means of settling disputes because it is cheaper and faster.

Which of the following are TRUE statements when comparing Regulation T and Regulation U? I Regulation T controls credit from bank to broker II Regulation T controls credit from broker to customer III Regulation U controls credit from bank to broker IV Regulation U controls credit from broker to customer A) I and III B) I and IV C) II and III D) II and IV

C) II and III Regulation T controls credit from broker to customer. Regulation U controls credit from bank to broker.

To make a suitable recommendation, the registered representative must have sufficient knowledge of the customer's financial background. Regarding recommendations to a customer, which of the following statements are TRUE under MSRB rules? I If the customer refuses to disclose sufficient financial information, recommendations are still allowed II If the customer refuses to disclose sufficient financial information, recommendations are not permitted III If the customer insists upon performing a trade that is deemed to be unsuitable, the registered representative should follow the customer's instructions IV If the customer insists upon performing a trade that is deemed to be unsuitable, the registered representative must refuse the trade A) I and III B) I and IV C) II and III D) II and IV

C) II and III The registered representative should inquire as to the customer's "financial background" under MSRB rules, asking information such as income and net worth. The customer may refuse to provide this information, stating that it is an invasion of privacy. The account can still be opened, however when the customer fails to provide sufficient personal information on his financial status or investment objective, no recommendations can be made. If the customer wishes to execute an unsuitable trade, the registered representative should note this and mark the order ticket as "unsolicited" and execute the order. The registered representative is obligated to do what the customer instructs.

Under the provisions of the PATRIOT Act, if a non-U.S. citizen wishes to open a brokerage account, which of the following must be obtained? I A copy of the customer's U.S. passport II A copy of the customer's foreign passport III The customer's U.S. tax ID number IV The customer's foreign tax ID number A) I and III B) I and IV C) II and III D) II and IV

C) II and III To open an account for a non-U.S. citizen, a copy of the customer's foreign passport must be obtained; and the customer must have a U.S. tax identification number.

Which of the following non-exempt securities are marginable? I Securities included in the Pink Sheets II Securities included in the NASDAQ Global Market III American Stock Exchange listed securities IV New York Stock Exchange listed securities A) I and II only B) III and IV only C) II, III, IV D) I, II, III, IV

C) II, III, IV All securities listed on an exchange, such as the NYSE, NYSE American (AMEX) or NASDAQ, are marginable. Regarding over-the-counter securities, those on the OTCBB or in the Pink Sheets are not marginable (since the market is illiquid).

A registered representative solicits an order from a customer to buy 200 shares of XYZZ at $50. The customer agrees and the registered representative completes the order ticket and enters the order for execution. Once the member firm processes the order, the order ticket record must contain which of the following information? I Time of order solicitation II Time of order receipt III Time of order entry IV Time of order execution A) I and II only B) II and IV only C) II, III, IV D) I, II, III, IV

C) II, III, IV The required time stamps on an order ticket are time of order receipt; order entry; and order execution. There is no requirement for the time of order solicitation to be on the order ticket (remember, also, that many trades are unsolicited).

When an account is frozen, which statement is TRUE? A) No trades are permitted in the account for 90 days B) Only liquidating trades are permitted in the account for 90 days C) Payment in advance is required for purchases occurring in the next 90 days D) Payment by the regular way settlement date is required for purchases occurring in the next 90 days

C) Payment in advance is required for purchases occurring in the next 90 days When an account is frozen, this means that the customer did not pay within the maximum time period specified under Regulation T. When an account is frozen, to buy securities, payment must be made in advance; and to sell securities, delivery of the security must be made in advance. The freeze lasts for 90 days.

A customer gives her registered representative instructions to buy 100 shares of XYZ stock during the trading day, if it looks attractive. As of the end of the day, the trade is not executed and the customer wants to extend the instructions through the end of the week. Which statement is TRUE? A) The registered representative can accept the verbal instructions because only price and time decisions are left to the representative B) The registered representative can accept the verbal instructions only if the principal approves C) The registered representative can do this only if the customer gives written instructions D) The registered representative may not accept the customer's instructions under any circumstances Verbal discretion over price and time of execution is only permitted for retail clients if the trade is executed that day. To take price and time discretion from a retail client covering a longer time frame requires written authorization (a power of attorney) from the customer.

C) The registered representative can do this only if the customer gives written instructions Verbal discretion over price and time of execution is only permitted for retail clients if the trade is executed that day. To take price and time discretion from a retail client covering a longer time frame requires written authorization (a power of attorney) from the customer.

A wealthy customer is very satisfied with her registered representative. She approaches the representative to ask him if he would like to be appointed as trustee over a trust account that she is establishing for her 2 grandchildren. If he accepts, he would be paid a trustee fee. Which statement is TRUE about this? A) The registered representative cannot act as the trustee because he already manages another account for the customer B) The registered representative cannot act as the trustee because he cannot accept a trustee fee C) The registered representative cannot act as the trustee because of the conflict of interest D) The registered representative can act as the trustee without restriction

C) The registered representative cannot act as the trustee because of the conflict of interest The trustee over a trust account is a fiduciary who must manage the account in the best interest of the beneficiaries. It is an inherent conflict of interest for a registered representative handling an account to act as the trustee over that account. As an example of the potential conflict, is the representative effecting trades in the account to benefit the beneficiaries or is the representative effecting trades to generate personal commission income? Typically, a trustee is a bank or an investment adviser, both of whom are already under a fiduciary obligation. While it is "possible" for a registered representative to be a trustee in such an account (if there is written disclosure to the grantor of the trust of the nature of the conflict of interest and if the fees charged by the trustee are "reasonable"), most brokerage firms have an internal policy of prohibiting their representatives from being trustees in any accounts that they oversee.

A customer has sold an options contract and after 15 days, still has not returned the signed Options Agreement. The customer is only allowed to make which of the following transactions in this account? A) opening purchase B) opening sale C) closing purchase D) closing sale

C) closing purchase If the Options Agreement is not signed and returned within 15 days, only closing transactions are allowed. Since the customer made an opening sale (he sold the contract), this transaction is closed with a purchase.

All of the following statements are true regarding joint accounts EXCEPT: A) opening a joint account requires new account information on each account participant B) if a party in a Tenancy in Common account dies, his or her share of the account is included in his taxable estate C) if a party in a Joint Tenants With Rights of Survivorship account dies, his or her share is excluded from his taxable estate D) any party in the account can authorize trades or withdraw funds

C) if a party in a Joint Tenants With Rights of Survivorship account dies, his or her share is excluded from his taxable estate Even though a "Joint Tenancy" gives each owner an undivided interest in an account, if one owner dies, the IRS assigns a portion of the account to that person and taxes it. If the owners are married, then the marital exclusion stops this from happening. The other statements are true - in a joint account any party can trade or draw checks; new account information is needed for each party to the account; and if the account is Tenancy in Common and one person dies, his or her share goes to his estate.

Prior to opening an options account, all of the following steps must be taken EXCEPT: A) completing the new account form B) delivering the options disclosure document to the customer C) receiving the signed options agreement from the customer D) approving the first transaction in the account

C) receiving the signed options agreement from the customer The customer has 15 days after the account is opened to sign and return the options agreement. All of the other steps must be completed prior to opening the account - the new account form must be completed; the customer must be delivered an Options Disclosure Document (ODD); and the first transaction (as well as the account itself) must be approved in writing by the Registered Options Principal.

In order to open a discretionary cash account, all of the following procedures are required EXCEPT: A) signature of manager on new account form B) signed trading authorization C) signed customer's agreement D) completed customer new account form

C) signed customer's agreement A signed customer's agreement is only required for a margin account; it is not used in a cash account. The customer's agreement is the hypothecation agreement. To open a discretionary cash account, a new account form must be completed by the registered representative and approved in writing by the manager. The customer must provide a signed trading authorization to the firm (first party trading authorization) allowing discretionary trades.

In a new margin account, a customer buys 1,000 shares of ABC stock at $30 per share. The stock rises to $60 during the next week and subsequently declines to $45. If there are no other transactions in the account, the current SMA balance would be: A) $2,500 B) $7,500 C) $10,000 D) $15,000

D) $15,000 In a long account, every $1.00 increase in equity would cause SMA to go up by $.50 - or half the amount. Here, the market value went up from $30,000 to $60,000. The account will now show: LMV - Debit = Equity SMA $60,000 - $15,000 = $45,000 $15,000 Against $60,000 of market value, 50% can be borrowed, or $30,000. Since the debit is $15,000, an additional $15,000 can be borrowed. This is the SMA. If the account beings to fall, SMA "locks" and is not taken away. If the account falls, to a $45,000 market value, the account will now show: LMV - Debit = Equity SMA $45,000 - $15,000 = $30,000 $15,000 The SMA can be withdrawn, increasing the debit and reducing equity. It can be withdrawn in full or in part, as long as the withdrawal does not cause the account to fall below the 25% minimum percentage.

A customer makes a purchase of $22,100 of ACME Income Fund in her margin account. The customer must deposit: A) $5,525 B) $6,630 C) $11,050 D) $22,100

D) $22,100 Mutual fund shares are new issues sold with a prospectus, and as such, require that 100% of the purchase amount be paid. Once the position has been held in the account for 30 days, it becomes marginable and has loan value.

Question A customer has an existing margin account that shows the following: Long Market Value: $200,000 Debit Balance: $120,000 The market value declines to $120,000, the customer is sent a maintenance call, which the customer wishes to meet by depositing fully paid stock. The amount of stock that must be deposited is: A) $10,000 B) $20,000 C) $30,000 D) $40,000

D) $40,000 This customer account sets up as: Long Market Value - Debit = Equity % $200,000 $120,000 $80,000 40% If the market value declines to $120,000, the account will now show: Long Market Value - Debit = Equity % $120,000 - $120,000 $0 0% Minimum margin is 25% of market value, or 25% of $120,000 = $30,000. This account will receive a maintenance call for $30,000 - this would be the cash deposit. If the customer wishes to deposit other fully paid stock to meet the call, the market value of securities needed in the account at minimum is the $120,000 Debit / .75 = $160,000. Since the account already has $120,000 of securities, another $40,000 of securities must be deposited. After the fully paid securities deposit is made, the account will show: Long Market Value - Debit = Equity % $120,000 - $120,000 $0 0% +40,000 +40,000 $160,000 - $120,000 $40,000 25%

All of the following procedures are required to open an account for an employee of another municipal securities firm EXCEPT: A) Prior notice of the opening of the account must be given to the municipal employer B) Duplicate trade confirmations must be sent to the municipal employer C) Any instructions of the municipal employer must be followed D) Duplicate account statements must be sent to the municipal employer To open an account for an employee of another municipal securities firm, the MSRB requires that prior notice be given to the employing firm; and that duplicate confirmations of each trade be sent to the employer. There is no requirement to send duplicate statements to the employer. Also, any instructions of the employer regarding the account must be followed - for example, if the employer says "Don't open the account," then those instructions must be followed.

D) Duplicate account statements must be sent to the municipal employer To open an account for an employee of another municipal securities firm, the MSRB requires that prior notice be given to the employing firm; and that duplicate confirmations of each trade be sent to the employer. There is no requirement to send duplicate statements to the employer. Also, any instructions of the employer regarding the account must be followed - for example, if the employer says "Don't open the account," then those instructions must be followed.

If a FINRA member firm maintains fee based accounts for customers, the supervisory procedures should include: I Periodic review of fee based accounts to determine whether they remain appropriate for their respective customers II Review of any changes in customer objectives or financial circumstances III Comparison of total asset based fees charged to such accounts to the charges that would have been imposed on a commission basis A) I only B) I and II C) II and III D) I, II, III

D) I, II, III The concern of FINRA is that customers may be charged more for fee based accounts than they would have been charged if they simply paid a commission on each trade. Thus, the volume of trading in the account must be high enough to justify a fixed fee charge. Also, FINRA requires that fee based accounts be reviewed periodically to determine that they are appropriate for their respective customers; and to determine if changes in customer objectives or financial circumstances require changing how charges are assessed in the account. Finally, FINRA recommends that firms compare (preferably annually) the charges assessed on a fee basis in customer accounts to the charges that would have been imposed on a per-trade commission basis.

In order to open a discretionary margin account, which of the following procedures are required? I Completed Customer New Account Form II Signed Trading Authorization III Signed Customer's Agreement IV Signature of Manager on New Account Form A) I and IV only B) II and III only C) I, II, IV D) I, II, III, IV

D) I, II, III, IV Every new account must have a new account form, which is approved by the manager. A signed customer's agreement is required for a margin account, as this is the case with this account (the customer's agreement is the hypothecation agreement). To open a discretionary account, the customer must provide a signed trading authorization to the firm (first party trading authorization) allowing discretionary trades.

Under SEC rules, customer account information must be verified by the member firm: I within 15 days of account opening II within 30 days of account opening III every 12 months IV every 36 months A) I and III B) I and IV C) II and III

D) II and IV SEC rules require that the basic customer account information collected at account opening be sent separately to the customer for verification within 30 days of account opening; and this information must be sent for verification and updating (if needed) every 36 months thereafter.

Which statements are TRUE about meeting a Regulation T call for initial margin? I 50% of the call amount must be deposited in cash II 100% of the call amount must be deposited in cash III 100% of the call amount must be deposited in fully paid securities IV 200% of the call amount must be deposited in fully paid securities A) I and III B) I and IV C) II and III D) II and IV

D) II and IV To meet a Regulation T call, either the entire call amount must be deposited in cash; or twice the call amount must be deposited in fully paid securities (which have a loan value of 50% of the market value that is used to meet the call).

If an employee of another municipal securities firm wishes to open an account at your firm, which of the following statements are TRUE? I Written notice of the opening of the account must be sent to the MSRB II Written notice of the opening of the account must be sent to the employer member III Duplicate confirmations must be sent to the MSRB IV Duplicate confirmations must be sent to the employer member A) I and III B) I and IV C) II and III D) II and IV

D) II and IV To open an account for an employee of another municipal securities firm, the MSRB requires that prior notice be given to the employing firm; and that duplicate confirmations of each trade be sent to the employer. In contrast, FINRA requires that confirmations and/or statements be sent only if the employer requests in writing.

A corporation is preparing a registration statement for a new issue offering consisting of 300,000 new shares and 200,000 existing shares held by officers. Which of the following statements is TRUE? A) Only the 300,000 new shares can be purchased on margin B) Only the 200,000 shares previously held by officers can be purchased on margin C) All 500,000 shares can be purchased on margin D) None of the shares can be purchased on margin

D) None of the shares can be purchased on margin Under FRB rules "new" issues are not eligible for margin until 30 days after the offering. The definition of a "new" issue for the purposes of this rule is a prospectus offering. Both the primary and secondary shares held by the officers are being offered through the prospectus; so no margin is permitted.

All of the following statements are true regarding Regulation T EXCEPT: A) Regulation T requires payment for purchases within 4 business days B) Regulation T applies to non-exempt securities only C) Regulation T applies to both listed and unlisted securities D) Regulation T sets both initial and maintenance margins

D) Regulation T sets both initial and maintenance margins Regulation T requires payment promptly for purchases, but no later than "S + 2," which is 4 business days after trade date (regular way settlement of 2 days + 2 grace days). Regulation T only applies to non-exempt securities. It does not apply to exempt securities since it is part of the Securities Exchange Act of 1934, of which only the anti-fraud provisions apply to exempts. Regulation T margins apply to both listed and unlisted securities. The Federal Reserve only allows exchange listed and NASDAQ securities to be margined. OTCBB and Pink Sheet securities cannot be margined. Regulation T only sets initial margins; maintenance margins are set by FINRA.

All of the following paperwork is required for trades to be effected in an account for a deceased person who held an individual account at a brokerage firm EXCEPT: A) Executor's authorization certificate B) Copy of the death certificate C) Affidavit of domicile D) Third party trading authorization

D) Third party trading authorization 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. To transfer the assets into an account for the estate: A certified copy of the death certificate must be provided, proving that the individual really died. 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. An Affidavit of Domicile must be completed and notarized. It declares the state of residence of the individual, therefore that State's laws will apply to the estate. There are no trading authorizations in Executor accounts - only the executor gets to trade the account. (Also note that if an individual account is held TOD - Transfer on Death - then the only paperwork that needs to be submitted to transfer the assets to the name beneficiary is a certified copy of the death certificate.)

A woman in the 15% tax bracket wishes to buy a municipal bond. The registered representative tells her that such an investment is not appropriate. The registered representative can execute the trade: A) if the principal approves B)if the manager approves C) under no circumstances D) at the specific direction of the customer

D) at the specific direction of the customer Under an MSRB interpretation, if a customer directs a registered representative to do a trade that the representative believes is inappropriate, the representative must inform the customer of his or her objections; and if the customer still directs that the trade be performed, then the representative must execute the trade. We call this the MSRB "Do It!" rule.

A registered representative solicits an order from a customer to buy 200 shares of XYZZ at $50. The customer agrees and the registered representative completes the order ticket and enters the order for execution. Once the member firm processes the order, the ticket record must contain all of the following information EXCEPT the time of order: A) receipt B) entry C) execution D) confirmation

D) confirmation The required time stamps on an order ticket are time of order receipt; order entry; and order execution. There is no requirement for the time of order confirmation to be on the order ticket.

A FINRA member firm uses a structure for its wealthy client group where a "team" of registered representatives with differing specializations services those accounts. In order to do this, the member firm must: A) have a written agreement signed by all of the representatives in the team that details the compensation sharing arrangement, if any, between the team members B) tape the phone conversations of each team member when talking to clients to maintain a record of which registered person made recommendations to that client C) maintain a record of the CRD number of each representative assigned to the account D) document the role and responsibilities of each member of the team

D) document the role and responsibilities of each member of the team As part of the customer account information required by FINRA, the name of the representative assigned to the account must be recorded. This way, FINRA knows who is responsible if there is an "issue" with the account. When a firm uses a "team structure" to service accounts (a very common practice when dealing with very wealthy clients), FINRA requires that: "if multiple individuals are assigned responsibility for the account, a record indicating the scope of their responsibilities with respect to the account" must be maintained by the member firm. Note that this rule (FINRA Rule 4512) only requires the recording of the names of the representative(s) assigned to the account. It does not require the CRD number of the representative as part of the record, though this information is readily available.

To open a joint account for a husband and wife, the social security number to be used for IRS reporting purposes is: A) the husband's social security number B) the wife's social security number C) both the husband' and wife's social security number D) either the husband's or wife's social security number

D) either the husband's or wife's social security number The Internal Revenue Service requires that income from each brokerage account be reported on a Form 1099 under 1 social security number (the IRS can't handle more than 1!) In a joint account, the participants decide under whose number the report will be filed. Please note that the New Account Form generally requires the social security number of each account owner; however, reporting to the IRS is done only under one of these numbers.

A customer with a long margin account receives a call for minimum maintenance margin on Tuesday morning. The call notice states that the funds are to be deposited by Thursday. If the funds do not arrive, the firm has the right to sell out: A) the entire account on Thursday at the market close B) the entire account on Friday at the market opening C) enough securities from the account to meet the call on Thursday at the market close D) enough securities from the account to meet the call on Friday at the market opening

D) enough securities from the account to meet the call on Friday at the market opening Calls for maintenance margin must be met "promptly." This call requires that the customer deposit the funds on Thursday. If the monies are not deposited on Thursday, at the opening on Friday morning, enough securities will be sold out of the account to satisfy the maintenance call.

Question A customer opens a margin account by purchasing 400 shares of XYZ stock at $60 per share and deposits the required margin. If the stock increases in value by 25%, the customer's equity in the account will: A) remain unchanged B) increase by 12.5% C) increase by 25% D) increase by 50%

D) increase by 50% Long Market Value- Debit= Equity % $24,000 - $12,000 $12,000 50% If the market value increases by 25%, the new market value will be 125% of $24,000 = $30,000. The account will now show: Long Market Value - Debit = Equity % $30,000 - $12,000 = $18,000 60% The equity has increased from $12,000 to $18,000 - a 50% increase.

A registered representative has been prospecting for new customers in neighboring states, and has contacted an individual who wishes to open an account with a $25,000 stock purchase. The customer is located 500 miles away from the representative's branch office. In order to open the account: A) the customer must physically appear at the registered representative's branch office with government issued identification documents such as a passport or driver's license B) the registered representative must visit the customer's residence and obtain a copy of government issued identification documents such as a passport or driver's license C) no physical contact is required between the customer and the registered representative, but the branch manager must speak to the customer prior to account opening and verify the account information provided by the customer D) no physical contact is required between the customer and the registered representative, but the broker-dealer must verify the customer's identity by comparing information provided by the customer to a public database

D) no physical contact is required between the customer and the registered representative, but the broker-dealer must verify the customer's identity by comparing information provided by the customer to a public database To open an account for a new customer, 4 critical pieces of information must be obtained before the account can be opened - customer name, mailing address, social security number, and birthdate. This information must be used to independently verify the customer's identity within a reasonable time after account opening. This verification can be done by matching the 4 critical pieces of information to a valid government issued identification (which cannot be expired); or by using a database service such as Equifax to do the matching. Thus, there is no need for physical contact with the customer to open the account.