Customer Accounts: Account Basics
Prior to opening an options account, which of the following steps is NOT required? A Completing the new account form B Approving the first transaction in the account C Receiving the signed options agreement from the customer D Delivering the options disclosure document to the customer Review
The best answer is C. 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.
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
The best answer is C. 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.
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
The best answer is A. 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.
You have an elderly client who telephones you at the office, telling you the following: "I have been notified by certified mail that I have just won $100,000 in the Nigerian Government National Lottery, and in order to claim my prize, I need to wire $1,000 from my account to the Nigerian Lottery Overseas Bank." This client has a small individual account with your firm, where her adult daughter is named as the beneficiary. The action that you should take is: A escalate the request to a supervisor in the firm's compliance department B contact the daughter to see if the transfer should be made C refer the matter to the firm's AML officer D follow the customer's instructions
The best answer is A. Well, this certainly looks like the elderly client is being scammed! It should be escalated to the firm's compliance department, and under the new "elder abuse" rules, compliance can put a 15 day restriction on the account wire transfer while it assesses the situation and decides what action to take - such as referring the case to the state social service department, as well as the state attorney general. Note that the daughter being named the beneficiary on the account is meaningless here. The only way that the daughter can do anything in the account is if she has been given a written power of attorney by her mother in this account - which is not the case here. Also note that this is not a case of suspected money laundering (rather, it appears to be fraud), so reporting this to the firm's AML (Anti-Money Laundering) officer would not be appropriate
When opening an account to buy options, which of the following signatures is needed on the options new account form? A Registered options principal signature B General principal signature C Chief Compliance Officer signature D Customer signature Review
The best answer is A. The customer's signature is not required on a new account form. It is required on the options agreement, margin agreement and loan consent agreement.The regular new account form for equity securities requires the signature of the registered representative and the general principal (Series 24 license). The options new account form, required for options trading, is signed by the registered representative, who is attesting to the fact that the information on the form is true; and must be approved before the account is traded by the registered options principal (Series 4 license). The same person can hold both the Series 24 General Principal and Series 4 Registered Options Principal licenses.
A client has an options account that is qualified to buy options and sell covered calls. The client calls his representative, telling him that he wants to sell naked calls in the account. Which statement is TRUE about this? A The representative can do this without taking any further action B The "Special Statement for Uncovered Options Writers" must be provided before executing the transaction C The "Options Disclosure Document" must be provided before executing the transaction D The representative must open a separate options account for the customer and segregate the resulting naked options positions
The best answer is B. Most firms have a structure for options account qualification that codes accounts as Level 1, 2, 3 or 4. A Level 1 account can only sell covered calls (the most conservative and popular options strategy) or buy puts to hedge existing stock positions; A Level 2 account can also buy calls and buy puts to speculate; A Level 3 account can also take spread positions; and A Level 4 account can do anything, both covered or naked. For a customer to move up in Level, the suitability determination must be redone and the ROP (Registered Options Principal) must reapprove the account. To move to Level 4, the customer must also be given the "Special Statement for Uncovered Options Writers." This discloses that: Naked call writers have unlimited risk and naked put writers have substantial risk. If the broker demands additional margin due to an adverse market move, the broker may liquidate customer positions without prior notice if such margin payment is not received. If a secondary market in options were to become unavailable, the writer would be subject to exercise at any time until expiration of the contract. Uncovered option writing is only suitable for the knowledgeable investor who understands the risks and has the capacity to absorb substantial losses and has sufficient liquid assets to meet margin requirements. The writer of an American style option is subject to exercise at any time, whereas the writer of a European style option is only subject to exercise during the exercise period.
Under MSRB rules, new accounts must be approved, in writing, by the: A Registered Representative B Municipal Securities Principal C Compliance Officer D Supervisory Analyst
The best answer is B. The Municipal Securities Principal (Series 53 license) is the person responsible for approving the opening of municipal new accounts. In addition, the MSRB permits the General Principal (Series 24 license) or the Branch Office Manager (Series 9/10 license) to approve new accounts. The Compliance Officer (Series 14 license) is a FINRA designation for the person responsible for overall compliance matters and overall supervision of accounts. This person typically resides in the home office. The Supervisory Analyst (Series 16 license) is a FINRA designation for the person who writes or approves research reports.
Under SEC rules, when and to whom must a Form CRS be provided? A Within a reasonable time after account opening, only for retail clients B Within a reasonable time after account opening, to both retail and institutional clients C At, or prior to, the making of a recommendation or account opening, only for retail clients D At, or prior to, the making of a recommendation or account opening, to both retail and institutional clients
The best answer is C. Regulation BI went into effect in mid-2020. It requires that customers receive a 2-page document at account opening called Form CRS - Customer Relationship Summary. Form CRS details: Whether the firm is acting as a broker-dealer in the relationship, where it can charge commissions; or if the firm is acting as an investment adviser in the relationship, where is can only charge fixed fees; That the firm must adhere to a suitability standard when making recommendations as a broker-dealer; and that the firm must adhere to a tougher fiduciary standard when acting as an investment adviser; The fees and costs that the customer will pay; Any conflicts of interest that the firm may have in providing its services to the client; and Whether the firm or its associated persons has had any reportable disciplinary events. If the firm presents a client with a package of documents at account opening, the Form CRS must be on the top. It must also be posted on prominently on the firm's website. Form CRS is only required to be provided to retail clients, including wealthy retail clients. It is not required to be provided to institutional clients, who are presumed to be sophisticated. The rule requires that the Form CRS be provided to retail clients at the earlier of making a recommendation or opening a new account.
A customer account holds $100,000 of Negotiable Certificates of Deposit that are maturing. The customer has inquired about alternative investments that can be made with these funds. To make a suitable recommendation, inquiry should be made as to all of the following EXCEPT: A Liquidity requirements B Tax bracket C Other investments D The name of the bank where the CD is held
The best answer is D. Common sense dictates that to make any recommendation to a customer, all of the choices should be evaluated - the customer's liquidity requirements, tax bracket, and other investments. Where the CD is held is irrelevant as far as suitability is concerned.
After opening an options account, 15 days have passed and the customer has not returned the signed options agreement. The proper procedure is to: A refuse all further trades in the account B freeze the account for 90 days C only accept orders for opening transactions D only accept orders for closing transactions
The best answer is D. If the customer does not return the signed options agreement within 15 days' of account opening, no new positions can be initiated in the account. Orders can be accepted only to close out existing positions. There is no requirement to liquidate the account, nor to freeze the account.
Under FINRA rules, a registered representative must obtain and retain all of the following information relating to the customer's account EXCEPT: A Whether the customer is an administrative manager of a publicly traded company B The customer's country of citizenship C Whether the customer is employed by another FINRA member firm D Customer's financial status
The best answer is A. FINRA rules require that a registered representative ascertain whether the customer is an officer, director, or 10% shareholder of a publicly traded company, since these persons are defined as "insiders" under the Securities Exchange Act of 1934, and their trading in that company's shares is restricted. Note that employees who are managers of publicly traded companies do not fall under this definition. Country of citizenship is required as well, since if the customer is a non-U.S. citizen, a copy of the customer's passport must be obtained and the customer must have a U.S. tax identification number. If the customer is employed by another FINRA member firm, special procedures must be followed to open the account. Customer financial information must be obtained to perform a suitability determination under the requirements of the "Know Your Customer" rule.
In order to open a new single account for an individual customer, which information is required on the new account form? A Date of birth B Date of reaching legal majority C Spouse's Social Security number D Telephone number
The best answer is A. There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information. The spouse's social security number would only be required if the account was jointly held.
Which procedure is required at, or prior to, opening a new options account? A A new account form must be signed by the customer B The customer must be sent the latest Options Disclosure Document C The customer must sign and return the Options Agreement D A principal must counter-sign the options agreement Review
The best answer is B. An account is considered "opened" with the first trade. Prior to opening an options account, the new account form must be completed (There is no requirement for a customer signature) and the customer must be sent the latest Options Disclosure Document (ODD). This is a pamphlet entitled "Characteristics and Risks of Standardized Options" and is basically an options primer. The date that the customer was sent the ODD is noted on the options new account form. A copy of the options new account form is part of the Options Agreement that is sent to the customer, to be signed and returned within 15 days of account opening. The Options Agreement is a recap of the customer new account profile including the suitability determination and it qualifies the customer for a level of options trading, detailing which options transactions are permitted. Review
Which of the following signatures must appear on the New Account Form when a customer has provided information over the phone? A Customer B Manager and Registered Representative C Registered Representative only D Manager only
The best answer is B. The customer does not need to sign the new account form - he or she does sign the margin agreement and loan consent agreement if a margin account is opened, however. This rule allows brokerage firms to open new cash accounts "over the phone." The registered representative signs the new account form, indicating that he or she believes the information to be true. The manager must review and approve the account by signing the form, before any trades take place. (Also note that this is very much a "test world" question. In the real world, pretty much every brokerage firm, as part of the new account form, has an embedded arbitration agreement and has the customer sign it when opening the account. However, this is a firm requirement and not an SEC or FINRA legal requirement. If a brokerage firm wanted to open a customer cash account without the customer signing an arbitration agreement, it could.) (As a final note, FINRA has amended its rule that requires a registered representative's signature on the new account form. If the customer gives the information to the representative, who then enters it on the form, the registered representative's signature is required. If the customer opens the account on-line and directly enters his or her own information, no registered representative signature is required - but a manager or principal's signature still is required.)
Under FINRA rules, initial approval of new accounts must be performed, in writing, by the: A Financial and Operations Principal B Branch Office Manager C Registered Representative D Supervisory Analyst
The best answer is B. Under FINRA rules, new accounts must be approved, in writing, by a Branch Office Manager ("BOM" - Series 9/10 license) or a General Principal (Series 24 license). The Compliance Officer (Series 14 license) is responsible for overall compliance matters and overall supervision and approval of accounts. This person typically resides in the home office, and could also approve new accounts, but the BOM is the better answer. A Supervisory Analyst (Series 16 license) writes or approves research reports. The Financial and Operations Principal (Series 27 license) is responsible only for the firm's financial reporting and back office operations.
A natural person who wishes to open an individual account at a brokerage firm is generally permitted to do so upon reaching age: A 16 B 18 C 21 D 25
The best answer is B. A "natural person" is a human being (as compared to other "legal persons" such as corporations and partnerships). In the vast majority of states, the legal age to enter into a binding contract is 18 (Nebraska is an outlier with an age of 19!)
Information about SIPC, must be made available to customers: A at account opening only B at account opening only and annually thereafter C on each account statement D on each trade confirmation
The best answer is B. At, or prior to, account opening, the customer must be provided with the telephone number and web site address of SIPC (Securities Investor Protection Corp., which insures customer accounts against broker-dealer failure), through which the customer can obtain a copy of the SIPC brochure. In addition, this information must be provided to the customer annually thereafter. Review
A customer wishes to buy a municipal bond that the registered representative feels is unsuitable for that customer. After explaining this, the registered representative is told by the customer "Just do the trade; let me worry about it." Which statement is TRUE under MSRB rules? A The trade must be refused B The trade must be accepted as given C The matter must be submitted to industry arbitration D The trade must be approved in advance by the municipal principal
The best answer is B. If a customer directs that a specific trade be done, then "Do It!" However, the registered representative should note his exception on both the order ticket and in the customer's account file. Many firms will also tape record the customer authorizing such a transaction as evidence if things go bad. There is no requirement for prior approval of the municipal principal in such a transaction.
Under the rules of the Options Exchanges, if there is a material change in a customer's financial condition: A the account must be restricted from options trading until the effect of the change is ascertained B the customer new account form must be updated and the options agreement must be amended to reflect the change C the customer can only place closing orders in the account; opening transactions are prohibited D no special procedures need be followed
The best answer is B. 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, for his or her signature and returned within 15 days. At the same time, customer account information would also be updated.
In order to open a new account for a customer, the customer's name, date of birth, address and tax identification number must be: A obtained and independently verified prior to account opening B obtained prior to account opening and independently verified within a reasonable time before or after account opening C obtained within a reasonable time before or after account opening and independently verified prior to account opening D obtained and independently verified within a reasonable time before or after account opening
The best answer is B. 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.
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 Review
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.
All of the following items are needed to open a cash account for a customer who gives the information over the phone EXCEPT: A Customer tax I.D. number B Name of employer C Signature of customer D Signature of registered representative
The best answer is C. A customer signature is not needed to open a cash account. A signature is required for margin accounts and on the Options Agreement for options accounts (and it can be obtained 15 days after account opening for options accounts). To open a cash account, the registered representative must complete a new account form which includes the Social Security number of the customer (tax I.D. number), the customer's address, and employer. The registered representative and the manager (principal) must sign the form. By signing, the registered representative indicates that the information is written as stated by the customer; and the manager is signing that the information has been reviewed prior to accepting the account for the firm. (Also note that this is very much a "test world" question. In the real world, pretty much every brokerage firm, as part of the new account form, has an embedded arbitration agreement and has the customer sign it when opening the account. However, this is a firm requirement and not an SEC or FINRA legal requirement. If a brokerage firm wanted to open a customer cash account without the customer signing an arbitration agreement, it could.) (As a final note, FINRA has amended its rule that requires a registered representative's signature on the new account form. If the customer gives the information to the representative, who then enters it on the form, the registered representative's signature is required. If the customer opens the account on-line and directly enters his or her own information, no registered representative signature is required - but a manager or principal's signature still is required.)
A registered representative that has completed the certified financial planner designation has a customer base consisting mainly of senior citizens. The registered representative may refer to him- or herself as a: A "Certified Senior Adviser" B "Certified Financial Gerontologist" C "Certified Financial Planner" D None of the above
The best answer is C. FINRA is concerned about registered representatives using "bogus" certifications when making presentations to senior citizens. Stating that one is a "Certified Senior Adviser," "Certified Financial Gerontologist," "Senior Specialist," or "Retirement Specialist" is prohibited since these are not true professional designations. However, the "Certified Financial Planner" (CFP) designation requires formal certification with procedures that include a detailed and rigorous curriculum and exam, so this is a "real" certification and a representative that completes it can call him- or herself a "Certified Financial Planner."
A client has an options account that is qualified to buy options and sell covered calls. The client calls his representative, telling him that he wants to sell naked calls in the account. In order to do this, all of the following procedures are required EXCEPT: A the registered representative must perform a new suitability determination to determine that naked options writing is appropriate for this client B The "Special Statement for Uncovered Options Writers" must be provided before executing the transaction C The "Options Disclosure Document" must be provided before executing the transaction D The Registered Options Principal must reapprove the account for naked options writing Review
The best answer is C. Most firms have a structure for options account qualification that codes accounts as Level 1, 2, 3 or 4. A Level 1 account can only sell covered calls (the most conservative and popular options strategy) or buy puts to hedge existing stock positions; A Level 2 account can also buy calls and buy puts to speculate; A Level 3 account can also take spread positions; and A Level 4 account can do anything, both covered or naked. For a customer to move up in Level, the suitability determination must be redone and the ROP (Registered Options Principal) must reapprove the account. To move to Level 4, the customer must also be given the "Special Statement for Uncovered Options Writers." This discloses that: Naked call writers have unlimited risk and naked put writers have substantial risk. If the broker demands additional margin due to an adverse market move, the broker may liquidate customer positions without prior notice if such margin payment is not received. If a secondary market in options were to become unavailable, the writer would be subject to exercise at any time until expiration of the contract. Uncovered option writing is only suitable for the knowledgeable investor who understands the risks and has the capacity to absorb substantial losses and has sufficient liquid assets to meet margin requirements. The writer of an American style option is subject to exercise at any time, whereas the writer of a European style option is only subject to exercise during the exercise period.
A client has an options account that is qualified to buy options and sell covered calls. The client calls his representative, telling him that he wants to sell naked calls in the account. Which statement is FALSE about this? A The customer must be sent a new Options Agreement which must be signed and returned within 15 days B The Registered Options Principal must reapprove the account for naked options writing C The customer must cross-guarantee the account because of the increased risk level D The "Special Statement for Uncovered Options Writers" must be provided before executing the transaction
The best answer is C. Most firms have a structure for options account qualification that codes accounts as Level 1, 2, 3 or 4. A Level 1 account can only sell covered calls (the most conservative and popular options strategy) or buy puts to hedge existing stock positions; A Level 2 account can also buy calls and buy puts to speculate; A Level 3 account can also take spread positions; and A Level 4 account can do anything, both covered or naked. For a customer to move up in Level, the suitability determination must be redone and the customer must be sent a new options agreement, which must be signed and returned within 15 days. Also, the ROP (Registered Options Principal) must reapprove the account. To move to Level 4, the customer must also be given the "Special Statement for Uncovered Options Writers." This discloses that: Naked call writers have unlimited risk and naked put writers have substantial risk. If the broker demands additional margin due to an adverse market move, the broker may liquidate customer positions without prior notice if such margin payment is not received. If a secondary market in options were to become unavailable, the writer would be subject to exercise at any time until expiration of the contract. Uncovered option writing is only suitable for the knowledgeable investor who understands the risks and has the capacity to absorb substantial losses and has sufficient liquid assets to meet margin requirements. The writer of an American style option is subject to exercise at any time, whereas the writer of a European style option is only subject to exercise during the exercise period. Note that there is no requirement to cross-guarantee the account because of the increased risk level. Any additional margin required by the positions taken is set by the margin rules.
Approval of new accounts for MSRB member firms CANNOT be performed by the: A Branch Office Manager B Municipal Securities Principal C Registered Representative D General Principal
The best answer is C. The Municipal Principal (Series 53 license) approves accounts at municipal securities firms. In addition, the MSRB permits the General Principal (Series 24 license) or the Branch Office Manager (Series 9/10 license) to approve new accounts. Registered Representatives may fill out a new account form but lack approval authority.
An 80-year old customer with an existing individual account comes into a branch office and tells his representative that: "My son has been telling me that I need to give him a power of attorney over my account because of my advanced age, and I want to keep him happy and keep him from putting me in a retirement home." What should the representative do? A The representative should give the customer a power of attorney form, naming the son as attorney over the account, and have the customer sign the form B The representative should contact the son and get permission to have the customer sign a power of attorney C The representative should escalate the matter to the branch manager or compliance department of the firm D The representative should freeze the account until it can be determined that the customer is not mentally incapacitated
The best answer is C. The SEC and FINRA are concerned about aging investors, who as their mental capacity diminishes, are prey for investment scams. To protect senior investors, firms must train their employees to identify diminished mental capacity. In this example, the red flag is that the 80-year old customer tells the representative that "if I don't give my son a power of attorney, he will put me in a home." It could be that the son really is acting in the customer's best interests; or the son could be attempting to coerce the old man to give a power of attorney so the son can drain the account. From the initial information given, we just don't know the full details of the situation. FINRA requires that firms have an internal process to permit representatives to get advice from others as to what steps to take. These include: the representative should document the suspected diminished capacity and escalate immediately;the firm should have a clearly designated individual to whom the matter is escalated. Once the problem is identified and escalated, the next step for the firm is to determine if the customer appears to be competent and if the son is acting in the elderly father's best interests. If so, then completing the power of attorney is appropriate. If not, then the next step would be to alert a government protective services organization.
To make a suitable recommendation, the registered representative must have sufficient knowledge of the customer's financial background. Regarding recommendations to a customer, which statement is TRUE under MSRB rules? A If the customer refuses to disclose sufficient financial information, recommendations are allowed if the recommended security is investment grade B If the customer refuses to disclose sufficient financial information, only recommendations being made to other customers are permitted C If the customer refuses to disclose sufficient financial information, recommendations are not permitted D If the customer insists upon performing a trade that is deemed to be unsuitable, the registered representative must refuse the trade
The best answer is C. 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 or her 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.
Which of the following information is required on an individual new account form? A Tax bracket of the customer B Type of securities that can be traded in the account C Type of account - cash or margin D Proof of domicile of account holder Review
The best answer is C. The type of account (cash or margin) is needed when opening a new account, since a margin account requires the customer's signature on a separate "margin agreement." The country of citizenship of the account holder is needed because the PATRIOT Act requires that a copy of the customer's passport be obtained if the account is being opened for a non-U.S. citizen. In addition, the non-U.S. citizen must present a U.S. tax identification number. There is no requirement for Proof of Domicile - this documents the state (not the country) in which the customer legally resides. The tax bracket of the customer would be helpful information but it's not required to open a new account.
An elderly client has a $400,000 portfolio that is conservatively invested in blue chip stocks and government bonds. He calls his representative and tells him that he wants to liquidate the entire portfolio and buy growth stocks. His son also has an account serviced by the same representative, so the representative calls the son to ask him about how his father is doing, to which the son responds: "Dad has not been himself lately." What step should the representative take? A The representative should follow the customer's instructions, liquidate the portfolio, and buy growth stocks B The representative should refuse to follow the customer's instructions C The representative should contact the client and explain the risks inherent in the customer's strategy D The representative should contact compliance and ask them to file a SAR
The best answer is C. This one is kinda cute! The basic rule for elderly clients that appear to be "out of it" is to escalate the matter to compliance and let them deal with it. However, a SAR is a Suspicious Activities Report, which is filed with the Federal Government if the firm is suspicious that a client is money laundering or supporting terrorism. So Choice D is incorrect! Looking at the other choices, representatives are supposed to follow client instructions, but they also have an obligation to steer customers away from doing something really stupid. The representative should neither do what the customer wants (which is stupid) or refuse to do what the customer wants. Sitting down with the customer and explaining why this is stupid appears to be the best choice. If the customer appears to be unable to understand when the registered representative is explaining why the customer's request is not a good idea, then escalate the matter to compliance and let them deal with it! Review
If a member firm believes that a senior citizen with an account at the firm is being financially exploited, the member would contact the client's A attorney B closest relative C trusted contact person D registered representative
The best answer is C. To address growing problems with financial exploitation of vulnerable senior citizens, FINRA requires that "reasonable efforts" be made to obtain the name and contact information of a "trusted contact person" when an account is being opened. Note that this requirement applies to any new account, not just to accounts opened by senior citizens (age 65 or older). If a member places a temporary hold on a senior citizen's account because of suspected financial exploitation, within 2 business days of placing the hold, all parties authorized to do business in the account must be notified, as well as the trusted contact person. The "idea" is that the trusted contact person will take the steps necessary to stop the financial exploitation of the senior citizen (such as filing a complaint with the police).
Under FINRA rules, if a member suspects that a senior citizen is being financially exploited, a temporary hold may be placed on disbursements from the account for up to: A 5 business days B 10 business days C 15 business days D 20 business days
The best answer is C. FINRA permits member firms to place a temporary hold on disbursements from customer accounts if the firm suspects that the account owner is being financially exploited. The initial hold can be for up to 15 business days. In addition, if the member's review of the situation supports this, the member can extend the hold for another 10 business days.
If a customer does not return a signed options agreement, which statement is TRUE? A The account must be frozen for 90 days B Opening transactions are permitted in the account C Closing transactions are permitted in the account D Payment in advance is required for any further transactions
The best answer is C. If the customer does not return the signed options agreement within 15 days' of account opening, no new positions can be initiated in the account. Orders can be accepted only to close out existing positions. There is no requirement to liquidate the account, nor to freeze the account, nor is there a requirement that cash be paid in advance for any further transactions.
A customer directs a registered representative to execute a trade which the representative believes is unsuitable for the customer. After explaining this, the customer directs that the trade be performed. The representative should: A refuse the order B obtain the manager's written approval before entering the order C execute the order, but note his or her exception in the customer account file D close the account
The best answer is C. If the customer tells you to do something, do it! It's his account, not yours. Since you don't agree with the customer's decision, cover your actions by documenting your exception to the trade in the customer file.
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
The best answer is C. 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.
Which of the following statements is FALSE? To open an options account, inquiry must be made into the customer's financial situation and needs in order to: A make suitable customer recommendations B determine if it is appropriate to open the account C determine whether the customer should receive an Options Disclosure Document D determine the restrictions, if any, to be placed in the Options Agreement Review
The best answer is C. The Options Disclosure Document and Options Agreement are mandatory parts of the option account opening procedure. Inquiry into the customer's financial situation is not made to determine whether the customer gets these. It is made to determine whether the account should be opened and what to recommend. Review
When opening of a joint account for a husband and wife the firm should obtain the social security number of: A the husband B the wife C both owners D the owner with the higher tax bracket
The best answer is C. When a new account is opened jointly, the firm will collect the social security number of each owner. Note: 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.
When opening an options account, the customer must return the signed Options Agreement: A 15 days prior to opening the account B 5 days prior to opening the account C at or prior to opening the account D 15 days after opening the account
The best answer is D. A copy of the options new account form is part of the Options Agreement that is sent to the customer, to be signed and returned within 15 days of account opening. The Options Agreement is a recap of the customer new account profile including the suitability determination and it qualifies the customer for a level of options trading, detailing which options transactions are permitted. If the signed agreement is not returned, you are prohibited from accepting new orders - only closing transactions are allowed.
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
The best answer is D. 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.
The FINRA suitability rule requires all of the following EXCEPT: A Before a product or strategy can be recommended, a reasonable basis suitability determination must be completed, evaluating the investment's features, returns, costs and risks B Before a product or strategy can be recommended to a customer, it must be determined that the investment is suitable, based on that client's new account profile C Before a product or strategy can be recommended to a customer, it must be determined that the customer has the ability to meet the financial commitment required by the recommendation D Before a product or strategy can be recommended, the registered representative must understand and be able protect the client against the product's inherent risks
The best answer is D. FINRA requires that suitability determinations include multiple levels of review. These are to be completed in the following order: Reasonable Basis Suitability: This is a review of the features, returns, costs and risks of the recommended product or strategy. Only those products with the best combination can be recommended to clients. In essence, this rule requires that firms have an internal "recommended list" that has completed this review. Customer-Specific Suitability: Once the recommendation has completed "reasonable basis" suitability, that does not mean that it can be recommended to all customers. To recommend it to a customer requires that "customer-specific" suitability be determined. Quantitative Suitability: A single recommendation might be suitable for a customer, however a large number of similar recommendations might not be. It all depends of the customer's objectives, needs, and ability to pay for the recommended transactions. Choice D is incorrect since risks cannot always be avoided. Note that the "Suitability" rule only applies to recommended transactions. It explicitly does not apply to unsolicited trades; and it also does not apply to institutional customers - only to retail customers.
Recommendations by a registered representative to a customer are permitted when the: A customer has not received the Options Disclosure Document B opening of the account has not been approved by the Registered Options Principal C representative is unsure about the client's ability to assume the risk associated with the recommended strategy D the options agreement has not been returned within 15 days of account opening Review
The best answer is D. Recommendations about options should not be made to a customer unless he or she has received an Options Disclosure Document; and the account has been approved by the Registered Options Principal; and the registered representative believes that the recommendations made are suitable for the customer. The customer must sign and return the Options Agreement no later than 15 days after opening the account. There is no requirement to sign the agreement prior to any recommendations being made. If the agreement is not returned within 15 days, new opening transactions in the account are prohibited - only closing transactions are allowed.
All of the following information must be disclosed to a client on Form CRS when opening a new account at a broker-dealer EXCEPT: A whether the firm acts as a broker-dealer or an investment adviser in the relationship B whether the firm operates under a suitability standard or a fiduciary standard in the relationship C the type of fees charged by the firm in the relationship D the type of information collected by the firm about that customer and how it is used
The best answer is D. Regulation BI went into effect in mid-2020. It requires that customers receive a 2-page document at account opening called Form CRS - Customer Relationship Summary. Form CRS details: Whether the firm is acting as a broker-dealer in the relationship, where it can charge commissions; or if the firm is acting as an investment adviser in the relationship, where is can only charge fixed fees; That the firm must adhere to a suitability standard when making recommendations as a broker-dealer; and that the firm must adhere to a tougher fiduciary standard when acting as an investment adviser; The fees and costs that the customer will pay; Any conflicts of interest that the firm may have in providing its services to the client; and Whether the firm or its associated persons has had any reportable disciplinary events. Regulation SP (Statement of Privacy) covers the confidentiality of customer information and how the firm may use it. It also gives the customer the right to "opt out" and deny the right of the firm to use any of his or her personal information (e.g., for marketing purposes).
All of the following should be considered when determining the suitability of a municipal bond recommendation EXCEPT the customer's: A state of permanent residence B tax bracket C financial background D formal education level
The best answer is D. The customer's education level is of no relevance in making a securities recommendation (people can be educated smart, and people can be street smart as well!) State of residence is important for a municipal bond recommendation, since if the purchaser is a resident of the issuing state, then the state exempts that issue from state and local tax (in addition to the federal tax exemption). Tax bracket is important because municipal yields are lower than those of taxable investments; and the customer's tax bracket must be high enough to justify this type of investment. Financial background information such as income, net worth, and other investments, is needed to recommend the right type of municipal bond to the customer.
All of the following information is needed to open a new cash account EXCEPT: A Customer name B Customer birthdate C Customer citizenship D A list of external brokerage account holding
The best answer is D. To open a new cash account, the name of the customer is needed (obviously); the customer's birthdate is needed to do a proper suitability determination. The customer's citizenship because if the customer is a not a U.S. citizen, then a copy of the customer's passport must be obtained and the customer must have a U.S. tax I.D. number. The customer's occupation is needed to see if the customer works in the financial services industry. If this is the case, then additional documentation is required to open the account. A firm should inquire about other assets held away from the firm but a list of these external assets in not required to open an account.
All of the following information is required to open an account under FINRA rules EXCEPT: A the country of citizenship of the customer B whether the customer is employed by another financial services firm C the customer's birthdate D a letter of reference for the customer
The best answer is D. Under FINRA rules, to open a new account for a customer, the country of citizenship must be obtained since, if the customer is a non-U.S. citizen, a copy of the customer's passport must be obtained and the customer must have a U.S. tax identification number. Whether the customer is employed by another financial services firm must be ascertained, since special procedures are required to open such an account. The customer's birthdate is a required piece of information to open an account. There is no requirement for a letter of reference about the customer
A married couple opens a joint margin account. The brokerage firm will send the Internal Revenue Service Form 1099 (Report of Interest and Dividends Earned) to the: A husband only B wife only C husband on one report; and the wife on another report D person whose social security number was given on the account form
The best answer is D. When opening a joint account, the social security number of each participant must be obtained, but the account form will have a box for the "Primary" social security number. This is the number that will be used for IRS reporting purposes, because the IRS can only deal with one number! Form 1099s (Reports of Interest and Dividends Earned) are sent to the customer whose primary social security number appears on the account. If it is a joint account, then the parties to the account must decide which single person's social security number will be the "Primary" one used. The Form 1099 is sent to that 1 party in the account. It is up to the joint owners to allocate the proper share of income as shown on that report onto their personal tax returns.
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
The best answer is D. When opening a joint account, the social security number of each participant must be obtained, but the account form will have a box for the "Primary" social security number. This is the number that will be used for IRS reporting purposes, because the IRS can only deal with one number! Form 1099s (Reports of Interest and Dividends Earned) are sent to the customer whose primary social security number appears on the account. If it is a joint account, then the parties to the account must decide which single person's social security number will be the "Primary" one used. The Form 1099 is sent to that 1 party in the account. It is up to the joint owners to allocate the proper share of income as shown on that report onto their personal tax returns.
Under FINRA rules, to ascertain which investments are suitable for the customer, the registered representative would inquire about all of the following EXCEPT: A Investment objective B Financial situation and needs C Tax status D Educational background Review
The best answer is D. "Suitability" means that securities which are recommended to a customer are appropriate for that customer. To ascertain which investments are suitable for the customer, FINRA states that the basis for making the recommendation are the facts disclosed by the customer about his other security holdings and financial situation and needs. Inquiry should be made as the customer's investment objective, tax status, and financial status. Review
Regarding arbitration agreements between member firms and customers: A FINRA requires each customer to sign an arbitration agreement as part of the account opening process B each member firm requires customers to sign an arbitration agreement which holds the firm harmless if errors occur C each member firm must provide the customer with a separate copy of the arbitration agreement for signature and return within 10 days of account opening D each member firm must provide the customer with a separate copy of the arbitration agreement for signature and return within 30 days of account opening
The best answer is D. 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. Arbitration is a dispute resolution process that does not in any way indemnify firms from errors or omissions.
Recommendations by a registered representative to a customer about options strategies may still be suitable if the: A customer has not received the Options Disclosure Document B opening of the account has not been approved by the Registered Options Principal C representative is unsure about the client's ability to assume the risk associated with a specific options strategy D customer has not signed the Options Agreement
The best answer is D. Recommendations about options should not be made to a customer unless he has received an Options Disclosure Document (ODD); and the account has been approved by the Registered Options Principal; and the registered representative believes that the recommendations are suitable for the customer. The customer must sign and return the Options Agreement no later than 15 days after opening the account. There is no requirement to sign the Agreement prior to any recommendations being made. If the agreement is not returned within 15 days, new opening transactions in the account are prohibited - only closing transactions are allowed.
Under SEC rules, customer account information must be verified by the member firm: A within 10 days of account opening B within 15 days of account opening C every 12 months D every 36 months
The best answer is D. 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.
Under the Know Your Customer Rule, in order to open and maintain a customer account, each registered representative must: A know "every fact" concerning the customer B know "every financial fact" concerning the customer C know "every economic fact" concerning a customer D know "every essential fact" concerning the customer
The best answer is D. The Know Your Customer rule is separate from the "Suitability" rule. The KYC rule requires that the essential facts about the customer be collected at account opening, so that the member firm can: effectively service the customer's account; act in accordance with any special handling instructions for the account; understand the authority of each person acting for the customer; and comply with applicable laws and regulations. This is a very general rule regarding collection of customer account information and it applies whether trades are recommended or not in the account. For example, the PATRIOT Act requires that customer citizenship be obtained, because if a non-U.S citizen opens an account, a copy of their foreign passport must be obtained. Thus, citizenship becomes an essential fact in order to "comply with applicable laws and regulations." In contrast, the Suitability rule only applies when recommendations are made.
In order to open a new account for an individual customer, all of the following information is required on the new account form EXCEPT: A Date of birth B Street address C Social security number D Telephone number
The best answer is D. There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information.
Independent verification of a new customer's identity can be satisfied by obtaining a photocopy of all of the following EXCEPT the customer's: A passport B driver's license C military ID D marriage certificate
The best answer is D. There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information. A marriage certificate does not have the required information needed for matching.
A customer wishes to open a new account, but refuses to give his or her social security number and date of birth, claiming that the release of such information would allow the customer's identity to be stolen. Which statement is TRUE? A As long as the customer signs a statement to the effect that he or she is the true account owner, then the account can be opened B The account can be opened as long as the firm is able to verify the customer's identity C The account can be opened as long as the manager approves D The account cannot be opened
The best answer is D. There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information. If the customer does not give this information, then the account cannot be opened.
A social security number or tax identification number is needed to open a securities account for: A a U.S. individual only B both U.S. and foreign individuals only C U.S. individuals and corporations only D All of the above Review
The best answer is D. To open an account for a U.S. resident, a social security number is needed; to open an account for a U.S. corporation, the tax identification number is needed. If a foreign resident or foreign corporation wishes to open an account, then that person must have a U.S. tax identification number.
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
The best answer is D. 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.
To open an options account, inquiry must be made regarding all of the following aspects of the customer EXCEPT: A Financial Status B Marital Status C Income D Education
The best answer is D. To open an options account, a customer must give detailed financial disclosure. Inquiry must be made as to the customer's investment objective, investment experience, financial situation and financial needs. Inquiry must also be made about the customer's income, net worth, liquid net worth, marital status, and tax status.
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
The best answer is D. 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.
