Opening Procedures For Other Account Types

The principal reason for an institutional investor to open a prime brokerage account is: A. consolidation of account positions with one broker B. lower commission costs on trade executions C. direct access to execution venues D. simplified reporting for tax purposes

The best answer is A. Hedge fund investors typically use a "prime broker" to consolidate all of their positions with one brokerage firm. In a prime brokerage agreement, the institutional investor can use different executing brokers for its trades, but all of these trades are settled by the "prime broker" who maintains custody of the positions, and most importantly, provides margin financing on these positions and arranges for stock loans on short stock positions. The hedge fund, in return for sending trades to different executing brokers at full commission rates, gets valuable research and recommendations in return. By using a prime broker to consolidate all positions, the hedge fund gets lower financing costs on borrowed funds and "front of the line" status when it wishes to borrow securities to effect short sales.

Under FINRA rules, a written power of attorney is 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

The best answer is A. A registered representative can always pick the time and price of execution of an order without requiring a written power of attorney from the customer. However, if the registered representative selects the size of the trade and/or the security to be traded, then the trade is "discretionary" and requires a written power of attorney from the customer.

An aunt wishes to open a custodian account to give a gift to her minor niece. Which statement is TRUE? A. The account can be opened without restriction B. The account can be opened only with the permission of the parents C. The account can be opened only with the permission of the niece D. The account cannot be opened

The best answer is A. Any adult can open a custodian account for any minor.

Jack Jones, age 82, has an individual account at your firm. He gives a full written trading authorization to his son, Jack Jones Jr. under a durable power of attorney. Upon the death of Jack Jones, the power of attorney: A. is void B. continues because it is a "durable" power of attorney C. continues because it is a "full" power of attorney D. continues until the executor over the Jack Jones estate is appointed

The best answer is A. Any power of attorney granted by a customer "dies" when that customer dies. The difference between a "durable" and a "non-durable" power of attorney only relates to mental incapacitation. If an individual that has granted a non-durable power of attorney becomes mentally incapacitated, then that power of attorney becomes void. If an individual that has granted a durable power of attorney becomes mentally incapacitated, the power of attorney continues in effect.

Jack Jones, age 82, has an individual account at your firm. He gives a full written trading authorization to his son, Jack Jones Jr. under a non-durable power of attorney. Upon the death of Jack Jones, the power of attorney: A. is void B. continues because it was given to an immediate family member C. continues because it is a "full" power of attorney D. continues until the executor over the Jack Jones estate is appointed

The best answer is A. Any power of attorney granted by a customer "dies" when that customer dies. The difference between a "durable" and a "non-durable" power of attorney only relates to mental incapacitation. If an individual that has granted a non-durable power of attorney becomes mentally incapacitated, then that power of attorney becomes void. If an individual that has granted a durable power of attorney becomes mentally incapacitated, the power of attorney continues in effect.

Which of the following accounts can be opened as margin accounts? I Investment Adviser account II Custodian account III Guardian account IV Executor for an Estate account A. I only B. II and III C. I and IV D. I, II, III, IV

The best answer is A. As a general rule, fiduciary accounts cannot be opened as margin accounts, unless the authorizing document specifically permits this. Custodian accounts, Guardian accounts, and Executor accounts are all fiduciary accounts. Investment adviser accounts are essentially regular customer accounts with a Third Party Trading Authorization given to the Investment Adviser. Customer accounts can be opened as either cash or margin accounts (as long as the proper documentation is completed).

The social security number(s) that is (are) used for Internal Revenue Service reporting in a custodian account is (are) the: A. minor's social security number B. custodian's social security number C. account has the choice of using either the minor's social security number or the custodian's social security number D. parent's social security number

The best answer is A. Custodian accounts use the social security number of the minor.

An individual customer places an order with a broker at 12:30 PM Eastern Time to "Buy 10,000 shares of ABC stock whenever you think the time is best." This order: I must be entered immediately by the representative as a "Market-Not Held" order II should be entered by the representative at the moment that he or she thinks is appropriate for getting the best execution III must be filled by the close of the market on that trading day IV must be filled by 12:30 PM Eastern Time on the following trading day A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Discretion over price and time of execution can be given verbally. However, the order must be filled by the close of the market on that day or it is canceled. If price and time discretion are given for a time period that is longer than 1 day, then a written power of attorney from the customer is required to accept the order.

A husband and wife have a joint account with a member firm. The wife calls the registered representative with instructions to liquidate their 500 share position of ABC stock. The registered representative should: A. accept and execute the order as given B. execute the order only after the branch manager approves C. execute the order only after the husband approves orally D. execute the order only after the husband approves in writing

The best answer is A. In a joint account, any one of the owners can enter trades in the account. In addition, any one of the owners can authorize that checks be drawn on the account, however all checks must be drawn to full account name.

All of the following are allowable joint accounts EXCEPT: A. father and 12-year old son B. father and 25-year old son C. husband and wife D. two partners in a business

The best answer is A. Joint accounts can only be opened between adults. Accounts for a minor can only be opened as fiduciary accounts such as a Guardian account or Custodian account. These are not joint accounts - the minor or incompetent is not authorized to trade the account nor can he or she draw checks from the account. Only the Guardian or Custodian can perform these actions. A 12-year old person is a minor; a 25-year old person is an adult.

A custodian account is opened by a parent for their 12-year old daughter. Securities in the account are sold later that year for a $3,000 profit. The gain will be taxed at the bracket of the: A. parent B. minor C. minor at the age of majority D. parent at the age of majority

The best answer is A. Tax liability in a custodian account is the responsibility of the minor - it is the minor's social security number that is on the account. However, the income is taxed at the parent's rate if the child is age 18 or under; and the account has over $2,100 of income in 2019. This is called the "kiddie tax" and is designed to stop parents from shifting their income to their children, who typically have less income and thus are taxed at a lower bracket.

Custodian accounts can be opened as a: I Cash account II Margin account III Arbitrage account A. I only B. I and II C. II and III D. I, II, III

The best answer is A. The "default" setting of the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act is that custodian 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, custodian accounts can only be opened as cash accounts, since this is the rule in most States.

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

The best answer is B. 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.

An individual is declared incompetent in a court proceeding. What type of account can be opened for this person with appropriate documentation? A. Cash account B. Guardianship account C. Joint account D. An account may not be opened

The best answer is B. A Guardianship account can be opened if the court order appointing the guardian over the incompetent or minor is given to the brokerage firm.

All of the following actions by a custodian in an account opened under the Uniform Gifts to Minors Act are permitted EXCEPT: A. donating funds to the account to make additional investments B. withdrawing funds from the account for the custodian's use C. managing the investments in the account with the objective of generating enough income for college tuition D. selling securities in the account to generate proceeds for other investments

The best answer is B. Custodians are obligated to manage the assets of the account in the best interests of the minor. Custodians cannot use account assets for their own benefit.

An individual customer says the following to his broker: "Buy 100,000 shares of ABC stock whenever you think the time is best. This order is good unless I call you to cancel." Which statement is TRUE about the handling of this order? A. An executed power of attorney must be obtained from the customer prior to accepting the order B. The order must be executed by the close of the market on that trading day C. The order can be accepted as given, and can be executed at the discretion of the brokerage firm at any time or day D. This order can only be accepted if the customer places it via fax or e-mail

The best answer is B. Discretion over price and time of execution can be given verbally. However, the order must be filled by the close of the market on that day or it is canceled. If price and time discretion are given for a time period that is longer than 1 day, then a written power of attorney from the customer is required to accept the order.

Which statements are TRUE about FINRA rules regarding the designation of accounts? I A record must be maintained of the actual customer's name II No record need be maintained of the actual customer's name III Numbered accounts are prohibited IV Numbered accounts are permitted if the customer attests in writing to account ownership A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. FINRA requires that accounts be maintained in customer name; however it will allow a numbered account to be maintained if the firm keeps on file a written statement by the customer attesting to ownership. For example, professional traders might worry that if their trades are seen in their name in the firm, that unscrupulous employees might try to "ghost" their trades. If the account is maintained as a numbered account, then whoever sees the order does not know the identity of the customer.

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

The best answer is B. 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.

A parent opens a custodian account for a 10-year old child. The grandparents donate into the account. If the investment income in the account exceeds Internal Revenue Service guidelines, the income is taxed at the: A. minor's tax rate B. gift and estate tax rate C. grandparent's tax rate D. the highest tax rate of the minor, parent or grandparent

The best answer is B. If a custodian account is opened by a parent for a minor who is age 18 or under; and if the income exceeds $2,100 in 2019; then the income is taxed at the gift and estate tax rate instead of the minor's rate. The IRS 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.

Two brothers wish to open an account at a broker-dealer. One brother will contribute $100,000 and the other brother will contribute $300,000. They have stated that if one should die, then that person's share will go to the remaining brother. What kind of account should be opened? A. partnership account B. joint account with rights of survivorship C. joint account with tenants in common D. 2 separate individual accounts

The best answer is B. In a joint account with rights of survivorship, if one participant in the account dies, the decedent's share will go directly to the other participant, avoiding probate. In a joint account with tenants in common, if one dies, his or her percentage ownership goes into the estate and is bequeathed to a beneficiary in the will.

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

The best answer is B. 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.")

Shares are purchased in a custodian account, and are later sold at a profit. Tax liability rests with the: A. custodian B. minor C. minor at the age of majority D. custodian at the age of majority

The best answer is B. Tax liability in a custodian 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. Tax is due on income reported each year - there is no waiting until the minor reaches adult age (the IRS wants its money now!)

All of the following are true regarding a custodian account EXCEPT: A. tax liability is the responsibility of the minor B. tax liability is deferred until the minor reaches adulthood C. any income is reported to the IRS each year D. the minor's social security number is on the account

The best answer is B. Tax liability in a custodian account is the responsibility of the minor; each year any income is reported to the IRS using the minor's social security number. Tax is due on that income in the year it was received - there is no waiting until the minor reaches adult age.

In a custodian account which of the following statements are TRUE? I The custodian can enter orders into the account II The custodian cannot enter orders into the account III The custodian can give trading authorization to another third party in the account IV The custodian cannot give trading authorization to another third party in the account A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Technically, the custodian is the Third Party on a custodian account, with the minor being the Second Party. Only the custodian can enter orders, since the Second Party (the minor customer) is not yet of legal age. The custodian, since it's already the Third Party in the account, cannot give trading authorization to another Third Party in the account.

Which statements are TRUE when comparing a custodian 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

The best answer is B. 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).

Transfer on Death account registration transfers all securities in the account into the name of the: A. estate upon death of the owner B. designated beneficiary upon death of the owner C. executor upon death of the owner D. spouse upon death of the owner

The best answer is B. Transfer On Death (TOD) is a type of account registration that allows the registered owner to name the person into whose name the securities will be transferred upon the death of the customer. Thus, the securities are not required to be transferred into the name of the estate; and then retransferred to the beneficiary; after the estate clears probate.

A customer wishes to give a gift of securities to her nephew under the Uniform Gifts To Minors Act. When the minor reaches legal age in that state, the: A. custodian can continue in that capacity with the express permission of the minor B. account must be transferred into the name of the minor C. account must be liquidated and the proceeds paid to the new adult D. custodian must pay the minor the highest market value that the account has had over its life

The best answer is B. Under UGMA (Uniform Gifts to Minors Act), when a minor reaches legal age, the registration on the custodian account is changed to the sole name of the new adult. The new adult is free to do as he or she wishes with the account.

An elderly customer has a discretionary account with your firm. The power of attorney signed by the customer for the account is durable. If the customer becomes mentally incapacitated, the registered representative handling the account: A. can no longer effect discretionary trades for that customer B. must liquidate the account and wait for instructions from the court appointed guardian C. can continue to execute discretionary trades for that customer D. can only close existing positions but cannot introduce new positions in the account

The best answer is C. A durable power of attorney continues in force if the grantor becomes mentally incompetent. A non-durable power of attorney ceases if the grantor becomes mentally incompetent. All powers of attorney die when the grantor dies.

A registered representative is allowed to choose which of the following in a transaction without requiring written trading authorization from the customer? A. Quantity and price B. Security and time C. Price and time D. Security and price

The best answer is C. A registered representative is allowed to select the price and time of execution without the order being considered as "discretionary." If he or she selects any more, such as the security to be traded or the number of shares, then the order is discretionary and requires a written power of attorney from the customer.

In order to open a discretionary cash 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 II only B. I and III only C. I, II, IV D. II, III, IV

The best answer is C. 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.

Which one of the following orders requires specific customer authorization? A. "Buy 100 shares of ABC at the best price available" B. "Sell 100 shares of ABC at the market" C. "Buy 100 shares of any computer stock priced at under $40" D. "Sell 100 shares of ABC at $40 if it gets to that level"

The best answer is C. A written power of attorney is required only if a registered representative chooses more than price and/or time of execution in a customer transaction - translated, this means that the registered representative either selects the security to be traded or selects the size of the transaction. In Choices A, B, and D, the customer specifies the size and security, so no power of attorney is needed. In Choice C, the choice of the security is left to the registered representative, so a power of attorney is required.

Which of the following transactions are permitted in a custodian account? I Short sale of common stock II Sale of pre-emptive rights III Purchase of warrants IV Purchase of mutual fund shares A. I and II only B. IV only C. II, III, IV D. I, II, III, IV

The best answer is C. Custodian accounts cannot be margin accounts - so short sales are prohibited. If securities are purchased, they must be paid in full. If securities are sold, they must be long sales with the proceeds being used for other investments or expenses that benefit the minor. Any type of security can be purchased in a custodian account, as long as the investment is "prudent."

All of the following are types of fiduciary accounts EXCEPT: A. Custodian Account B. Guardian Account C. Joint Account D. Trust Account

The best answer is C. Custodian accounts, Guardian accounts, and Trust accounts are "fiduciary accounts," where a third party is designated to manage the account in the best interests of the account owner. Joint accounts are directly managed by an owner of the account, and thus are not fiduciary accounts.

Which of the following statements are TRUE regarding discretionary accounts? I The account must be approved by a general principal or branch office manager II An account can be opened once a customer has guaranteed that a written power of attorney has been placed in the mail III Each order ticket must be marked "discretionary" IV Every order ticket must be approved promptly by a general principal or a branch office manager A. I and IV only B. II and III only C. I, III, IV D. II, III, IV

The best answer is C. 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.

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

The best answer is C. 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.

A custodian account is established under UTMA in a State with a transfer age of 21. Legal age in the state is 18. At age 19, the beneficiary leaves college to go into business setting up a software company. The beneficiary wishes to use the assets in the UTMA account as "seed money" for the business. Which statement is TRUE? A. The beneficiary can use the account assets immediately without restriction B. The beneficiary has no access to the account assets until he or she reaches age 21 C. The beneficiary can use the account assets only with the approval of the custodian D. The beneficiary can use the assets only with the approval of the state administrator

The best answer is C. If this were an UGMA (Uniform Gifts to Minors Act) account, the beneficiary gets control over the assets at legal age in the State and the answer would be Choice A. Since this is a UTMA (Uniform Transfers to Minors Act) account, the custodian sets the transfer age, up to the maximum transfer age permitted in the State. This custodian set a transfer age of 21. The beneficiary, who is now 19, cannot get control of the funds unless the custodian resets the transfer age.

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

The best answer is C. 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.

An unmarried couple wishes to open a new account as "JTWROS." What should the registered representative do? A. Open the account without making any further inquiries B. Explain the risks involved with opening such an account C. Ask why they wish to open this type of account D. Refuse to open the account

The best answer is C. Joint Tenants with Rights of Survivorship is the account ownership option usually chosen by a married couple. Legally, each 100% owns the account - if 1 dies, the other automatically 100% owns the account. The transfer bypasses the estate and cannot be challenged. If the account is titled as "Tenants in Common," then each tenant owns a stated percentage of the account. If one dies, that percentage goes to that person's estate and is passed by will. The registered representative should inquire as to why this unmarried couple wants JTWROS ownership. The big question is: "Do they understand how it all works?"

Which of the following can open a joint account without restriction? A. Parent and minor B. Guardian and custodian C. 3 limited partners D. Registered representative and client

The best answer is C. Minors cannot participate in a joint account - the only way to open an account for a minor is via a custodian, guardian, or trust account. A guardian and a custodian cannot open a joint account as such - the custodian opens an account for the benefit of the designated minor; the guardian opens the account for the benefit of the designated person whose assets need to be protected. A registered representative and a client cannot open a joint account unless the firm approves; and profit and loss is shared in proportion to capital contributed. As a practical matter, almost all firms prohibit such sharing outright. 3 limited partners could open a joint account (they could also open a partnership account).

Which of the following are synonymous terms for the "parties" to a brokerage account? A. First Party / Customer B. Second Party / Broker C. First Party / Broker D. Third Party / Customer

The best answer is C. The "First Party" to a brokerage account is the brokerage firm; the "Second Party" to a brokerage account is the customer; the "Third Party" to a brokerage account is anyone other than the broker or customer.

Which of the following are acceptable methods for opening an investment adviser account? I Each individual client of the adviser opens an account under the client's name II Each individual client of the adviser opens an account under the adviser's name III The adviser opens a Third Party account for each client IV The adviser opens an Omnibus account holding all of his clients' funds and securities A. I and II only B. III and IV only C. I and IV only D. II and III only

The best answer is C. The parties to an account are: First Party: Brokerage Firm Second Party: Customer Third Party: Someone Other Than the Broker or Customer Only Second Parties can open accounts. A Second Party can give trading authorization to either the First Party (a discretionary account) or to the Third Party (a Third Party trading authorization). An Investment Adviser can have each of his individual clients open an account at a brokerage firm, with the client giving the investment adviser Third Party power of attorney. The account is held in the name of the Second Party - that is, the customer. The other way for an investment adviser to open an account is on an Omnibus basis. In this situation, the Investment Adviser is the Second Party, opening a "group account." The names of the individual customers in the account are not known to the brokerage firm. From the brokerage firm's standpoint, the customer is the Adviser. Third Parties can never open accounts. The purpose of this rule is to make sure that any person cannot walk into a broker-dealer and open an account for someone else.

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

The best answer is C. 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.

To open a margin account for a partnership, which documentation is required? I New Account Form II Customer's Agreement III Partnership Agreement IV Authorizing Resolution A. I and III B. II and IV C. I, II, III D. I, II, III, IV

The best answer is C. To open any account, a new account form must be completed. Since this will be a margin account, a margin agreement (also termed a customer's agreement or hypothecation agreement) must be signed. To open a partnership account, a copy of the partnership agreement must be obtained (it will detail whether the account can be opened; and which partners are allowed to trade the account). An authorizing resolution of the Board of Directors is needed to open a corporate account - there is no similar requirement for a partnership account.

How must an account opened under the Uniform Gifts to Minors Act be titled? A. In the name of the custodian only B. In the name of the minor only C. In the name of the custodian for the minor D. In the name of the minor for the custodian

The best answer is C. Under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), any adult can open a custodian account for any minor. The account must be titled in the name of the custodian for the minor - so both names are there. Also note that the social security number of the minor is used on the account, not the social security number of the custodian.

A type of brokerage account where the customer is charged a single annual fee for all account services, regardless of activity in the account, is known as a: A. fiduciary account B. active trader account C. wrap account D. omnibus account

The best answer is C. 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 nor are charges imposed for safekeeping of securities. 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 registered representative ("RR") manages a corporate account. The corporation recently elected a new CEO who contacts the "RR" and gives trade instructions. Which statement is TRUE? The trade should be: A. refused until a new account form has been completed by the new CEO B. entered without restriction C. entered after the branch manager approves the transaction D. entered once the "RR" verifies that the CEO is an authorized trader in the account

The best answer is D. A corporate resolution will name the person(s) authorized to trade the account. Once the "RR" verifies that the CEO is an authorized trader listed in the corporate resolution, the trade can be entered as given.

Which of the following accounts can be opened by a minor? A. Custodian account B. Joint tenants with rights of survivorship account C. Uniform Gifts To Minors account D. A minor cannot open an account

The best answer is D. A minor cannot open an account, nor does the minor have legal capacity to participate in any joint account. The acceptable method of opening such an account is an adult custodian opening an account for the benefit of the minor.

Which documents are completed when opening a margin account? I new account form II margin agreement III loan consent agreement IV credit disclosure statement A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is D. A new account form must be completed whether an account is set up as a cash or a margin account. The paperwork that is unique to opening margin accounts includes the margin agreement, which the customer must sign, pledging the securities in the account as collateral for the margin loan; the loan consent agreement, which is customarily signed, where the customer permits the securities in the account to be lent out for short sales by others; and the credit disclosure statement, which explains how the loan balance is computed and interest is charged.

When comparing a full power of attorney given in a brokerage account to a limited power of attorney, the person given the: A. full power of attorney can draw checks only B. full power of attorney can enter orders only C. limited power of attorney can draw checks only D. limited power of attorney can enter orders only

The best answer is D. A person holding a limited power of attorney in a brokerage account can enter orders but cannot draw checks. A person holding a full power of attorney can do both - but any checks must be drawn to account name - not to the name of the third party.

Which statements are TRUE regarding a customer account with a "full power" third party trading authorization? I Checks drawn on the account can only be made out to the name of the customer, not to the third party II Upon the death of the customer, the power of attorney is revoked III The third party can enter orders in the account A. I only B. II only C. I and II D. I, II, III

The best answer is D. All statements are true about full trading authorizations. Any checks must be drawn in the account name (that is the name of the second party - the customer) - not third party name; the power of attorney dies if the customer dies; and the third party can enter orders. It is also true that if the customer so designates (in writing), that confirmations can be sent only to the third party.

A customer wishes to give a gift of securities to her nephew under the Uniform Gifts To Minors Act. Which of the following statements is TRUE? A. The account cannot be opened because only parents are permitted to be custodians B. The account can be opened only with the written permission of the minor C. The securities can only be donated if they are included on that state's "legal list" D. The account can be opened without further documentation

The best answer is D. Any adult can open a custodian account for a minor - the adult does not have to be related in any way to the minor. Financial institutions and trusts are often limited to the type of investments that they can make because the state can restrict investment to those securities included on its "legal list." Legal list securities are generally Treasuries and investment grade municipal and corporate bonds. Legal list requirements are not imposed on custodian accounts. Since the minor is not of legal age, the minor is in no position to give permission to open the account.

If an employee of a FINRA member firm wishes to open up an account with another FINRA member firm, all of the following statements are true EXCEPT: A. The employee must get written consent of his or her employing member firm to open the account B. The executing member firm must be notified, in writing, of the fact that the individual opening the account is associated with another member firm C. Duplicate confirmations and/or statements must be sent to the employing member, if requested in writing by the employer D. Duplicate confirmations and/or statements must be sent to FINRA, if requested in writing

The best answer is D. FINRA requires that if an employee of another FINRA member firm (whether registered or unregistered) wishes to open an account: - prior written consent of the employing member firm must be obtained; - the executing member must be notified in writing of the employee's association with another member firm; and - on written request of the employer member, the executing member must provide duplicate confirmations and statements. There is no requirement to send duplicate confirmations and statements to FINRA on request.

Which of the following statements are TRUE regarding fiduciary accounts? I Trading authorization can be given to a third party other than the fiduciary II Trading authorization cannot be given to a third party other than the fiduciary III Margin accounts can be opened without restriction IV No margin accounts are allowed unless the account documentation authorizes the opening of a margin account A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Since the fiduciary is the "third party" handling the account, only he is permitted to trade that account. He cannot give the trading authorization to another person. As a general rule fiduciary accounts must be cash accounts. However if the authorizing document specifically authorizes the opening of a margin account, then this is allowed.

Which of the following statements are TRUE regarding Trust Accounts? I The trust agreement will specify the transactions that the trustee is allowed to perform II A copy of the trust agreement must be obtained before any transactions are allowed III The account will be a cash account unless the trust agreement authorizes the opening of a margin account A. I only B. II only C. I and II only D. I, II, III

The best answer is D. The trust agreement will specify what transactions are allowed. A copy of the trust agreement must be obtained before any transactions are allowed. As a general rule fiduciary accounts must be cash accounts. A trust account will be opened as a cash account unless the agreement specifically authorizes the opening of a margin account.

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

The best answer is D. 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 an investor wishes to open a margin account, which of the following paperwork is customarily completed? I New Account Form II Hypothecation Agreement III Loan Consent Agreement IV Credit Agreement A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is D. To open any account, the new account form must be completed. In addition, if the account is a margin account, then the customer must sign a hypothecation agreement (where the customer pledges the securities to the broker in return for the margin loan); the customer is asked to sign a loan consent agreement, allowing the broker to lend out the customer's securities for short selling by other customers of the firm; and the customer must sign a credit disclosure agreement, which explains how the loan balance is computed and how interest will be charged on the loan.

All of the following are true statements about managed wrap accounts EXCEPT: A. a single annual fee is charged for account maintenance B. no separate commission charges are imposed for each transaction performed in the account C. no separate charges are imposed for safekeeping of securities in the account D. no options transactions are permitted in such account types

The best answer is D. 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 nor are charges imposed for safekeeping of securities. All services are covered in the single "wrap" fee. There is no prohibition on performing options transactions in such accounts. 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.