Series 7 part 1 (prac quiz)

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A broker-dealer has set up a prime brokerage account for one of its customers. This customer is most likely A) an individual retail customer. B) two spouses, each having individual accounts and a joint account together. C) an institutional customer. D) an investment club.

C Explanation A prime brokerage account is one in which a customer—generally an institutional customer—selects one member firm (the prime broker) to provide custody and other services, while other firms—called executing brokers—handle all trades placed by the customer.

One of the effects of Regulation BI is to place a limitation on the use of the descriptive term A) agent. B) registered representative. C) financial advisor. D) stockbroker.

C Explanation Regulation BI limits the use of the words adviser or advisor to those who are registered as investment advisers or representatives of those who are. Passing the Series 7 exam legally qualifies one as a registered representative. Under state law, the legal term is agent and the historical, and not misleading term, is stockbroker. Most of our Series 7 students go on to pass the Series 66 exam and become IARs. In that case, investment adviser representative is permitted.

What are the three primary investment objectives?

growth income capital preservation.

Which of the following are nonqualified and not subject to ERISA. A) Deferred compensation plans B) Defined benefit plans C) 401(k) plans D) Keogh plans

A Deferred compensation plans, by design, are nonqualified and not subject to ERISA. Therefore, they may discriminate as to who may participate. In any question on the exam, a qualified plan sponsored by a business will most likely have to comply with ERISA.

One of your customers has maintained a traditional IRA for the past 15 years. Some of her annual contributions were not tax deductible due to her income level and participation in another qualified plan. At age 60, the customer elects to make a lump-sum withdrawal. Which of the following statements is true? A) The portion representing principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. B) The entire withdrawal is taxable as ordinary income. C) The portion representing earnings and principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. D) The portion representing earnings from the nondeductible contributions is tax free, while the balance is taxable as ordinary income.

A Explanation All earnings, whether from deductible or nondeductible contributions, are tax deferred. Therefore, all earnings are taxable as ordinary income upon withdrawal. Only the nondeductible contribution is returned tax free.

One of your customers has maintained a traditional IRA for the past 15 years. Some of her annual contributions were not tax deductible due to her income level and participation in another qualified plan. At age 60, the customer elects to make a lump-sum withdrawal. Which of the following statements is true? A) The portion representing principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. B) The portion representing earnings and principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. C) The portion representing earnings from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. D) The entire withdrawal is taxable as ordinary income.

One of the most important roles played by registered representatives is making suitable recommendations to their customers. Doing that requires gathering as much information about the customers as possible. Which of the following factors would likely be the least important when dealing with a couple in their late twenties with two children? A) Expected retirement age B) Values C) Current employment stability D) Education goals for the children

A Explanation Although saving for retirement is the single most common investment objective, determining an expected retirement age for a couple this young is unrealistic—it is just too far away to make an accurate determination. Meeting the children's educational needs is something that needs to be addressed now. Knowing the reliability of the family's income stream is critical for financial planning. Selecting investments matching the customers' attitudes is necessary to ensure that their values are being met.

All of the following are true regarding nonqualified deferred compensation plans except A) employees may use accumulated funds as collateral for a bank loan. B) IRS approval is not needed for deferred compensation plans. C) income taxes on compensation are not due until constructive receipt. D) the plans need not be offered to all employees.

A Explanation Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary upon retirement. The employee has no right to the money until retirement, death, or disability, and thus cannot use it as collateral.

All of the following statements regarding a qualified pension plan are true except A) growth in the account is tax free. B) it must cover all of its eligible employees. C) it requires advance approval from the IRS. D) it must comply with nondiscrimination rules.

A Explanation Growth in qualified pension plans, as well as other qualified plans, is tax deferred, not tax free. All growth is taxable at the time of distribution.

Two friends would like to open a joint account but have the tax filed under the name of the nonemployed individual. That could be done in A) a JTWROS account with the Social Security number of the designated person used. B) a joint account with a TOD designation. C) a tenants in common account with the percentage ownership in the name of the designated person. D) an account opened as a partnership.

A Explanation In a JTWROS account, the assets are considered jointly owned. Only one tax identification number (Social Security number) is placed on the account. If it is the number of the nonemployed individual, the Form 1099 will go to that person and that is whom the IRS will expect to pay the taxes. That might be the correct answer to a test question. In the real world, it might not satisfy the IRS that the one in the lower tax bracket is being credited with all the income and gains. If the IRS audits the account and sees that the funds came from the working individual, there could be tax issues. However, the exam does not always deal with the real world and we won't either on this one.

Dale Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. Wells is looking for favorable tax treatment of earnings and losses. Wells also wants to limit the number of investors but is willing to share control of the enterprise with others to attract them. What business form would you advise? A) General partnership B) Limited partnership C) C corporation D) S corporation

A Explanation Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. Although an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.

A new client turns in the new account form. While reviewing the information on the form, the registered representative handling the account notices that the space for listing the Social Security number is blank. Under the provisions of the USA PATRIOT Act of 2001, A) the account can be opened if the client has already applied for a number. B) the account cannot be opened until the number has been received. C) the account can be opened without the number if at least two pieces of government ID are presented. D) the account can be opened if the client assures you that an application will be filed.

A Explanation The customer identification program (CIP), a part of the USA PATRIOT Act of 2001, requires a Social Security or tax identification number included on the new account form. The firm can open the account if the number has been applied for. In this instance, the firm must obtain the number within a reasonable period and the account card must be marked applied for.

Regulations regarding how contributions are made to tax-qualified plans relate to which of the following ERISA requirements? A) Funding policy B) Nondiscrimination C) Reporting and disclosure D) Vesting

A Explanation The funding policy covers how an employer contributes to, or funds, a retirement plan.

A husband and wife wish to open a Roth IRA. She is 49 years old and earns $99,000 per year; he is 51 and earns $49,000 per year. What is the maximum permitted contribution for the married couple, based on age and income? A) Husband $7,000 and wife $6,000 B) Husband $6,000 and wife $0 C) Husband $6,000 and wife $6,000 D) Husband $7,000 and wife $0

A Explanation The husband may contribute $7,000 and his wife may contribute $6,000. For married couples, an adjusted gross income level of $196,000 (2020) begins to limit the amount of contribution that is permitted into a Roth IRA (although this specific amount is never tested). The married couple has an income level of $148,000, well below that AGI. Therefore, each would be permitted to make the maximum contribution. The wife may contribute a maximum amount of $6,000. Because the husband is 51, he is eligible to contribute an additional $1,000 per year (the catch-up provision applied to those age 50 and older) for a contribution of $7,000.

When dealing with suitable recommendations to clients, it is important to distinguish between investment objectives and investment constraints. Which of the following would be an investment objective rather than a constraint? A) Capital appreciation B) Time horizon C) Tax considerations D) Need for liquidity

A Explanation The objective is the route you wish to take. The constraints are what might keep you from getting there. The client who has capital appreciation (growth) as an objective needs to consider the potential obstacles (constraints) in the way. The longer the time horizon, the more aggressive the growth investor can be. The same is true when the need to liquidity is low. Taxes are another potential roadblock to overcome.

A schoolteacher has a 403(b) tax-qualified deferred retirement plan into which she has deposited $100,000 over a 12-year period. At retirement, if the teacher withdraws the total value of the account (now $220,000), how much of the withdrawal will be subject to taxation as ordinary income? A) $220,000 B) $0 C) $100,000 D) $120,000

A Explanation The retirement plan is qualified, which means that contributions were made with pretax dollars. The teacher must pay taxes on the total value of the account when withdrawn.

Section 408 of the Internal Revenue Code set the minimum age requirement to establish an IRA at A) no minimum. B) the age of majority in the individual's state of residence. C) 18 years. D) 21 years.

A Explanation There is no minimum age requirement to establish an IRA. However, to be eligible to make an IRA contribution, you must have earned income such as wages or tips. As with any IRA, that earned income must equal or exceed the amount of your IRA contribution.

All of the following must be verified or determined about a new customer except A) whether she has a brokerage account at another broker-dealer. B) whether she is employed by another broker-dealer. C) citizenship. D) whether she appears on a list of known or suspected terrorists.

A Explanation Though individual firms may require it, there is no industry requirement to verify or determine that a customer has an account at another broker-dealer.

Which of the following is required to sign a new account form for a cash account? A) The principal B) The spouse of the customer C) The customer D) The registered representative

A Explanation To open a cash account, only the signature of the principal accepting the account is required. For margin accounts, the signature of the customer is required on the margin agreement. The signature of the spouse is required only for a joint account.

Which the following statements regarding customer accounts is not true? A) Margin trading in a fiduciary account does not require any special documentation. B) The customer who opens a numbered account must sign a statement attesting to ownership. C) Stock held under joint tenants with rights of survivorship (JTWROS) goes to the survivor in the event of the death of one of the tenants. D) Many states publish a legal list of securities approved for fiduciary accounts.

A Explanation Trading on margin is prohibited in fiduciary accounts except with the appropriate documentation. Numbered accounts are permitted with a letter signed by the customer. Stock held under JTWROS passes to the survivor(s) in the event of death of one of the tenants.

One of your customers with a JTWROS account contacts you to remove the other tenant and put the account into the customer's own name. This can be done only A) if the change has been authorized by a qualified and registered principal designated by the member. B) upon the death of the other tenant. C) if the customer has a full power of attorney over the account. D) if you contact the other tenant and get their approval.

A Explanation Under FINRA rules, no change in any account name(s) can be made unless the change has been authorized by a qualified and registered principal designated by the member. This principal must, before giving her approval of the account designation change, be personally informed of the essential facts relative thereto and indicate her approval of such change in writing. The essential facts relied upon by the person approving the change must be documented in writing and preserved with the customer account records. One of those facts is approval of the other tenant, but that approval goes to the principal, not to you, the registered representative. Even in the case of death of the other tenant, the principal needs to see the proper documentation, such as a death certificate.

Regulations regarding how contributions are made to tax-qualified plans relate to which of the following ERISA requirements? A) Vesting B) Funding policy C) Nondiscrimination D) Reporting and disclosure

B Explanation The funding policy covers how an employer contributes to, or funds, a retirement plan.

Which of the following is nonqualified? (does not need to meet ERISA nondiscrimination) A) defined benefit plans. B) deferred compensation plans. C) profit-sharing plans. D) 401(k) plans.

Many businesses open brokerage accounts to invest surplus funds. For which of the following business forms would suitability information on the owners not be required? A) A sole proprietorship B) A C corporation C) An LLC D) An S corporation

B Explanation A C corporation is the only business form where the tax and other consequences of the account do not accrue to the individual owners. Can you imagine a well-known publicly traded corporation with several million shareholders opening an account where the registered representative would have to obtain suitability information on all of them? Even when it is a small business, because the C corporation is its own taxable entity, the suitability requirements are not as critical as with the pass-through businesses (partnerships, LLCs, and S corporations). Of course, the sole proprietorship is the individual, so that is where the suitability is focused.

Which of the following businesses would have the simplest requirements for opening an account at a FINRA member firm? A) An S corporation B) A sole proprietorship C) A limited partnership D) A general partnership

B Explanation A sole proprietorship is opened up as an individual account because, legally, the business is the individual. The other entities require various forms authorizing named individuals to transact business in the account.

A new client would like to invest in an offering restricted to accredited investors. Any of the following could be used to verify accredited investor status except A) tax returns for the past two years. B) a letter from a duly licensed life insurance agent. C) written confirmation from the client's CPA. D) a bank account statement not more than three months old.

B Explanation Although it is possible that the insurance agent has sufficient information, the regulators do not include them in the list of verifiable sources, such as the CPA or the client's attorney.

All of the following statements about SEP IRAs are true except A) SEP IRAs allow employers to make contributions. B) there are no minimum earning requirements to be an eligible participant. C) SEP IRAs are established for small-business owners and their employees. D) the retirement account is usually set up at a bank or other financial institution.

B Explanation Eligibility to participate in a SEP IRA is limited to employees who have earned a minimum of $600 for the year in question.

Features of an employee stock purchase program (ESPP) include all of the following except A) contributions are a percentage of pre-tax income. B) contributions are made with pre-tax dollars. C) the purchase price is discounted. D) participants can sell the stock at any time.

B Explanation Employee stock purchase plans (ESPPs) are not qualified plans. That means that the employee purchases the stock with after-tax dollars. For example, an individual has a monthly salary of $5,000 and elects to contribute 10% of gross salary to the plan. The employer will take $500 per month out of the paycheck after subtracting withholding tax and Social Security contributions and any other deductions. Before enrolling in the plan, this employee's monthly take-home pay might have been $3,700. Now it will be $3,200.

If a member firm suspects exploitation in the account of a specified adult, proceeds from sales may be put on temporary hold for A) one month. B) 15 business days. C) until the need for the hold ends. D) 15 calendar days.

B Explanation FINRA Rule 2165 permits a member that reasonably believes that financial exploitation has occurred, is occurring, has been attempted, or will be attempted, to place a temporary hold on the disbursement of funds or securities from the account of a "specified adult" customer. The maximum length of the hold is 15 business days. Do we expect the exam will ask you to choose between 15 business and 15 calendar days? No, that is not FINRA's style, but we do want you to know the correct count.

Which of the following retirement plans must be ERISA compliant? A) Roth IRAs B) 401(k) plans C) Nonqualified plans D) Traditional IRAs

B Explanation For exam purposes, if it is a private employer (nongovernmental) qualified retirement plan, it must be ERISA compliant. The most widely used of those today is the 401(k) plan. The "E" in ERISA stands for employee. IRAs are individual retirement accounts; there is no employer-employee relationship. Nonqualified plans are retirement plans that do not have to follow ERISA regulations. These non-qualified plans include deferred compensation plans, individual annuities, and some payroll deduction plans.

If a customer wishes to open a new account but declines to provide all of the financial information the member firm requests, which of the following statements are true? The member firm may open the account and make recommendations without meeting any other criteria. The member firm may open the account if it has determined (by other means) that the customer has the financial resources to carry the account and that trading is suitable. The member firm may not recommend any transactions unless the representative is able—through the information available—to make a suitability determination. The member firm may not allow trades in the account until the requested information is received. A) II and IV B) II and III C) I and III D) I and IV

B Explanation If a customer refuses to provide financial information, the member firm may use whatever information is available to decide whether to open the account. Any recommendation made to a customer must be suitable, taking into account the customer's investment objectives, financial situation, and any other relevant information. If the information is not provided, the account may be opened, but no investment recommendations may be made.

Qualified distributions from Roth IRAs are A) taxable only to the extent of earnings. B) tax free. C) tax deferred. D) 100% taxable.

B Explanation If a withdrawal from a Roth IRA is a qualified distribution, the withdrawal is tax free. A qualified distribution is made after a five-year holding period and after the taxpayer has reached age 59½.

Under the Uniform Transfer to Minors Act (UTMA), how can stock subscription rights be handled in a custodial account? A) The custodian can exercise, sell, or allow the rights to expire as he deems prudent. B) The custodian can exercise or sell the rights as he deems prudent. C) The rights can be exercised or sold only if the custodian is also the donor. D) The custodian cannot exercise rights; they can only be sold.

B Explanation One thing that is never considered prudent is to let the rights expire. Even if the custodian does not believe adding more of the stock to the account is proper, there is a value to the rights, and the best interest of the minor is served by turning those rights into cash. Custodians in these accounts are able to sell or exercise the right, regardless of any relationship existing between them and the donor.

Which of the following would be considered an inappropriate investment for your client's traditional IRA? A) A mutual fund whose portfolio consists solely of shares of over-the-counter stocks B) A unit investment trust whose portfolio consists solely of tax-free municipal bonds C) A taxable municipal bond D) A valuable collection of rare postage stamps

B Explanation Tax-free bonds, whether purchased individually or through a mutual fund or UIT, are considered inappropriate investments because the tax-free benefit is lost. On the other hand, taxable municipal bonds benefit from the tax deferral offered in an IRA. What about the stamp collection? That is an ineligible investment, not merely inappropriate.

Which of the following would be considered an inappropriate investment for your client's traditional IRA? A) A mutual fund whose portfolio consists solely of shares of over-the-counter stocks B) A unit investment trust whose portfolio consists solely of tax-free municipal bonds C) A valuable collection of rare postage stamps D) A taxable municipal bond

An incorporated business model that allows flow-through of business income and losses directly to shareholders in order to avoid double taxation is A) a C corporation. B) an S corporation. C) a limited partnership. D) a general partnership.

B Explanation The S corporation, the general partnership, and the limited partnership are business models where all income or loss flows through to the owners. This avoids the double taxation on the business level and owner level, as is the case with the C corporation. With C corporations, corporate earnings taxed once at the business level and again when they are paid out to shareholders as dividends. Because the question is asking about the incorporated business model, the correct choice is the S corporation.

The federal legislation that requires broker-dealers to verify the identity of any person opening an account is A) the Securities Exchange Act of 1934. B) the USA PATRIOT Act of 2001. C) the Insider Trading Act. D) the Maloney Act.

B Explanation The USA PATRIOT Act of 2001 requires firms to obtain identifying information on each new customer, verify the identity of each new customer, maintain records relating to identity verification, and determine if any new customer appears on a list of known or suspected terrorist groups compiled by the Office of Foreign Asset Control.

Which of the following statements regarding both traditional and Roth IRAs is true? A) Withdrawals at retirement are tax free. B) Contribution limits are the same. C) Distributions must begin in the year after the owner reaches age 72. D) Contributions are tax deductible.

B Explanation The common factor for both traditional and Roth IRAs is that contribution limits are identical. A significant difference between the two is that Roth IRAs do not have RMDs.

If a registered representative (RR) of a FINRA member firm wants to open an account with another member firm, which of the following statements are true? The account may only be opened if the RR is also a principal of his employing broker-dealer. The account may be opened, but the RR may not engage in securities transactions that he could do through his own firm. The member firm opening the account must send duplicate confirmations to the employing member firm if the employing member firm has requested that the member firm do so. The employing broker-dealer must receive prior written notice and give prior written consent in order for the account to be opened. A) I and III B) III and IV C) II and IV D) I and II

B Explanation The employing broker-dealer must be notified, in writing, and give prior written approval for the account to be opened. It must receive duplicate confirmations and account statements if it has requested them.

When a broker-dealer sends a communication to its customers that the sweep account used for customer credit balances will be changed from one money market fund to a different one, the communication must include A) a statement that the change will not take place until at least 45 days after the communication was sent. B) a tabular comparison of the nature and amount of the fees charged by each fund. C) a description of the objectives of the new fund and its prospectus. D) a detailed explanation of the reason for the change.

B Explanation The only one of these meeting FINRA's requirement when a negative response letter is sent is the tabular comparison. While a description of the new fund and its prospectus is required, the communication must also include a comparison of the objectives of the two funds. The minimum time is 30 days (not 45) and there is no requirement to include an explanation.

Your broker-dealer acts as a prime broker for ABC Fund. In this arrangement, your broker-dealer is likely providing which of the following services? Execution of all transactions for the fund portfolio Clearing services Lending for trades done on margin Ensuring that all exchange trading rules are complied with A) I and IV B) II and III C) II and IV D) I and III

B Explanation The prime broker would supply clearing services and lending services for a marginable transaction, as well as back-office support such as cash management, account statements, and transaction processing. Actual executions and abiding by all exchange rules when transactions occur is the responsibility of the executing broker-dealers.

A customer calls the brokerage firm and turns in an order to buy 400 shares of Oscillate Pharmaceuticals, Inc. The instructions are for the firm to use its best judgement as to the right time to place the order. Which of the following are true about this order? A) It requires written discretionary authorization. B) It is good only for the day entered. C) It may be executed at any price or any time the broker-dealer feels is best. D) It cannot be accepted without a price being specified.

B Explanation This is a time or price order and is excluded from the definition of discretion. One of the characteristics of this type of order is that, unless written instructions to the contrary have been received, it is effective only the day entered.

Which of the following documents must an existing customer sign to establish a discretionary account? A) New account application B) Trading authorization C) Options agreement D) Customer's agreement

B Explanation To establish a discretionary account, the agent must receive written authorization from the customer(s) in whose name(s) the account has been established. An existing customer has already completed the new account application and signed any required customer agreements.

It is generally understood that the least complicated employer-sponsored retirement plan is the Savings Incentive Match Plan for Employees (SIMPLE). These plans tend to have certain restrictions. Among them are the restriction that A) the catch-up provision for those 50 and older is limited to $1,000. B) the business cannot have another retirement plan in place. C) employer matching contributions are made with after-tax funds. D) there must be fewer than 100 employees who earned at least $5,000 during the preceding calendar year.

B Explanation To institute a SIMPLE plan, the business cannot have any other retirement plan in place. The limit is 100 or fewer, not fewer than 100. The catch-up provision is $3,000, and both employee and employer contributions are made with pre-tax funds.

Lindsey Wolfe, a public school teacher, has been contributing to a 403(b) TSA plan for the past 20 years. Contributions total $50,000 and the current value is $200,000. Wolfe is still teaching full time for the school system. When does Wolfe have to begin taking required minimum distributions? A) Required minimum distributions are never required for annuities B) At age 72 or when no longer working for the school system, whichever is later C) At age 59½ D) At age 72

B Explanation Wolfe is invested in a qualified annuity. Therefore, the minimum distribution requirements are the same as for any qualified account. RMDs must begin at age 72 but can be postponed as long as continuously employed by the same employer. Unless qualifying for an exception, any withdrawals from a qualified annuity before reaching age 59½ are taxed as ordinary income with the additional 10% penalty.

Which of the following plans requires an actuary's services? A) 401(k) B) Profit-sharing C) Defined benefit D) Defined contribution

C Explanation In a defined benefit plan, the payout is established, and employers must contribute annually to assure payment of the benefit amount. An actuary must calculate the annual contribution amount necessary to meet the benefit requirement.

A customer asks his registered representative to purchase $10,000 worth of shares in any pharmaceutical company that looks promising. Which type of account allows the registered representative to act in accordance with this instruction? A) Custodial B) Special cash C) Discretionary D) Margin

C Explanation If the registered representative may decide the specific security, the transaction requires discretionary authority, and therefore, must be done in a discretionary account. Determining the time or price does not require discretionary authority.

A retiree is paid an annual amount equal to 30% of the average of his last three years' salary. Which of the following retirement plans offers this type of payment? A) Defined contribution B) Deferred compensation C) Defined benefit D) Profit-sharing

C Explanation A defined benefit retirement plan establishes, in advance, the payout to be received by the retiree.

Under what circumstances would the fiduciary of a qualified corporate retirement plan be permitted to write covered calls on the securities in the portfolio? A) Under no circumstances B) If specifically approved by the SEC C) If this strategy is consistent with the objectives of the plan D) If specifically approved by the covered employees

C Explanation As covered calls are not considered to be a speculative option strategy, they would be permitted as long as the strategy is deemed prudent and is consistent with the objectives of the plan. No outside approval is required.

Which of the following statements about a Coverdell Education Savings Account (ESA) is not true? A) The funds grow income tax deferred and, if used for elementary, secondary, or college educational expenses, the earnings are tax free. B) Contributions can be made to this type of plan and a Section 529 plan in the same year for the same beneficiary. C) Contributions are tax deductible, subject to a modified adjusted gross income phase out. D) Contributions of $2,000 per child per year are allowed.

C Explanation Contributions to an ESA are not tax deductible.

A customer, age 75, who is retired and on a fixed income wants to invest $50,000 in speculative stocks in an account set up as joints tenants with right of survivorship (JTWROS) with a spouse. As a registered representative (RR), you feel the transactions are unsuitable for the customer. Therefore, you should A) enter the trade without question or discussion. B) require documentation from the other party to the JTWROS account showing they agree with the proposed transactions. C) discuss with the customer why speculative stocks might not be appropriate, given the circumstances as you know them before entering any orders. D) refuse the trade as unsuitable.

C Explanation If an RR feels the proposed transactions might not be suitable for the customer, by industry rule, there is no obligation to refuse the trade, but there is a responsibility to provide an explanation to them before entering any orders. In a JTWROS account, either party may enter trades without the prior consent of the other party.

A wealthy individual has established a trust and named you as the trustee. If you wish to establish an account that permits the trust to engage in margin transactions, which of the following statements regarding margin trading is true? A) It is permitted if the fiduciary shares in the profits or losses. B) It is not permitted. C) It is permitted if provided for in the underlying documentation. D) It is permitted if the fiduciary observes the prudent investor rule.

C Explanation Margin trading in a trust account is permitted only if it is specifically provided for in the trust agreement.

A 45-year-old employment counselor has a savings incentive match plan for employees (SIMPLE) plan for herself and three full-time employees who have been working for her for the past four years. If she earns $150,000 this year and contributes the maximum amount allowed to her SIMPLE plan, how much may she invest in a traditional IRA? A) She may have an IRA but may not make a contribution for this year. B) She may invest any amount up to 100% of his earned income. C) She may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. D) She may not have an IRA.

C Explanation Regardless of how much is invested in a SIMPLE IRA through work, an investor may still invest in an IRA if she has earned income. The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less. In this individual's case, however, the contribution would probably be nondeductible. Please note this reflects the SECURE Act which removed any age restriction on contributions to a traditional IRA.

Designating a beneficiary with a transfer on death (TOD) provision may be done in which of the following accounts? A) Individual account and joint tenants in common (TIC) B) Individual account, joint tenants with right of survivorship (JTWROS), and joint tenants in common (TIC) C) Individual account and joint tenants with right of survivorship (JTWROS) D) Individual account only

C Explanation The TOD designation is limited to the individual account and the JTWROS account.

If one of your clients dies, upon notification of death, you should immediately mark the account Deceased until proper documents are received. cancel all good-til-canceled orders for the account. obtain a letter from the attorney representing the estate with instructions for transfer. obtain the names and addresses of the beneficiaries of the estate. A) III and IV B) I and III C) I and II D) II and III

C Explanation The account's registered representative must cancel all open orders and mark the account Deceased. The firm must not permit any trades until proper documents are received from the estate representative. It is not the responsibility of the firm to contact the decedent's attorney or the beneficiaries.

Responding to the student loan crisis, the SECURE Act now permits qualified withdrawals from Section 529 plans to include payments of A) student loan principal up to an annual maximum of $10,000 per child. B) student loan interest up to a maximum of $10,000 per family. C) student loan interest up to a lifetime maximum of $10,000 per child. D) student loan interest up to a maximum of $10,000 per year.

C Explanation The lifetime limit is $10,000 of interest or principal per child. If the child who is the beneficiary of the plan does not use all the money by graduation, the remaining funds can be used to pay the interest or principal (subject to the standard limits) for other siblings.

When a customer instructs a registered representative to transfer and ship, the representative instructs the margin department to transfer ownership into A) the brokerage firm's name and deliver the securities to the customer. B) the customer's name and deliver the securities to the customer's bank for safekeeping. C) the customer's name and deliver the securities to the customer. D) the brokerage firm's name and deliver the securities to the brokerage firm's commercial bank for safekeeping.

C Explanation The term transfer and ship means to transfer the securities into the name of the customer and ship (deliver) the securities to the customer. To hold in street name would require the securities to be transferred into the name of the broker-dealer and held for safekeeping.

The amount paid into a defined contribution plan is set by A) the employee's age. B) the ERISA-defined contribution requirements. C) the employer's profits. D) the trust agreement.

D Explanation A defined contribution plan's trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan.

Under FINRA's rules governing the activities of member broker-dealers, prior notification to the employing firm and prior written consent from the employing firm would be required to open a brokerage account for all of the following except A) a registered representative of another member opening an options account. B) an officer of another member firm opening a cash account. C) a clerical employee of another member opening a margin account. D) a registered representative of another member opening a 529 plan.

D Explanation FINRA requires prior written notification be made and prior written consent be received before any employee can open a brokerage account with other members or financial institutions. Exceptions include accounts where the only activity will be in 529 plans, mutual funds, or variable annuities.

If a business owner's goal is to establish an entity that features ease in raising capital and limits personal liability, which of these entities is the most appropriate? A) An S form of corporation B) A sole proprietorship C) A general partnership D) A limited liability company (LLC)

D Explanation If a business owner's goal is ease in raising capital, the limited liability company (LLC) is preferable because it has no restrictions on the number or nationality of investors. While the regular or C corporate form is also preferable, the S form of corporation is limited to a maximum of 100 potential shareholders, none of whom may be a nonresident alien. The sole proprietorship and general partnership carry unlimited personal liability.

A married couple are both employed by firms that cover them under the company pension plans, and each earns approximately $300,000 annually. If they both open a traditional IRA and make the maximum contribution, how much of their contribution could they deduct? A) Neither is eligible to make a contribution in any amount (deductible or not). B) Only one spouse is eligible to deduct their entire contribution. C) Both may deduct the entire contribution. D) They are ineligible to deduct any contribution made.

D Explanation It is important to recognize that FINRA does not expect you to know the income level at which deductible contributions for those covered under employer-sponsored plans begins to phase out. The question uses numbers that are so much higher than current law just to remind you that such a regulation exists. While each are eligible to make the maximum contribution, at this income level, neither spouse—both of whom are covered under employer-sponsored plans—would be eligible to deduct their contributions to their respective IRAs.

One important respect in which the Roth 401(k) differs from the Roth IRA is that A) contributions to the Roth 401(k) are made with pre-tax funds while those to the Roth IRA are from post-tax funds. B) withdrawals from a Roth 401(k) are subject to tax on the earnings whereas all qualified withdrawals from a Roth IRA are tax-free. C) it is only the Roth IRA that provides for catch-up contributions for those age 50 and older. D) RMDs from the Roth 401(k) must begin at age 72 while there are no RMDs from the Roth IRA.

D Explanation It is only the Roth IRA where the participant never has RMDs. In both cases, contributions are with after-tax money and withdrawals are tax-free. Both have the catch-up provision, and it is $6,000 in the Roth 401(k) and $1,000 in the Roth IRA.

A nonqualified deferred compensation plan is often used by corporations to A) replace an outdated qualified plan. B) comply with ERISA. C) reduce their current income tax burden. D) retain high salaried key employees.

D Explanation Key employees in higher tax brackets do not get the full benefit of bonuses or pay increases because so much goes to pay the taxes. The attractiveness of the deferred compensation program is that those funds are deferred until a later time, such as retirement, when it is expected that the individual will be in a lower tax bracket. Nonqualified plans are not covered by ERISA. This enables the company to "pick and choose." The deferred compensation plan doesn't affect current corporate taxation because nothing is expended; the deduction does not come until the compensation is paid in the future. Deferred compensation plans are most often used to supplement, not replace, qualified plans.

A customer, without giving written authorization, may permit a registered representative to exercise his discretion as to the security. the price at which to enter the order. the amount of shares. when to enter the order. A) III and IV B) I and III C) I and II D) II and IV

D Explanation Registered representatives may choose the price or timing of an order without having discretionary authority.

An agent taking which of the following actions would be committing a violation? A) Buying securities in a cash account with the consent of the customer B) Buying securities in a joint account at the request of one party only C) Selling securities from a corporate account by using limited power of attorney trading authority for the account D) Selling securities from a minor's custodial account without the custodian's consent but with the beneficial owner's consent

D Explanation The custodian—not the beneficial owner (minor)—is the person who has the authority to make investment decisions for an account. Any tenant in a joint account may give instructions for the account.

Your customer opened a Roth IRA on February 2 and deposited $5,000. In August of the same the year, the value of the account had risen to $6,000, but by December, the value declined to $5,100 and the customer closed the securities positions and withdrew the entire amount. If the customer was age 55 at the time of the withdrawal, what would be the early withdrawal penalty? A) $510 B) 0 C) $500 D) $10

D Explanation The customer would have an early withdrawal penalty of $10. A 10% early withdrawal penalty applies to the taxable amount withdrawn for those aged less than 59½.In a Roth IRA, the investment is made with after-tax dollars. Therefore, only the increase above the investment is subject to an early withdrawal penalty. In this case, the earnings of $100 would be taxable and have a 10% penalty equaling $10

A customer would like to set aside some money for his grandson's college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is true? A) The customer may take a deduction for the amount contributed. B) The maximum contribution permitted is $3,000 annually. C) The customer may make annual contributions until the grandson graduates from college. D) The funds must be distributed by the time the grandchild reaches age 30 unless they are rolled over.

D Explanation The maximum annual contribution to an ESA is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Any unused balance must be rolled over or distributed by the time the beneficiary reaches age 30. Amounts not used for one child may be rolled over tax free to the account of another child of the same family only once during any 12-month period.

D Explanation The retirement plan is qualified, which means that contributions were made with pretax dollars. The teacher must pay taxes on the total value of the account when withdrawn.

One of the differences between a traditional IRA and a Roth IRA is A) traditional IRAs offer tax-deferred growth while a Roth does not. B) traditional IRAs have higher annual contribution levels. C) both allow for tax-free withdrawals in retirement. D) deductible contributions are possible with a traditional IRA, but not with a Roth IRA.

D Explanation There are two key differences between a traditional IRA and a Roth IRA. One of those is that the traditional IRA allows for tax-deductible contributions (with certain restrictions), while the Roth IRA does not. Both offer tax-deferred growth and the same annual contribution limits. Remember, though, that although the maximum dollar limit is the same, those holding both types cannot exceed the single IRA limit. The other key difference is that only the Roth IRA allows for tax-free withdrawals when meeting the specific requirements. All deductible contributions to a traditional IRA, as well as all deferred earnings, are taxable at withdrawal.

What type of account allows for the irrevocable transfer of almost any kind of asset, including works of art and real estate, for the benefit of a minor? A) Coverdell ESA B) UGMA C) Tenants in common D) UTMA

D Explanation UTMA expanded the types of property that are transferable into a custodial account. One of the main differences between an UTMA and UGMA is the types of assets they can hold. Assets within an UGMA are limited to cash (bank deposits), stocks, bonds, mutual funds, and other securities and insurance policies. UTMAs allow almost any kind of asset, including works of art and real estate. As with other assets, the title is registered in the name of a custodian for the benefit of the minor. Although there are a few states that allow the custodial property to remain in an UTMA account until the minor reaches age 25, more than half of the states set the age of majority for UTMA at 21 instead of 18.

All of the following may be used to verify a customer's identity except A) a valid passport. B) a valid military ID card. C) a current drivers license. D) a certified birth certificate.

D Explanation Verifying a customer's identity requires presentation of at least one government-issued document with a photograph. Your birth certificate may have had a photo of you as a newborn, but that certainly will not suffice to identify you today.

If a customer who has granted a durable power of attorney to her son dies, which of the following statements regarding the power of attorney is true? A) It remains in effect until the executor of the estate cancels it. B) It remains in effect only if the son is the sole heir to the estate. C) It remains in effect until the son cancels it. D) It is canceled upon the death of either principal.

D Explanation When the customer or her son dies, the power of attorney also expires. However, a durable power of attorney will survive a declaration of mental incompetence and is useful in those cases where a parent suffers from dementia.

Price Time What Amount Discretion vs Non

Non: Price and time Dis: What, Amount

Define vesting schedule for retirement plan

Vesting defines when an employer contribution to a plan becomes the employee's money.

Buying municipal bonds would normally not be considered suitable for A) a corporation's investment account. B) an individual investor. C) a mutual fund portfolio. D) a defined benefit plan portfolio.

D A defined benefit plan is a form of qualified tax-deferred corporate pension plan. Tax-free municipal bonds would never be considered suitable for a tax-deferred account on the exam. An individual investor, a mutual fund portfolio, and a corporate investment account could benefit from receiving tax-free municipal bond interest.

The amount paid into a defined contribution plan is set by A) the trust agreement. B) the ERISA-defined contribution requirements. C) the employer's profits. D) the employee's age.

A Explanation A defined contribution plan's trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan.

All of the following are the advantages of a margin account except A) losses are minimized. B) money is borrowed. C) leveraging is possible. D) less cash is needed.

A Explanation Any losses on a margin trade are magnified because of the leverage.

Which of the following can be rolled over into an IRA? Another IRA Balances from savings accounts A corporate profit-sharing plan Judgments from lawsuit settlements A) I and III B) III and IV C) II and III D) I and IV

A Explanation Assets from any qualified corporate plan or from another IRA may be rolled over into an IRA.

Which of the following statements regarding joint accounts/tenants in common (TIC) are true? Each party specifies a percentage of interest in the account. Each party has an equal interest in the account. The interest of a deceased tenant passes to the estate of the decedent. The interest of a deceased tenant passes to the cotenant. A) I and III B) I and IV C) II and III D) II and IV

A Explanation In a TIC account, each party must specify a percentage of interest in the account. If one party dies, his percentage of ownership passes to his estate, not to any other party to the account.

Which of the following oral orders can be accepted from a customer without additional documentation? A) Buy 100 shares of ABC when the price is right B) Buy $20,000 of quality bank stocks C) Increase my position in ABC D) Buy 200 shares of computer stock

A Explanation Prices and time of execution do not require discretionary authority.

A registered representative is opening both cash and margin accounts for a corporation. Which of the following documents will he need? The corporation's charter and bylaws A copy of the corporation's most recent balance sheet The corporation's last three profit and loss statements The name(s) of natural persons authorized to trade the account A) II and III B) I and IV C) II and IV D) I and III

B Explanation Corporate accounts are generally those established by the officers of a corporation. Such accounts require a copy of the corporate resolution naming the authorized person(s) and account trading limits (if any). If it is to be a margin account, a copy of the corporate charter and a signed margin agreement are also required.

The customer relationship summary (Form CRS) is an integral part of Regulation Best Interest. For an existing cash account customer who received the initial Form CRS in early July 2020, a new Form CRS must be delivered no later than A) a change to the customer's investment objectives. B) the opening of a new margin account. C) the temporary withholding of a disbursement from the account under Rule 2165. D) a change to the beneficiary of an existing Roth IRA.

B Explanation Existing customers received their initial Form CRS no later than July 30, 2020. They must also be sent a revised copy at or before the opening of a new account that is different from the retail investor's existing account. An example of this would be the opening of a margin account. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Which of the following persons must sign a stock or bond power to effect good delivery of securities sold from an account set up under the Uniform Transfer to Minors Act? A) Parent B) Custodian C) Donor D) Minor

B Explanation The custodian must sign securities in a custodial account to effect good delivery.

Which of the following statements regarding qualified retirement plans are true? Contributions are made with pretax dollars. Contributions are made with after-tax dollars. Distributions are 100% taxable. Distributions are taxable only to the extent of earnings. A) II and III B) I and IV C) I and III D) II and IV

C Explanation With qualified plans, participants receive a tax deduction for contributions to their plan. As earnings accumulate tax deferred, distributions, which consist of tax-deferred earnings and contributions for which the participant received a tax deduction, are 100% taxable.

A registered representative of a FINRA member firm specializes in handling business accounts. In which of the following accounts are the business owners subject to double taxation? A) Sole proprietorships B) LLCs C) S corporations D) C corporations

D Explanation It is the C corporation whose owners are subject to double taxation. First, the corporation pays income tax on its earnings. Then, any dividends paid from the after-tax income are taxed again, this time to the shareholders.

If earnings decline significantly, which of the following employer-sponsored qualified retirement plans can reduce or even eliminate its contribution for the year? A) Profit-sharing plan B) Defined contribution plan C) Defined benefit plan D) 401(k) plan

A Explanation A special feature of the profit-sharing plan is that employer contributions may be reduced or skipped when earnings fall. In each of the others, contributions must be made at the stated or, in the case of the defined benefit plan, the actuarially computed amount.

Which of the following statements regarding Coverdell Education Savings Accounts (ESAs) are true? After-tax contributions of up to an indexed maximum per student per year are allowed. Contributions may not be made for students past their 18th birthday. If the account value is not used for educational purposes, it can be rolled over into a traditional IRA. Distributions are always taxable. A) I and II B) II and IV C) I and III D) III and IV

A Explanation Coverdell ESAs allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and are subject to income tax and a 10% penalty, or they are rolled over into a different Coverdell ESA for another family member.

A pension plan might invest in each of the following except A) tax-free municipal bonds. B) variable annuities. C) corporate bonds. D) equities.

A Explanation It is inappropriate to place tax-free investments into a tax-deferred plan because there is no benefit to the deferral.

Which of the following would be the least appropriate investment in a traditional IRA for a 67-year-old client? A) Variable annuities B) Common stock C) Treasury notes D) Corporate bonds

A Explanation Why buy a tax-deferred product in a tax-deferred account? A variable annuity will provide no additional tax savings and will likely increase the expense of the IRA. In addition to sales and surrender charges, variable annuities may impose other charges such as mortality and expense risk charges, administrative fees, et cetera. In five years, your client will have to begin making withdrawals, regardless of any surrender charges the annuity may impose.

A nonqualified deferred compensation plan is often used by corporations to A) retain high salaried key employees. B) reduce their current income tax burden. C) comply with ERISA. D) replace an outdated qualified plan.

A Key employees in higher tax brackets do not get the full benefit of bonuses or pay increases because so much goes to pay the taxes. The attractiveness of the deferred compensation program is that those funds are deferred until a later time, such as retirement, when it is expected that the individual will be in a lower tax bracket. Nonqualified plans are not covered by ERISA. This enables the company to "pick and choose." The deferred compensation plan doesn't affect current corporate taxation because nothing is expended; the deduction does not come until the compensation is paid in the future. Deferred compensation plans are most often used to supplement, not replace, qualified plans.

Which of the following permits the highest annual contributions? A) A traditional spousal IRA for which the contribution has been deducted B) A SEP IRA C) A traditional nondeductible IRA D) A Coverdell Education Savings Account

B Explanation Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for education savings accounts or traditional or Roth IRAs.

Which of the following would make an employee ineligible to participate in a company's qualified retirement plan? A) He is not a member of the company's management team. B) He is only 20 years old. C) He has been with the company for only two years. D) He works only 1,200 hours a year for the company.

B Explanation Under the Employee Retirement Income Security Act, anyone over the age of 21—management or not—who has been with the company for at least one year and who works 1,000 or more hours per year or 500 hours per year for three consecutive years for the company, must be allowed to participate in the company's qualified plan.

All of the following statements regarding a transfer on death (TOD) account are correct except A) only those assets held at the broker-dealer are transferred. B) probate is avoided. C) estate taxes are reduced. D) the owner of the account may change beneficiaries at will.

C Explanation A TOD account avoids probate but not estate taxes. The owner of the account may change beneficiaries and their percentages as she wishes. The TOD account is an account at a specific broker-dealer and only relates to the assets in that account.

Which of the following information should a registered representative obtain from a prospective client to ensure suitable investment recommendations? Professional society memberships Languages spoken Liquidity needs Number of dependents A) II and IV B) I and III C) III and IV D) I and II

C Only information relevant to a prospective customer's investment needs and objectives is required to ensure suitable recommendations.

A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status? A) 90 B) 45 C) 60 D) 30

C Rollovers from pension plans into IRAs must be accomplished within 60 days to retain tax-deferred status.

One of your customers would like to begin an investment program calling for regular monthly contributions of $200. Which of the following would be the best source for determining if this plan is reasonable? A) The investor's balance sheet B) The investor's objectives C) The investor's income statement D) The investor's savings account

C When it comes to the ability to make ongoing contributions to an investment program, the income statement is usually going to be the most reliable tool for verification. It is from the income statement that discretionary income (the amount left over after paying expenses) is determined. The balance sheet indicates any lump sum availability. The savings account is a part of the balance sheet. Objectives are important, but they are not a financial measurement.

If a customer attempts to place an order for municipal securities that the registered representative deems completely unsuitable for the customer, the registered representative A) may execute the order on a not held basis. B) must refuse to execute the order. C) must obtain the permission of a municipal securities principal before executing the order. D) may execute the order and mark the order ticket as unsolicited.

D Explanation A registered representative may enter any unsolicited order from a customer despite the fact that the representative believes the trade to be unsuitable for the customer. The representative must mark the order ticket unsolicited.

If your 50-year-old client wants to withdraw funds from her traditional IRA, the early withdrawal will be taxed as A) capital gains plus a 10% penalty. B) capital gains. C) ordinary income. D) ordinary income plus a 10% penalty.

D Explanation An early withdrawal from an IRA is taxed as ordinary income plus a 10% penalty.

Tamika is a registered representative with Financial Engineers, LLC, a FINRA member broker-dealer. The firm uses an investment policy statement (IPS) to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat seven months from now. When using the IPS, this would be considered A) an investment objective. B) a long-term goal. C) a financial objective. D) an investment constraint.

D Explanation Investment constraints are obstacles or restrictions that must be met in order to meet goals. In this case, we are dealing with a liquidity constraint—in seven months, cash will be necessary to make the purchase.

Two siblings have an account with your broker-dealer registered as joint tenants with right of survivorship (JTWROS). Both live in a state that recognizes community property as an ownership designation. If one of the siblings dies, which of the following will occur? A) The deceased sibling's interest in the account will be divided in accordance with the community property laws of that state. B) The deceased sibling's interest in the account will become the property of her estate. C) The entire account will be liquidated and divided in accordance with the community property laws of that state. D) The deceased sibling's interest in the account will pass to the surviving sibling in accordance with the JTWROS account registration.

D This account, registered as JTWROS, will be handled in accordance with that account registration at the time of the death of either sibling. The deceased sibling's interest in the account will pass to the surviving sibling. Community property laws in jurisdictions presuming that type of ownership designation only applies to marital property (property acquired by the two individuals while married). Therefore, community property laws would not be applicable to siblings.

ed representative has a client who wants to save for college for her child. The child will be entering college in five years. This would be an example of A) an investment constraint. B) planning too late. C) tactical asset allocation. D) an investment objective.

A Time constraints include such conditions as liquidity and time horizon, both of which are in play here. It may be true that the client has started too late, but that is not what the exam would be looking for as the correct answer. This is an investment goal, not an investment objective.

A deferred compensation plan would be most suitable for A) an employer with a few highly paid employees who are near retirement age and want to reduce current taxes. B) an employer who wants a retirement plan to benefit the younger employees of the company. C) an employer who wants to provide a plan for all of the firm's employees who are in lower tax brackets. D) an employer who wants employees to make their own set contributions to a plan as an incentive for them to remain with the firm.

A Deferred compensation plans are nonqualified plans that allow an employer to select which employees may participate in the plan. These plans are more suitable for highly compensated employees who are just a few years from retirement, allowing them to defer earnings and taxation until then. Offering this type of plan to young employees is less suitable due to the risk that the business could fail or the risk that they may leave the firm before retiring, and thus forfeit any benefit. Defined contribution plans are considered more suitable for those further from retirement.

One of your customers passed away recently. The customer had an IRA with you and had his sister listed as the beneficiary. Other assets included the home and furnishings and a brokerage account at another firm. The titling on that brokerage account was the customer and his son, JTWROS. The customer's will specified that 100% of his assets should pass to his daughter. Based on this information, the estate settlement will have A) the daughter getting the home and furnishings, the son the brokerage account, and the sister the IRA. B) the daughter receiving everything as stated in the will. C) the daughter getting the home and furnishings and the IRA, with the son getting the brokerage account. D) the daughter getting the home and furnishings and the brokerage account, with the sister getting the IRA.

A Explanation A will can designate the disposition of an estate's assets only to the extent that they are not previously assigned. A JTWROS account specifies that the assets go to the survivor and that overrules any will. An IRA (or any qualified retirement plan) always has a designated beneficiary and that supersedes any will. Anything other than the assets in the JTWROS account or the IRA will go to the daughter.

A 40-year-old individual who is covered by an employer-sponsored retirement plan wants to save more for retirement. Which of the following is the most suitable recommendation? A) A Roth IRA, as long as the individual's income level does not exceed the maximum allowed to make a contribution (phase-out schedule) B) A hedge fund utilizing high-risk, high-potential yield strategies C) An investment account utilizing only tax-free municipal bond mutual funds D) A traditional IRA, as there will be no limit to the amount of the contribution that can be deducted

A Explanation Given the limited information, the Roth IRA is the most suitable as long as the investor's income level, due to the phaseout schedule, does not limit what can be contributed to the IRA. Dollars invested will grow, and distributions will be tax free as long as the dollars have been in the account for five years once the IRA owner has reached age 59½. Because the individual is covered by an employer-sponsored plan, we know that the contribution to a traditional IRA may not be fully tax deductible, if at all, and the earnings would be taxable when distributed. Growth in an investment account would be taxable, and the utilization of tax-free municipal bonds with low yields are unlikely to accommodate saving for retirement. Hedge funds utilizing high-risk investment strategies are inappropriate for retirement saving.

Dale Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. Wells is looking for favorable tax treatment of earnings and losses. Wells also wants to limit the number of investors but is willing to share control of the enterprise with others to attract them. What business form would you advise? A) General partnership B) C corporation C) Limited partnership D) S corporation

A customer wants to be a day trader but is interested in the term pattern day trader and asks you to define the term. You state that all of the following are true of pattern day traders except A) the buying power in margin accounts is the same as for other customers. B) in a margin account the minimum maintenance requirement is 25%. C) they make four or more day trades in a five-business day period. D) they must have a minimum of $25,000 of equity in their account on any day in which trading occurs.

A Explanation Pattern day traders are also treated differently when it comes to buying power. Buying power for day traders is four times the maintenance margin excess. Maintenance margin excess is defined as the equity in the account above the 25% minimum requirement. For regular customers, buying power is double SMA.

Once individuals have passed the Series 7 exam and are now registered as general securities registered representatives, compliance with Regulation BI would allow including which of these on their business card following their name? A) Registered representative B) Financial adviser C) Investment adviser representative D) Financial advisor

A Explanation Regulation BI limits the use of the words adviser or advisor to those who are registered as investment advisers or representatives of those who are. Passing the Series 7 exam allows one to use the term registered representative. Most of our Series 7 students go on to pass the Series 66 exam and become IARs. In that case, investment adviser representative is permitted.

Which of the following statements is true regarding IRA rollovers? A) One rollover may be conducted every 12 months, but it must be completed within 60 days. B) One rollover may be conducted annually, but it must be completed within 60 days. C) One rollover may be conducted every 12 months, but it must be completed within 90 days. D) One rollover may be conducted annually, but it must be completed within 90 days.

A Explanation The IRS permits IRA holders to engage in one rollover every 12 months. Legally, that is not the same as annually. To avoid taxation (and possible penalties as an early distribution), the rollover must be completed within 60 days. In a rollover from one IRA to another IRA, or from an employer-sponsored retirement plan to an IRA, the owner of the plan receives the funds. More popular is the direct transfer that occurs from institution to institution. Unlike the rollover, with a direct transfer, the one per 12-month limit is not in effect. Because the funds are never handled by the individual, another benefit is that the 60-day time limit does not apply.

If an agent is assigned to an account previously handled by an agent who has since left the firm, which of the following actions should the agent take first? A) Verify the account information. B) Liquidate the portfolio for immediate reinvestment in stocks the firm is currently recommending. C) Suggest the customer buy one of the stocks the firm is currently recommending. D) Require the customer to sign a trading authorization naming the agent as the party with authority.

A Explanation The agent must verify and update client information before recommending trades. Without knowledge of the client's needs and financial profile, the agent cannot make suitable recommendations.

If three individuals have a tenants in common account with your firm, and one individual dies, which of the following statements is true? A) Two survivors continue as cotenants with the decedent's estate. B) The account must be liquidated and the proceeds split evenly among the two survivors and the decedent's estate. C) Trading is discontinued until the executor names a replacement for the deceased. D) The account is converted to joint tenants with right of survivorship.

A Explanation The decedent's estate becomes a tenant in common with the survivors.

When opening a new account for an individual investor, FINRA asks its member to make a reasonable effort to obtain certain information about the account. Included information would be all of the following except A) the name(s) of the customer's dependents. B) the occupation of the customer and name and address of the employer. C) the customer's tax identification or Social Security number. D) whether the customer is an associated person of another member.

A Nowhere in the FINRA rules on account opening does it require or suggest obtaining personal information about family members. That information becomes important when we look at the suitability rules. Please note that the tax ID or Social Security number is required under the customer identification program (CIP), but not FINRA rules.

If a 40-year-old customer earns $65,000 a year, and his 38-year-old spouse earns $40,000 a year, how much may they contribute to IRAs? A) They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less, to an IRA. B) They may contribute up to the maximum annual allowable dollar limit split evenly between both accounts. C) Only the higher wage earner may contribute to an IRA. D) They may not contribute because their combined income is too high.

A Regardless of the amount, individuals or couples may contribute to their IRAs if they have earned income. Each is entitled to contribute 100% of earned income up to the maximum allowed. However, if either or both of them are covered under a qualified plan, limits may exist on the deductibility of the contributions.

Which of the following would not be eligible for a tax-sheltered 403(b) annuity? A) Employee of a county high school B) Student at a private college C) Professor at a land grant college D) Custodian at a municipal public school

B Explanation All of the individuals listed meet the requirement of being a school system employee except for the student, who is a client—rather than an employee—of the school system.

A new client would like to invest in an offering restricted to accredited investors. Any of the following could be used to verify accredited investor status except A) tax returns for the past two years. B) a letter from a duly licensed life insurance agent. C) a bank account statement not more than three months old. D) written confirmation from the client's CPA.

A FINRA member firm making a bulk transfer of customers' assets would most likely give notification through A) a broadly circulated publication such as the Wall Street Journal. B) a negative response letter. C) a positive response letter. D) FINRA's Central Registration Depository (CRD).

B Explanation An example of a bulk transfer is the member firm deciding to switch money market funds used for sweeps of customer credit balances. A negative response letter is one where the customer's agreement is assumed unless responding negatively to the change.

You have a client who is an active trader in his margin account. Wishing to take advantage of the tax benefits of the Roth IRA, he asks for the form to open the Roth. While attempting to complete the form, he calls to ask, "How do I indicate margin trading on this form." You would respond, A) "Let me check with our operations department for that information." B) "IRAs, traditional or Roth, can only be opened as cash accounts." C) "Only traditional IRAs can be opened as margin accounts." D) "Because our minimum for margin accounts is $20,000 is above the IRA maximum contribution, you will have to open it in a cash account."

B Explanation IRAs, and other retirement accounts, cannot be opened in margin accounts. They are limited to cash accounts only.

A customer wants to buy ABC bonds, and as his representative, you have advised him that the trade is unsuitable. If he decides to go ahead with the purchase, you must A) execute the trade only if the customer has previous trading experience in similar securities. B) execute the trade specifically as the customer has directed you to do but mark it unsolicited. C) not execute the trade. D) execute the trade if FINRA approves.

B Explanation If a customer wishes to purchase a security that the registered representative feels is unsuitable, the trade may be executed if the customer specifically directs it. The ticket should be marked unsolicited.

In an account opened by two individuals as joint tenants with right of survivorship (JTWROS), all of the following statements are true except A) mail may be directed to the joint owner agreed upon by both parties to the account. B) stock certificates may be delivered in the name of either party. C) in the event of death, the other party assumes full ownership of the account. D) orders may be entered by either party.

B Explanation In a JTWROS account, each party has an equal, undivided interest in the account. Upon the death of one party in a two-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account.

One important respect in which the Roth 401(k) differs from the Roth IRA is that A) it is only the Roth IRA that provides for catch-up contributions for those age 50 and older. B) RMDs from the Roth 401(k) must begin at age 72 while there are no RMDs from the Roth IRA. C) withdrawals from a Roth 401(k) are subject to tax on the earnings whereas all qualified withdrawals from a Roth IRA are tax-free. D) contributions to the Roth 401(k) are made with pre-tax funds while those to the Roth IRA are from post-tax funds.

B Explanation It is only the Roth IRA where the participant never has RMDs. In both cases, contributions are with after-tax money and withdrawals are tax-free. Both have the catch-up provision, and it is $6,000 in the Roth 401(k) and $1,000 in the Roth IRA.

The concept of double taxation applies to shareholders of A) S corporations. B) C corporations. C) limited partnerships. D) general partnerships.

B Explanation It is the C corporation where the owners contend with double taxation. The first tax is on the corporation's earnings. After that, any dividends distributed to the shareholders are subject to tax.

In constructing a profile for your customer, you wish to assemble information on both financial and nonfinancial investment considerations that affect your customer. Which of the following qualify as financial investment considerations? Your customer's tolerance of various forms of risk Your customer's dependents and their ages Your customer's liquid net worth Your customer's monthly credit card payments A) I and III B) III and IV C) II and IV D) I and II

B Explanation Liquid net worth and expenses such as credit card payments involve concrete sums of money and cash flow, and thus, they are financial. The number of dependents and risk tolerance should be considered regarding suitability and making appropriate recommendations, but they are nonfinancial considerations.

All of the following are benefits of a traditional IRA except A) that funds may be withdrawn without penalty for certain exemptions. B) that no penalty is charged for failing to withdraw funds after age 72. C) that earnings accumulate on a tax-deferred basis. D) that contributions may be tax deductible.

B Explanation Required minimum distributions must begin the year after the account owner reaches age 72.

A registered representative of a FINRA member broker-dealer is gathering information from a prospective customer. When the representative uses the information to prepare a financial profile, which of the following would not be included? A) Cash value in life insurance policies B) The individual's risk tolerance C) Current value of any IRAs D) Outstanding credit card balances

B Explanation The financial profile includes items with numbers. While risk tolerance is one of the most important aspects of information gathering, it cannot be quantified in the manner that debts, cash value, and IRA accounts are.

Which of the following activities are disallowed under FINRA rules? Opening an account for a 16-year-old individual Accepting a sale in a joint account from one of the owners and having the check payable in the name of that individual Accepting a sale order from the husband only in a joint account owned by both husband and wife Requiring written discretionary authorization before accepting orders for a discretionary account A) III and IV B) I and II C) II and III D) I and IV

B Explanation The question is asking for the nonallowable practices. We cannot open an account for a minor, nor may we make a check payable to only one of the parties in a joint account.

FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. FINRA's suitability rules would likely find a registered representative is not in violation of complying with those three if A) proper disclosures were made of the representative's compensation received. B) the recommendation made would be suitable for at least some customers. C) the recommendation was profitable for the investors. D) control relationships were disclosed.

B Explanation This question refers to the three specific obligations under Rule 2111. Those three are reasonable-basis suitability, customer-specific suitability, and quantitative suitability. Complying with the first of the three means the registered representative has to have a reasonable basis to believe that a recommendation is suitable for at least some investors. Control relationships must always be disclosed, but that is not part of the three obligations. Compensation may have to be disclosed, but, once again, that is not part of the three obligations. Be sure to focus on answering the question being asked.

You have a client who owns a small business. The business provides an ERISA-qualified plan for employees. Your client manages the investments and asks you about permitted strategies. ERISA rules would permit which of the following investments? A) U.S. Treasury bonds purchased from a plan participant B) Covered call options C) Stamp collections D) Uncovered call options

B Explanation Uncovered call options carry a potentially unlimited risk of loss. As such, ERISA has declared them unsuitable for investments in a qualified plan. However, covered calls, as well as protective puts, are allowable investments. Selling a security to or buying a security from a plan participant is a prohibited transaction. Most collectibles are not permitted in ERISA plans.

Which of the following individuals could most likely open an account at a FINRA member firm without notifying or receiving permission from her employer? A) A purchases and sales clerk of a member B) A bank employee selling fixed annuities only C) An agent who sells variable annuities D) A government security trader employed by a member

B Explanation Whenever an employee of a FINRA member wants to open a securities account with another FINRA member firm or financial institution, the employee must give prior written notice to her employer and receive prior written consent from her employer before the account can be opened. Someone selling fixed annuities only (not a security like variable annuities) is most likely not associated with a member.

Under FINRA's rules governing the activities of member broker-dealers, prior notification to the employing firm and prior written consent from the employing firm would be required to open a brokerage account for all of the following except A) a clerical employee of another member opening a margin account. B) a registered representative of another member opening a 529 plan. C) an officer of another member firm opening a cash account. D) a registered representative of another member opening an options account.

B FINRA requires prior written notification be made and prior written consent be received before any employee can open a brokerage account with other members or financial institutions. Exceptions include accounts where the only activity will be in 529 plans, mutual funds, or variable annuities.

In a discretionary account where the investment objective is preservation of capital with moderate income, all of the following practices are unsuitable except A) marking the investment objective on the new account form as high risk. B) maintaining a fixed asset allocation mix, which includes some underperforming sectors. C) frequent and profitable short-term trading in volatile stocks. D) marking order tickets solicited or unsolicited when discretion is used.

B In some test questions, the best way to select the correct choice is when three of the four options are clearly wrong. This is an example of that case. Preservation of capital is certainly not a high-risk objective and does not call for frequent trading in any stock, volatile or not. Orders in a discretionary account are not considered unsolicited (the client is not the one placing the orders). Allocating the portfolio to fixed-income assets (bonds and preferred stock) would seem to be the most appropriate step to take.

One of your clients has asked for the requirements for having duplicate confirmations and statements for his account be sent to his CPA. To accomplish this, the client A) may only have duplicates sent to the trusted contact person on the account. B) must give the CPA a full power of attorney over the account. C) must complete and sign the duplicate statement/confirm request form. D) must give the CPA a limited power of attorney over the account.

C Explanation A client may have duplicates of trade confirmation, account statements, or both sent to a third party. Member firms have forms authorizing this action that must be completed and signed by the customer. At any time, the client may withdraw the authorization, change the authorization, or add authorized recipients. The trusted contact person under FINRA Rule 2165 does not receive these unless the client completes the proper form.

One of your clients has appointed his daughter as the trusted contact person per FINRA Rule 2165. She contacts you to explain that her father's cognitive abilities are declining. Because of that, before it gets too late, she wants to know what can be done to give her control over the account. It is likely that the best suggestion would be to have her father sign A) the discretionary power authorization. B) a limited power of attorney. C) a durable power of attorney. D) a full power of attorney.

C Explanation A durable power of attorney is used when the account owner has diminished physical or mental capacity. It is durable because it survives the client becoming legally incompetent (but does not survive death).

A financial institution sends a communication to its clients indicating an action the institution plans to change. The communication states that this change will take place in 45 days and any client wishing to opt-out must notify the institution before the end of that period. This is known as A) a change letter. B) an unethical procedure. C) a negative response letter. D) an informational communication.

C Explanation A negative response letter is a communication where, unless the recipient responds negatively, the proposed action is accepted. The letter must contain certain disclosures such as different costs or features.

Jack has a margin account in his own name with BR Securities, Inc. He also has a joint tenancy account with his father, Roberto . Rosa, Jack's spouse, calls Joe, the registered representative who is assigned to both accounts, and instructs him to sell 100 shares of AOL from Jack's margin account. Which of the following should the registered representative do? A) Not execute the order until he receives verbal authority from Jack, which authorizes his father to act with discretionary authority over his margin account B) Transfer the AOL to the joint account and then execute the transaction in the joint account C) Not execute the order until he receives written power of attorney from Jack, authorizing his spouse to act with trading authority over his margin account D) Execute the transaction immediately

C Explanation A registered representative may not execute a third-party order (one given by someone other than the account owner) without a signed written power of attorney from the account owner that has been accepted by the representative and a principal of the firm.

An employer-sponsored retirement plan that pays a specific benefit to participants at their normal retirement age is A) a supplemental employee retirement plan. B) a defined contribution plan. C) a defined benefit plan. D) a Section 401(k) plan.

C Explanation A traditional defined benefit plan promises to pay a specific benefit to a participant at his normal retirement age, as specified by the plan document.

Who of the following is not permitted to open an IRA? A) A self-employed attorney who has a Keogh plan B) A person divorced in 2017 whose sole income is alimony and child support C) An individual whose sole income consists of dividends and capital gains D) A corporate officer covered by a 401(k) plan

C Explanation An IRA contribution can be made only from earned income. Dividends and interest are investment income, but alimony received as part of a divorce settlement entered into before January 1, 2019 is considered compensation for purposes of an IRA by the IRS. Individuals can contribute to an IRA even if they are already covered by a corporate pension plan or Keogh plan. Although a contribution can be made, it may or may not be deductible, depending on the individual's income.

An employee not covered under his company's pension plan has been contributing to a traditional IRA for five years. If he leaves his current job, starts a new job, and is covered under the new corporation's pension plan, which of the following statements is true? A) His traditional IRA must be closed. B) Contributions to his IRA must stop; the money in the account will be frozen, but interest and dividends can accrue tax free until he retires. C) Contributions to his traditional IRA may continue. D) The money in his IRA must be combined with any money he will receive from the pension plan.

C Explanation An employee covered under a qualified retirement plan may continue to own and contribute to an IRA. The contributions to a traditional IRA may not be fully tax deductible, depending on the amount of compensation earned, but the employee benefits from the tax deferral of IRA earnings.

A registered representative is explaining the characteristics of a Coverdell Education Savings Account (ESA) to a customer. Which of the following statements regarding this type of savings account is correct? Contributions are tax deductible. Contributions are not tax deductible. When used for qualified educational expenses, withdrawals are taxable. When used for qualified educational expenses, withdrawals are not taxable. A) II and III B) I and III C) II and IV D) I and IV

C Explanation Contributions to a Coverdell ESA are made with after-tax dollars. Distributions used for qualified educational expenses are tax free.

An arrangement in which the registered representative has the authority, or power of attorney, to make trades from funds in the account without prior approval from the investor is known as A) a power-of-attorney account. B) a nonapproval account. C) a discretionary account. D) a stop-loss account.

C Explanation Discretionary accounts are arrangements in which the registered representative has the authority, or power of attorney, to make trades from funds in the account without prior approval from the investor.

Which of the following circumstances would not cause a registered representative to be identified as a fiduciary? A) A registered representative receives discretionary authorization from a client B) A registered representative becomes a member of the board of directors of a charitable foundation. C) A registered representative names one of his customers the executor of his estate D) A registered representative holds himself out as a fiduciary for ERISA plans and pensions.

C Explanation Executors of an estate are included in the definition of a fiduciary. However, in this choice, the customer is the executor, not the registered representative. That customer has a fiduciary responsibility to the representative's heirs (when that time comes). The granting of discretionary authority over the account of a client is a form of having fiduciary responsibility the registered representative is in control of the customer's money. Being a board member of a foundation, or holding oneself out as a fiduciary for an ERISA plan, will generally find themselves being defined as a fiduciary.

To be defined as a pattern day trader, the customer must execute at least A) four day trades on a single business day. B) five day trades in five business days. C) four day trades in five business days. D) four day trades in the same week.

C Explanation FINRA defines a pattern day trader as one who executes 4 or more day trades in a 5-business-day period. That can stretch over two different weeks.

If a customer wishes to open a cash account in her name only and allow her spouse to make purchases and receive checks in his name only, she must instruct her broker-dealer to open A) a margin account. B) a cash account with limited power of attorney. C) a cash account with full power of attorney. D) a cash account.

C Explanation For anyone other than the account owner, entering trades and withdrawing assets requires a full power of attorney. A limited power of attorney enables a nonaccount owner to enter trades but not to withdraw assets.

All of the following statements regarding liquidity are correct except A) a liquid asset can easily be converted to cash. B) liquid assets include CDs and Treasury bills. C) it is the inability to find willing buyers for an asset. D) the most liquid of assets is cash.

C Explanation Liquidity and marketability are often used synonymously. Liquidity is the ability to turn an asset into cash, whereas marketability is the ability to easily find buyers for an asset. If an asset is easily marketable, this would imply that it is also liquid.

A registered representative's recommendations to a customer A) are not covered by FINRA rules. B) must be approved in advance by a principal. C) must match the customer's risk tolerance and investment objectives. D) must be reviewed by a principal whether or not they result in a trade.

C Explanation Recommendations made to a customer must be suitable for that customer. Individual recommendations do not require advance approval or review by a principal, though the resulting trade, if one occurs, must be reviewed by a principal.

Which of the following investments would be most suitable for an IRA? A) Highly rated general obligation bond B) Short sale of a stock that has just started what is expected to be a prolonged decrease in price C) A covered call (selling a call option on a stock owned within the IRA) D) Uncovered call on a stock whose price is extremely stable

C Explanation Short sales, uncovered calls, and municipal bonds are all inappropriate for individual retirement accounts. Covered calls are allowed and will be covered in detail in Unit 4.

Tenants in common (TIC) ownership provides that a deceased tenant's fractional interest in an account is retained by which of the following? A) Will be decided during probate B) The registered representative for the account C) The deceased tenant's estate D) The surviving tenant

C Explanation TIC ownership of an account provides that a deceased tenant's interest in an account is retained by that tenant's estate and not passed on to the surviving tenant.

n a margin account, the broker-dealer lends money to the customer to assist in the purchase of a marginable security. Instead of delivering the security to the purchaser, the broker-dealer holds it as collateral for the loan. The form signed by the customer agreeing to this is A) the stock pledge agreement. B) the credit agreement. C) the hypothecation agreement. D) the loan consent agreement.

C Explanation There are three special margin account agreement forms. The hypothecation agreement is the one in which the customer agrees to allow the broker-dealer to keep the securities purchased as collateral for the margin loan. The credit agreement contains the terms of the loan, such as interest to be charged, and the loan consent agreement is an optional form agreeing to let the broker-dealer lend out those securities.

A married couple has had an account with your FINRA member firm for many years. The account is registered in both names, JTWROS. Upon the advice of their estate-planning attorney, they wish to move the assets in equal proportion to individual accounts. This would require all of the following except A) authorization of the change by a qualified registered principal designated by the member. B) before obtaining approval of the account designation change, a designated principal must be personally informed of the essential facts relative to the change. C) a statement from the couple's attorney explaining the reason for the change. D) the essential facts relied upon by the person approving the change must be documented in writing and preserved with the customer account records.

C Explanation There is no FINRA requirement to receive any information from the couple's lawyer. All the other statements are correct.

Which of the following statements regarding discretionary accounts is not true? A) Each discretionary order must be reviewed promptly by a principal. B) The account may not be accepted unless approved, in writing, by a principal of the member firm. C) The customer must approve each order before or after it is executed. D) The customer must grant written authorization to the broker-dealer or a designated individual to exercise discretion in the account.

C Explanation To establish a discretionary account, a customer must grant trading authority in writing. Furthermore, the firm must indicate its willingness to handle the account on a discretionary basis through the signature of a principal of the firm. All orders, including those for discretionary accounts, must be reviewed and endorsed promptly but not before execution.

A customer wants to open a new cash account and give her sibling trading authorization. The required documents to accommodate her request would be A) a margin agreement and a limited power of attorney. B) a new account form and a loan consent agreement. C) a new account form and a limited power of attorney. D) a margin agreement and a loan consent form.

C Explanation When a customer wants to give trading authorization or discretionary privileges to a third party in a cash account, a member firm requires a new account form (as with all new accounts) and a limited power of attorney. A limited power of attorney gives the third party trading authority but prohibits that party from withdrawing assets (cash or securities) from the account.

If a new joint tenants with right of survivorship account is opened, all of the following statements are true except A) orders may be given by either party. B) mail may be sent to either party (with the permission of each party). C) checks may be drawn in the name of either party. D) in the event of death, the decedent's interest in the account goes to the other party.

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

A married couple are both employed by firms that cover them under the company pension plans, and each earns approximately $300,000 annually. If they both open a traditional IRA and make the maximum contribution, how much of their contribution could they deduct? A) Both may deduct the entire contribution. B) Neither is eligible to make a contribution in any amount (deductible or not). C) They are ineligible to deduct any contribution made. D) Only one spouse is eligible to deduct their entire contribution.

C It is important to recognize that FINRA does not expect you to know the income level at which deductible contributions for those covered under employer-sponsored plans begins to phase out. The question uses numbers that are so much higher than current law just to remind you that such a regulation exists. While each are eligible to make the maximum contribution, at this income level, neither spouse—both of whom are covered under employer-sponsored plans—would be eligible to deduct their contributions to their respective IRAs.

A married couple has several individual and joint accounts with your firm. One spouse calls you and requests that you make a transfer of funds between the accounts. This would not present a problem if A) you have the caller send the request in writing. B) the caller is a signatory on the account receiving the funds. C) the caller is a signatory on both accounts. D) you verify the identity of the caller.

C It is only when the party initiating the transfer of funds between accounts is not a signatory on both accounts that this request presents a problem. In that case, a principal of the firm needs to get involved.

As a registered representative, it is important to be able to distinguish between investment goals and investment objectives. Which of the following would be an investment objective rather than an investment goal? A) Saving for a child's education B) Leaving a financial legacy C) Preserving capital D) Generating ample funds for retirement

C Just as there are three primary colors, there are three primary investment objectives. Those three are growth, income, and capital preservation. Investors use those objectives to reach their goals. For example, a 40-year-old whose goal is ample funds for retirement will have growth of capital as the primary objective. Someone who is already retired and wishes to have the funds to pay the bills will have income as the investment objective.

Regulation BI established a new standard of conduct under the Securities Exchange Act of 1934 for broker-dealers and associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer. All of the following are examples of account recommendations except A) opening an UTMA account for a grandchild. B) taking a distribution from an employer-sponsored plan and executing a rollover into a self-directed IRA. C) opening a margin account to go along with an existing cash account. D) changing the asset allocation in an existing account.

D Account recommendations include recommendations of securities account types generally (e.g., to open an IRA or margin account), as well as recommendations to roll over or transfer assets from one type of account to another (e.g., a workplace retirement plan account to an IRA). It has nothing to do with changing the strategy in an existing account. Rather, the desired result of an account recommendation is a new account.

Which of the following statements regarding Roth IRAs are true? Contributions are made with pretax dollars Earnings can accumulate tax free Distributions are not taxable if an age requirement and holding period are met Distributions in excess of growth are always taxable A) II and IV B) I and IV C) I and III D) II and III

D Contributions to Roth IRAs are made with after-tax dollars. Distributions are received tax free if the account holder is at least 59½ and has held the account for at least five years.

A teacher has a 403(b) plan, and the school system he works for has deposited $10,000 into his plan over a 12-year period. At retirement, if the teacher withdraws the total value of $16,000, on what amount does he pay tax? A) $10,000 B) $8,000 C) $6,000 D) $16,000

D Explanation A 403(b) plan is a qualified retirement plan; contributions to the plan are made before taxes, and the growth of the contract is tax deferred. Any distribution from a 403(b) plan is fully taxable to the participant at the ordinary income tax rate.

A person wishing to grant a registered representative the right to make investment decisions for her account does so by A) providing a letter from an attorney. B) calling the representative each time she wants to place an order. C) providing a full power of attorney to someone other than the registered representative who will then instruct the representative as to investment decisions. D) providing a limited power of attorney giving discretionary powers.

D Explanation A discretionary account always requires prior written authorization from the customer in the form of a limited power of attorney (trading authorization).

Obtaining all of the following complies with the regulations regarding customer identification programs except A) name. B) date of birth. C) taxpayer identification number. D) post office box, instead of a physical address, if it is the primary mailing address.

D Explanation A post office box is never acceptable without a physical address.

According to FINRA rules, duplicate confirmations of transactions must be sent to an account owner's employer—if requested to do so by the employer—whenever establishing a margin account for a bank officer. an employee of another broker-dealer. an independent insurance agent. an officer of another broker-dealer. A) I and II B) III and IV C) I and III D) II and IV

D Explanation According to FINRA rules, when an employee of a member firm opens an account with another member broker-dealer, duplicate confirmations and account statements must be sent to the employer by the broker-dealer establishing the account when the employer requests it to do so. An officer of a broker-dealer is considered an employee.

A customer opening a margin account must be supplied with a special margin risk disclosure. Which of the following are specific risks disclosed? Customers are not entitled to choose which securities can be sold if a maintenance call is not met. Customers can lose more money than initially deposited. Customers are not entitled to an extension of time to meet a margin call. Firms can increase their in-house margin requirements without advance notice. A) I, and IV B) II, III and IV C) II and III D) I, II, III and IV

D Explanation All of these are part of the margin risk disclosure document.

Features of an employee stock purchase program (ESPP) include all of the following except A) participants can sell the stock at any time. B) contributions are a percentage of pre-tax income. C) the purchase price is discounted. D) contributions are made with pre-tax dollars.

D Explanation Although the contributions are based on pre-tax income, unlike a qualified plan, the contributions are made with after-tax dollars.

Which of the following individuals would not be permitted to contribute to an IRA? A) An individual divorced on December 26, 2018,whose sole income is alimony and child support from a former spouse B) A corporate officer who is covered by a company-sponsored 401(k) plan C) A self-employed attorney who already has a Keogh plan established D) An individual with current income consisting of dividends and capital gains only

D Explanation An IRA contribution may be made only from earned income. While dividends and interest are investment income, alimony received as part of a divorce settlement entered into prior to January 1, 2019, is considered compensation for IRA purposes. Individuals may contribute to an IRA even if they are already covered by a corporate pension plan or Keogh plan. Although a contribution can be made, it may or may not be deductible, depending on the individual's income.

Which of the following statements about a Coverdell Education Savings Account (ESA) is not true? A) Contributions of $2,000 per child per year are allowed. B) Contributions can be made to this type of plan and a Section 529 plan in the same year for the same beneficiary. C) The funds grow income tax deferred and, if used for elementary, secondary, or college educational expenses, the earnings are tax free. D) Contributions are tax deductible, subject to a modified adjusted gross income phase out.

D Explanation Contributions to an ESA are not tax deductible.

Regulation BI calls for broker-dealers and their associated persons to meet a care obligation when making a recommendation to a retail customer. In describing the nature of the care, the rule requires that those making recommendations adhere to all of these except A) reasonable skill. B) reasonable diligence. C) reasonable care. D) reasonable prudence.

D Explanation In the original rule proposal, the SEC had four care requirements, including prudence. After careful consideration of comments received, it "concluded that its inclusion creates legal uncertainty and confusion, and it is redundant of what we intended in requiring a broker-dealer to exercise diligence, care, and skill, and its removal does not change the requirements under the Care Obligation. Accordingly, the Care Obligation requires broker-dealers to ''exercise reasonable diligence, care, and skill'' to meet the three components of the Care Obligation."

Under a Keogh plan, which of the following is not an acceptable investment? A) Unit investment trust B) International bond fund C) U.S. government bond D) Rare oil painting

D Explanation Investments not permitted in Keogh plans are commodities, collectibles and antiques, precious metals (other than U.S. government-issued gold and silver coins), and uncovered options.

Bob and Tori are a married couple in their 40s filing a joint tax return. Both contribute to their employer's qualified retirement plan and will have a combined adjusted gross income of $4,000,000 this year. Bob and Tori are A) not permitted to contribute to their traditional IRAs. B) permitted to make tax-deductible contributions to their traditional IRAs. C) permitted to make fully deductible contributions to their traditional IRAs, as long as their contributions to their employer-sponsored plans do not exceed certain limits. D) permitted to make nondeductible contributions to their traditional IRAs.

D Explanation Once both parties to a joint tax return participate in qualified employer-sponsored retirement plans, there are limits beyond which contributions are no longer tax-deductible. The exam will never ask for those exact numbers because they change every year. As example of the numbers is found in your LEM. That said, the earnings level for this couple is so far above the allowable limits that you are expected to recognize that their contributions would not be tax favored. The key point this question is making is that anyone with earned income, regardless of how much, can open a traditional IRA and receive tax deferral on the earnings in the account. Compare this to the Roth IRA, where there is a limit beyond which contributions are nonallowable.

Under the USA PATROIT Act of 2001, which of the following must be maintained by financial institutions, such as banks and broker-dealers, to prevent the financing of terrorist operations and money laundering? A) Do-not-call lists B) Privacy notices C) Specially Designated Nationals and Blocked Persons list D) Customer identification programs (CIPs)

D Explanation The USA PATRIOT Act of 2001 requires financial institutions to maintain CIPs to protect against financing terrorist operations or activities and potential money laundering activities. The Office of Foreign Asset Control (OFAC) publishes and maintains the Specially Designated Nationals and Blocked Persons list, which financial institutions use to determine if any customers or potential customers have been identified by OFAC as posing a terroristic threat or are involved in money-laundering activities.

Each of the following can create activity in a customer's account except A) the registered representative granted discretionary authorization. B) the holder of a limited power of attorney. C) the holder of a full power of attorney. D) the trusted contact person.

D Explanation The trusted contact person has no trading authority over the account. The purpose of this person being named is to assist the member firm when there is suspicion of possible senior exploitation. A registered representative who has been granted discretionary power is able to make buy and sell decisions without contacting the client. The only difference between a limited and a full POA is that the person with a full POA can access funds as well as make trades.

A customer calls the brokerage firm and turns in an order to buy 400 shares of Oscillate Pharmaceuticals, Inc. The instructions are for the firm to use its best judgement as to the right time to place the order. Which of the following are true about this order? A) It requires written discretionary authorization. B) It may be executed at any price or any time the broker-dealer feels is best. C) It cannot be accepted without a price being specified. D) It is good only for the day entered.

D Explanation This is a time or price order and is excluded from the definition of discretion. One of the characteristics of this type of order is that, unless written instructions to the contrary have been received, it is effective only the day entered.

Which of the following occurs in a partnership account if one partner dies? A) The surviving partners are considered joint tenants and receive the deceased partner's share. B) The surviving partners are considered joint tenants. C) The surviving partners receive the deceased partner's share. D) The account is frozen until a new or amended partnership agreement is received.

D Explanation Upon a partner's death, a partnership account is automatically frozen until a new or amended partnership agreement is received. The deceased partner's share usually goes to an estate, not to the other partners.

Payments received by the owner of a 403(b) plan are A) not taxable. B) taxable only to extent of earnings. C) taxable only to extent of the owner's cost basis. D) 100% taxable.

D Explanation When tax-sheltered annuity funds are withdrawn, they are fully taxed at ordinary income rates. Funds were contributed pretax and earnings accumulate tax deferred. Because no taxes were ever paid, the full withdrawal is taxable.

A corporation wishes to set up a retirement plan that will cover only certain executives. Which of the following would be appropriate? A) A 401(k) plan with a Roth option B) A defined benefit plan C) A Section 457 plan D) A deferred compensation plan

D The key to this question is that the company wishes to discriminate and only cover some employees. That means a non-qualified plan such as deferred compensation. Isn't a Section 457 plan also technically non-qualified? Yes, but those are not available for corporations.

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