Series 7 unit 2
Which of the following circumstances would not cause a registered representative to be identified as a fiduciary? A) A registered representative names one of his customers the executor of his estate B) A registered representative receives discretionary authorization from a client C) A registered representative becomes a member of the board of directors of a charitable foundation. D) A registered representative holds himself out as a fiduciary for ERISA plans and pensions.
A 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 responsibilitythe 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.
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) a financial objective. B) an investment constraint. C) a long-term goal. D) an investment objective.
B 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.
A customer wishing to open a numbered account must be informed that A) he must supply proof of U.S. citizenship and reside permanently in the United States. B) the account may only be opened with prior permission from the SEC. C) he must supply a written statement attesting to his ownership of the account. D) numbered accounts are restricted to cash accounts.
C Numbered—or symbol—accounts require that a written statement, which is signed by the client and acknowledges ownership, be kept on file.
Which of the following are governed by the prudent investor rule? Trustee Executor Custodian Registered representative who has been granted discretionary authority A) II and III B) I and II C) III and IV D) I, II, III, and IV
D The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. With these accounts, the fiduciary must act prudently. A registered representative who has been granted discretionary authority is acting in a fiduciary capacity.
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) the recommendation made would be suitable for at least some customers. B) the recommendation was profitable for the investors. C) control relationships were disclosed. D) proper disclosures were made of the representative's compensation received.
A 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.
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 income statement B) The investor's savings account C) The investor's balance sheet D) The investor's objectives
A 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.
Opening a margin account involves a number of different documents. The document describing how the interest on the margin debt is calculated is generally known as A) the loan consent agreement. B) the credit agreement. C) the hypothecation agreement. D) the risk disclosure document.
B It is the credit agreement, sometimes referred to as the margin agreement, that describes the creditor-debtor relationship. This includes the method of computing interest on the debit balance (the amount owed). The hypothecation agreement allows the broker-dealer to maintain possession of the margined securities as collateral for the loan, and the loan consent agreement allows the broker-dealer to lend out the client's margined securities. The risk disclosure document is provided to make sure the client understands the risks of margin trading.
A customer asks her registered representative to exercise discretion over her account. To do so, the representative must do each of the following except A) obtain evidence of written acceptance of the account by a registered principal of the firm. B) obtain approval from FINRA. C) obtain written authorization from the customer. D) have a principal initial each order promptly, which may be before or after execution.
B The requirements for a discretionary account include a written authorization from the customer, a written acceptance by a principal of the firm, and close supervision of each transaction to ensure suitable transactions in light of the customer's objectives and financial situation. No approval from FINRA is required.
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 a margin account to go along with an existing cash account. B) changing the asset allocation in an existing account. C) opening an UTMA account for a grandchild. D) taking a distribution from an employer-sponsored plan and executing a rollover into a self-directed IRA.
B 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. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
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) Current employment stability B) Values C) Expected retirement age D) Education goals for the children
C 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.
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 beneficiary of an existing Roth IRA. B) the temporary withholding of a disbursement from the account under Rule 2165. C) the opening of a new margin account. D) a change to the customer's investment objectives.
C 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.
In a discretionary account where the investment objective is preservation of capital with moderate income, all of the following practices are unsuitable except A) frequent and profitable short-term trading in volatile stocks. B) marking order tickets solicited or unsolicited when discretion is used. C) maintaining a fixed asset allocation mix, which includes some underperforming sectors. D) marking the investment objective on the new account form as high risk.
C 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.
When discussing a client's finances, which of the following would be of least importance when planning to make a lump-sum investment? A) Expected inheritance B) Year-end bonus C) Current salary D) Winning the lottery
C Salary enables the registered representative to determine the funds available for periodic investment. A lump-sum investment could be made with money from an inheritance, a year-end bonus, or lottery winnings.
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) Suggest the customer buy one of the stocks the firm is currently recommending. B) Liquidate the portfolio for immediate reinvestment in stocks the firm is currently recommending. C) Verify the account information. D) Require the customer to sign a trading authorization naming the agent as the party with authority.
C 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.