Unit 12
You have been given the name of a new potential client who responded to a marketing piece sent out by your broker-dealer. Which of the following would be the most appropriate way to obtain information about the client's objectives and investment constraints? A) A face-to-face meeting at the client's home B) The client's LinkedIn page C) An interview with the client's neighbors D) Monitoring the client's tweets
A) A face-to-face meeting at the client's home There are a number of ways to gather information about your client's financial resources, but it is highly unlikely that a social media page would be one of them. Privacy laws would make interviewing a client's neighbors unethical.
Certain investments are available only to those who meet the SEC's definition of an accredited investor. Which of the following qualify? A) An individual with net worth in excess of $1 million, exclusive of the equity in a primary residence B) An individual who has joint income with that person's spouse in excess of $200,000 in each of the previous two years and has a reasonable expectation of reaching the same income level in the current year C) An individual with net worth in excess of $1 million, inclusive of the equity in a primary residence D) An individual with earnings of $200,000 in the previous year with a reasonable expectation of reaching the same income level in the current year
A) An individual with net worth in excess of $1 million, exclusive of the equity in a primary residence Those using the net worth standard to qualify as an accredited investor must exclude the equity in their primary residence. Those using the income standard must reach levels in excess of $200,000 as individuals and in excess of $300,000 when combining with the income of a spouse. Those earnings must have been achieved in the previous two years along with an expectation of similar earnings for the current year.
When evaluating a client's suitability, which of the following would be considered a nonfinancial consideration? A) Attitude B) Salary C) Net worth D) Debt
A) Attitude Nonfinancial considerations are those which cannot be quantified. The client's salary, debt, and net worth can be described numerically, but attitudes cannot.
When discussing a client's finances, which of the following would be of least importance when planning to make a lump-sum investment? A) Current salary B) Expected inheritance C) Winning the lottery D) Year-end bonus
A) Current salary 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.
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) Education goals for the children C) Values D) Current employment stability
A) Expected retirement age 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.
You are reviewing an investor's balance sheet. Which of the following items would be found on a balance sheet and help you determine the client's net worth? I. 401(k) balance II. Credit card balance III. Monthly income IV. Electric bill A) I and II B) II and III C) I and IV D) III and IV
A) I and II The balance sheet reflects a person's net worth by comparing assets and liabilities. A 401(k) balance is an asset and credit card debt is a liability. Income and monthly bills, such as the electric bill, are found on the income statement.
When considering a specific recommendation for a new client, knowing which of the following would be the most crucial? A) The client's risk tolerance B) The client's beneficiary C) The client's medical condition D) The client's home and business address
A) The client's risk tolerance Risk tolerance is a crucial piece of information. Without that, suitable recommendations cannot be made. Addresses are important for legal purposes, but they don't affect suitability. Health issues can be important, but they really play into risk tolerance.
Your client informs you that a signed discretionary account form is in the mail. Before receiving the form, and unable to contact the client, you notice that one of her stocks is dropping sharply on adverse news. You A) cannot enter a discretionary order. B) can enter a discretionary order with written permission of a principal of the broker-dealer. C) can enter a discretionary order with instructions that the order is not held. D) can enter a discretionary order with written documentation of the situation.
A) cannot enter a discretionary order. A discretionary order cannot be entered until the signed discretionary account form has been received.
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) changing the asset allocation in an existing account. B) taking a distribution from an employer-sponsored plan and executing a rollover into a self-directed IRA. C) opening an UTMA account for a grandchild. D) opening a margin account to go along with an existing cash account.
A) changing the asset allocation in an existing account. 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.
Complying with the suitability rules involves evaluating all of the following except A) qualitative suitability. B) reasonable-basis suitability. C) customer-specific suitability. D) quantitative suitability.
A) qualitative suitability. Under FINRA Rule 2111, there are three main obligations: reasonable-basis suitability, customer-specific suitability, and quantitative suitability. There is no such thing as qualitative suitability.
Determining a client's investment objectives is an important function of a registered representative. A customer who identifies as having a conservative investment posture would probably avoid A) speculation. B) income. C) growth. D) preservation of capital.
A) speculation. Those with a conservative outlook on investing are unlikely to be willing to engage in speculation. Preservation of capital is generally the most conservative, followed by income and growth.
A new biotechnology company is exploring a novel method to reduce the side effects of certain chemotherapies. Investors in this company's stock have which of the following objectives? A) High-risk income B) Aggressive growth C) Liquidity D) Preservation of capital
B) Aggressive growth New research and development companies have a history of being exceptionally risky. However, the company's stock could jump dramatically in market value.
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 permitted if provided for in the underlying documentation. C) It is not permitted. D) It is permitted if the fiduciary observes the prudent investor rule.
B) It is permitted if provided for in the underlying documentation. Margin trading in a trust account is permitted only if it is specifically provided for in the trust agreement.
Which of the following statements regarding customer accounts is not true? A) Many states publish a legal list of securities approved for fiduciary accounts. B) Margin trading in a fiduciary account does not require any special documentation. 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) The customer who opens a numbered account must sign a statement attesting to ownership.
B) Margin trading in a fiduciary account does not require any special documentation. 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 survivors in the event of death of one of the tenants. There is a handful of state Administrators who publish a legal list of securities approved for fiduciary accounts in that state. Fiduciaries acting in a legal list state are barred from buying any security that does not appear on the approved list. By comparison, most states are not legal list; instead they operate under the Prudent Investor Rule. Under the Prudent Investor Rule, the fiduciary may invest in anything that a prudent person would. The Prudent Investor Rule is also known as the Prudent Trustee Rule.
When opening a margin account for an individual customer, a number of documents are required. Which one of the following never requires the customer's signature? A) The hypothecation agreement B) The margin risk disclosure document C) The loan consent agreement D) The credit agreement
B) The margin risk disclosure document The margin risk disclosure document must be furnished to the margin account customer, but there is nothing for the customer to sign. A clue to that being the correct choice is that it is the only one without the word agreement. Agreements must be signed. Although the loan consent agreement is optional, if the customer wishes to permit the lending of their securities, the agreement must be signed.
It is important for a registered representative to be able to distinguish between a client's investment objectives and investment constraints. Which of the following is an example of an investment constraint? A) Capital growth B) Time horizon C) Educational funding D) Retirement income
B) Time horizon Of the choices, time horizon is an example of an investment constraint while the others are investment objectives. Remember, an objective is where you want to go; a constraint is what is keeping you from getting there. If your time horizon is very short, you might not be able to reach any of the objectives listed here.
You have a customer you must often attempt to constrain. If he sees any chance to make a profit, he's willing to risk his life savings on an investment. You would rate this customer's attitude toward risk as A) assertive. B) aggressive. C) insane. D) moderately aggressive.
B) aggressive. A customer willing to take high risks is rated as aggressive.
A walk-in customer completes the new account form and includes all of the information required by the customer identification program. However, the customer supplies none of the requested financial data and is unwilling to discuss objectives. Under Regulation BI of the SEC, A) opening this account could place the firm in the position of violating Regulation BI. B) the account may be opened, but no recommendations may be made. C) the account may be opened, but only after receiving SEC approval. D) the account may be opened, but all recommendations must be suitable based on the customer's situation.
B) the account may be opened, but no recommendations may be made. Regulation BI deals with recommendations from a broker-dealers to its customers. As long as there are no recommendations, the rule does not apply. When the customer refuses to supply the necessary suitability information, the account may be opened, but trading must be limited to unsolicited orders. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
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) the credit agreement. 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.
Regulation BI contains four key component obligations. Which two of them apply to registered representatives? I. Disclosure Obligation II. Care Obligation III. Conflict of Interest Obligation IV. Compliance Obligation A) III and IV B) II and III C) I and II D) I and III
C) I and II The obligation to disclose all material information and to exercise reasonable diligence, care, and skill in making any recommendation apply to both the member firm and the registered representative. The Conflict of Interest Obligation and the Compliance Obligation belong to the firm. That does not mean you do not have an obligation to disclose any conflicts of interest. That is part of the disclosure obligation. The specified Conflict of Interest Obligation includes the written supervisory procedures and training the firm must provide.
FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. Which of the following is not one of those three? A) Quantitative suitability B) Customer-specific suitability C) Qualitative-basis suitability D) Reasonable-basis suitability
C) Qualitative-basis suitability The rule does not refer to qualitative-basis suitability. It does say that a recommendation may be suitable if at least some investors would benefit from it (reasonable-basis suitability). The recommendation should also take the specific customer's profile into consideration (customer-specific suitability). Finally, although a specific recommendation may be suitable, when looking at the quantity of trading, there could be a churning violation (quantitative suitability).
When reviewing a client's account, your supervisor notices that although each recommendation appears to be suitable based on that client's profile, there is a concern regarding the frequency of activity in the account. This is an example of A) reasonable-basis suitability. B) qualitative suitability. C) quantitative suitability. D) customer-specific suitability.
C) quantitative suitability. Quantitative suitability requires a member firm who has control over a customer account to believe that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together.
A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) lend the customer money. B) hypothecate securities in the account. C) commingle the customer's securities with securities owned by the firm. D) loan out the customer's margin securities.
D) loan out the customer's margin securities. A signed loan consent agreement permits a firm to loan out a customer's margin securities; this is considered another way to finance a customer's debit balance.
A registered representative sits down with a new customer to complete the customer account form. During this time, the customer expresses being comfortable with some risk to her initial investment in exchange for potentially higher returns. After the registered representative explains that the willingness to accept some risk may allow the account to keep pace with inflation, but that it also means the account could lose value, the customer acknowledges that she understands. This customer's risk tolerance would best be defined as A) speculative. B) aggressive. C) conservative. D) moderate.
D) moderate. An investment risk tolerance in which the customer is willing to accept some risk to the initial principal sum invested and the potential loss of the funds in exchange for the opportunity to earn higher returns is best defined as moderate.
