Unit 2 Obtain Necessary Suitability Information and Approvals Questions

Which of the following client statements describes an investment objective rather than an investment constraint? A) "I want to maximize my income." B) "I will not invest in any polluter of the atmosphere." C) "I want my investments to be liquid." D) "See how much in taxes you can save."

A) "I want to maximize my income." Income is an objective. Liquidity, tax considerations, and personal attitudes are investment constraints.

When evaluating a client's suitability, which of the following would be considered a nonfinancial consideration? A) Attitude B) Net worth C) Salary 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) Year-end bonus C) Winning the lottery D) Expected inheritance

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.

Regulation T controls the extension of credit from A) broker-dealer to customer. B) bank to broker-dealer. C) broker-dealer to broker-dealer. D) bank to customer.

A) broker-dealer to customer. Regulation T controls the extension of credit from broker-dealer to customer, with customer securities providing the collateral for such loans.

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 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 B) An individual with net worth in excess of $1 million, exclusive of the equity in a primary residence C) 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 D) An individual with net worth in excess of $1 million, inclusive of the equity in a primary residence

B) 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.

A new client of yours indicates that they remember hearing stories from grandparents who lived through the Great Depression of the 1930s. Those relatives lost almost everything they had in the stock market, and the client is not interested in seeing a repeat of the family history. When doing your information gathering, this would be an indication of the client's A) values. B) level of risk tolerance. C) net worth. D) employment stability.

B) level of risk tolerance. Risk tolerance is one of the primary nonfinancial considerations that must be addressed. Those who do not wish to lose money in investments must be presented with recommendations offering a higher level of capital preservation. Values are more likely to be expressed by indicating industries not to be included (or the opposite). If the client's reference to the 1930s dealt with unemployment, then perhaps employment stability would be a correct choice.

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) hypothecate securities in the account. B) loan out the customer's margin securities. C) commingle the customer's securities with securities owned by the firm. D) lend the customer money.

B) 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.

Complying with the suitability rules involves evaluating all of the following except A) customer-specific suitability. B) qualitative suitability. C) reasonable-basis suitability. D) quantitative suitability.

B) 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.

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) An interview with the client's neighbors B) The client's LinkedIn page C) A face-to-face meeting at the client's home D) Monitoring the client's tweets

C) 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.

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) customer-specific suitability. B) qualitative suitability. C) quantitative suitability. D) reasonable-basis 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.

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 hypothecation agreement. B) the loan consent agreement. C) the credit agreement. D) the risk disclosure document.

C) 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.

There are certain securities offerings that are limited to those who meet the definition of accredited investor. The SEC requires that the issuer shall take reasonable steps to verify that purchasers of securities sold in those offerings are accredited investors. One way in which this may be accomplished for natural persons is obtaining a written confirmation from certain persons or entities that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the prior three months and has determined that such purchaser is an accredited investor. Confirmation from which of the following would not meet the SEC's requirements? A) A certified public accountant who is duly registered and in good standing under the laws of the place of his or her residence or principal office B) A registered broker-dealer C) A licensed attorney who is in good standing under the laws of the jurisdictions in which he or she is admitted to practice law D) An investment adviser registered and in good standing under the laws of the state of its principal office

D) An investment adviser registered and in good standing under the laws of the state of its principal office It is only investment advisers registered with the SEC, not the state(s), for whom the written confirmation of their accredited investor status is acceptable.

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? 401(k) balance Credit card balance Monthly income Electric bill A) II and III B) I and IV C) III and IV D) I and II

D) 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.

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) Educational funding C) Retirement income D) Time horizon

D) 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.

Determining a client's investment objectives is an important function of being a registered representative. A customer who identifies as having a conservative investment posture would probably avoid A) income. B) growth. C) preservation of capital. D) speculation.

D) 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.