Customer Accounts

SIPC will provide protection for customers up to:

$500,000 per separate customer for cash and securities, but not more than $250,000 may be paid for a cash claim

Tenants in Common

- if one Tenant Dies, interest will pass to Estate

What is on the New Account Report Form?

- the account name/customer name - address, telephone # - SSN or Tax ID #, DOB - citizenship/passport # - occupation and employer - Govt. issued ID - how the account was acquired - name and occupation of those with authority to create/maintain account (corporate accounts) - associated persons responsible for the account - FINRA principal - discretionary authorization (when issued) - other firms with accounts for the customer (when provided) - customer's investment objectives

Non-systematic risk

-Company specific risk -can be minimized with diversification

How many custodians can be on a UGMA/UTMA account?

1 - has to be an adult

What are the 5 items of information that the RR must make reasonable efforts to obtain from the client to make a suitable recommendation?

1. customer's financial status 2. customer's tax status 3. customer's investment objectives 4. any other pertinent facts about the customer 5. FINRA suitability requirements

How long can an RR hold a client's mail?

3 consecutive months

SEC rules require customer account records be kept for __ years

6 years after the account is closed

What documents do you need for a corporate account?

A corporation which opens a securities account must provide a Certified Copy of the Corporate Resolution and Articles of Incorporation and may require a copy of the Corporate Bylaws or Charter

What is a fiduciary?

A person vested with legal rights and powers to be exercised for the benefit of other persons. Examples: Trustees, Executors, Administrators, Guardians, Custodians, and accounts For the Benefit Of (FBO) another person

Who has to sign for a Limited Partnership Account?

All General Partner's signatures are required. The account would NOT require the signatures of limited partner(s)

Full Power of Attorney

Allows the broker/dealer or another party to make purchase and sale decisions for the account and withdraw cash or securities from the account

Sharing in a Customer's Accounts

An RR may share in a customer's account with the written consent of the member firm and the customer. The RR may share only in direct proportion to their financial contributions

When are transaction confirmations sent out?

Must be sent out to customers at or before the completion of any transaction in any security (previous rules said; no later than the business day following trade date)

Time and Price Discretion

The RR can place orders where the RR determines the Time and Price ONLY. The RR cannot determine the Size of the order or the Security being traded. That information has to be provided by the client

Risk/Reward Relationship

The greater the risk, the greater the reward

Can an RR share in a customer's account?

They must obtain prior written authorization of their employing member and obtain prior written authorization of the customer. Can only share in direct proportion to their financial contribution to the account

Transfer on Death (TOD)

Upon death of an individual investor, or the last surviving account owner in a joint account, the assets in the account are passed on to beneficiaries according to the written TOD agreement, thus eliminating the need for probate

When can an RR share in the profits and losses in a customer's account?

With written consent of the member firm and the customer. May share only in direct proportion to their financial contribution

Which of the following is accurate of FINRA Rule 2165 regarding the Financial Exploitation of Specified Adults? [A] A trusted contact person can be named to the account but is not required. [B] The member firm must contact account holders within 30 days of placing a hold on the account. [C] The member firm can contact the "trusted person" on the account only if the account owner is incapacitated. [D] A hold on disbursements from the account can be placed for 5 business days.

[A] A trusted contact person can be named to the account but is not required. FINRA Rule 2165 allows for a trusted contact person to be added to an account, but the rule does not require a trusted contact person. The member firm is obligated to ask if the account owner wants to name a trusted contact person, but the owner can decline. The other answers provided are inaccurate.

Under the Investment Advisors Act of 1940, which of the following persons would be excluded from the definition of an Investment Advisor? An accountant who gives general investment advice as an incidental part of their accounting service A registered representative who gives clients specific investment advice, but does not charge clients a management fee for such advice An accountant who gives specific investment advice and who charges the client a fee for such advice A registered representative who does not give specific investment advice, but solicits client's funds for managed accounts of the broker/dealer and who is paid a wrap fee for such clients [A] I and II [B] I and III [C] II and IV [D] III and IV

[A] I and II If advice is incidental to their practice of their profession or if there is no charge for the advice, those persons would be excluded from the definition of an investment advisor. When specific advice is given for a fee, registration as an investment advisor would be required

A broker-dealer is a Member of SIPC. Which of the following statements is not true with regard to that membership? [A] SIPC Membership is not mandatory for broker-dealer firms as long as the firm has obtained better coverage than what SIPC offers. [B] SIPC does not cover claims relating to commodity accounts. [C] SIPC is a non-profit organization and is not an agency of the government. [D] SIPC broker-dealers are required to advise all new customers in writing at the time the account is opened and annually thereafter regarding SIPC coverage.

[A] SIPC Membership is not mandatory for broker-dealer firms as long as the firm has obtained better coverage than what SIPC offers.

Which of the following is FALSE about discretionary accounts? [A] The customer must approve each transaction by settlement date. [B] The account must be approved by a principal before an order is placed. [C] Discretionary orders must be reviewed promptly by a principal. [D] The customer must provide written authorization granting discretionary authority to the member firm.

[A] The customer must approve each transaction by settlement date. The customer is not required to review the transaction by settlement date; there is no customer review requirement in the discretionary account rules. All other choices are true.

Which of the following is NOT required on new account applications according to FINRA regulations? [A] The designation of a beneficiary [B] The age of the customer [C] The name and address of the customer/account holder [D] The Tax ID Number or SSN of the customer

[A] The designation of a beneficiary Beneficiary designations may be included but are not required to be included to open an account. The other choices are all required information: B. determines if the customer is of a legal age and not a minor; C provides identification and D. provides for tax reporting. A new account application form is also referred to as a new account report form.

With regards to the "know your customer" rules, which of the following need not be considered? [A] The margin debit balance in the customer's account at any given time. [B] The net worth and annual income of the customer. [C] The social security number of the customer. [D] The occupation and job title of the customer.

[A] The margin debit balance in the customer's account at any given time. When a client applies for a new account, necessary information that is to be included on the application usually includes the customer's social security number, their occupation and job title, and their net worth and annual income. All of these facts are necessary in the opening of a new account as well as in determining the customer's investment objectives and suitable transactions. A customer's margin debit balance can be important when purchasing and selling securities in an account, but is not a part of the "know your customer" rule. The customer's margin debit balance can change often daily.

When reviewing a transfer-on-death registration of an account which one of the following is true? [A] The securities avoid probate [B] The securities avoid inheritance taxes [C] The securities are sheltered from creditors' claims [D] The named beneficiary is irrevocably entitled to the securities

[A] The securities avoid probate Transfer on death registration of an account is where the account is in one party's name but on death the securities in the account go directly to a beneficiary named in a TOD Agreement, thus avoiding probate. The securities do not avoid inheritance taxes or creditors' claims. The beneficiary designation is revocable.

All of the following would be considered an investment "recommendation" under FINRA Rule 2111 on Suitability EXCEPT: [A] An explicit "hold" recommendation [B] An implicit "hold" recommendation by remaining silent about existing positions [C] The use or distribution of marketing or offering materials with explicit recommendations [D] Brokers who execute trades on behalf of a customer without informing the customer

[B] An implicit "hold" recommendation by remaining silent about existing positions A "recommendation" generally involves a "call to action". A "hold" recommendation must be explicit (not implied) to be considered a "recommendation".

For purposes of the customer confirmation rule, which of the following is not considered to be a customer? [A] A bank investment portfolio [B] An issuer selling a new issue of its securities [C] A casualty insurance company buying securities for its own account [D] Individuals who now reside in a foreign country

[B] An issuer selling a new issue of its securities Issuers are not considered to be customers. Customers purchase shares, issuers distribute shares

Which of the following regarding proxies must be provided to customers if they hold their securities at a member firm in street name? [A] Copies of red herrings of any secondary offering conducted by the issuer in the past two years [B] Annual reports published by the issuer [C] Any research report on the issuer that is published by the member firm [D] Any news story published in the media that discusses the proxy

[B] Annual reports published by the issuer

According to the Uniform Gift/Transfer to Minors Act an individual may do which of the following? Give an unlimited amount of cash. Give securities. Only give up to $3,000 in cash. Revoke only cash gifts. [A] I only [B] I and II only [C] II and III only [D] I, II and IV only

[B] I and II only

In order to open a corporate account, which of the following is required: Copy of Corporate resolution Copy of Corporate Charter New account form Joint account agreement [A] I, II [B] I, II, III [C] II, III [D] I, II, III, IV

[B] I, II, III Joint account agreements are not used for corporate accounts.

Which of the following statements concerning the Securities Investor Protection Corporation are correct? It provides protection of up to $250,000 per separate customer for cash claims. It covers balances in commodity accounts. SIPC members are assessed a percentage of their gross revenues from the securities business or a nominal annual fee and this represents the principal source of revenues for the SIPC fund. If a customer's claim exceeds the maximum protected by SIPC, the customer becomes a general creditor of the firm. [A] I, II, and III [B] I, III, and IV [C] II, III, and IV [D] I, II, III, and IV

[B] I, III, and IV II is incorrect. SIPC does not cover commodity claims.

A husband and wife maintain a cash and margin account with a broker/dealer, both held as joint tenants. In addition, each spouse maintains separate, individual cash accounts with the same firm. How would the accounts be treated under SIPC? Each account is considered an account of a "separate customer." The joint accounts are combined and treated as a single account of a "separate customer." The individual accounts are each treated as a single account of a "separate customer." All the accounts are combined and treated as a single account of a "separate customer." [A] I [B] II and III [C] IV [D] None of the above.

[B] II and III

One of your firm's clients dies and your firm is so notified. The member firm should: Get the names and addresses of beneficiaries of the estate. Cancel all open orders for the account. Freeze the account until the required documents are received. Get a letter from the attorney representing the estate with instructions. [A] I and IV [B] II and III [C] III and IV [D] All

[B] II and III Upon the death of a client the representative would - Cancel all open orders and - Freeze the account

Which of the following statements concerning the SIPC coverage is FALSE? [A] It provides protection of up to $250,000 per separate customer for cash claims. [B] It covers balances in commodity accounts. [C] SIPC members are assessed a percentage of their gross revenues from the securities business or a nominal annual fee and this represents the principal source of revenues for the SIPC fund. [D] If a customer's claim exceeds the maximum protected by SIPC, the customer becomes a general creditor of the firm.

[B] It covers balances in commodity accounts.

A registered representative (RR) is servicing an institutional account and providing recommendations for the account. The institution has delegated all decision-making authority to an investment adviser (IA), who is the RR's only contact. Which of the following is TRUE concerning FINRA Suitability Rule 2111 and this scenario? [A] Since the IA is registered and handling the account, the RR has no obligation related to suitability as this becomes the sole duty of the IA. [B] Since the IA is registered and handling the account, the suitability factors that normally apply in terms of dealing with a customer directly now would apply to dealings and recommendations made by the RR to the IA. [C] The RR is responsible for contacting the customer directly and ensuring that the customer is capable of evaluating and accepting the recommendations, despite the fact that the customer has hired and delegated decision-making authority to the IA. [D] The RR must contact both the IA and the client directly and ensure that both are capable of evaluating and accepting the recommendations.

[B] Since the IA is registered and handling the account, the suitability factors that normally apply in terms of dealing with a customer directly now would apply to dealings and recommendations made by the RR to the IA. Under FINRA Suitability Rule 2111, if an institutional customer delegates decision-making authority to a third party, such as the IA in this case, the suitability factors that normally apply to dealings between the RR and the institutional client would now be applied to dealings between the RR and the third party (the IA). The RR in this case may not be responsible for directly contacting the institutional client because of the delegation of authority to the IA, but the RR still must ensure suitability of all recommendations made in relation to the account, even though these recommendations are being made to an IA with trading authority.

A customer who is classified as a senior, expresses an interest in investing in penny stocks. The RR recommends that the investor take a small, early withdrawal from her IRA to buy some shares. Which of the following is TRUE of this recommendation? [A] The RR made a reasonable recommendation as the suggestion is to make a small withdrawal only. [B] The RR made an inappropriate recommendation as withdrawing from an IRA to purchase penny stocks is not in the best interest of the customer. [C] The RR made an appropriate recommendation as he is acting at the request of the customer. [D] The RR made a poor recommendation as he could have recommended buying penny stocks in the IRA, rather than having the client withdraw from the IRA to do so

[B] The RR made an inappropriate recommendation as withdrawing from an IRA to purchase penny stocks is not in the best interest of the customer. Recommending that a senior investor make an early withdrawal from an IRA in order to buy penny stocks is inappropriate and not in the customer's best interest given the information that is provided. Penny stocks are high risk investments and early withdrawals may lead to unnecessary penalties for the investor. Also, purchasing penny stocks directly within an IRA is also inappropriate given the level of risk and the lack of suitability of penny stocks for retirement purposes.

Industry rules state that time and price discretion over customer orders can be exercised by an RR for what period of time? [A] The RR must exercise the time and price discretion within 5 days of receiving such orders from the customer. [B] The RR must exercise the time and price discretion within the day that the discretion is granted. [C] The RR must exercise the time and price discretion within 30 calendar days. [D] The RR can exercise time and price discretion until the customer withdraws the discretionary power from the RR

[B] The RR must exercise the time and price discretion within the day that the discretion is granted. RRs can practice discretion in non-discretionary accounts for a limited period of the day when discretionary power is granted by customers (Ex- Buy 300 shares of ABC Company Common Stock today when you think the price is right). If a customer wants to give the RR more discretion over the account, discretionary power must be given to the RR in writing and the customer's account must be changed to a discretionary account.

Which of the following items can affect the cost basis of a stock that has already been purchased? [A] The company declares a cash dividend. [B] The company declares a stock dividend. [C] Bonds are issued by the company. [D] There is a change in the corporate tax rate.

[B] The company declares a stock dividend. Of the choices presented, only the stock dividend would affect the cost basis of a stock that has already been purchased. All other choices would not affect the cost basis of a stock that has already been purchased.

Which of the following can be said if an individual or institutional investor is engaging in frequent trading activity in mutual funds? [A] The investor is likely hedging other investments. [B] The investor is using market timing to attempt to maximize results. [C] The investor is front-running ahead of upcoming larger trades. [D] The investor is leveraging his accounts.

[B] The investor is using market timing to attempt to maximize results. Market timers attempt to maximize results by trading frequently in and out of investments. Mutual funds are designed for long-term investment. Short-term, rapid, in-and-out trading by investors, especially large investors, can adversely affect long-term investment results for ordinary shareholders. This practice may be illegal when engaged in by member firms or their registered representatives. Hedging is an investment strategy to attempt to reduce or eliminate risk. Leveraging refers to increasing the investment rate of return by investing borrowed funds. Front-running is trading on advance knowledge of non public information.

Whose social security number must be provided to open a Uniform Gifts to Minors Act account? [A] The custodian's [B] The minor's [C] Both the custodian's and the minor's [D] A social security number is not required for a minor account

[B] The minor's Since the minor pays all taxes in an account formed under the Uniform Gifts to Minors Act, the minor's social security number must appear on the account.

When a registered representative is determining suitability for a customer, all of the following are included in this determination EXCEPT the [A] customer's net worth [B] historic performance of a fund [C] customer's risk tolerance [D] customer's retirement or education goals

[B] historic performance of a fund The suitability rules are also known as the "know your customer" rules. Suitability relates to the customer, not to the past performance of a prospective fund.

What is the maximum coverage afforded to an investor under SIPC? [A] $500,000 per account [B] $250,000 per account [C] $500,000 per separate customer of which $250,000 may be cash [D] $500,000 per separate customer

[C] $500,000 per separate customer of which $250,000 may be cash

Joe is an elderly retired client who wishes to remain owner of his assets, but is no longer interested in managing his finances and legal matters. His adult daughter, Jackie, who has some experience in finance, agrees to take on these responsibilities. In a situation such as this, a broker/dealer should inform the client of what? [A] The broker/dealer needs to have Joe open a joint account with Jackie at the firm and transfer all assets into the joint account in order to allow Jackie to trade in his account. [B] Jackie only needs to obtain legal documentation that she is the executor of the Joe's estate. [C] A Durable Power of Attorney must be completed for Joe that specifically names Jackie and provides for authorized trading at the broker/dealer by Jackie in Joe's account. [D] Under FINRA Rules, this type of arrangement is never permitted with regards to a broker/dealer account.

[C] A Durable Power of Attorney must be completed for Joe that specifically names Jackie and provides for authorized trading at the broker/dealer by Jackie in Joe's account. A Durable Power of Attorney is a legal document that is signed by an individual that gives legal authority to make decisions to another individual on the signing party's behalf. In this case, Joe would sign a power of attorney that authorizes Jackie to handle his affairs. Joe and Jackie would have to ensure that the broker/dealer had a copy of the power of attorney or that Joe files a power of attorney at the broker/dealer specifically in relation to Jackie. Opening a joint account does not allow Joe to maintain individual ownership of his assets. Becoming executor would be valid upon Joe's death, but does not help in light of the fact that Joe is still alive. FINRA Rules do allow for this type of arrangement, but it requires legal documentation via the durable power of attorney.

Written authorization would not be required for which of the following transactions? [A] An investor decides to re-invest dividends and interest income in their account that previously was paid out to the customer. In doing so, the client allows the agent to decide which investments to buy with the dividend and interest income. [B] An investor has $20,000 that they would like to invest in a balanced fund and asks their agent to choose a fund with low expenses and moderate returns. [C] An investor asks their agent to sell 200 shares of ABC Corp some time during the trading day. [D] An investor would like to take a family vacation and asks their agent pick and sell $3,000 worth of securities for the trip.

[C] An investor asks their agent to sell 200 shares of ABC Corp some time during the trading day. The only form of discretionary authority that does not require written authorization by the customer is in relation to purchases and sales where only time and price decisions are left to the agent over the course of a trading day. Here, the only example of time and price discretion is the answer where the agent is directed to sell a specific number of shares over the course of the day.

Which of the following accounts can trade on margin? [A] Custodian account for a minor. [B] Bank trust officer when managing a trust account. [C] Discretionary account for a public customer. [D] Executor for account of a deceased person.

[C] Discretionary account for a public customer. Just because an account is on discretionary authority, does not mean it is restricted from trading on margin. However, bank trusts, estate accounts, and Uniform Gift to Minors Act accounts are prohibited from trading on margin.

Which of the following are true regarding a discretionary account: Each trade must be approved in writing Accounts must be reapproved in writing annually Members must review all trades Each order ticket must be marked "discretionary" [A] I, II [B] I, III [C] I, III, IV [D] I, II, III, IV

[C] I, III, IV All statements except II are true. II is incorrect because discretionary account authorizations are good until revoked and do not have to be renewed annually.

Which of the following documents would not be required when a corporation wants to open a cash account at a broker-dealer? [A] Corporate Charter [B] Corporate Resolution [C] Margin Agreement [D] Corporate By-Laws

[C] Margin Agreement In reading the question carefully, we see that the corporation wants to open a "Cash" account, therefore a Margin Agreement would not be required in order to open the account. All other documentation is normally required when a corporation opens a new account.

In a Uniform Gifts to Minor's Account, income received from investments and capital gains is the tax responsibility of the: [A] Custodian. [B] Donor. [C] Minor. [D] Guardian of the minor.

[C] Minor.

Under FINRA rules, new account report forms must be signed by the which of the following? [A] The Customer [B] The Registered Representative [C] The Branch Office Manager [D] The Compliance Officer

[C] The Branch Office Manager Registered Representatives, Customers and compliance officers are not required to sign the new account form. The Form must be signed by the Branch Manager or Principal of the Firm. (Formerly RR's were required to sign but that rule has been changed).

One of your clients has the following portfolio: - 28% LMN Utilities Incorporated - 35% OPQ Health Providers Incorporated - 32% Index ETF (Tracks S&P 100) - 5% Cash Equivalents / Money Market Funds Of the following types of risks, which is MOST important to discuss with this client regarding the current asset allocation in the portfolio? [A] The client should be informed about risks associated with liquidity in relation to these investments. [B] The client should be informed about the political and legislative risks associated with these investments. [C] The client should be informed about the non-systematic risks that exist in relation to their portfolio. [D] The client should be informed of the credit risk which is inherent to their portfolio.

[C] The client should be informed about the non-systematic risks that exist in relation to their portfolio. This client should be informed that a substantial amount of non-systematic risk exists in this portfolio, because the client is so heavily invested in only two securities (63% of the portfolio is invested in LMN and OPQ). This is the MOST important risk to discuss with the client. Liquidity risk, political/legislative risk, and credit risk are also important to consider, but are not as important as the non-systematic risk which can be reduced/eliminated with further diversification

Which of the following statements is TRUE concerning the Uniform Gifts to Minors Act? [A] Securities in the custodial account may be registered in street name. [B] The donor pays capital gains taxes. [C] The minor's Social Security number is provided for the account. [D] Checks in the custodian's own name may be drawn on the account.

[C] The minor's Social Security number is provided for the account. Stock certificates must be registered in the name of the custodian. The donor does not pay capital gain taxes. Checks can never be drawn on the account in the custodian's own name.

Regarding sharing in profits and losses in a customer's account which of the following would be true? [A] This practice is strictly prohibited. [B] This practice is permitted with written approval from the customer. [C] This practice is permitted if the RR received prior written approval from the firm and customer, and the profits and losses are shared in direct proportion to their financial contribution. [D] This practice is prohibited unless the customer receives a greater share of the profits and a lesser share of the losses than the RR.

[C] This practice is permitted if the RR received prior written approval from the firm and customer, and the profits and losses are shared in direct proportion to their financial contribution. According to FINRA Rule 2150 sharing in customer profits and losses is allowed if the RR receives prior written approval from the firm and the customer, and the profits and losses are shared in direct proportion to the financial contributions made to the account.

A broker/dealer firm which is a member firm of FINRA is allowed to share in customer profits and losses [A] Never [B] if the customer is a family member [C] if sharing in the profits and losses is in direct proportion to the member's contribution to the account [D] if they received prior written consent of SEC

[C] if sharing in the profits and losses is in direct proportion to the member's contribution to the account FINRA Rule 2330 (f) allows FINRA member firms to share in a customer's account profits and losses only in direct proportion to the member's financial contribution to the account.

If a broker-dealer fails the trustee appointed by SIPC will [A] secure temporary financing for the broker-dealer with the Federal Reserve. [B] freeze the assets of the broker-dealer and recover damages in bankruptcy court. [C] liquidate the assets of the broker-dealer in an orderly fashion and notify customers on how they can file their claims. [D] hire an investment banker to seek a suitable merger partner with the failing broker-dealer.

[C] liquidate the assets of the broker-dealer in an orderly fashion and notify customers on how they can file their claims. The SIPC trustee will liquidate the assets and notify customers on the procedures to file a claim. The other three choices are not responsibilities of the SIPC trustee.

The opening of a discretionary account under FINRA Rules must be approved by a(an): [A] Regional President [B] Sales assistant. [C] the Member or a designated person of the Member [D] Registered representative with five years' experience.

[C] the Member or a designated person of the Member FINRA Rule 2510(b) requires that a Discretionary account be approved in writing by the Member or a Designated person of the Member such as a partner, officer or manager. Registered Representatives cannot act in a supervisory capacity.

When a joint tenants-in-common account is opened, if one of the tenants of the account should die [A] the remaining tenant would become the sole owner of the account [B] the remaining tenant would own half of the account and the spouse of the deceased person would become the owner of the other half of the account. [C] the deceased person's portion of the account would go to their estate [D] the deceased person's portion of the account would belong to the IRS

[C] the deceased person's portion of the account would go to their estate In a tenants-in-common account when one party dies their portion of the account would become part of their estate and then the assets of the estate would be distributed according to the decedent's will or state law.

As well as a new account report form, a margin account opened by two sisters as tenants-in-common would require all of the following documents EXCEPT: [A] Margin Agreement [B] Loan Consent Agreement [C] Tenants in Common Account Agreement [D] A Limited Power of Attorney

[D] A Limited Power of Attorney The Margin Agreement (aka the Customer Agreement), the Loan Consent Agreement and the Credit Disclosure Document are normally required documents for opening a margin account. The Tenants in Common Account Agreement must also be signed to authorize either sister to enter orders, without the need for a Limited Power of Attorney, and to indicate their intention that there is no right of survivorship on the death of either sister

Which of the following are true if a customer has granted limited trading authorization to a third party in writing? The death of the owner of the account would immediately terminate trading authorization. Confirmations and statements will be sent to the agent only, if the owner waives his right to receive them in writing. Any checks paid out of the account must be to the order of the owner. [A] I [B] II and III [C] I and II [D] All

[D] All

All of the following would be considered a "customer" subject to the FINRA Rule 2111 requirement of suitability for recommendations except: [A] A person with a brokerage account at the broker-dealer firm [B] A person who purchases a security through a broker-dealer where the security will be held by the issuer but the broker-dealer will be compensated for the sale [C] A potential customer who then becomes a customer [D] An institutional customer

[D] An institutional customer There is an institutional customer exemption in Rule 2111. Institutional accounts include organizations that trade large volumes of securities (e.g. banks, etc) and any other person with at least $50 million in assets. Such institutions are exempt from the rule if (1.) the broker-dealer has a reasonable basis to believe that the institution is capable of evaluating investment risks independently and (2.) the institution affirmatively indicates that it is exercising independent judgment. The other choices are all retail customers within the definition of a "customer".

An individual broker at a broker-dealer firm is considering recommending a complex and possibly risky security to one of his more financially-sophisticated retail customers. Under FINRA Rule 2111 on suitability, before making such a recommendation, he should do all of the following EXCEPT: [A] Perform reasonable diligence to understand the potential risks and rewards of the product [B] Determine whether the product is suitable for at least some investors [C] Check the broker-dealer's list of "approved products" to see if the product is included [D] Determine if there is a risk and cost disclosure document available for delivery to the customer

[D] Determine if there is a risk and cost disclosure document available for delivery to the customer The first two answer choices (A+B) are required by Rule 2111. The third choice (C) is not required, but is considered "extremely beneficial" in the official guidance to the rule. The fourth choice (D) is not required since there generally is not a risk/cost type of disclosure document.

When obtaining information from a customer for a new account the member firm must obtain all of the following EXCEPT: [A] Whether the customer is of legal age [B] The customer's name [C] The customer's address [D] Form W-9 signed by the customer

[D] Form W-9 signed by the customer

An existing client in her late 20s comes in with her boyfriend. The couple is not married, but they desire to open an account set up as a JTWROS (Joint Tenants with Rights of Survivorship). They specify that the money that they would like to invest should be directed toward a very speculative small-capitalization mutual fund comprised of international companies. What recommendations should you, the RR in this case, make? Because there is a high degree of risk associated with this mutual fund, you should refuse to even open the account for the couple. As the RR, you should start acquiring all of the information needed to open the account from each joint owner. Because JTWROS accounts are normally set up between spouses or immediate family members, you should inquire as to why they have chosen this type of account since they are not yet married. Prior to purchasing the desired mutual fund, you should sit down with both joint owners and discuss the various risks associated with the investment. [A] I and II [B] I and III [C] II and III [D] II and IV

[D] II and IV In this scenario, the RR must obtain the relevant information in terms of opening the account and should discuss the risks of the investment in this type of fund. The RR should not immediately refuse to open the account due to risk and it is not the duty of the RR to discuss reasoning behind opening a JTWROS account. The RR is responsible, however, for explaining the implications of the JTWROS account to the couple.

The purchase of a high-quality long-term municipal bond would MOST likely be subject to which of the following types of risk? [A] Timing risk [B] Non-Systematic risk [C] Credit risk [D] Inflationary risk

[D] Inflationary risk The money received when a long-term municipal bond matures may not be worth as much at that time as when it was originally invested.

Broker-dealer firms and their individual brokers who make investment recommendations to their customers have a duty to ensure that their recommendations are suitable based on the customers' investment profiles. All the following would generally be included in the customer's investment profile except the customers: [A] Investment time horizon [B] Liquidity needs [C] Risk tolerance [D] Level of education

[D] Level of education FINRA Rule 2111 requires recommendations to be suitable based on the customer's investment profile. The official guidance issued with this rule says that the customer's investment time horizon (the years that the customer plans to be invested), liquidity needs (the ability to quickly and easily convert the investment into cash without a loss of value) and risk tolerance (the ability and willingness to lose some or all of the original investment) are generally included in a customer's investment profile. The level of a customer's education is not included

A FINRA member broker-dealer must comply with all of the following requirements of FINRA Rule 4512 on customer account information recordkeeping EXCEPT: [A] The name(s) of each authorized person who trades in the account [B] The name of the associated person responsible for the account [C] The signature of the manager, officer or partner of the firm responsible for the account [D] The date that a discretionary authorization was requested by the customer

[D] The date that a discretionary authorization was requested by the customer

Under the Telephone Solicitation Act of 1991, a fax sent to a customer must contain all of the following information EXCEPT: [A] The date and time the transmission is sent [B] The identity of the sender [C] The telephone number of the sender or sending machine [D] The number of pages in the fax

[D] The number of pages in the fax

All of the following would be considered to be an investment recommendation to engage in an "investment strategy" subject to the FINRA Rule 2111 requirement of suitability for recommendations except: [A] To buy stock using margin [B] To use a home equity line to purchase securities [C] To engage in day trading [D] To suggest the investment in securities, in general

[D] To suggest the investment in securities, in general The rule covers a recommended investment strategy regardless of whether the recommendations results in a securities transaction or even references a specific security or securities. A recommendation to invest in securities generally is too broad to be considered a "call to action" which is the general definition of a "recommendation".

A registered representative is assigned an account. The account information lists the customer's age, income, and investment objectives. The information is 15 years old. What should the RR do? [A] Ask for referrals. [B] Recommend that the customer invest idle funds in the account. [C] Find out if the customer has an IRA [D] Verify the information and investment objectives

[D] Verify the information and investment objectives

All of the following documentation is required to open a customer margin account for the president of a bank EXCEPT: [A] a new account report form [B] a margin agreement [C] a hypothecation agreement [D] authorization from the bank's board of directors

[D] authorization from the bank's board of directors Opening any customer account requires a New Account Report form. Opening a margin account also requires a margin agreement and a hypothecation agreement. The president of a bank does not need authorization from the bank's board of directors to open the account.

An RR is paid generously for selling certain products sold by his firm. He calls all of his customers, including seniors, and encourages them to buy these products now as the offer is for a limited time only. The RR has conducted himself [A] appropriately, as the call was made to all customers, not just to seniors. [B] appropriately, as the product is sponsored by the RR's firm. [C] inappropriately, as the RR should have given the seniors more time to make an investment decision. [D] inappropriately, as the RR employed high-pressure sales techniques to sell this product

[D] inappropriately, as the RR employed high-pressure sales techniques to sell this product Employing high-pressure techniques such as pushing customers to buy an investment because of a "limited time offer" is prohibited. This RR has acted inappropriately by using this high-pressure sales technique to market to all customers, including the senior investors. As well, when marketing to all customers, the RR may have also failed to meet the criteria necessary to make a suitable recommendation.

Mr. Jones purchases a B-rated corporate bond maturing in 20 years. Mr. Jones would be least concerned with which of the following risks? [A] default risk [B] purchasing power risk [C] interest rate risk [D] liquidity risk

[D] liquidity risk Of all the risks listed, liquidity would be the least important. Since the bond is long-term, the default, buying power, and interest rate risks would affect the bond on an ongoing basis.

Limited Power of Attorney

allows the broker to make investment decisions for the customer BUT does not allow the withdrawal of cash and/or securities

Joint tenants with right of survivorship (JTWROS)

an account for two or more people, generally a husband and wife. Upon the death of either party, the surviving tenant becomes the sole owner of the securities

Trust Accounts

an arrangement in which property is managed by one person for the benefit of another person

How often must customers receive account statements?

at least quarterly, regardless if there has been any activity in the account

When must the new account form be completed?

by the RR before entering any trades

Pattern Day Traders

customers who execute 4 or more day trades within 5 business days. must maintain minimum equity of $25,000

Churning

excessive activity in a customer's account for the purpose of generating sales commissions (Violation)

Discretionary Authority

exists when a person other than the individual who owns the account has discretion to make purchases and sales in an account. this can be a registered representative at the firm, or an investment adviser representative etc. Prior to executing discretion, written authorization from the client is required

Economic or Social risk

generally refers to how domestic and world affairs affect investments as well as fiscal and monetary policies

Systematic Risk

is a securities market risk common to all securities of the same general class

Interest Rate Risk

loss of principal on fixed income securities because of a rise in competitive interest rates

What is the role of the custodian?

must manage the account for the best interest of the minor/beneficiary which could include purchases and sales of securities as well as the exercising of subscription rights

At what times can telephone solicitations be placed?

only between the hours of 8am and 9pm local time of the party called

Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors

provide guidelines and regulations for the opening of securities account for a minor (under 18 yo)

Securities Investor Protection Act of 1970

put into place for the purpose of protecting public customers against the risk of loss due to the failure of a Broker-Dealer

Non-Managed Fee Based Account Programs

refers to arrangements in which no investment advisory services are provided by the member firm and in which customers are charged a fixed fee and/or percentage of the account's value rather than transaction based commissions

Call RIsk

risk that a bondholder will have their bond called or redeemed prior to maturity

Credit risk

risk that a company will declare bankruptcy or that financial obligations will not be met

Currency Risk

risk that changes in exchange rates will adversely affect investments

Timing Risk

the risk incurred by trying to time the market, or a particular investment

Inflationary Risk

the risk of loss of buying power

Capital Risk

the risk of loss of principal value of an asset or security

Liquidity Risk

the risk that an investor will not be able to sell or liquidate a security

Reinvestment Risk

the risk that interest rates will decline and income received from existing investments will earn less when reinvested

Regulatory Risk

the risk that legislative changes may adversely affect investments