Customer Accounts--Documentation
Which TWO of the following statements are TRUE under the Uniform Transfers to Minors Act (UTMA) regarding a custodian account in which an individual is custodian for her son? I. The securities purchased must be suitable for the minor II. The mother's Social Security number is used for purposes of reporting and paying taxes III. The custodial relationship is terminated when the son reaches majority IV. The securities will be registered in the mother's name until the son reaches the age of majority
I and III Explanation: A custodian under the Uniform Transfers to Minors Act is required to act under the Prudent Man Rule in the handling of the account. The custodian may make any transactions that a prudent man or woman would make for her own account. The transaction, however, must be suitable for the minor. All stock in the account must be registered in the name of the custodian as custodian for the minor. The account would be registered, for example, as "Mary Jones as custodian for Robert Jones under the New York Uniform Transfers to Minors Act." The custodial relationship is terminated when the minor reaches the age of majority.
You discover that one of your clients is on the OFAC list. You must: a. Contact federal law enforcement authorities immediately b. Call the client to see if a mistake has been made c. Investigate the matter further to see if there is evidence of suspicious activity d. Notify FINRA
a. Contact federal law enforcement authorities immediately Explanation: You must contact the federal law enforcement authorities immediately if you discover that a client is on the list of suspicious persons and entities maintained by the Office of Foreign Assets Control (OFAC). You must also freeze the account and block further transactions.
A client has a margin account with a long market value of $950,000 and a debit balance of $550,000. If the broker-dealer declares bankruptcy, which TWO of the following statements are TRUE? I. The client is permitted to pay $550,000 and receive $950,000 of securities II. The client is permitted to pay $500,000 and receive $950,000 of securities III. The client is covered for $400,000 of securities IV. The client is covered for $500,000 of securities
I and III Explanation: According to SIPC, if a client has a margin account, the net equity is covered (the long market value minus the debit balance). In this example, the client is covered for $400,000 of securities. A client is also permitted (but not required) to pay off the debit balance and receive the full value of the securities. If the client paid $500,000, she would only receive $900,000 of securities.
Which TWO of the following statements are TRUE regarding account statements that are sent by member firms to customers? I. Active accounts receive monthly statements II. Active accounts receive quarterly statements III. Inactive accounts receive monthly statements IV. Inactive accounts receive quarterly statements
I and IV Explanation: Brokerage firms are required to send customer statements quarterly for accounts with no activity. If there is activity, statements are sent monthly.
An uncle is a custodian for his nephew's account. The account receives rights to subscribe to additional stock held in the account. As custodian, the uncle may: I. Sell the rights II. Subscribe to the stock III. Buy additional rights to subscribe if additional rights are needed IV. Do whatever he considers to be in the best interest of the minor
I, II, III, and IV Explanation: The uncle may sell the rights, subscribe to the stock, or buy additional rights to subscribe if additional rights are needed. The uncle may do whatever he considers to be in the best interest of the minor.
If a broker-dealer goes bankrupt, the trustee appointed under the Securities Investor Protection Act is responsible for: I. Notifying the firm's customers that the firm is in the process of being liquidated II. Distribution of securities owned by customers that are held by the firm III. Seeing that the distribution of cash and securities are administered in an orderly manner
I, II, and III Explanation: If a corporation goes bankrupt, it is the responsibility of the SIPC trustee to follow through on all of the items listed.
A registered representative wants to open a new account for a client who is a resident of Mexico. Which TWO of the following statements are TRUE? I. Customer verification of the client's personal information is not required if the customer was referred by an existing client II. Customer verification of the client's personal information is required under any circumstances III. The client may have either a taxpayer identification number or a passport number and country of origin IV. The client must have a taxpayer identification number to open the account
II and III Explanation: If a non-U.S. citizen wants to open a new account, the member firm is required to obtain certain information as part of its AML procedures under its customer identification program (CIP). For non-U.S. citizens, the firm must obtain the client's name, address, date of birth and one of the following: passport and country of issuance, taxpayer identification number, or any other government issued document with a photograph. An RR always needs to verify the client's personal information regardless of whether the customer was referred by an existing client.
Which TWO of the following statements are TRUE about SIPC? I. It was created by an Act of Congress and is considered a U.S. government agency II. It is a nonprofit organization that broker-dealers join III. It provides insurance for customer accounts in the event of bankruptcy by a broker-dealer IV. It provides insurance for customer accounts for fraud, embezzlement, and counterfeiting
II and III Explanation: SIPC can borrow from the U.S. government, but it is not an agency of the U.S. government. SIPC provides insurance coverage for customer accounts in the event of a brokerage firm's failure. Each brokerage firm must take out a separate insurance policy (known as a fidelity bond) to insure itself for fraud, embezzlement, and counterfeiting. This bonding is not provided by SIPC.
A registered representative wants to open a joint account for the dentists in his office building. Dr. White and Dr. Enamel will each contribute equally to the account but each dentist wants his portion of the account to pass to his own estate. Which TWO of the following statements are TRUE? I. The account should be established as Joint Tenants with Right of Survivorship II. The account should be established as Tenants in Common III. All dividends and capital gains in the account will be reported by the brokerage firm under one Social Security number IV. All dividends and capital gains in the account will be reported by the brokerage firm on a percentage-of-ownership basis
II and III Explanation: The dentists should open a Tenants in Common account. If a Joint Tenants with Right of Survivorship account is used, all assets pass to the surviving owner upon the death of one of the participants. All joint accounts use only one Social Security number for tax reporting purposes. The dentists must indicate the percentage of dividends, bond interest, and capital gains they are responsible for on their individual returns.
Which TWO of the following arrangements is NOT considered a joint account? I. Two unrelated individuals as tenants in common II. Husband and wife as tenants with right of survivorship III. An investment club managed by an investment adviser IV. A mother and her minor child in an account under the UGMA
III and IV Explanation: Only individuals are permitted to have joint accounts. The account may be established as tenants in common or tenants with right of survivorship. A custodian account may be established for the benefit of only one minor. An account for an investment club would not be a joint account.
Mr. Jones requests that his securities be held in street name. To honor his request, the broker-dealer must: a. Have the customer sign a hypothecation agreement b. Segregate the securities from the B/D's own securities c. Have the customer sign a margin agreement d. Not honor his request since securities may not be held in street name
b. Segregate the securities from the B/D's own securities Explanation: The only requirement for holding securities in street name is that they must be segregated. A customer signs a margin agreement and hypothecation agreement only when opening a margin account.
A customer's margin account has a market value of $750,000 and a debit balance of $400,000. She also has a commodities account that has equity of $150,000. If the firm goes bankrupt, SIPC will provide coverage to this customer for: a. $350,000 in the margin account and nothing for the commodities account b. $150,000 in the commodities account and nothing for the margin account c. $350,000 in the margin account and $150,000 in the commodities account d. $500,000 in the margin account and $150,000 in the commodities account
a. $350,000 in the margin account and nothing for the commodities account Explanation: SIPC will cover the customer's equity in the margin account ($350,000). SIPC does not provide coverage for commodities accounts.
A customer's margin account has a market value of $800,000 and a debit balance of $375,000. He also has a commodities account that has equity of $150,000. If the firm went bankrupt, SIPC would provide coverage to this customer for: a. $425,000 in the margin account and nothing for the commodities account b. $150,000 in the commodities account and nothing for the margin account c. $425,000 in the margin account and $150,000 in the commodities account d. $500,000 in the margin account and nothing in the commodities account
a. $425,000 in the margin account and nothing for the commodities account Explanation: SIPC will cover the customer's equity in the margin account ($425,000). SIPC does not provide coverage for commodities or futures accounts.
A corporation wishes to open a cash account. Which of the following documents is required? a. A corporate resolution b. A copy of the corporate charter c. A hypothecation agreement d. A risk disclosure document
a. A corporate resolution Explanation: A corporate resolution authorizing a person to trade for the account is necessary to open a corporate cash account. A risk disclosure document may be required but only if options or penny stocks are going to be traded in the account. A hypothecation agreement and corporate charter are required to open a margin account.
SEC regulations state that a brokerage firm must provide a current financial statement (balance sheet) to: a. A customer when requested by the customer b. A noncustomer who requests it c. Both of the above d. Neither of the above
a. A customer when requested by the customer Explanation: SEC regulations states that a brokerage firm must provide a current financial statement (balance sheet with net capital computation) to a customer upon request. The customer has the right to know the financial condition of the company with which she is doing business.
A client wants all trade confirmations sent to his investment adviser. This will require: a. A written letter from the client b. Approval by a partner in the firm c. Approval by a branch manager d. All of the above
a. A written letter from the client Explanation: Written approval is required only from the client.
A customer has a nondiscretionary account at a broker-dealer. The customer has received a research report and has indicated that she may want to purchase a stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take? a. Contact the customer and ask her to place an order to buy the security b. Purchase a small amount of the stock and contact the customer no later than the same business day c. Purchase a small amount of the stock and have the customer sign a written authorization form no later than the same business day d. Purchase the stock on behalf of the customer and have the order approved promptly by a principal
a. Contact the customer and ask her to place an order to buy the security Explanation: This is a nondiscretionary account and, therefore, no shares may be purchased unless the customer gives the broker-dealer an order to purchase the security.
Mr. Jones has a margin account in which there is activity each month. The firm sends Mr. Jones an account statement: a. Each month when there is activity during the month b. At the end of calendar quarter c. Each week when there is activity during the week d. After each trade is executed
a. Each month when there is activity during the month Explanation: Brokerage firms send customer statements monthly for accounts with activity during that month. For inactive accounts, statements must be sent at least quarterly.
Mr. Smith is associated with two other partners in an insurance partnership. He opens a cash account for the partnership. If Mr. Smith dies, what will the firm do as far as the partnership account is concerned? a. Freeze the assets of the account b. Allow the account to continue trading as is c. Open new separate accounts for the remaining partners d. Await instructions from the executor of Mr. Smith's estate
a. Freeze the assets of the account Explanation: If Mr. Smith died, the firm would freeze the assets of the account. The firm would then await the proper legal documents needed to release the assets.
A customer has two children and wants to open one UTMA account which will be shared by the two of them. The RR should take which of the following actions? a. Instruct the customer to open two UTMA accounts, one for each child b. Instruct the customer that the account may be set up for both children provided it is preapproved by the firm's compliance department c. Instruct the customer that one UTMA account may be shared by both children as long as they are at least 14 years of age d. Instruct the customer that one UTMA account may be opened if the customer's spouse also signs the new account agreement
a. Instruct the customer to open two UTMA accounts, one for each child Explanation: A custodial account (UTMA or UGMA) may be established for the benefit of one minor only. In this question, the customer should open two UTMA accounts, one for each of his children.
A client's wife calls and wants to purchase 200 shares of XYZ in her husband's personal account. The registered representative handling the account knows that a favorable earnings report is about to be issued. The registered representative: a. May not accept the order because the wife does not have trading authorization to enter orders for the husband's personal account b. May enter the order because the husband had previously mentioned he would like to establish a position in XYZ c. May enter the order in the husband's account if the wife also has a joint account with her husband d. May not enter the order because the earnings report has not been released
a. May not accept the order because the wife does not have trading authorization to enter orders for the husband's personal account Explanation: The registered representative may not accept the order because the wife does not have trading authorization to enter orders for her husband's personal account.
SIPC is a(n): a. Not-for-profit corporation b. Self-regulatory organization c. U.S. government agency d. Insurer of municipal bonds
a. Not-for-profit corporation Explanation: The Securities Investor Protection Corporation (SIPC) is a nonprofit corporation that was created by an act of Congress in 1970. SIPC insures a customer's account for up to $500,000 in the event of a brokerage firm's failure. SIPC is not a government-sponsored agency or a regulatory body.
A registered representative sells shares of stock for an investor and executes the transaction using the wrong account. Which of the following actions should be taken? a. Request a cancel and rebill after receiving principal approval b. Request a cancel and rebill without principal approval c. Contact the trader who executed the order and enter a new one d. Cancel the order and take no other action
a. Request a cancel and rebill after receiving principal approval Explanation: If a transaction is executed but the wrong account is used, the error can be corrected without placing a new order. This is done by transferring the transaction to the correct account number with the permission of a registered principal. This transfer process is sometimes referred to as a cancel and rebill. In some cases, an error is made using the correct account number for the customer but the wrong account (e.g., a margin account instead of an IRA account). The same process of cancel and rebill is also used to correct this situation.
A registered representative sells 1,500 shares of stock for a client and executes the transaction using the wrong account number. Which of the following actions should be taken? a. Request a cancel and rebill after receiving principal approval b. Request a cancel and rebill without principal approval c. Contact the trader who executed the order and enter a new order d. Cancel the order and take no other action
a. Request a cancel and rebill after receiving principal approval Explanation: If a transaction is executed but the wrong account number is used, the error can be corrected without placing a new order. This is done by transferring the transaction to the correct account number with the permission of a registered principal. This transfer process is sometimes referred to as a cancel and rebill. In some cases, the error is made using the correct account number for the client but the wrong account (margin account instead of an IRA account). This kind of error is also corrected by using a cancel and rebill.
A registered representative discovers that one of her customers is on the Office of Foreign Assets Control (OFAC) list. The RR or someone else at her firm must notify: a. The Office of the Comptroller of the Currency b. The Treasury Department c. The SEC d. FINRA
b. The Treasury Department Explanation: Firms are prohibited from transacting business with individuals and entities on the Office of Foreign Assets Control (OFAC) list. If a registered representative discovers that one of the owners or beneficiaries of an account is on the OFAC list (or if someone on the list tries to open an account with his firm), the RR or someone else from her firm should contact the U.S. Treasury Department immediately. The Financial Crimes Enforcement Network (FinCEN) and OFAC are part of the Treasury Department.
A customer without a discretionary account gives a registered representative the following verbal instructions: Buy 1,000 shares of General Electric whenever you think the price is right. Under current regulations: a. The order may be executed by the RR only on the same trading day b. The order must be marked discretionary and approved by a branch manager c. The order may be executed by the RR on any trading day d. The RR is not permitted to accept this type of order
a. The order may be executed by the RR only on the same trading day Explanation: The order may be executed by the RR, but only on the same trading day. It is not a discretionary order, which requires written power of attorney. The customer indicated to the registered representative the name of the specific stock (GE), the action (to buy), and the amount (1,000 shares), so this is a not-held order. Allowing the RR to make decisions limited to price and time does not constitute discretion. Absent written instructions from the client, this type of time and price discretion is only valid the same trading day.
Which of the following statements is NOT TRUE regarding a firm's anti-money laundering program? a. The program must comply with a blueprint or template supplied by the SEC b. The program requires an ongoing employee training program c. The program must provide for annual testing of the system d. The firm must designate a specific individual responsible for implementing the firm's anti-money laundering program and must identify the person to FINRA
a. The program must comply with a blueprint or template supplied by the SEC Explanation: There is no anti-money laundering blueprint or template supplied by either the SEC or FINRA to broker-dealers. However, any program implemented by the broker-dealer must be designed to comply with the provisions of the Bank Secrecy Act (BSA) and must provide for annual testing of the systems as well as ongoing employee training. Broker-dealers must appoint a compliance person to oversee anti-money laundering regulation compliance, and must identify that person to FINRA.
Under what circumstances may a husband and wife both be custodians in one minor's account? a. Under no circumstances b. If the minor gives written consent c. If the husband and the wife both agree d. If the account has a market value of at least $14,000
a. Under no circumstances Explanation: There may be only one custodian for a minor's account. Either the husband or the wife may be the custodian. However, they may not both be custodians for the minor's account.
Discretionary accounts require: a. Written authorization from the customer b. Oral authorization from the customer c. Written authorization from the client for each trade the registered representative executes d. The registered representative to send the client a letter detailing the proposed transaction
a. Written authorization from the customer Explanation: Discretionary accounts require written authorization from the customer. In addition, each discretionary order must be approved on the day the order is entered by a manager, partner, or authorized person.
A client purchases $900,000 of stock in a margin account and deposits the Regulation T margin requirement. If the current value of the stock is $800,000 and the broker-dealer declares bankruptcy, SIPC would cover: a. $100,000 b. $350,000 c. $450,000 d. $500,000
b. $350,000 Explanation: When the customer met the original Reg. T call, he deposited $450,000 (50% of $900,000) and borrowed $450,000, which is the debit balance. Now the market value (MV) has fallen from $900,000 to $800,000, so the new equity level is $350,000 ($800,000 MV minus the debit balance of $450,000 equals $350,000). SIPC will cover the customer's current equity in the margin account of $350,000. SIPC does not cover a decline in the market value of securities.
An investment adviser opens an account for one of his clients. The registered representative opening the account would NOT need which of the following items? a. Written authorization from the client b. A listing of all the investment adviser's clients c. The client's name d. The client's Social Security number
b. A listing of all the investment adviser's clients Explanation: Since the account is being opened for the investment adviser's client, the registered representative would require the client's name and Social Security number. Since a person other than the account holder (the adviser) will be entering orders, the registered representative would require written authorization from the client granting the adviser the right to enter orders. The client list of the investment adviser is not required by the registered representative.
Which of the following choices best describes a wrap account? a. A personal, joint, and IRA account with one account number b. A managed account in which advisory and transaction charges are included in one comprehensive fee c. A consolidated account in which the investor can buy or sell options, equities, or bonds d. An investment club account with no more than 99 investors
b. A managed account in which advisory and transaction charges are included in one comprehensive fee Explanation: The term wrap account refers to the fee arrangement where one fee, usually ranging from one to three percent annually, is charged by a broker-dealer. The fee is used to cover administrative, portfolio management, and transaction costs. A wrap account is usually managed by an investment adviser.
Which of the following signatures is an invalid endorsement on a stock certificate? a. The signature of an appointed representative for an estate b. A minor's signature under the UGMA c. The signature of one of several partners in a partnership account d. The signature of a person authorized by a corporate resolution
b. A minor's signature under the UGMA Explanation: A minor may not endorse a stock certificate. The signature of the custodian for the minor's account must be on the stock certificate.
A registered representative receives an order from her customer to sell 600 shares of BWGF to be executed in her IRA account. The RR mistakenly executes the order in the wrong account. What action should be taken to correct the error? a. Cancel the transaction and reenter it in the correct account after receiving approval by the margin department b. Cancel the transaction and reenter it in the correct account after receiving approval by a registered principal c. Resend the order to the floor of the exchange d. Cancel the order, but no other action is necessary
b. Cancel the transaction and reenter it in the correct account after receiving approval by a registered principal Explanation: If a trade is executed in the wrong account due to an error on the part of the registered representative, the best course of action is to cancel the trade and reenter it to the correct account. This action must be approved by a registered principal or supervisor.
Jim and his brother Ed have the following accounts at a brokerage firm. 1. Jim's cash account with $175,000 in securities 2. Ed's margin account with $150,000 in equity 3. A cash account for Jim and Ed as JTWROS with $200,000 in securities If the brokerage firm were to go bankrupt, SIPC would provide: a. A maximum of $500,000 coverage for all three accounts combined b. Full coverage for each account c. Full coverage for Jim's cash account and the joint account d. Full coverage for Jim's cash account, the joint account, and $100,000 coverage for the equity in Ed's margin account
b. Full coverage for each account Explanation: SIPC provides maximum protection of $500,000 for each customer (i.e., for each different account title). Since each account has a different title, each would receive the maximum coverage and be protected for the full value in each account. In a margin account, the customer's equity is insured up to the $500,000 maximum.
An aunt wishes to give her niece securities as a gift. The niece's parents have recently died and a court has appointed a guardian other than the aunt. The aunt: a. Must register the securities in the guardian's name b. May give the securities without the permission of the guardian c. May give the securities only if they would qualify under the state's legal list requirements d. May give the securities only if the guardian is also appointed the custodian
b. May give the securities without the permission of the guardian Explanation: The aunt may give securities to the minor as a gift. There are no restrictions on a donor giving a gift.
Before accepting a DVP order from a customer, a broker-dealer must: a. Notify FINRA b. Obtain the name of the customer's agent from the customer c. Receive approval for the trade from the contrabroker d. Notify the appropriate banking regulator
b. Obtain the name of the customer's agent from the customer Explanation: Before accepting a DVP (delivery versus payment) or RVP (receipt versus payment) order from a customer, a broker-dealer must receive the name of the customer's agent and the customer's account number. The order ticket must be marked DVP or RVP.
A registered representative has limited discretion over a customer's account. The registered representative may: a. Remove money freely from the account b. Place orders before the order has been approved by a principal c. Not enter buy stop orders d. Have all confirmations of transactions sent only to himself
b. Place orders before the order has been approved by a principal Explanation: Limited discretion does not permit free withdrawal of funds. The account owner must receive confirmations. Buy stop orders are permitted. The RR may place orders which can be approved promptly afterward.
A client would like to open a numbered account. An RR may open the account: a. Under no circumstances b. Provided the broker-dealer has a written statement on file signed by the client c. Provided the broker-dealer has a written statement on file signed by the client that is also filed with the appropriate SRO d. Provided the broker-dealer has a written statement on file signed by the client and the client is an accredited investor
b. Provided the broker-dealer has a written statement on file signed by the client Explanation: Any client may open a numbered account for reasons of confidentiality. However, the registered representative should open the account only if the customer signs a written statement acknowledging ownership of the account. This document must be kept on file at the brokerage firm, but does not need to be filed with an SRO.
A customer has a nondiscretionary account at a broker-dealer. The customer received a research report and instructs the registered representative to purchase 500 shares of a specific stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take? a. Contact the customer and ask her to place a limit order to buy the security b. Purchase the stock no later than the end of that business day c. Purchase the stock any day that you think is best d. Have the order preapproved by a principal and then purchase the stock
b. Purchase the stock no later than the end of that business day Explanation: This is a nondiscretionary account and, therefore, no shares may be purchased unless the customer gives the broker-dealer an order to purchase the security. In some cases, a registered representative may accept the customer's verbal authorization to make certain decisions without it being considered discretionary. If a customer (1) selects the specific security, (2) decides whether to buy or sell the security, and (3) specifies the number of shares, leaving discretion only as to time and/or price, it would not be considered a discretionary order and written authorization would not be required. The customer mentioned all three of these details. This time and price discretion concerning the order is limited to the trading day on the day the order was placed, and must be noted on the order ticket. The client is permitted to give her RR written instructions for a longer period. There is no requirement to have the order preapproved by a principal.
A registered representative buys stock in a customer's margin account instead of the customer's retirement account. Which of the following actions should be taken? a. Request a cancel and rebill without principal approval b. Request a cancel and rebill after receiving principal approval c. Contact the trader who executed the order and enter a new order d. Cancel the order and take no other action
b. Request a cancel and rebill after receiving principal approval Explanation: If a transaction is executed but the wrong account is used, the error can be corrected without placing a new order. This is done by transferring the transaction to the correct account number with the permission of a registered principal. This transfer process is sometimes referred to as a cancel and rebill. In some cases, an error is made using the correct account number for the client but the wrong account (e.g., a margin account instead of a retirement account). The same process of cancel and rebill is also used to correct this situation.
A registered representative enters an order for a client. In error, the RR purchases shares of the wrong security. Which of the following statements is TRUE? a. The shares must be placed in the RR's error account b. The shares must be placed in the broker-dealer's error account c. The RR must contact the client and cancel the original transaction d. The firm is required to report the error to the market in which the order was executed
b. The shares must be placed in the broker-dealer's error account Explanation: All broker-dealers are required to maintain an error account. It is used by a broker-dealer if the firm or an RR executes a trade in error (e.g., the wrong security or the wrong side of the market). RRs do not have an error account. It is maintained by the firm. The firm should execute the original transaction immediately and maintain a record of the error. The firm is not required to notify the market where the order entered in error was executed.
Under SRO rules, the carrying firm must complete the transfer of a customer account: a. Within one business day of receipt of the transfer instructions b. Within three business days of validation of the transfer instructions c. Immediately upon receipt of the transfer instructions d. Immediately upon validation of the transfer instructions
b. Within three business days of validation of the transfer instructions Explanation: If a customer wants to transfer an account to another broker-dealer, she must sign a transfer request. The firm where the client has the existing account is known as the carrying firm and the new firm is known as the receiving firm. According to SRO rules, the transfer of a customer account must be completed by the carrying party within three business days of validation of the transfer instructions. The carrying firm must either validate the instructions or take exception within one business day.
You are a registered representative servicing a joint tenants with right of survivorship account for a married couple, Byron and Shelly Nelson. You also maintain an account for their adult son Frank. This morning you receive a phone call from Frank informing you that Byron has died. As part of helping his mother sort out the many details associated with his father's death, Frank requests that the assets in the account be transferred to an account in Shelly's name only. The first course of action is to inform Frank that: a. The request may only be made by the account survivor b. Your firm must receive a death certificate before it may transfer the assets c. The executor or administrator of Byron's estate must make this request in writing d. The transfer will be processed as directed
b. Your firm must receive a death certificate before it may transfer the assets Explanation: The broker-dealer must receive a death certificate as proof of death before it may mark an account deceased, or change the account title in a joint account.
Emily and her sister Lucy have the following accounts at a brokerage firm. - Emily has a cash account with $420,000 of securities. - Lucy has a margin account with $665,000 of securities and a debit balance of $365,000. - A cash account for Emily and Lucy as JTWROS with $290,000 in securities. If the brokerage firm were to go bankrupt, SIPC would provide a maximum of: a. $500,000 coverage for all the accounts combined b. $1,000,000 coverage for all the accounts combined c. $1,010,000 coverage for all the accounts combined d. $1,210,000 coverage for all the accounts combined
c. $1,010,000 coverage for all the accounts combined Explanation: SIPC provides protection of $500,000 for each customer (different account title). Since each account has a different title, each would receive coverage of $500,000 of securities. Emily's cash account would receive $420,000 and the joint account would receive $290,000. SIPC will cover Lucy's current equity in a margin account of $300,000. The total coverage is $1,010,000 ($420,000 + $300,000 + $290,000).
Which of the following choices does NOT require additional documentation to transfer stock? a. A partnership account signed by a general partner b. A corporate account signed by an authorized officer c. A custodial account signed by the custodian d. An executor signing for an estate
c. A custodial account signed by the custodian Explanation: The only authorized signature for a custodial account is that of the custodian. There is no further documentation required. In each of the other choices, the transfer agent requires additional documentation showing that the person signing the certificate is authorized to do so.
An uncle is the custodian for a nephew's account. When the nephew reaches majority, the uncle: a. May continue to be the custodian b. Must compensate the nephew for any losses incurred in the account during the time the uncle was the custodian c. Must transfer all the securities in the account to the nephew d. Must sell all securities at current market prices
c. Must transfer all the securities in the account to the nephew Explanation: When the nephew reaches majority, the uncle must transfer all the securities in the account to the nephew.
A customer would like to open an account designated by number. The registered representative should: a. Open the account b. Not open the account because it is a violation of SEC rules c. Open the account if the customer signs a written statement acknowledging the account is the customer's d. Not open the account because it is a violation of industry rules
c. Open the account if the customer signs a written statement acknowledging the account is the customer's Explanation: A customer may open a numbered account for reasons of confidentiality. However, the registered representative should open the account only if the customer signs a written statement acknowledging the fact that the account is the customer's. This must be kept on file at the brokerage firm.
A 17-year-old, whose birthday is approaching, wants to open his own brokerage account at a firm. Which of the following choices is the BEST course of action for the RR to take? a. Open the account with approval of the 17-year-old's parents b. Open the account with the approval of the branch manager c. Refuse to open the account d. Open the account since he about to be the age of 18
c. Refuse to open the account Explanation: Minors are not permitted to open accounts with broker-dealers since they are not legally responsible and could reject certain transactions once they reach the age of majority. The age of majority is actually determined by the state. In most states, the age of majority is age 18.
Lyle, Molly, and Seena have a joint account registered as Tenants in Common. In the event that Seena dies, which of the following statements is TRUE? a. The account would be liquidated as soon as the brokerage firm learns of Seena's death b. Lyle and Molly must change the arrangement to a Joint Tenants with Right of Survivorship c. Seena's estate has a claim on her portion of the account's assets d. Seena's share of the assets in the account are automatically transferred to Lyle and Molly
c. Seena's estate has a claim on her portion of the account's assets Explanation: Upon learning of Seena's death, the brokerage firm will freeze the account. Seena's executor will then provide documentation to establish authority to act on behalf of the estate. Typically, Seena's estate will become the third joint owner in the existing Tenants in Common arrangement.
A registered representative is preparing to leave her firm. Her clients will be assigned to another representative at the same firm. To accomplish this: a. A new account form must be completed b. The customer must approve of the change c. The account records must be amended to reflect the change d. The SEC must be notified of the change
c. The account records must be amended to reflect the change Explanation: Account records must be amended whenever an internal transfer of an account is made. This change does not require approval of the customer, the completion of a new account form, or the notification of any regulatory
Which of the following statements is NOT TRUE regarding accounts established under the Uniform Gifts to Minors Act? a. Taxes are the responsibility of the minor b. The custodian makes all investment decisions in the account c. The custodian may use account positions to cover short options positions in his own personal account d. The account must reflect the minor's Social Security number
c. The custodian may use account positions to cover short options positions in his own personal account Explanation: The custodian may not use securities in the custodian account to cover an options position in his own personal account. All securities in the custodian account must be used only for the benefit of the minor.
In a custodian account, which of the following choices would determine when a minor takes control of the account? a. FINRA b. The Internal Revenue Service c. The state in which the minor is a resident d. The state in which the account is held by the broker-dealer
c. The state in which the minor is a resident Explanation: In a custodian account, the minor would take control of the account when the child reaches the age of majority. This is determined by the state in which the minor is a resident. This is part of the Uniform Transfers to Minors Act (UTMA). Where the account is being held is not relevant.
Supplemental documentation would NOT be required when opening which of the following types of accounts? a. Guardian b. Partnership c. Uniform Transfers to Minors d. Account for an estate
c. Uniform Transfers to Minors Explanation: A copy of the court appointment of the guardian is necessary for choice (a). To open a partnership account, a copy of the partnership articles should be obtained. In the case of an account for an estate, documentation should be obtained that shows the executor or administrator is properly authorized. Many new account forms contain UTMA/UGMA as one of the standard ownership choices, making additional documentation unnecessary.
A customer has a cash account that has securities valued at $320,000 and $180,000 in cash. The customer and a spouse also have a joint account with securities valued at $120,000 and $270,000 in cash. If the member firm were to become bankrupt, the coverage under SIPC would be: a. Full coverage of cash and securities for both accounts b. $500,000 for the individual account and $290,000 for the joint account c. $500,000 for the individual account and $390,000 for the joint account d. $500,000 for the individual account and $370,000 for the joint account
d. $500,000 for the individual account and $370,000 for the joint account Explanation: Both the individual account and the joint account are considered separate customers and will each receive independent coverage of $500,000, of which no more than $250,000 may be for cash. In the individual account, full coverage will be provided of $500,000 ($320,000 of securities and $180,000 in cash). In the joint account, the full value of the securities is covered. However, only $250,000 of the cash in the account is covered. The total coverage for the joint account would be $370,000 ($120,000 + $250,000). For the balance of $20,000 cash, the customer will become a general creditor of the broker-dealer.
A broker-dealer has failed because it has a net capital deficiency. Which of the following parties is NOT covered by SIPC? a. A margin account with $300,000 of securities being held in street name b. A customer account with a $70,000 cash balance c. An IRA with securities valued at $400,000 and $100,000 of cash d. A creditor of the broker-dealer who is owed $40,000
d. A creditor of the broker-dealer who is owed $40,000 Explanation: SIPC provides protection for customer accounts in the event of a broker-dealer's failure. Each account is covered for up to $500,000, of which $250,000 may be cash. SIPC does not insure creditors of the broker-dealer or the failed firm's own inventory account.
Which of the following choices does NOT delegate power of attorney to a third party for the purpose of making securities transactions? a. A husband b. A wife c. A corporation d. A custodian
d. A custodian Explanation: Of the choices given, the only one that does not delegate power of attorney to a third party for the purpose of making securities transactions is a custodian for a minor. The custodian acts as the fiduciary for a minor's account and does not delegate a power of attorney.
Which of the following persons may not delegate power of attorney to a third party for the purpose of making securities transactions? a. A husband b. A wife c. A corporation d. A custodian for a minor
d. A custodian for a minor Explanation: Of the choices given, the only one that may not delegate power of attorney to a third party for the purpose of making securities transactions is a custodian for a minor.
Bert is the custodian for a Uniform Transfers to Minors Act (UTMA) account for his niece Betty. Betty has just reached the age of majority. Which of the following statements is TRUE under the UTMA? a. Bert may continue to manage the account as custodian if he believes Betty is not capable of doing so b. Bert may continue to manage the account as custodian if Betty requests that he do so c. Bert must sell the securities in the account and turn the proceeds over to Betty d. Bert should arrange to have the securities transferred into Betty's name
d. Bert should arrange to have the securities transferred into Betty's name Explanation: Under the UTMA, when the minor reaches the age of majority as determined by the state, the custodian must transfer the account to the owner's individual name. If the owner wishes the former custodian to continue to manage the account, third-party trading authorization can be granted. However, the UTMA does not provide for the continuation of the account as a custodial account.
Two brothers open a joint account to trade options. Who will be required to sign the options agreement? a. The brother with the larger contribution to the account b. The brother with the smaller contribution to the account c. Either brother d. Both brothers
d. Both brothers Explanation: In a joint options account, it is necessary for both parties to sign the options agreement. It is also necessary to record financial information for both parties.
All of the following information should be obtained by a registered representative when opening a new account for a customer, EXCEPT the: a. Street address b. Tax identification number c. Occupation d. Education
d. Education Explanation: When opening a new account for a customer, education is not required information.
Under the Know-Your-Customer Rule, when a registered representative opens a new account for a customer, the registered representative should determine all of the following information, EXCEPT the customer's: a. Financial condition and needs b. Objectives c. Ability to assume risk d. Education level
d. Education level Explanation: According to the Know-Your-Customer Rule, the registered representative should determine all of the items listed except education level.
Which of the following transactions may be executed in a cash account? a. Short 100 shares of XYZ stock b. Long 500 shares of ABC stock and short 500 shares of ABC stock c. Short 10 DEF May 50 call options d. Long 5 GHI Jan 15 put options
d. Long 5 GHI Jan 15 put options Explanation: A purchase of options may be transacted in a cash or margin account. Selling short stock and short option positions must be executed in a margin account.
A customer has a discretionary account at a broker-dealer. The customer has received a research report and has indicated that she may want to purchase a stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take? a. Contact the customer and ask her to place an order to buy the security b. Purchase a small amount of the stock and contact the customer no later than the same business day c. Purchase a small amount of the stock and have the customer provide a written authorization form no later than the same business day d. Purchase the stock on behalf of the customer and have the order approved promptly by a principal
d. Purchase the stock on behalf of the customer and have the order approved promptly by a principal Explanation: This is a discretionary account and, therefore, shares may be purchased without additional written customer consent. A principal or supervisor of the broker-dealer is required to approve promptly in writing each discretionary order. There is no requirement to notify the customer on the same business day. The customer will, however, receive a confirmation of the trade.
A customer contacts his registered representative to purchase a security in a custodial account. The RR executed the transaction in the custodial account of the son, but the customer wanted to purchase the security in the account for her daughter. Which of the following actions should be taken? a. Request a cancel and rebill without principal approval b. Enter a new order c. Cancel the order and take no other action d. Request a cancel and rebill after receiving principal approval
d. Request a cancel and rebill after receiving principal approval Explanation: If a transaction is executed but the wrong account is used, the error can be corrected without placing a new order. This is done by transferring the transaction to the correct account number with the permission of a registered principal. This transfer process is sometimes referred to as a cancel and rebill. In some cases, an error is made using the correct customer but transferred to a different account (e.g., a wrong custodial account or a joint account instead of an individual account).
A customer has a discretionary account at a broker-dealer. The customer owns 1,000 shares of a stock that is the subject of a news article detailing a major SEC investigation. If you anticipate a significant decline in the stock, which of the following actions would be MOST appropriate for you to take? a. Contact the customer and ask her to place an order to sell the security b. Sell the stock only after receiving written authorization from the customer c. Wait until you receive notification from a research analyst at your firm that he will be downgrading the security and then sell the stock d. Sell the stock on behalf of the customer and have the order approved promptly by a principal
d. Sell the stock on behalf of the customer and have the order approved promptly by a principal Explanation: This is a discretionary account and, therefore, shares may be sold without additional customer consent. A principal or supervisor of the broker-dealer is required to approve in writing promptly each discretionary order. Since the news is negative, the RR may want to sell the security on behalf of the customer. There is no requirement to receive notification or contact a research analyst at your firm.
Which of the following proxy rules is TRUE regarding customer securities held in street name by a brokerage firm? a. The corporation sends the proxy to the customer b. The corporation sends the proxy to the NYSE, which then sends it to the customer c. The corporation sends the proxy to the SEC, which then sends it to the customer d. The corporation sends the proxy to the brokerage firm, which then sends it to the customer
d. The corporation sends the proxy to the brokerage firm, which then sends it to the customer Explanation: A publicly held company must provide a means for shareholders who cannot attend company meetings to vote on important matters. This is done through a proxy, which is a delegation of the shareholder's vote. The corporation will send the proxy to all stockholders of record who can then cast their votes without attending the meeting. When stock is held in street name (i.e., in the name of the brokerage firm), the corporation sends the proxy to the brokerage firm, which is the stockholder of record on the corporate books. The brokerage firm sends the proxy to the customer and the corporation then pays the additional expenses. The SEC regulates the solicitations of proxy material.
A customer will be taking a six-month trip to a foreign country and will not have access to her mail. If the customer provides written instructions and includes a valid reason: a. The firm is not permitted to hold a customer's mail under any conditions b. The firm may hold the customer's mail for the six-month period provided a power of attorney is signed in advance by the customer c. The firm may hold the customer's mail for only three months d. The firm may hold the customer's mail for the six-month period
d. The firm may hold the customer's mail for the six-month period Explanation: A broker-dealer may hold mail for a customer who will not be receiving mail at his usual address provided the firm receives written instructions from the customer that include the time-period during which the mail is to be held. If the period exceeds three consecutive months, the customer's instructions must also include a valid reason for the request.
If a registered representative opens an account for an investor, the registered representative would need to know all of the following information, EXCEPT: a. The investor's tax identification number b. If the investor is a U.S. citizen c. The investor's investment objectives d. The investor's educational background
d. The investor's educational background Explanation: A registered representative does not need to know the customer's educational background to open an account. A reasonable attempt should be made to obtain all the other information when opening an account for a customer.
In an UTMA account, the earnings are reported based on the Social Security number of: a. The custodian b. The donor of the largest gift c. A parent or guardian d. The minor
d. The minor Explanation: In both UTMA and UGMA accounts, the earnings are reported based on the Social Security or tax ID number of the minor. This number must be disclosed at the time of the opening of the account.
According to SRO rules, what information must be obtained when an RR opens an account in which mutual fund shares will be purchased? a. The name of the beneficiary for the customer's account b. Whether the customer is subject to IRS backup withholding rules c. A written acknowledgment that the customer has received the fund's prospectus d. The name of the RR responsible for the account and the manager who approved the account
d. The name of the RR responsible for the account and the manager who approved the account Explanation: Under industry rules, the following items MUST be obtained when opening an account. 1. The customer's name and residence 2. Whether the customer is of legal age 3. The name of the registered representative introducing the account and the signature of the member or partner, officer, or manager who accepted the account 4. If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity The name of the beneficiary is not required when opening an account.
A customer does not have a discretionary account with his brokerage firm. The firm may decide which of the following factors for the customer? a. Whether to buy or sell b. The quantity if the customer specifies the security and price c. The security if the customer specifies the quantity and price d. The price if the customer specifies the security and quantity
d. The price if the customer specifies the security and quantity Explanation: If a customer indicates the specific stock and amount that he wishes to buy or sell, the registered representative is permitted to choose the time and price of execution. This would not be considered a discretionary order and written trading authorization would not be necessary.
