Series 7 Questions Unit 2

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

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

One of your customers has become nervous about current stock market conditions and calls to discuss the matter with you. Which of the following would not meet Regulation BI's definition of a recommendation? A) Our top analysts tell us that the market is about to strengthen. B) Liquidate some of the losers for the tax benefit. C) This is not the time to sell. Hold what you have. D) You need to reallocate some of the equity portion of the portfolio to cash.

A) Our top analysts tell us that the market is about to strengthen. Nothing in the statement about the analysts is telling the customer the steps to take. Regulation BI uses the phrase "a call to action" to describe the essence of a recommendation and there is no "call" in that statement. The firm or associated person must use language explicitly suggesting that the customer follow a certain behavior for it to be a recommendation. Regardless of the reason, telling a customer to sell specifically identified stock is a recommendation. Reallocating a portfolio means selling some assets and buying others. Although we tend to think of recommendations as a buy or a sell, Regulation BI points out that an explicit recommendation to hold a security (or securities) is a recommendation. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) loan out the customer's margin securities. B) lend the customer money. C) hypothecate securities in the account. D) commingle the customer's securities with securities owned by the firm.

A) loan out the customer's margin securities. A signed loan consent agreement permits a firm to loan out a customer's margin securities; this is considered another way to finance a customer's debit balance.

In a discretionary account where the investment objective is preservation of capital with moderate income, all of the following practices are unsuitable except A) maintaining a fixed asset allocation mix, which includes some underperforming sectors. B) marking order tickets solicited or unsolicited when discretion is used. C) frequent and profitable short-term trading in volatile stocks. D) marking the investment objective on the new account form as high risk.

A) maintaining a fixed asset allocation mix, which includes some underperforming sectors. In some test questions, the best way to select the correct choice is when three of the four options are clearly wrong. This is an example of that case. Preservation of capital is certainly not a high-risk objective and does not call for frequent trading in any stock, volatile or not. Orders in a discretionary account are not considered unsolicited (the client is not the one placing the orders). Allocating the portfolio to fixed-income assets (bonds and preferred stock) would seem to be the most appropriate step to take.

A customer asks her registered representative to exercise discretion over her account. To do so, the representative must do each of the following except A) obtain approval from FINRA. B) obtain evidence of written acceptance of the account by a registered principal of the firm. C) have a principal initial each order promptly, which may be before or after execution. D) obtain written authorization from the customer.

A) obtain approval from FINRA. The requirements for a discretionary account include a written authorization from the customer, a written acceptance by a principal of the firm, and close supervision of each transaction to ensure suitable transactions in light of the customer's objectives and financial situation. No approval from FINRA is required.

When reviewing a client's account, your supervisor notices that although each recommendation appears to be suitable based on that client's profile, there is a concern regarding the frequency of activity in the account. This is an example of A) quantitative suitability. B) qualitative suitability. C) customer-specific suitability. D) reasonable-basis suitability.

A) quantitative suitability. Quantitative suitability requires a member firm who has control over a customer account to believe that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together.

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

A) speculation Those with a conservative outlook on investing are unlikely to be willing to engage in speculation. Preservation of capital is generally the most conservative, followed by income and growth.

Which of the following circumstances would not cause a registered representative to be identified as a fiduciary? A) A registered representative holds himself out as a fiduciary for ERISA plans and pensions. B) A registered representative names one of his customers the executor of his estate C) A registered representative receives discretionary authorization from a client D) A registered representative becomes a member of the board of directors of a charitable foundation.

B) A registered representative names one of his customers the executor of his estate Executors of an estate are included in the definition of a fiduciary. However, in this choice, the customer is the executor, not the registered representative. That customer has a fiduciary responsibility to the representative's heirs (when that time comes). The granting of discretionary authority over the account of a client is a form of having fiduciary responsibility the registered representative is in control of the customer's money. Being a board member of a foundation, or holding oneself out as a fiduciary for an ERISA plan, will generally find themselves being defined as a fiduciary.

Which of the following statements regarding discretionary accounts is not true? A) Each discretionary order must be reviewed promptly by a principal. B) The customer must approve each order before or after it is executed. C) The customer must grant written authorization to the broker-dealer or a designated individual to exercise discretion in the account. D) The account may not be accepted unless approved, in writing, by a principal of the member firm.

B) The customer must approve each order before or after it is executed. To establish a discretionary account, a customer must grant trading authority in writing. Furthermore, the firm must indicate its willingness to handle the account on a discretionary basis through the signature of a principal of the firm. All orders, including those for discretionary accounts, must be reviewed and endorsed promptly but not before execution.

Which of the following documents must an existing customer sign to establish a discretionary account? A) Options agreement B) Trading authorization C) Customer's agreement D) New account application

B) Trading authorization To establish a discretionary account, the agent must receive written authorization from the customer(s) in whose name(s) the account has been established. An existing customer has already completed the new account application and signed any required customer agreements.

An investor wants to open an account designated by number, not by name. In addition to the normal account-opening requirements, the registered representative A) can open this account without additional documentation. B) can open the account with a written statement of ownership from the customer. C) cannot open the account in this manner. D) can open this account with a written statement of ownership and approval from FINRA.

B) can open the account with a written statement of ownership from the customer. For numbered accounts, there is an additional requirement that the customer must sign a document attesting to ownership.

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

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

Regulation BI calls for broker-dealers and their associated persons to meet a care obligation when making a recommendation to a retail customer. In describing the nature of the care, the rule requires that those making recommendations adhere to all of these except A) reasonable skill. B) reasonable prudence. C) reasonable care. D) reasonable diligence.

B) reasonable prudence. In the original rule proposal, the SEC had four care requirements, including prudence. After careful consideration of comments received, it "concluded that its inclusion creates legal uncertainty and confusion, and it is redundant of what we intended in requiring a broker-dealer to exercise diligence, care, and skill, and its removal does not change the requirements under the Care Obligation. Accordingly, the Care Obligation requires broker-dealers to ''exercise reasonable diligence, care, and skill'' to meet the three components of the Care Obligation." **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

The customer relationship summary (Form CRS) is an integral part of Regulation Best Interest. For an existing cash account customer who received the initial Form CRS in early July 2020, a new Form CRS must be delivered no later than A) a change to the customer's investment objectives. B) the opening of a new margin account. C) the temporary withholding of a disbursement from the account under Rule 2165. D) a change to the beneficiary of an existing Roth IRA.

B) the opening of a new margin account. Existing customers received their initial Form CRS no later than July 30, 2020. They must also be sent a revised copy at or before the opening of a new account that is different from the retail investor's existing account. An example of this would be the opening of a margin account. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

A charge of churning would likely be brought against a registered representative who was found to have disregarded the FINRA rule on A)customer-specific suitability. B)quantitative suitability. C)investment goal suitability. D)reasonable-basis suitability.

B)quantitative suitability. FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. One of those obligations is quantitative suitability. Churning is generally defined as excessive trading in a customer's account. The registered representative, having control over a customer account, has to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together.

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

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

A customer opening a margin account must be supplied with a special margin risk disclosure. Which of the following are specific risks disclosed? I. Customers are not entitled to choose which securities can be sold if a maintenance call is not met. II. Customers can lose more money than initially deposited. III. Customers are not entitled to an extension of time to meet a margin call. IV. Firms can increase their in-house margin requirements without advance notice. A) II and III B) II, III and IV C) I, II, III and IV D) I, and IV

C) I, II, III and IV All of these are part of the margin risk disclosure document

Which of the following are governed by the prudent investor rule? I. Trustee II. Executor III. Custodian IV. Registered representative who has been granted discretionary authority A) III and IV B) II and III C) I, II, III, and IV D) I and II

C) I, II, III, and IV The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. With these accounts, the fiduciary must act prudently. A registered representative who has been granted discretionary authority is acting in a fiduciary capacity.

A firm must provide a risk disclosure document to a customer before opening which of the following accounts? A) Partnership B) Transfer on death C) Margin D) Custodial

C) Margin All customers opening margin accounts must receive a risk disclosure document describing the risks associated with trading on margin (e.g., that a customer could lose more than the initial investment, or that the firm could sell out securities in the account to meet a maintenance call without providing prior notice to the customer). This document must also be provided to customers on an annual basis.

When opening a margin account for an individual customer, there are a number of documents required. Which one of the following never requires the customer's signature? A) The loan consent agreement B) The credit agreement C) The margin risk disclosure document D) The hypothecation agreement

C) The margin risk disclosure document The margin risk disclosure document must be furnished to the margin account customer, but there is nothing for the customer to sign. A clue to that being the correct choice is that it is the only one without the word agreement. It is agreements that must be signed. Although the loan consent agreement is optional, if the customer wishes to permit the lending of their securities, the agreement must be signed.

It is important for a registered representative to be able to distinguish between a client's investment objectives and investment constraints. Which of the following is an example of an investment constraint? A) Capital growth B) Educational funding C) Time horizon D) Retirement income

C) Time horizon Of the choices, time horizon is an example of an investment constraint while the others are investment objectives. Remember, an objective is where you want to go; a constraint is what is keeping you from getting there. If your time horizon is very short, you might not be able to reach any of the objectives listed here.

Regulation BI established a new standard of conduct under the Securities Exchange Act of 1934 for broker-dealers and associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer. All of the following are examples of account recommendations except A) opening a margin account to go along with an existing cash account. B) opening an UTMA account for a grandchild. C) changing the asset allocation in an existing account. D) taking a distribution from an employer-sponsored plan and executing a rollover into a self-directed IRA.

C) changing the asset allocation in an existing account. Account recommendations include recommendations of securities account types generally (e.g., to open an IRA or margin account), as well as recommendations to roll over or transfer assets from one type of account to another (e.g., a workplace retirement plan account to an IRA). It has nothing to do with changing the strategy in an existing account. Rather, the desired result of an account recommendation is a new account. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

SEC Regulation Best Interest (BI) focuses on A) ensuring that customers receive the highest possible interest on their cash balances. B) ensuring broker-dealer profitability. C) recommendations to customers. D) customer transaction costs.

C) recommendations to customers. Regulation BI became effective on June 30, 2020, and states, "When making such a recommendation to a retail customer, you must act in the best interest of the retail customer at the time the recommendation is made, without placing your financial or other interest ahead of the retail customer's interests." **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Opening a margin account involves a number of different documents. The document describing how the interest on the margin debt is calculated is generally known as: A) the loan consent agreement. B) the risk disclosure document. C) the credit agreement. D) the hypothecation agreement.

C) the credit agreement. It is the credit agreement, sometimes referred to as the margin agreement, that describes the creditor-debtor relationship. This includes the method of computing interest on the debit balance (the amount owed). The hypothecation agreement allows the broker-dealer to maintain possession of the margined securities as collateral for the loan, and the loan consent agreement allows the broker-dealer to lend out the client's margined securities. The risk disclosure document is provided to make sure the client understands the risks of margin trading.

In a margin account, the broker-dealer lends money to the customer to assist in the purchase of a marginable security. Instead of delivering the security to the purchaser, the broker-dealer holds it as collateral for the loan. The form signed by the customer agreeing to this is A) the stock pledge agreement. B) the credit agreement. C) the hypothecation agreement. D) the loan consent agreement.

C) the hypothecation agreement. There are three special margin account agreement forms. The hypothecation agreement is the one in which the customer agrees to allow the broker-dealer to keep the securities purchased as collateral for the margin loan. The credit agreement contains the terms of the loan, such as interest to be charged, and the loan consent agreement is an optional form agreeing to let the broker-dealer lend out those securities.

You are reviewing an investor's balance sheet. Which of the following items would be found on a balance sheet and help you determine the client's net worth? I. 401(k) balance II. Credit card balance III. Monthly income IV. Electric bill A) II and III B) I and IV C) III and IV D) I and II

D) I and II The balance sheet reflects a person's net worth by comparing assets and liabilities. A 401(k) balance is an asset and credit card debt is a liability. Income and monthly bills, such as the electric bill, are found on the income statement.

Which of the following circumstances must be met for a fiduciary to trade options in a trust account? I. Special circumstances are determined by the broker-dealer. II. The trust agreement states the trustee has the power to trade options. II. The trust's investment objectives are determined to be compatible with options trading. IV. Only covered options may be traded by a fiduciary. A) I and IV B) II and IV C) I and III D) II and III

D) II and III A fiduciary account may only trade options if expressly authorized to do so and if suitable for the beneficial owner of the account.

A customer calls the brokerage firm and turns in an order to buy 400 shares of Oscillate Pharmaceuticals, Inc. The instructions are for the firm to use its best judgement as to the right time to place the order. Which of the following are true about this order? A) It requires written discretionary authorization. B) It may be executed at any price or any time the broker-dealer feels is best. C) It cannot be accepted without a price being specified. D) It is good only for the day entered.

D) It is good only for the day entered. This is a time or price order and is excluded from the definition of discretion. One of the characteristics of this type of order is that, unless written instructions to the contrary have been received, it is effective only the day entered.

Once individuals have passed the Series 7 exam and are now registered as general securities registered representatives, compliance with Regulation BI would allow including which of these on their business card following their name? A) Investment adviser representative B) Financial advisor C) Financial adviser D) Registered representative

D) Registered representative Regulation BI limits the use of the words adviser or advisor to those who are registered as investment advisers or representatives of those who are. Passing the Series 7 exam allows one to use the term registered representative. Most of our Series 7 students go on to pass the Series 66 exam and become IARs. In that case, investment adviser representative is permitted. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

A registered representative has a client who wants to save for college for her child. The child will be entering college in five years. This would be an example of A) tactical asset allocation. B) planning too late. C) an investment objective. D) an investment constraint.

D) an investment constraint. Time constraints include such conditions as liquidity and time horizon, both of which are in play here. It may be true that the client has started too late, but that is not what the exam would be looking for as the correct answer. This is an investment goal, not an investment objective.

Your client informs you that a signed discretionary account form is in the mail. Before receiving the form, and unable to contact the client, you notice that one of her stocks is dropping sharply on adverse news. You A) can enter a discretionary order with instructions that the order is not held. B) can enter a discretionary order with written permission of a principal of the broker-dealer. C) can enter a discretionary order with written documentation of the situation. D) cannot enter a discretionary order.

D) cannot enter a discretionary order. A discretionary order cannot be entered until the signed discretionary account form has been received.

When comparing investment alternatives, all of the following must be considered EXCEPT: A) differences in risk exposure between the two companies. B) relative time period of returns on investment. C) relative after-tax returns, when appropriate. D) state of incorporation of the companies.

D) state of incorporation of the companies.

A new client would like to invest in an offering restricted to accredited investors. Any of the following could be used to verify accredited investor status except A) written confirmation from the client's CPA. B) a bank account statement not more than three months old. C) a letter from a duly licensed life insurance agent. D) tax returns for the past two years.

D)a letter from a duly licensed life insurance agent. Although it is possible that the insurance agent has sufficient information, the regulators do not include them in the list of verifiable sources, such as the CPA or the client's attorney.

When discussing a client's finances, which of the following would be of least importance when planning to make a lump-sum investment? A) Expected inheritance B) Current salary C) Winning the lottery D) Year-end bonus

B) Current salary Salary enables the registered representative to determine the funds available for periodic investment. A lump-sum investment could be made with money from an inheritance, a year-end bonus, or lottery winnings.

As the poet Robert Burns wrote, "The best-laid plans of mice and men often go awry." The same could be said for investment plans. The term used to describe those things that can have an impact on the ability of our plans to reach fulfillment is A) investment conditions. B) investment constraints. C) investment decisions. D) investment goals.

B) investment constraints.

Regulation BI contains four key component obligations. Which two of them apply to registered representatives? I. Disclosure Obligation II. Care Obligation III. Conflict of Interest Obligation IV. Compliance Obligation A) III and IV B) I and III C) I and II D) II and III

C) I and II The obligation to disclose all material information and to exercise reasonable diligence, care, and skill in making any recommendation apply to both the member firm and the registered representative. The Conflict of Interest Obligation and the Compliance Obligation belong to the firm. That does not mean you do not have an obligation to disclose any conflicts of interest. That is part of the disclosure obligation. The specified Conflict of Interest Obligation includes the written supervisory procedures and training the firm must provide. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

A person legally responsible for the handling of the financial assets of another, such as an executor or guardian, is usually called A) an investment adviser. B) a trustee. C) a custodian. D) a fiduciary.

D) a fiduciary. Fiduciary is the term that describes the legal position of trustees, custodians, and most investment advisers. This is a case where you choose the most complete response.

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

D) qualitative suitability. Under FINRA Rule 2111, there are three main obligations: reasonable-basis suitability, customer-specific suitability, and quantitative suitability. There is no such thing as qualitative suitability.