Unit 5

In order to pool their money for securities trading, two married sisters wish to open a single account with your firm. Which of the following would you recommend? A) Commingling is illegal. B) A tenants-in-common account. C) A joint tenants with right of survivorship (JTWROS) account. D) A partnership account.

Because the sisters are married, it is most likely that, upon death, each would like their share to pass to their respective estates. Tenants-in-common provides that the deceased tenant's share passes to the estate and the remaining tenant is a co-tenant with the estate.

An agent may open a joint account for which of the following? I. Lee and his 13-year-old son, Tom. II. Mary and Kelley, two adult college roommates. III. Jerry and Mark, friends and partners in business for more than 20 years. IV. Melinda and her minor nephew, John, for whom she is guardian.

II & III. Joint account owners share ownership of the account and must be adults. A minor may not legally exercise control over an account and may not be an owner of record of an account.

Terry Bolton opens a UTMA for each of his sons, Josh, age 12, and Drake, age 14. Under current tax regulations, after deductions and exemptions, how will the income in the UTMAs be taxed? I. Josh's income is taxed at his tax rate. II. Drake's income is taxed at his tax rate. III. Josh's income in excess of $2,000 is taxed at Terry's marginal tax rate. IV. Drake's income in excess of $2,000 is taxed at Terry's marginal tax rate.

II & IV. Currently (2014), children younger than 19 have such income in excess of $2,000 taxed at the parent's marginal tax rate.

In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account is A) Totten trust B) Passbook savings account C) Demand deposit account (DDA) D) Revocable trust

A) Totten trust

To compute the combined equity in a mixed (long and short) margin account. Add the "positives" and subtract the "negatives".

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Under UGMA: prohibits securities in a custodial account from being bought on margin.

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Who is responsible for the taxes in an UTMA account? A) Child. B) Donor. C) Custodian. D) Parent.

A) Child. UTMA and UGMA accounts are custodial accounts. They are for the benefit of the child and bear the child's Social Security number. Although in practice the taxes are usually paid by the parent or legal guardian, they are the responsibility of the beneficial minor (child).

Which of the following occurs in a partnership account if one partner dies? A) The account is frozen until a new or amended partnership agreement is received. B) The surviving partners receive the deceased partner's share. C) The surviving partners are considered joint tenants and receive the deceased partner's share. D) The surviving partners are considered joint tenants.

A) The account is frozen until a new or amended partnership agreement is received. The deceased's partner's share usually goes to an estate, not the other partner.

The term "discretionary" refers to an: A) account in which the agent has the power to decide which securities to buy or sell without customer authorization for those specific trades. B) account in which someone has been given custodial power over another individual's account. C) account in which a person has power of attorney over an incompetent individual's account. D) order that specifies size, security, or action but leaves the choice of time and price up to the agent.

A) account in which the agent has the power to decide which securities to buy or sell without customer authorization for those specific trades.

One of your clients dies. You could legally take instructions regarding the individual's estate from A) the administrator in intestacy B) the spouse of the deceased C) a person with durable power of attorney D) a CPA who prepared the deceased's tax return

A) the administrator in intestacy. If an individual dies without a will (intestate), the state will appoint an administrator in intestacy who, just as an executor for one who had a will, has control over the deceased's assets. A durable power of attorney, just like any other power, expires upon the death of either party to the power.

Under the Uniform Transfers to Minors Act, Ralph wants to give some stock to his brother's son, Jose. Jose's father, Bob, is the legal guardian, but he has failed the Series 7 exam 11 times. Which of the following is CORRECT? A) Uncle Ralph cannot be the custodian, because he is not the legal guardian. B) Either Ralph or Bob can be the custodian. C) Ralph can be the custodian only if the securities are on the legal list of the state. D) Bob cannot be the custodian because he is not qualified.

B) Either Ralph or Bob can be the custodian. Under UTMA, a custodian is required. Any adult can be the custodian and there are no other specific requirements, nor does the custodian have to be a member of the family.

A customer and his spouse own shares in the ABC Fund as joint tenants with rights of survivorship. If the customer dies, what happens to the shares in the account? A) Ownership of the shares must be determined by probate court. B) The spouse would own all the shares. C) The account would be frozen until the estate was settled. D) One-half of the shares would belong to the spouse, and the remaining half would be distributed to the customer's estate.

B) The spouse would own all the shares.

During your annual review with your clients, Matt and Sally Eberhart, they indicate that they think it is time to start putting away some money for college for their 3 year-old son. They ask you to describe the advantage of using an UTMA account over a Coverdell ESA. You would likely point out all of the following as advantages EXCEPT A) there are no earnings limits for making UTMA contributions. B) contributions to the UTMA are made with after-tax dollars. C) there is no limit to the amount that can be contributed to an UTMA. D) withdrawals for other than qualified education expenses are not subject to any penalties.

B) contributions to the UTMA are made with after-tax dollars.

When a security purchased on margin suffers a decline in market value, it may cause the equity in the account to fall to a level such that additional funds are required under the terms of the margin agreement between the client and the broker/dealer. The term that describes the request by a broker/dealer rather than an SRO for more money is: A) regulation T call. B) house call. C) margin call. D) sell-out.

B) house call. When the account value drops to a certain level, SRO rules require a maintenance call. When the broker/dealer sets that level more stringently (above that of the SRO), it is known as a house call. A margin call and Regulation T call are the same thing - the initial call for funds when purchasing on margin.

An agent of a broker/dealer must obtain all of the following when opening a customer account EXCEPT: A) investment objectives. B) marital status. C) physical address. D) date of birth.

B) marital status.

During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from the: A) person with a durable power of attorney. B) person appointed as administrator of the estate. C) spouse. D) person named as executor of the estate.

B) person appointed as administrator of the estate. Dying intestate means that there is no valid will. Only in a will is there an executor.

In an account opened by two individuals as joint tenants with rights of survivorship, all of the following are true EXCEPT: A) orders may be entered by either party. B) stock certificates may be delivered in the name of either party. C) in the event of death, the other party assumes full ownership of the account. D) mail may be directed to the joint owner agreed upon by both parties to the account.

B) stock certificates may be delivered in the name of either party. This is FALSE. Orders may be entered by either party, and mail may be directed to either party.

Among the ways in which UGMA accounts differ from UTMA accounts is that: A) gifts given under UGMA are irrevocable, while UTMA accounts allow the transfer of assets in and out of the account at the custodian's discretion. B) the transfer of assets in a UTMA account can be deferred until the beneficial owner reaches as late as age 25; in a UGMA account, assets are transferred when the minor reaches the age of majority. C) UGMA accounts transfer the assets of a deceased minor into the account of the custodian, while UTMA accounts retain the deceased minor's assets until the minor would have reached age 25. D) there is no difference between the accounts.

B) the transfer of assets in a UTMA account can be deferred until the beneficial owner reaches as late as age 25; in a UGMA account, assets are transferred when the minor reaches the age of majority.

If a new joint tenants with rights of survivorship account is opened, all of the following statements are true EXCEPT: A) orders may be given by either party. B) in the event of death, the decedent's interest in the account goes to the other party. C) checks may be drawn in the name of either party. D) mail may be sent to either party (with the permission of each party).

C) checks may be drawn in the name of either party. While either party may enter an order, any money or securities delivered out of the account must be in the names of both owners.

If three individuals have a tenants in common account with your firm and one individual dies, then A) trading is discontinued until the executor names a replacement for the deceased B) account is converted to joint tenants with rights of survivorship C) the two survivors continue as co-tenants with the decedent's estate D) the account must be liquidated and the proceeds split evenly between the two survivors and the decedent's estate

C) the two survivors continue as co-tenants with the decedent's estate

A woman wishes to make a gift of securities to her niece's account under the Uniform Transfer to Minors Act, but the niece's custodian opposes the gift. All things considered, the woman may give the securities under which of the following circumstances? A) Only after obtaining the court's permission. B) Only with the custodian's written approval. C) Only if the niece approves. D) As she desires.

D) As she desires.

A wealthy individual has established a trust and wishes to establish an account that permits the trust to engage in margin transactions. Which of the following statements regarding margin trading in trust accounts is TRUE? A) It is permitted with the written approval of the beneficiary of the trust. B) It is permitted if the trustee observes the prudent investor rule. C) It is not permitted. D) It is permitted if provided for in the underlying documentation.

D) It is permitted if provided for in the underlying documentation.

Which of the following individuals may not open a joint account? A) Business colleagues. B) Three sisters. C) Two spouses. D) Parent and a minor.

D) Parent and a minor. Any two or more persons can have a joint account, but a minor is specifically excluded from the definition of a person.

Under the Uniform Gifts to Minors Act, Ralph wants to give some stock to his brother's son, Jose. His nephew's father, Bob, is the legal guardian. If Ralph wants to name himself as custodian, which of the following needs to be done? A) Ralph must have the permission of the guardian. B) Ralph must receive legal permission to act as custodian. C) Ralph must file the proper legal documents. D) Ralph must open the account and name himself as the custodian.

D) Ralph must open the account and name himself as the custodian.

Which of the following is the beneficial owner of securities in an UTMA account? A) The donor. B) The guardian. C) The custodian. D) The minor.

D) The minor. The minor is always the beneficial owner in an UTMA account.

A client's investment objective is safety of principal and income, and the client places an order with his agent to buy a speculative investment. The agent strongly encourages the customer to reconsider as he believes that the transaction would be unsuitable. If the customer insists that the trade proceed, the agent should: A) obtain prior approval from one of the firm's general securities sales principals before effecting the trade. B) obtain a written statement of indemnification from the customer before effecting the unsuitable trade. C) refuse to make the unsuitable trade, notify the customer of this by telephone, then send written notification by first-class mail or other prompt means. D) complete the trade.

D) complete the trade

An agent is assisting a client in opening an account who refuses to provide his net worth and annual income. The agent should A) seek permission to consult with the client's fiduciary team including accountants and attorneys to obtain the financial information B) refuse to open the account C) proceed with opening the account, but limit recommendations to conservative investments D) in the absence of company policy to the contrary, open the account, but limit transactions to unsolicited orders

D) in the absence of company policy to the contrary, open the account, but limit transactions to unsolicited orders

The term used to describe a broker/dealer contacting a margin account client with a demand for additional funds is: A) Reg. T call. B) margin call. C) market call. D) maintenance margin.

D) maintenance margin. The original call for funds is the Reg. T or margin call. But, when the call is for additional money, it is known as maintenance margin. This generally occurs when the value of the collateral in the account has fallen sharply.

Which of the following are discretionary orders? I. A customer sends a check for $25,000 to an agent and instructs the agent to purchase bank and insurance company stocks when the price appears favorable. II. A customer instructs an agent to buy 1,000 shares of ABC Corporation at a time and price determined by the agent. III. A customer instructs an agent to purchase as many shares of XYZ as the agent considers appropriate. IV. A customer instructs an agent to sell 300 shares of LMN, Inc., when the agent deems the time and price appropriate.

I & III. Discretion authorizes a representative to choose the security, the amount of shares, or whether to buy or sell. Time and/or price alone are not discretionary decisions.

Which of the following statements regarding the handling of discretionary accounts are TRUE? I. Discretionary accounts must be reviewed frequently by the designated supervisory person. II. An investment adviser representative may decide, without discretionary authority, the security to buy or sell and the amount to buy or sell. III. A husband or wife may at any time exercise discretionary authority in the spouse's account without specific written authorization. IV. An investment adviser representative may decide, without discretionary authority, the time at which to execute a trade.

I & IV.

Which of the following statements are NOT true? I. The kiddie tax applies to any income received by a child under the age of 19. II. IRAs have advantages over other estate assets when left to charity. III. Simple trusts have to distribute income annually. IV. For U.S. citizens, there is an unlimited marital estate tax deduction.

I. & II. The kiddie tax applies to unearned income only such as that received in an UTMA account. Leaving IRA assets to a charity offers the same estate tax benefits as any other asset.

Terry Bolton opens a UTMA for each of his sons, Josh, age 12, and Drake, age 14. Under current tax regulations, after deductions and exemptions, how will the income in the UTMAs be taxed? I. Josh's income is taxed at his tax rate. II. Drake's income is taxed at his tax rate. III. Josh's income in excess of $2,000 is taxed at Terry's marginal tax rate. IV. Drake's income in excess of $2,000 is taxed at Terry's marginal tax rate.

III & IV. As the income on the UTMAs is not earned income, the kiddie tax rules apply. Currently (2014), children younger than 19 have such income in excess of $2,000 taxed at the parent's marginal tax rate.

Which of the following accounts are prohibited from using margin? I. Joint account for a husband and wife. II. Discretionary account. III. Corporation account. IV. Custodian account under the Uniform Gifts to Minors Act.

IV. This act prohibits securities in a custodial account from being bought on margin.