Customer Accounts Quiz
The minimum maintenance margin requirement for a short stock position valued at $9 per share is? A $2.70 per share B $4.50 per share C $5.00 per share D $9.00 per share
The best answer is C. For short stock positions that are valued at $5 per share or more, the minimum maintenance margin is the greater of $5 or 30% of market value. For a $9 stock, the minimum maintenance margin is 30% of $9 = $2.70 or $5.00, whichever is greater. The greater amount is $5 per share.
At what age does a natural person possess the complete legal capacity to be held liable for the duties he or she contractually agrees to undertake? A 18 B 21 C 59 1/2 D 65
The best answer is A. A "natural person" is a human being (as compared to other "legal persons" such as corporations and partnerships). In the vast majority of states, the legal age to enter into a binding contract is 18 (Nebraska is an outlier with an age of 19!).
Regarding arbitration agreements between member firms and customers, which statement is FALSE? A FINRA requires each customer to sign an arbitration agreement as part of the account opening process B Each member firm can require each customer to sign an arbitration agreement as part of the account opening process C Industry arbitration is preferred over litigation as a means of settling disputes because it is cheaper and faster D Each member firm must provide the customer with a separate copy of the arbitration agreement for signature and return within 30 days of account opening
The best answer is A. FINRA does not require arbitration agreements between customers and member firms. However, each member firm can require this (and usually does). FINRA does require that if a customer signs an arbitration agreement as part of the account opening process, then the customer must be sent a separate "stand alone" copy of the agreement and must sign an acknowledgement of receipt within 30 days of account opening. Industry arbitration is preferred over litigation as a means of settling disputes because it is cheaper and faster.
Which statement is TRUE about entering trades into a custodial account? A Only the custodian can enter trades B Only the minor can enter trades C Only the donor can enter trades D Only the parents can enter trades
The best answer is A. In a custodial account, only the custodian is permitted to trade. Anyone can donate into such an account.
SEC Regulation SP covers: A notification to customers of a member firm's privacy policies and practices B selective disclosure of material non-public information by issuers C standardization of disclosure of financial and non-financial information by issuers D registration filings with the SEC by small business issuers
The best answer is A. Regulation SP ("Statement of Privacy"), passed in 2000, requires financial institutions to provide customers with a copy of their privacy policies and procedures, including whether customer information is provided to third parties; and requires that customers be given the ability to "opt out" of any such disclosures.
A customer wishes to give a gift of securities to her nephew under the Uniform Gifts To Minors Act. The registration on a custodial account is: A one custodian for one minor B up to two custodians for one minor C one custodian for up to two minors D any number of custodians for any number of minors
The best answer is A. The registration on a custodial account is one custodian for one minor. There can not be more than one of each on an account.
A corporation is making a combined primary offering of newly issued shares and secondary offering of shares held by officers, where both issues are offered through a single prospectus. Which statement is TRUE about margin rules on this offering? A Neither the primary nor secondary offering can be purchased on margin B Only the primary offering can be purchased on margin C Only the secondary offering can be purchased on margin D Both primary and secondary offerings can be purchased on margin
The best answer is A. Under FRB rules "new" issues are not eligible for margin until 30 days after the offering. The definition of a "new" issue for the purposes of this rule is a prospectus offering. Both the primary and secondary shares are being offered through the prospectus; so no margin is permitted.
OFAC: A receives Suspicious Activity Reports filed by financial institutions B creates the Specially Designated Nationals list that must be checked when opening an account for a non-U.S. citizen C monitors foreign currency inflows into the U.S. markets D enforces the provisions of the Bank Secrecy Act
The best answer is B. The Department of Treasury's Office of Foreign Assets Control (OFAC) maintains a list of named countries, organizations, and individuals with whom anyone in the U.S. is prohibited from doing business. The "SDN" (Specially Designated Nationals) list includes such countries as Iran and North Korea and such organizations as the Al-Qaeda, as well as specified individuals associated with these countries and organizations. The intent is to place economic pressure on these groups by stopping U.S. investment in them. The SDN list must be checked before opening an account for a foreigner or foreign entity.
An individual customer says the following to his broker: "Buy 100,000 shares of ABC stock whenever you think the time is best. This order is good unless I call you to cancel." Which statement is TRUE about the handling of this order? A An executed power of attorney must be obtained from the customer prior to accepting the order B The order must be executed by the close of the market on that trading day C The order can be accepted as given, and can be executed at the discretion of the brokerage firm at any time or day D This order can only be accepted if the customer places it via fax or e-mail
The best answer is B. Discretion over price and time of execution can be given verbally. However, the order must be filled by the close of the market on that day or it is canceled. If price and time discretion are given for a time period that is longer than 1 day, then a written power of attorney from the customer is required to accept the order.
When opening an account under the Uniform Gifts to Minors Act, the social security number to be used is that of the: A custodian B minor C guardian D trustee
The best answer is B. Since custodial account property is considered to be "owned" by the minor, the social security number of the minor (not the custodian) is used on the account.
To open an options account, inquiry must be made into the customer's financial situation and needs in order to do all of the following EXCEPT to: A determine the restrictions, if any, to be placed in the Options Agreement B determine whether the customer should receive an Options Disclosure Document C determine if it is appropriate to open the account D make suitable customer recommendations
The best answer is B. The Options Disclosure Document and Options Agreement are mandatory parts of the option account opening procedure. Inquiry into the customer's financial situation is not made to determine whether the customer gets these. It is made to determine whether the account should be opened and what to recommend.
What are initial and minimum maintenance margins for stock positions in a short margin account? A 50 / 50 B 50 / 25 C 50 / 30 D 25 / 30
The best answer is C. Initial margin for a short stock position is set by the Federal Reserve (FRB is the Federal Reserve Board) under Regulation T at 50%. Maintenance margin for short stock positions is set by FINRA at 30%
To open an options account, the customer must be sent the Options Disclosure Document: A 15 days prior to opening the account B 5 days prior to opening the account C at or prior to opening the account D 15 days after opening the account
The best answer is C. The customer must be sent the Options Disclosure Document (ODD) at or prior to opening an options account. This is a pamphlet entitled "Characteristics and Risks of Standardized Options" and is basically an options primer. The date that the customer was sent the Disclosure Document is noted on the options new account form. A copy of the options new account form is part of the Options Agreement that is sent to the customer, to be signed and returned within 15 days of account opening. The Options Agreement is a recap of the customer new account profile including the suitability determination and it qualifies the customer for a level of options trading, detailing which options transactions are permitted.
Which statement is TRUE regarding trading authorization in a brokerage account? A A first party can give trading authorization to a third party B A first party can give trading authorization to a second party C A second party can give trading authorization to a third party D A third party can give trading authorization to a second party
The best answer is C. The parties to an account are: First Party: Brokerage FirmSecond Party:CustomerThird Party:Someone Other Than the Broker or Customer Since only Second Parties can open accounts, only a Second Party can give trading authorization to either a First Party (a discretionary account) or to a Third Party (a Third Party trading authorization).
All of the following paperwork is customarily needed to open a margin account EXCEPT: A Margin agreement B Loan consent agreement C Joint account agreement D Credit agreement
The best answer is C. To open a margin account, the customer must sign a margin agreement (this can also be termed the customer's agreement or hypothecation agreement - where the customer pledges the securities to the broker in return for the margin loan); the customer is asked to sign a loan consent agreement, allowing the broker to lend out the customer's securities for short selling by other customers of the firm; and the customer must sign a credit disclosure agreement, which explains how the loan balance is computed and how interest will be charged on the loan. Joint account agreements are only signed if there will be more than 1 person owning the account.
Which joint account CANNOT be opened? A Adult brother and sister B Husband and wife C Parent and minor D Business partner and business partner
The best answer is C. A minor cannot open an account, nor does the minor have legal capacity to participate in any joint account. The acceptable method of opening such an account is an adult custodian opening an account for the benefit of the minor. Any adult can be one of the participants in a joint account.
If an execution report shows that an erroneous execution has occurred, the responsibility for the trade rests with the: A customer B registered representative C brokerage firm executing the transaction D stock exchange on which the trade occurred
The best answer is C. If an erroneous execution occurs, it is the responsibility of the firm to correct the error
Which transaction can only be performed in a margin account? A Long sale of stock B Purchase of stock C Sale of a naked call D Sale of a cash covered put
The best answer is C. Short sales of stock and sales of naked options can only be performed in a margin account. The purchase of stock or the sale of covered options can be performed in either a cash or margin account.
An individual comes into your firm to open a cash account. When completing the new account form, the customer responds to the question "What is your age?" by stating "I am 15 years old." Which statement is TRUE? A The account can be opened in the name of this customer without restriction B The account can be opened in the name of the customer with the permission of the parents C The account can be opened by an adult as custodian for this person D The account can be opened with the brokerage firm as custodian for this person
The best answer is C. Since this customer is not of legal age, he or she does not have the legal capacity to open the account. A custodian must be present to open the account for the minor. Custodians can only be human beings; brokerage firms cannot be custodians.
What is the best way to ensure that a broker-dealer has an effective AML program? A By providing AML training to the representatives in each office B By making sure that SAR and CTR reports are filed in a timely fashion C By following Know Your Customer procedures that are risk-based D By arranging for another member firm to review that firm's AML procedures
The best answer is C. The FINRA rule on creating a firm's AML (Anti-Money Laundering) policy is quite generic, however their interpretations state that the AML Policy should include "KYC" (Know Your Customer) procedures that permit the firm to make a reasonable risk-based determination as to its customers, its customers' sources of income, and expected activity. Also part of the AML procedures are the requirement for an annual outside independent audit; and for annual AML training. However, the key part of the interpretation is "KYC" - and this is the best answer.
A customer is short 1,000 shares of ABC stock at $50 in a margin account. The minimum maintenance margin requirement is: A $10,000 B $12,500 C $15,000 D $25,000
The best answer is C. The minimum maintenance margin requirement for short stock positions is 30% of the current market value = 30% of $50,000 = $15,000.
A customer places an order to buy 100 shares of ABC at the market. The broker enters the order and receives a report of execution shortly thereafter. Ten minutes later, the customer telephones, and states that he placed the order in error and wishes to cancel the order. The appropriate procedure is to: A follow the customer's instructions and cancel the order B sell out the position and charge any loss to the customer C explain to the customer that the order has already been executed and is binding D assign the order to another customer who has a discretionary account
The best answer is C. The registered representative executed the customer's instructions properly. The customer placed a market order which was executed promptly. The customer cannot call and cancel the order 10 minutes later (unless, for some reason, the order was never executed). The registered representative should explain to the customer that the order was filled and is binding. It is now up to the customer to decide what to do - keep the position or sell it.
A potential customer has visited the registered representative's branch office and is ready to open an account. The representative asks to see the customer's driver's license and the customer says "I will show it to you, but you cannot photocopy it - I am worried about identity theft." Which statement is TRUE? A The account cannot be opened unless a photocopy of the driver's license is maintained in the customer's account file B The account cannot be opened unless the branch manager signs a statement that he or she examined the customer's driver's license information and matched it to the new account form record C The account cannot be opened unless the firm independently verifies the customer's identity using the driver's license information or another non-documentary method D The account can be opened with no additional documentary procedures required
The best answer is C. There is no requirement to get a photocopy of a government issued I.D. to independently verify the customer's identity. The requirement is that the customer information be matched to either a government issued I.D. or to a database service. Some states actually prohibit the photocopying of driver's licenses and other such I.D.'s to stop identity theft. As long as the representative matches the customer information provided to the government issued I.D., the independent verification requirement is met.
To open a partnership account, the social security number(s) or tax identification number to be used is (are) the number(s) of: A all the partners to the account B the 3 largest partners to the account C the partnership D the broker opening the account
The best answer is C. To open an account for any legal business entity such as a corporation, partnership or trust, the tax identification number of the entity must be used. Note that when these business entities are formed, they must apply to the IRS at that time for a tax identification number. Social security numbers are only used for accounts opened in the names of humans!
Under FINRA rules, to ascertain which investments are suitable for the customer, the registered representative would NOT generally inquire about the customer's: A Existing investment holdings B Current investment objective C Financial situation and needs D Daily living expenses
The best answer is D. "Suitability" means that securities which are recommended to a customer are appropriate for that customer. To ascertain which investments are suitable for the customer, FINRA states that the basis for making the recommendation are the facts disclosed by the customer about his or her other security holdings and financial situation and needs. Inquiry should be made as the customer's investment objective, tax status, and financial status. Inquiring about the customer's daily living expenses might be a little too intrusive to ask.
All of the following are types of joint accounts EXCEPT: A Tenancy in Common account B Joint Tenants with Rights of Survivorship account C Tenants by Entireties account D Omnibus account
The best answer is D. The joint account ownership options are: Tenants in Common - each person has a divided interest with a specified ownership percentage for each party; Joint Tenancy With Rights of Survivorship (JTWROS) - each person has an undivided interest with each owning 100% of the account; or Tenants by Entireties - only allowed in some states, it is similar to JTWROS, however if a single tenant is sued, the assets of the joint account cannot be claimed. An Omnibus account is an account of pooled customer monies, where there is no specific identification to the broker carrying the account of who the specific customers are. These accounts are most often used by Investment Advisers who manage money for clients.
To open an options account, inquiry is NOT required regarding: A Investment objective B Investment experience C Financial situation D The name of other firms where the customer has accounts
The best answer is D. To open an options account, a customer must give detailed financial disclosure. The customer must be asked specifically about his or her: investment objective, investment experience, financial situation, financial needs, marital status, net worth, liquid net worth, and estimated annual income. The customer is not required to disclose the names of other financial providers that he or she uses.
All of the following are types of fiduciary accounts EXCEPT: A Trust Account B Custodial Account C Executor of Estate Account D Partnership Account
The best answer is D. Trust accounts, Custodial accounts, Executor of Estate accounts are all types of fiduciary accounts, where a third party is designated to manage the account in the best interests of the account owner. Partnership accounts are directly managed by those partners authorized to trade in the account.
All of the following persons can approve the opening of an account under MSRB rules EXCEPT the: A Branch Office Manager B Municipal Securities Principal C General Principal D Financial and Operations Principal
The best answer is D. Under MSRB rules, new accounts are approved by either a resident Branch Office Manager (Series 9/10 license); a General Securities Principal (Series 24 license) or by an individual with the MSRB's full Municipal Principal (Series 53) license. The Financial and Operations Principal (Series 27 license) is the firm's accountant, and cannot approve the opening of customer accounts.
A registered representative is soliciting a customer to purchase a security that has just been placed on his firm's "recommended" list, and which the representative feels is suitable for that customer. After discussing the recommendation, the customer is still resisting making a purchase. Which action by the registered representative is appropriate? A The registered representative should have the branch manager contact the customer to discuss the recommendation B The registered representative should continue to attempt to overcome the customer's objections C The registered representative should discuss the recommendation with anyone else who has signing authority on the account D The registered representative should accede to the customer's wishes
The best answer is D. Since the registered representative has discussed the recommendation fully with the customer; and the customer is not interested; the registered representative should not "bully" the customer into making a purchase. This is common sense. Over-aggressive sales practices ultimately result in discontented customers who tend to file arbitration claims!
