Module 11: Customer Accounts Quiz 1

A brokerage firm carrying an account being managed by an investment adviser is required to do all of the following, except: A. Receive a written statement of the investment adviser's authority to manage the account B. Receive a written statement from the client regarding where confirmations of transactions should be sent C. Obtain the name, address, and other essential information about the client D. Have a list of all the names and addresses of the investment adviser's other clients

Correct answer (false statement): Have a list of all the names and addresses of the investment adviser's other clients. An investment adviser does not need to disclose all its clients to a broker/dealer firm unless they are part of the account being carried by the brokerage firm. However, a brokerage firm carrying an account that is being managed by an investment adviser is required to receive a written statement of the investment adviser's authority to manage the account as well as a written statement from the client regarding where confirmations of transactions should be sent. The brokerage firm must also obtain each client's name, address, and other essential information

Under the Uniform Gifts to Minors Act, all of the following are permissible, except: A. Gifts of cash to a minor B. Gifts of securities to a minor C. The purchase of securities on margin and the securities held in street name D. The donor and the custodian being the same person

Correct answer (false statement): The purchase of securities on margin and held in street name. The purchasing of securities on margin and holding securities in street name are not allowed in an UGMA account. Gifts of cash and securities to a minor, and having the same person as donor and custodian are all permissible acts in an UGMA account

A customer wishes to open a custodian account for his nephew to gift him cash and securities. Under the Uniform Gifts to Minors Act:

It is permissible because the uncle may be both the donor and the custodian. If a customer wishes to open a custodian account for his nephew and gift him cash and securities, it is permissible under the Uniform Gifts to Minors Act. The uncle may be both the donor and the custodian. However, in cases like this where a donor is also the custodian, the donor can never be compensated for being the custodian.

Which of the following cannot delegate power of attorney to a third party for the purpose of making securities transactions?

A custodian for a minor. A custodian cannot delegate power of attorney to a third party. If it were permissible, the custodian would be allowing a registered rep to have trading authorization over a minor's account. This is not allowed under UGMA rules. On the other hand, a husband, corporation, or wife could delegate power of attorney to a third party to make securities transactions.

Joint accounts are set up so that more than one person can benefit from transactions in an account. All of the following can have a joint account, except: A. Two business partners B. Two corporations C. A minor and a parent D. Two unrelated people

A minor and a parent. A minor and a parent CANNOT have a joint account. The parent must be a custodian for the minor and therefore the parent cannot join the minor in the account. A custodial account and a trust account cannot be joint accounts. Any two adults, such as business partners, siblings, spouses, parents and adult children, and even unrelated people, may have a joint account. Even corporations can have a joint account, although it would be unlikely. Remember, corporations are a legal entity, and as such, can have a joint account in much the same way as two unrelated people can.

A brokerage firm may open an account for all of the following, except:

A minor. Accounts can be opened for any adult, company, entity, or even a third party as long as the appropriate authorization has been provided. However, a minor cannot open an account. This is because a minor cannot legally enter into contracts, and in opening a brokerage account, a person is entering into an agreement with the broker/dealer firm.

A customer has had a cash account for a number of years. With the bull market, the investor decides to leverage the account and buy on margin. Which of the following are required to be signed by the customer?

Customer agreement. The customer agreement includes the hypothecation agreement, the loan consent agreement, and the requirements for opening a margin account. The customer must sign each before he or she can trade on margin. The customer no longer has to sign the new account form, just the customer agreement. A letter granting the registered rep discretionary authority is not needed in a margin account.

If a customer gives a registered representative $50,000 with instructions to buy whatever stock the rep "thinks is best," the registered rep must:

First obtain written authorization from the customer. Since the registered representative is being allowed to decide what stock to purchase, it is considered a discretionary order. Discretionary orders require written permission prior to being entered by the registered representative. This power of attorney or trading authorization is obtained long before these types of orders are received. Once the written trading authorization has been obtained, the order must be initialed by a branch office manager and must be marked as a "discretionary order."

Sarah and Mary are business partners who have a tenants in common account, each with 50% participation. Sarah also has a joint tenant with rights of survivorship account with her husband. Sarah dies. Her widower may do which of the following? I. Sell shares from his joint tenants with rights of survivorship account with his wife II. Issue instructions to transfer all the shares from his joint tenants with rights of survivorship account with his wife into his name alone III. Instruct the brokerage firm to transfer all shares in which his wife had an interest to her personal account IV. Instruct the brokerage firm to transfer all shares in which his wife had an interest to his personal account

I and II. The husband may sell shares from his joint tenants with rights of survivorship account with his wife or transfer them into his name alone. However, he cannot do anything with the shares in his wife's tenants in common account with her business partner. The assets in his wife's tenants in common account with her business partner would be passed on to his wife's estate.

Which two of the following are considered a fiduciary? I. A trustee II. A joint owner III. A minor IV. An executor of an estate

I and IV. A fiduciary is a person or organization that acts in a position of trust for someone else or for their account. A trustee, guardian, administrator, and executor of an estate are all considered fiduciaries. A joint owner is not a fiduciary. A minor's account would have a fiduciary, but the minor is NOT a fiduciary

A customer of yours with a margin account calls and tells you that he wants to open an options account. He tells you to purchase 50 ABC 60 puts to protect his ABC stock position, and 15 EGG 30 puts to protect his EGG stock position. Which two of the following do you have to do before executing the trades? I. Send the OCC disclosure document II. Have the customer sign the new options account form III. Have the customer sign the options agreement IV. Have the BOM sign the new options account form

I and IV. Before you do anything, you must send the OCC disclosure document. Then get the information from the client and have the branch office manager (BOM) or other registered options principal (ROP) sign the new account form. The customer does not need to sign the new account form, since he will be signing the options agreement, which has to be signed and returned within 15 days of opening the account. The options agreement does not need to be signed by the customer, according to the rulebook, for 15 days after opening the account. This seems strange, but it is the rule. Most B/D firms make the customer (especially a new customer) sign the options agreement prior to executing options. But the rule gives the firm time to get the options agreement sent to the customer and returned in calendar 15 days.

Which of the following applies when a registered representative is handling a discretionary account? I. The registered rep must have verbal power of attorney authorizing him to act for the customer. II. Each order initiated by the registered rep must be marked "discretionary." III. Orders should not be excessive in size, and transactions should not be excessively frequent. IV. Each order initiated by the customer must be marked as "discretionary."

II and III. When a registered representative is handling a discretionary account, each order initiated by the registered rep must be marked "discretionary." Orders should not be excessive in size, and transactions should not be excessively frequent. However, when handling a discretionary account, the registered representative must have a written -- not verbal -- power of attorney authorizing him to act for the customer. Each order initiated by the customer must be marked as "UNSOLICITED," not as discretionary.

In a custodial account, the tax liability on interest and dividends received is paid by the:

Minor. In a custodial account, the minor pays the tax liability on interest and dividends received. All dividends and capital gains on the securities will be taxed as income received by the minor in the minor's tax bracket. The income is taxed in the year the dividends and gains are received by the minor. However, if the account earns more than $1,400 of income in a given year, and if the minor is under 14 years of age and a parent is the custodian, the account will be taxed at the parent's tax bracket. On your exam, do not assume that this is the case and remember that the minor is responsible for any tax liability.

An uncle is the custodian for a nephew's account. When the nephew reaches the age of majority, the uncle:

Must transfer all the securities into the account of the nephew. When the nephew reaches the age of majority, the uncle must transfer all the securities into the account of the nephew. There are no exceptions. At the minor's request, the custodian may still manage the account, but the securities still belong to and are in the name of the minor.

A numbered account is allowed under which of the following circumstances?

Numbered accounts are allowed when the owner of the account comes into the office in person and presents proper identification. The customer must have government-issued ID and come into the office in person, but they don't have to sign the numbered account form nor do they have to give discretionary authority.

A customer would like to open an account designated only by number (a numbered account). The registered representative should:

Open the account if the customer comes into the office with the proper identification. An account designated by number is allowable only if the customer can prove who they are and make an appearance in the office.

Which of the following securities must be fully paid for when purchased?

Open-end investment company shares. Only open-end investment company shares (mutual fund shares) must be fully paid for when purchased. They cannot be bought on margin because they are new issues, and all new issues must be paid in full. U.S. Treasury bonds and notes may be bought on margin. Some closed-end investment company shares may also be bought on margin because they are listed on an exchange.

A customer purchases stock in a cash account and requests that the stock be held in street name. The registered representative should inform the customer that:

The customer can have the stock registered in his name anytime in the future. A registered rep should inform the customer that he can have the stocks put in his name anytime he wishes. None of the other choices are true in a cash account. However, if this were a margin account and the stock wasn't fully paid for, all the other choices would be true.

A husband and wife have an account that is registered as joint tenants in common. They each also have individual accounts. The husband purchases 500 shares of BEG stock at 60 through his registered rep at Leap and Tuck Securities, Inc. for the joint account. Later, the husband again calls his registered rep and asks her to buy 300 more shares of BEG for his wife's account. Which of the following statements is true of the second transaction?

The registered rep cannot do the trade unless the husband has trading authority, which would allow the husband to enter trades for his wife's account. Unless the husband has trading authorization (limited power of attorney), the transaction may be an unauthorized trade. The trade in the joint account is allowed since both parties are on the account and either party can make the trade. Neither the husband nor the wife can authorize transactions for the other's account unless they have the written authorization to do so. The registered representative could call the wife for verification of the trade, but the registered rep cannot submit the order without the wife's trade authorization or prior written authority for the husband to trade in her account.

Two brothers have a tenants in common account with your firm. One of the brothers places a trade for $5,000 worth of stock. He asks you to send him the check in his name only. What do you tell him?

You will be glad to send the check on the settlement date, but it will be in both names. This is a tenants in common account and both names must be on the check when the check is issued. Either party can make the trade, but the check is always made payable to both parties.