Q Bank Unit 5
Broker/dealers are required to maintain customer identification programs (CIPs) and to check the names of new clients against A) a list of specially designated nationals (SDNs) maintained by the Office of Foreign Assets Control B) a list maintained by the Securities Exchange Commission (SEC) C) a list compiled by FINRA D) the FBI's most wanted list
Answer: A All financial institutions are required by federal law to maintain a customer identification program and to check the identifying information supplied by new clients against the specially designated nationals (SDNs) list maintained by the Office of Foreign Assets Control (OFAC).
Which of the following individuals may NOT open a joint account? A) Parent and a minor. B) Two spouses. C) Three sisters. D) Two business partners.
Answer: A A minor may not be a party in a joint account because a minor cannot legally exercise control over the account. A custodial account may be set up for the minor.
When a customer gives limited power of attorney to his registered representative, which of the following statements is TRUE? A) The power of attorney must have the customer's signature. B) The registered representative needs written permission from the customer for each trade. C) The customer must renew the power of attorney each year. D) A principal must initial each order before it is entered.
Answer: A The registered representative must have prior written authority from the customer and approval from a principal before exercising discretionary authority. Although a designated principal must review the account frequently and review and approve all trades on a daily basis, prior approval of discretionary orders is not required.
An agent is permitted to open all of the following customer accounts EXCEPT: A) a partnership account opened by the designated partner. B) an account in the name of Mrs. Jones opened by Mr. Jones. C) a minor's account opened by a custodian. D) a corporate account opened by the designated officer.
Answer: B An agent is not permitted to open an individual account in the name of a third person.
A customer wishes to open a new account but refuses to provide suitability information. Under FINRA rules, the member A) may open the account but must limit recommendations to investment-grade securities. B) may open the account but must limit recommendations to U.S. government securities. C) may open the account but may not make any recommendations. D) must not open the account.
Answer: C If a customer fails to provide suitability information, the account may be opened but the member may not make any recommendations.
Each of the following must be verified or determined about a new customer EXCEPT: A) whether he is employed by another broker/dealer. B) citizenship. C) whether he has a brokerage account at another broker/dealer. D) whether he appears on a list of known or suspected terrorists.
Answer: C Though individual firms may require it, there is no industry requirement to verify or determine that a customer has an account at another broker/dealer.
A customer wishes to open a cash account and give trading authorization to a sibling. The required documentation would include which of the following? New account form. Joint account agreement. Customer agreement. Limited power of attorney. A) I and III. B) II and III. C) II and IV. D) I and IV.
Answer: D If one party wants to give discretionary privileges to a third party in a cash account, a member firm requires a new account form and a limited power of attorney. A limited power of attorney gives the third party trading authority, but prohibits that party from withdrawing assets from the account.
Whose Social Security number is required to open a custodial account? A) Parent's or guardian's. B) Custodian's. C) Custodian, parent or guardian and minor. D) Minor's.
Answer: D The minor's Social Security number is required because the account is fully owned by, and taxed to, the minor-not to either the custodian or the parent.
If two brothers open a joint account tenants in common, at year's end, the member firm carrying the account will send Form 1099 to: A) the brother whose Social Security number is on the account. B) either of the brothers. C) both of the brothers. D) the brother with the largest percentage interest in the account.
Answer: A All accounts, joint or otherwise, have a primary Social Security number. The holder of this number receives the year-end statement (Form 1099).
Which of the following statements regarding UGMA accounts are NOT true? Only one custodian may be appointed for an UGMA account in the name of a minor. A gift under UGMA can be revoked. A custodian is liable for imprudence. Short sales are permitted in an UGMA account. A) II and IV. B) I and II. C) I and IV. D) II and III.
Answer: A An UGMA account is allowed only one custodian and one minor. Short selling is prohibited in UGMA accounts. Once a gift is given, it is irrevocable. The custodian has fiduciary responsibility toward the minor to invest conservatively, and the custodian is liable for imprudence in handling the entrusted funds.
Which of the following best describes the responsibility of the custodian regarding cash dividends received in an UGMA account? A) Cash dividends can remain in the account in anticipation of reinvestment. B) Cash dividends must be reinvested immediately. C) Cash dividends must be withdrawn and used for the minor's education. D) Cash dividends can be used to benefit the custodian.
Answer: A Cash in the account can remain idle for only a short period of time. Leaving it totally idle for prolonged periods is not deemed prudent, because of the loss of interest earning power.
Under the Uniform Transfer to Minors Act, a custodian may invest in all of the following EXCEPT: A) commodity futures. B) mutual funds. C) blue-chip stocks. D) corporate bonds.
Answer: A Commodity futures may not be purchased in a custodial account. Only cash and securities may be deposited.
A customer, without giving written authorization, may permit a registered representative to exercise his judgment as to: the security. the price at which to enter the order. the amount of shares. when to enter the order. A) II and IV. B) I and II. C) I and III. D) III and IV.
Answer: A Registered representatives may choose the price or timing of an order without having discretionary authority.
Which of the following are considered joint accounts? UTMA account. Guardianship account. Tenants in common. Tenants with right of survivorship. A) III and IV. B) I and II. C) I and III. D) II and III.
Answer: A Tenants in common and tenancy with rights of survivorship represent ownership by more than one party. UTMA and guardian accounts are in the name of a single fiduciary. To be a joint account, all parties associated with the account must be able to enter orders. In UTMA and guardian accounts, only the custodian and guardian, respectively, possess that authority.
If a customer wishes to open a custodial UGMA or UTMA account for his nephew (a minor), the uncle: A) can open the account and name himself custodian. B) can open the account provided the proper trust arrangements are filed first. C) needs a legal document evidencing the nephew's parents' approval of the account. D) can be custodian for the account only if he is also the minor's legal guardian.
Answer: A The donor may name himself the custodian of an UGMA or UTMA account. No documentation of custodial status is required to open an UGMA or UTMA account. The custodian is not required to be the minor's legal guardian.
Which of the following is the beneficial owner of securities in an UTMA account? A) The minor. B) The custodian. C) The guardian. D) The donor.
Answer: A The minor is always the beneficial owner under an UTMA account. The custodian merely exercises his best judgment in handling investment decisions on the minor's behalf.
For a trust account not seeking appreciation, which of the following would be recommended? A) Highly-rated, fixed-income securities. B) Common stock in small, highly profitable companies. C) Large-cap common and preferred stocks. D) Common stock, preferred stock, and debentures.
Answer: A The only choice that is prudent and does not have a goal of appreciation is the purchase of highly rated, fixed-income securities.
Which of the following activities are disallowed under FINRA rules? Opening an account for a 16-year-old individual. Accepting a sale in a joint account from one of the owners and having the check payable in the name of that individual. Accepting a sale order from the husband only in a joint account owned by both husband and wife. Requiring written discretionary authorization before accepting orders for a discretionary account. A) I and II. B) I and IV. C) II and III. D) III and IV.
Answer: A The question is asking for the nonallowable practices. We cannot open an account for a minor, nor may we make a check payable to only one of the parties in a joint account.
Two siblings have an account with your broker/dealer registered as joint tenants with rights of survivorship. Both live in a state that recognizes community property as an ownership designation. If one of the siblings dies, which of the following will occur? A) The deceased sibling's interest in the account will pass to the surviving sibling in accordance with the joint tenants with rights of survivorship account registration. B) The deceased sibling's interest in the account will be divided in accordance with the community property laws of that state. C) The deceased sibling's interest in the account will become the property of her estate. D) The entire account will be liquidated and divided in accordance with the community property laws of that state.
Answer: A This account, registered as joint tenants with rights of survivorship, will be handled in accordance with that account registration at the time of the death of either sibling. The deceased sibling's interest in the account will pass to the surviving sibling. Community property laws in jurisdictions that presume that type of ownership designation only applies to marital property (property acquired by the two individuals while married). Therefore, community property laws would not be applicable to siblings.
All of the following statements regarding a transfer on death (TOD) account are correct EXCEPT: A) only those assets held at the broker/dealer are transferred. B) estate taxes are reduced. C) the owner of the account may change beneficiaries at will. D) probate is avoided.
Answer: B A TOD account avoids probate, but not estate taxes. The owner of the account may change beneficiaries and their percentages as he wishes. The TOD account is an account at a specific broker/dealer and only relates to the assets in that account.
If a customer wants to open an account in the name of her adult son and wants the account to be approved for uncovered option writing, her request should be refused because: A) it is a trade through and nothing is currently known about the son's investment experience. B) the opening of accounts for third parties is prohibited. C) discretionary authorization may not be granted with respect to writing uncovered options. D) uncovered options can only be written in margin accounts.
Answer: B An adult cannot open an account and name another adult as the beneficial owner. The type of option trades and the third party's investment experience are not relevant.
Which of the following is NOT true in jurisdictions that recognize the marital property designation known as community property? A) Community property laws do not apply to inheritances. B) Community property applies to property owned individually before a marriage once the marriage has occurred. C) There may be tax implications regarding the dissolution of community property at the time of a divorce, marriage annulment, or death. D) Community property laws do not apply to gifts.
Answer: B Community property applies to property obtained during a marriage but does not apply to property owned individually by one spouse before the marriage. In addition, it does not apply to inheritances or gifts. There can be federal tax implications for property designated as community property and laws in states that recognize community property ownership differs from jurisdiction to jurisdiction
Which of the following statements regarding a death in a tenants in common account are TRUE? The decedent's interest in the account goes to his estate. The decedent's interest in the account goes to the remaining tenant. The member firm must freeze both the account and acceptance of orders until the required documents are presented. The member may immediately accept orders from the remaining tenant. A) II and IV. B) I and III. C) I and IV. D) II and III.
Answer: B If one party in a TIC account dies, the decedent's interest in the account goes to his estate, not to any other party to the account. The member firm must freeze the account and acceptance of all orders until the required documents are presented.
You have decided to open an UTMA account for your daughter and have named yourself as custodian. The child's grandparents have put the money in the account for the benefit of their granddaughter. As custodian, you are allowed to do which of the following? A) Return the money to the grandparents to fund their retirement needs. B) Charge the account a custodial fee and withdraw monies payable in your name for that exact amount. C) Charge the account for your own tuition payments to fund a college education so that you can better provide for your daughter. D) Use the funds to help pay for your son's daycare so that you can better take care of your daughter.
Answer: B If you are not the donor of the monies in an UTMA account, but are the custodian, you can be paid a reasonable custodial fee.
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) The account would be frozen until the estate was settled. B) The spouse would own all the shares. C) One-half of the shares would belong to the spouse, and the remaining half would be distributed to the customer's estate. D) Ownership of the shares must be determined by probate court.
Answer: B In a JTWROS account, securities pass to the surviving owner. The account does not have to be frozen but can continue to enter orders.
In a discretionary account where the investment objective is preservation of capital and growth, all of the following practices are unsuitable EXCEPT: A) marking the investment objective on the new account form as high risk. B) maintaining a fixed asset allocation mix which includes under-performing sectors. C) marking order tickets solicited or unsolicited when discretion is used. D) frequent and profitable short-term trading in volatile stocks.
Answer: B Maintaining a fixed asset allocation mix is suitable in a discretionary account because it assumes that over time, some sectors will outperform while others underperform.
A joint account could be opened for any of the following EXCEPT: A) a corporation. B) a parent and minor child. C) 3 business associates. D) 2 partners in a limited partnership.
Answer: B Minor children cannot be a party to any account except an UGMA or UTMA.
Which of the following can be a custodian under UGMA? Any legally competent adult. An investment advisory firm. A broker/dealer in street name. The beneficial owner. A) I, II, III and IV. B) I only. C) I and II. D) I, II and IV.
Answer: B Only an individual adult can be the custodian in a minor's account. Neither a broker/dealer nor an investment advisory firm can be the custodian for an account under UGMA. The beneficial owner is the minor and cannot be the custodian.
Securities in an UGMA account are sold at a profit. Who is liable for the current year taxes on the sale? A) No one; they are deferred to the age of majority. B) The minor. C) The donor. D) The guardian.
Answer: B The UGMA account is for the benefit of the minor, which is registered with the minor's Social Security number. All taxes on the account are the responsibility of the minor
John is the custodian of his niece's UGMA account. John places an order for 100 shares of a very speculative stock for the account. What should the representative do? A) Refuse to enter the order, because it is unsuitable for a UGMA account. B) Advise the custodian as to the suitability of the stock. C) Enter the order as requested, without comment. D) Consult with his principal before entering the order.
Answer: B The custodian should not place unsuitable orders in a UGMA account. The representative should inform the custodian of this.
An agent taking which of the following actions would be committing a violation? A) Selling securities from a corporate account by using limited power of attorney trading authority for the account. B) Selling securities from a minor's custodial account without the custodian's consent but with the beneficial owner's consent. C) Buying securities in a cash account with the consent of the customer. D) Buying securities in a joint account at the request of 1 party only.
Answer: B The custodian, not the beneficial owner (minor), is the person who has the authority to make investment decisions for an account. Any tenant in a joint account may give instructions for the account.
If a registered representative receives a call from a custodian wishing to buy shares of a new issue security, the registered representative should: A) talk the investor into buying another stock. B) discuss and review suitability. C) refuse to accept an order. D) accept the order only if it is placed in a margin account.
Answer: B There are no restrictions that specifically apply to the purchase of new issues in a custodial account, provided the registered representative has discussed and reviewed the suitability of the investment.
Under the Uniform Gift to Minors Act (UGMA), the custodian must be: A) court appointed. B) an adult. C) a member of the minor's family. D) bonded.
Answer: B Under UGMA, the custodian must be an adult. The custodian does not need to be bonded, a member of the minor's family, or appointed by a court.
Under the Uniform Transfer to Minors Act, which of the following gifts is allowable? A) From 1 donor to more than 1 child jointly. B) From 1 donor to 1 child. C) From 1 donor to 1 child with both parents named as custodians. D) From 2 donors to more than 1 child jointly.
Answer: B Under UTMA, a donor may give unlimited money or securities to one child - with one person named as custodian.
Under the provisions of an UGMA account, which of the following occurs when the minor reaches the age of majority? A) Any securities in the account must be converted to cash. B) The account must be turned over to the donee. C) The account must be turned over to the donor. . D) The account remains as an UGMA account.
Answer: B Under the terms of the Uniform Gifts to Minors Act, when a minor reaches the age of majority, the proceeds must be handed over to the new adult.
Under the Uniform Transfer to Minors Act, which of the following are allowable activities? Giving an unlimited amount of cash. Giving securities. Giving no more than $5,000 in cash. Revoking a gift. A) III and IV. B) I and II. C) I and IV. D) II and III.
Answer: B Unlimited gifts may be put into an UTMA account. Gifts under UTMA are irrevocable and may consist of cash and/or securities.
A client of your member firm dies. In correct order, you should freeze the account. accept orders from the executor. obtain the death certificate and other legal documents. cancel all open orders. A) III, IV, I, II. B) IV, I, III, II. C) I, IV, III, II. D) II, III, IV, I.
Answer: B Upon death of a client, all open orders must be canceled. The account is then frozen until proper legal documentation is received. Once that has occurred, the executor may begin conducting activity in the account.
Three brothers open a joint account instructing you that if they die, they want the cash and securities in the account to go to the remaining parties to the account. The account should be opened: A) as tenants by the entireties. B) with rights of survivorship. C) as tenants in common. D) as community property.
Answer: B Using tenants with right of survivorship, each brother's interest in the account would go to the surviving brothers
Tenants in common ownership provides that a deceased tenant's fractional interest in an account is retained by which of the following? A) The registered representative for the account. B) Will be decided during probate. C) The deceased tenant's estate. D) The surviving tenant.
Answer: C TIC (tenants in common) ownership of an account provides that a deceased tenant's interest in an account is retained by that tenant's estate and not passed on to the surviving tenant.
All of the following are fiduciary accounts EXCEPT: A) guardian accounts. B) estate accounts. C) transfer on death (TOD) accounts. D) trust accounts.
Answer: C A TOD account is an individual account in which, on the death of the account owner, the assets pass to a designated beneficiary.
Which of the following persons may legally open an account to trade on margin? A) A minor child with approval of a court-appointed guardian. B) An open-end investment company. C) A corporation. D) A custodian of an UTMA account.
Answer: C A corporation may open an account to trade on margin if provided for in the charter and authorized in the bylaws. Both UTMA and UGMA specifically prohibit custodians from either engaging in speculative trading or borrowing money or securities in the name of the minor through trading on margin. Mutual funds are also prohibited from trading on margin.
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 his stocks is dropping sharply on adverse news. You: A) can enter a discretionary order with written permission of a principal of the broker/dealer. B) can enter a discretionary order with instructions that the order is not held. C) cannot enter a discretionary order. D) can enter a discretionary order with written documentation of the situation.
Answer: C A discretionary order cannot be entered until the signed discretionary account form has been received.
Under the Uniform Transfer to Minors Act, all of the following statements are true EXCEPT: A) only an adult may make a gift to a minor in a custodial account. B) once a gift is given to a minor, it may not be reclaimed. C) the maximum amount of money an adult may give to a minor in any one year is an amount indexed for inflation. D) an UTMA account may have only one custodian for only one minor.
Answer: C Any adult may give a gift to a minor in a custodial account. There is no limitation on the size of the gift. Gifts in excess of the indexed maximum may be subject to a gift tax.
Which of the following may NOT normally assign authorization to a third party? A) A corporation. B) A joint account. C) A custodian.
Answer: C Assigning authorization to a third party is giving discretionary authority to someone else. The custodian of an account is the person with discretionary authority over the account. To assign the authority to someone else, unsupervised, is not allowed.
All of the following could open a joint account EXCEPT: A) Two business partners. B) a married couple. C) a father and 10-year-old son. D) a mother and 22-year-old daughter.
Answer: C Joint accounts can only be opened between adults.
Regarding dividends received in an UGMA account, the custodian may: reinvest the dividends in more stock. use the dividends to pay the taxes on the account. withdraw the dividends and place them in an UGMA savings account. buy Series EE bonds for the minor. A) II and III. B) III and IV. C) I, II, III and IV. D) I and II.
Answer: C The custodian may make investments deemed prudent and satisfy any tax obligations with the assets in the account on behalf of the minor.
How must stock subscription rights be handled in a custodial account for a minor? A) The rights may be exercised or sold only if the stock is held in street name. B) The rights may be exercised or sold only if the donor is also the custodian. C) The custodian can exercise or sell rights as he deems prudent. D) The custodian cannot exercise or sell rights for the custodial account.
Answer: C The custodian must either buy the securities or sell the rights; he cannot let the rights expire because this would not be in the best interest of the minor. The same is also true of warrants.
Under the Uniform Transfer to Minors Act, there may be: A) 2 custodians and 1 beneficial owner. B) There is no restriction on the number of tenants in an UTMA account. C) 1 custodian and 1 beneficial owner. D) 1 custodian and 2 beneficial owners.
Answer: C There may be only one custodian and one minor per UGMA/UTMA account.
All of the following are fiduciary accounts EXCEPT: A) guardian accounts. B) estate accounts. C) TOD accounts. D) trust accounts.
Answer: C Transfer on Death Accounts (TOD) are individual accounts with a designated beneficiary to receive account assets upon the death of the account owner.
Who is responsible for the taxes in an UTMA account? A) Donor. B) Parent. C) Child. D) Custodian.
Answer: C 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).
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 receive legal permission to act as custodian. B) Ralph must have the permission of the guardian. C) Ralph must open the account and name himself as the custodian. D) Ralph must file the proper legal documents.
Answer: C Under UTMA or UGMA, no special documentation is required. The account is opened in the name of the minor with the minor's Social Security number and the name of the adult listed as custodian.
A gift given to a minor under UTMA may be revoked under which of the following circumstances? A) If the minor dies before reaching the age of majority. B) If the custodian dies before the minor reaches the age of majority. C) Under no circumstances. D) At any time before the minor reaches the age of majority.
Answer: C Under both The Uniform Transfer to Minors Act (UTMA) and The Uniform Gifts to Minors Act (UGMA), all gifts to minors are irrevocable.
You have decided to open an UTMA account for your 10-year-old son. As you are completing the application to open the account, you are asked for a Social Security number. Whose Social Security number will be used to open the account? A) The custodian's. B) The donor's. C) The parents' Social Security number. D) The beneficial minor's.
Answer: D An UTMA account will be opened using the beneficial minor's Social Security number
An arrangement in which the broker has the authority, or power-of-attorney, to make trades from funds in the account without prior approval from the investor is known as: A) a power-of-attorney account. B) a stop loss account. C) a nonapproval account. D) a discretionary account.
Answer: D Discretionary accounts are arrangements in which the registered representative has the authority, or power-of-attorney, to make trades from funds in the account without prior approval from the investor.
In a discretionary account, due diligence requires a member to receive prior written consent before purchasing nonconventional investments (NCIs). All of the following are considered NCIs EXCEPT: A) Equity linked notes. B) Distressed corporate debt. C) Hedge funds. D) Corporate bond funds.
Answer: D Equity linked notes, debt issued by corporations that have filed for bankruptcy or are considering filing for bankruptcy, and hedge funds are all examples of investments that carry unique risks that an investor needs to be aware of. Therefore, before purchasing these types of investments in a discretionary account, proper due diligence by the broker/dealer requires that the customer provide prior written consent.
An individual has given full power of attorney (POA) to a third party. This means that the designee is permitted to: A) originate trades in the account, but not remove funds or securities. B) remove funds or securities from the account, but not originate trades. C) close the account and reopen it in the designee's name. D) originate trades in the account and remove funds or securities.
Answer: D Full power of attorney gives the named third party, the designee, all of the power of the owner except the right to change the name on the account.
A custodian of an UTMA account may do which of the following as a fiduciary to the account? A) Meet a margin call. B) Withdraw securities if he substitutes his own stock of equal value. C) Use the securities in the account for his own benefit. D) Be reimbursed as a fiduciary for reasonable expenses incurred for managing the account.
Answer: D The custodian has a fiduciary responsibility for the account and should invest for preservation of capital and to achieve reasonable income for the beneficial owner of the account. While the custodian, as a fiduciary, can be reimbursed for reasonable expenses incurred in acting as a fiduciary to the UTMA account, they may not trade on margin, nor would they be permitted to substitute securities in the account or use securities in the account for their own benefit.
Under the Uniform Gifts to Minors Act, how may stock subscription rights or warrants be handled in a custodial account? A) The custodian may not exercise or sell rights for a custodial account. B) The rights may be exercised or sold only if the donor is also the custodian. C) The rights may be exercised or sold only if the stock certificates are held in street name. D) The custodian may exercise or sell the rights as he deems prudent.
Answer: D The custodian in an UGMA account is obligated to handle that account in the best interests of the minor. In doing so, he must act as a prudent investor would. There is no requirement that the donor and custodian be the same person. Remember that UGMA and UTMA accounts may never have street name registration.
A customer signs a trading authorization form granting written discretion over the account to the registered representative. All of the following practices are permitted EXCEPT: A) buying or selling stocks without notifying the customer. B) shifting funds among several mutual funds within a fund family, based upon the representative's expectations for market performance. C) notifying the customer periodically of the account's performance. D) indicating that trades in which the representative used discretion were unsolicited or solicited.
Answer: D When discretion is used in a discretionary account, order tickets must be marked accordingly.
A broker/dealer has set up a prime brokerage account for one of its customers. This customer is most likely A) an institutional customer B) an individual retail customer C) an investment club D) 2 spouses, each having individual accounts and a joint account together
Answer: A A prime brokerage account is one in which a customer, generally an institutional customer, selects one member firm (the prime broker) to provide custody and other services, while other firms, called executing brokers, handle all trades placed by the customer.
Under MSRB rules, a municipal securities broker/dealer opening an account for an employee of another firm must: A) send duplicate confirmations to the employer after each trade. B) notify the SEC after each trade. C) obtain the employer's approval before each trade. D) refuse all trades unless approved by a municipal principal.
Answer: A Before opening an account for an employee of another municipal firm, a municipal dealer must notify the employer in writing. In addition, the dealer must send duplicate confirmations of each trade to the employer.
The federal legislation that requires broker/dealers to verify the identity of any person opening an account is the: A) Maloney Act. B) Insider Trading Act. C) U.S.A. PATRIOT Act. D) Act of 1934.
Answer: C The U.S.A. PATRIOT Act requires firms to obtain identifying information on each new customer, verify the identity of each new customer, maintain records relating to identity verification, and to determine if any new customer appears on a list of known or suspected terrorist groups compiled by the Office of Foreign Asset Control (OFAC).
Under FINRA rules on account transfers, the carrying member must transfer the positions in the account to the receiving member within how many business days of validation? A) 3. B) 4. C) 5. D) 7.
Answer: A The carrying firm must transfer the positions within 3 business days of validation.
All of the following information must be obtained from new individual customers EXCEPT: A) date of birth. B) educational background. C) residence address. D) Social Security number.
Answer: B A customer's educational background is not required to open a new account. In the case of an account opened in the name of a business, the business address and tax identification number are required.
Under SEC rules, which of the following events require a broker/dealer to furnish a copy of the account record to a customer? The opening of a new account. Change of customer's name or address. Change of customer's investment objectives. Change in customer's employment or financial status. A) I and II B) II and III C) I, II, III and IV D) I only
Answer: C Any change in a customer's status that may impact the suitability of recommendations requires a broker/dealer to update customer account records.
An employee of another broker/dealer would like to open an account with your firm. Under FINRA rules, all of the following statements regarding the employee and the account are true EXCEPT A) the employer must be notified in writing of the opening of the account B) the employer need not grant prior written approval to open the account C) the broker/dealer holding the account must approve each transaction before entry of the order D) if the employer requests them, they must receive duplicate copies of all account transactions
Answer: C FINRA rules do not require prior approval of individual transactions by the broker/dealer (at which the account has been opened). The rules do require that the employing broker/dealer be notified before the account is opened in writing and that duplicate copies of account statements and transaction confirmations be supplied if the employing BD has requested them. Prior approval of the employing BD to open the account is not required.
If a customer gives specific instructions to his registered representative to purchase a security that is clearly unsuitable in light of the customer's investment objectives, under FINRA rules, the registered representative: A) cannot enter the order. B) can only enter the order with the prior approval of a principal. C) can only enter the order if the customer puts his verbal instructions into written form. D) can enter the order.
Answer: D Under FINRA rules, the representative may execute the trade at the customer's request; the trade ticket should indicate that the order was unsolicited.
A power of attorney is not required for a registered representative to choose which of the following order instructions? Security to be bought or sold Number of shares to be bought or sold Time of execution Price of execution. A) I and II. B) I and III. C) II and IV. D) III and IV.
Answer: D If a registered representative chooses price or timing of an order only, that order is not a discretionary order and a power of attorney is not required. The order is a not-held order. To be discretionary, the representative must choose one or more of the following: the action (buy or sell), the security, or the amount (number of shares).
Mr. Jack Smith has a margin account in his own name with BR Securities, Inc. He also has a joint tenancy account with his father, John Smith. Mrs. Smith, Jack's wife, calls Joe Johnson, the registered representative who is assigned to both accounts, and instructs him to sell 100 shares of AOL from Jack's margin account. Which of the following should the registered representative do? A) Not execute the order until he receives written authority from Jack, which authorizes his wife to act with discretionary authority over his margin account. B) Execute the transaction immediately. C) Transfer the AOL to the joint account and then execute the transaction in the joint account. D) Not execute the order until he receives verbal authority from Jack, which authorizes his father to act with discretionary authority over his margin account.
Answer: A A registered representative may not execute a third-party order (one given by someone other than the account owner) without a signed written discretionary authorization from the account owner that has been accepted by the representative and a principal of the firm.
A registered representative is opening both cash and margin accounts for a corporation. Which of the following documents will he need? The corporation's charter, account resolution, and bylaws. A copy of the corporation's most recent balance sheet. The corporation's last 3 profit and loss statements. The name(s) of natural persons authorized to trade the account. A) I and IV. B) I and III. C) II and III. D) II and IV.
Answer: A Corporate accounts are generally those established by the officers of a corporation. Such accounts require a copy of the corporate resolution naming the authorized person(s) and account trading limits (if any). If it is to be a margin account, a copy of the corporate charter and a signed margin agreement are also required.
Policies and procedures regarding instructions received from customers by email should identify as red flags which of the following scenarios? An email received that can not be verified by the registered representative as having actually come from the customer An emailed request to liquidate certain account holdings and transfer the sales proceeds to a third party A request by email regarding a joint account with instructions to sell all securities and to forward a check made payable to only one party to the account An urgent request that funds be sent to an overseas bank account not previously known to be associated with the client A) I, II, III and IV B) I and IV C) II and IV D) I and III
Answer: A Each of the scenarios should raise a red flag regarding unusual instructions received by email or otherwise. All firms must have in place written supervisory policies and procedures for reviewing and monitoring the transmittal of funds and a method of verifying that instructions received by email came from the customer and not an unknown third party. Urgency that might be intended to circumvent or deter broker/dealer verification procedures should always be viewed with extreme caution.
Your firm has determined that a person seeking to open an account is on the Office of Foreign Asset Control's (OFAC) list of individuals who are viewed as threats to the United States. Who must oversee your firm's dealings, if any, with this individual? A) An officer of the firm who has been designated to monitor and check customer names against the Specially Designated Nationals (SDN) list maintained by OFAC. B) The registered representative whom the person approaches. C) The Internal Revenue Service (IRS). D) The U.S. Treasury will have OFAC send a licensed agent to handle this account.
Answer: A Financial institutions, including broker/dealer firms, must designate an officer of the firm as having responsibility for monitoring the OFAC list and OFAC regulations. The officer would additionally be responsible for the blocking of transactions or declining of business with certain customers should they appear on the OFAC list.
If a customer wishes to open a cash account, who must sign the new account form? A) Only the principal B) Only the customer C) Only the registered representative D) The customer, the registered representative, and the principal
Answer: A The customer's signature nor the registered representatives signature is required to open a cash account. A principal must review and then accept the new account by signing the form.
All of the following statements regarding customer accounts are true EXCEPT: A) margin trading in a fiduciary account does not require any special documentation. B) stock held in a custodial account may not be held in street name. C) the customer who opens a numbered account must sign a statement attesting to ownership. D) stock held under JTWROS goes to the survivor in the event of the death of one of the tenants.
Answer: A Trading on margin is prohibited in fiduciary accounts except with the appropriate documentation. Stock held in a custodial account must be registered to the custodian on behalf of the minor (the beneficial owner). Numbered accounts are permitted with a letter signed by the customer. Stock held under JTWROS passes to the survivor(s) in the event of death of one of the tenants.
A customer calls his registered representative and asks that the firm hold his mail as he will be traveling for an extended period of time. Under NYSE rules, which of the following statements are TRUE? If the customer is traveling domestically, mail can be held for up to 2 months. If the customer is traveling domestically, mail can be held for up to 3 months. If the customer is traveling abroad, mail can be held for up to 2 months. If the customer is traveling abroad, mail can be held for up to 3 months. A) I and IV. B) I and III. C) II and III. D) II and IV.
Answer: A Under NYSE rules, mail such as confirmations and statements can be held for up to 2 months if a customer is traveling domestically and up to 3 months if he is traveling internationally.
Under the Uniform Practice Code, which of the following statements regarding the transfer of customer accounts are TRUE? Upon receipt of the ACAT Form, the carrying firm has 1 business day to validate the account positions. Upon receipt of the ACAT Form, the carrying firm has 3 business days to validate the account positions. Upon validation, the carrying firm must effect the transfer within 3 business days. Upon validation, the carrying firm must effect the transfer within 4 business days. A) I and III. B) I and IV. C) II and III. D) II and IV.
Answer: A Upon receipt of the account transfer form (ACAT Form) signed by the customer, the carrying firm has 1 business day to validate the positions in the account. Upon validation, the carrying firm must freeze the account and cancel all open orders. After validation, the carrying firm has 3 business days to effect the transfer to the receiving firm.
Which of the following pieces of customer information must a registered representative attempt to obtain when opening a new account? Occupation. Financial condition. Investment objective. A) I, II and III. B) I and II. C) I and III. D) II and III.
Answer: A When opening a new account, the registered representative normally would obtain information about the customer's occupation, financial condition, investment objectives, and other relevant personal information.
Which of the following individuals could open an account at another member firm without his employer's knowledge? A registered representative of a member. A government security trader employed by a member. A purchases and sales clerk of a member. An insurance agent who sells variable annuities. A) None of these B) I only C) II and III D) II, III and IV
Answer: A Whenever an employee of a FINRA member wants to open a securities account with another FINRA member firm, the employee must give prior written notice to his employer before the account can be opened. Prior approval is not required.
A customer has just opened a new account at your firm and given her lawyer limited power of attorney. Which of the following statements are TRUE? Confirmations of trades will be sent to the account owner. Confirmations will be sent to the party given the power of attorney only. The POA ceases upon the death of either party. The POA must be renewed annually. A) I and III. B) I and IV. C) II and III. D) II and IV.
Answer: A Confirmations of trades will always be sent to the account owner. They may only be sent to a third party upon written request of the account owner. A POA need not be renewed and will cease upon the death of either party.
A customer asks his registered representative to purchase $10,000 worth of shares in any pharmaceutical company that looks promising. Which type of an account allows the registered representative to act in accordance with this instruction? A) Discretionary. B) Custodial. C) Margin. D) Special cash.
Answer: A If the registered representative may decide the specific security, the transaction requires discretionary authority and therefore must be done in a discretionary account. Determining the time or price does not require discretionary authority.
In an account opened by 2 individuals as joint tenants with rights of survivorship, all of the following are true EXCEPT: A) stock certificates may be delivered in the name of either party. B) orders may be entered by either party. C) mail may be directed to the joint owner agreed upon by both parties to the account. D) in the event of death, the other party assumes full ownership of the account.
Answer: A In a JTWROS account, each party has an equal, undivided interest in the account. Upon the death of one party in a two-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account.
Which of the following statements regarding joint accounts/tenants in common are TRUE? Each party specifies a percentage of interest in the account. Each party has an equal interest in the account. The interest of a deceased tenant passes to the estate of the decedent. The interest of a deceased tenant passes to the co-tenant. A) I and III. B) I and IV. C) II and III. D) II and IV.
Answer: A In a TIC account, each party must specify a percentage of interest in the account. If one party dies, his percentage of ownership passes to his estate, not to any other party to the account.
If three individuals open up a joint account with your firm, and one of the parties to the account possesses written authorization from the other parties granting him authority to make all trading decisions, the new account form must contain information on: A) all three individuals. B) the individual granted trading authority. C) the individual with the highest net worth. D) any two of the three individuals.
Answer: A Information is required for all three individuals because they all have ownership in the account.
An agent may open a joint account for which of the following? Lee and his 13-year-old son, Tom. Mary and Kelley, two adult college roommates. Jerry and Mark, friends and partners in business for more than 20 years. Melinda and her minor nephew, John, for whom she is guardian. A) II and III. B) I and III. C) I and IV. D) II and IV.
Answer: A 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.
Which of the following verbal orders can be accepted from a customer without additional documentation? A) Buy 100 shares of ABC when the price is right. B) Buy $20,000 of quality bank stocks. C) Increase my position in ABC. D) Buy 200 shares of computer stock.
Answer: A Prices and time of execution do not require discretionary authority.
Upon being informed that one party to a tenants in common account has died, a registered representative should: A) freeze the account. B) transfer all of the assets to the surviving tenants. C) allow the surviving tenants to continue trading. D) transfer half of the assets to the survivor.
Answer: A The assets of a deceased tenant in a TIC account eventually go to his estate. A registered representative first freezes the account and then awaits the proper court documents. If the account was JTWROS, trading by the surviving tenants could continue.
three individuals have a tenants in common account with your firm, and one individual dies, which of the following statements is TRUE? A) Two survivors continue as co-tenants with the decedent's estate. B) The account must be liquidated and the proceeds split evenly among the two survivors and the decedent's estate. C) Trading is discontinued until the executor names a replacement for the deceased. D) The account is converted to joint tenants with rights of survivorship (JTWROS).
Answer: A The decedent's estate becomes a tenant in common with the survivors.
Which of the following are governed by the prudent investor rule? Trustee. Executor. Custodian. Registered representative who has been granted discretionary authority. A) I, II, III and IV. B) I and II. C) III and IV. D) II and III.
Answer: A The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. In these accounts, the fiduciary must act prudently. A registered representative who has been granted discretionary authority is acting in a fiduciary capacity.
If a registered representative is opening a brokerage account for a partnership, in which order, from first to last, would the following events ordinarily take place? Representative obtains the partnership agreement Principal gives written acceptance of the account Representative fills out a new account card First trade is executed. A) III, I, II, IV. B) I, III, IV, II. C) III, II, I, IV. D) IV, III, II, I.
Answer: A When a registered representative opens a new account, the first step is to complete the new account form. In the case of a partnership account, a principal of the firm must see a copy of the partnership agreement before accepting the account. When the account has been accepted by the principal, trades may be entered.
Several years after opening a brokerage account at a FINRA member firm, an individual joins another FINRA member as a research analyst. Regarding his responsibilities, which of the following is TRUE? A) No notification is required, as the account was opened before his association with a member firm. B) The individual must notify both members of his relationship with the other. C) The individual need notify only the member carrying the account of his association with another member. D) The individual need notify only the employing member of the account.
Answer: B Before opening an account with another member, an associated person must notify both the employer member and the executing member in writing of his association. If the account was opened before his association with a member, the associated person must notify both members promptly in writing.
If a customer wishes to open a new account but declines to provide all of the financial information the member firm requests, which of the following statements are TRUE? The member firm may open the account and make recommendations without meeting any other criteria. The member firm may open the account if it has determined (by other means) that the customer has the financial resources to carry the account and that trading is suitable. The member firm may not recommend any transactions unless the representative is able, through the information available, to make a suitability determination. The member firm may not allow trades in the account until the requested information is received. A) II and IV. B) II and III. C) I and III. D) I and IV.
Answer: B If a customer refuses to provide financial information, the member firm may use whatever information is available to decide whether to open the account. Any recommendation made to a customer must be suitable, taking into account the customer's investment objectives, financial situation, and any other relevant information. If the information is not provided, the account may be opened, but no investment recommendations may be made.
Under the rules governing the activities of broker/dealer firms, prior notification to the employing firm would be required in order to open a cash account for all of the following EXCEPT: A) an exchange employee. B) a bank officer. C) a registered representative of another member. D) an employee of another member.
Answer: B SROs in the securities industry require prior notification for opening accounts of persons employed in the industry and margin accounts for employees of financial institutions.
If a registered representative of a FINRA member firm wants to open an account with another member firm, which of the following statements are TRUE? The account may only be opened if the registered representative (RR) is also a principal of his employing BD. The account may be opened, but the registered representative may not engage in securities transactions that he could do through his own firm. The member firm opening the account must send duplicate confirmations to the employing member firm if the employing member firm has requested them to do so. The employing broker/dealer must receive prior written notice in order for the account to be opened but need not grant prior approval. A) II and IV B) III and IV C) I and II D) I and III
Answer: B The employing broker/dealer must be notified in writing but need not grant prior approval for the account to be opened. It must receive duplicate confirms and account statements if it has requested them.
According to the U.S.A PATRIOT Act, account identification and verification procedures should be applied to which of the following? New individual accounts. New business accounts. Existing individual accounts. Existing business accounts. A) III and IV. B) I and II. C) I and IV. D) II and IV.
Answer: B The procedures required by the U.S.A PATRIOT Act for the verification and identification of customer accounts should be applied to all new customers-whether individuals or businesses.
Who must sign a new account form for a cash account? Principal Registered representative Customer Spouse of the customer A) I, II, III and IV B) I only C) I, II and III D) II and III
Answer: B To open a cash account, only the signature of the the principal accepting the account is required. For margin accounts, the signature of the customer is required on the margin agreement. The signature of the spouse is required only for a joint account.
A new customer has given you written authorization to transfer the holdings in his account at another broker/dealer to his new account at your broker/dealer. Under the Uniform Practice Code, using form ACAT the carrying broker/dealer would have how many days to validate the positions and how many days to complete the transfer after validation? 1 business day to validate. 2 business days to validate. 2 business days to transfer after validation. 3 business days to transfer after validation. A) II and IV. B) I and IV. C) I and III. D) II and III.
Answer: B Under the Uniform Practice Code the carrying broker/dealer has 1 business day to validate positions and 3 business days to transfer to the receiving broker/dealer after validation.
Which of the following statements are TRUE of a discretionary account? It must be approved by a principal of the firm. It must be reviewed frequently. A discretionary order may be placed once the customer has placed a power of attorney in the mail. It must be approved by the SEC. A) III and IV. B) I and II. C) I and III. D) II and IV.
Answer: B A new discretionary account must first be approved by a principal, orders must be approved on the day of the trade, and the account must be reviewed frequently for suitability.
Which of the following are discretionary orders? 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. A customer instructs an agent to buy 1,000 shares of ABC Corporation at a time and price determined by the agent. A customer instructs an agent to purchase as many shares of XYZ as the agent considers appropriate. A customer instructs an agent to sell 300 shares of LMN, Inc., when the agent deems the time and price appropriate. A) II and IV. B) I and III. C) I and IV. D) II and III.
Answer: B 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.
Your customer is interested in a product that offers part principal protection like a debt instrument but has return that is partly based on the return of a single stock or a basket of stocks like an index. Such products are known as: A) Treasury bonds. B) Equity-linked notes (ELNs). C) Real estate investment trusts (REITs). D) Direct participation programs (DPPs).
Answer: B Equity-linked notes (ELNs) or Index-linked notes are debt instruments that in one variation can offer some principal protection (known as principal-protected) as well as a final payment that is based on the return of a single stock or a basket of stocks. Some ELNs are exchange traded but not all.
When a customer wants to open a guardian account, which of the following is needed? A) Signed customer account card, credit agreement, and loan consent. B) Copy of the court-ordered guardianship papers. C) Limited power of attorney. D) Full power of attorney.
Answer: B The courts appoint a guardian to act on behalf of another individual who is unable to act for himself. Full and limited powers of attorney relate to accounts over which the beneficial owners have granted some form of control to other persons.
With a durable power of attorney the key feature that differentiates it from other power of attorneys is that it will: A) always be a limited POA. B) survive a declaration of mental incompetence regarding the party who has granted the durable POA. C) cease to exist if the grantor of the POA dies. D) cease to exist if the person who was given the POA dies.
Answer: B The key feature of a durable POA is that it will survive the declaration of mental incompetence on the part of the grantor. They can be either limited or full authorizations and all POAs will cease to exist if either party dies.
If a person wishes to enter orders in his spouse's account, he: A) could never be permitted to do so as there is no provision that would allow for it to occur. B) needs written permission from his spouse via a power of attorney. C) is free to do so. D) needs verbal permission from his spouse.
Answer: B The only persons permitted to enter orders in an account are the account owners. For a person to enter orders in his spouse's account, the spouse who's name is on the account must sign a power of attorney.
Several investors open an account in joint tenancy. Which of the following statements regarding the account is TRUE? A) Only one designated account holder need sign a margin agreement or other forms pertinent to the account. B) Mail need only be sent to one of the parties to the account. C) Checks may be made payable to one tenant of the account. D) Checks need not be endorsed by all parties to the account in order to be deposited
Answer: B While mail only need to be sent to one of the parties to the account, checks for disbursements from the account must be made payable to all parties and endorsed by all parties in order to be deposited. Any required forms pertinent to the account such as a margin agreement or options agreement must be signed by all parties.
Obtaining all of the following complies with the regulations regarding customer identification programs (CIPs) EXCEPT A) date of birth B) taxpayer identification number C) post office box, instead of a physical address, if it is the primary mailing address D) name
Answer: C A post office box is never acceptable without a physical address.
According to FINRA rules, duplicate confirmations of transactions must be sent to an account owner's employer when establishing a margin account for: a bank officer. an employee of another broker/dealer. an independent insurance agent. an officer of another broker/dealer. A) I and III. B) III and IV. C) II and IV. D) I and II.
Answer: C According to FINRA rules, when an employee of a member firm opens an account with another member broker/dealer, duplicate confirmations and account statements must be sent to the employer. An officer of a broker/dealer is considered an employee.
Which of the following allows investors to hold securities in either the name of the issuer or their transfer agent and facilitates the transfer of those securities from the issuer or their transfer agent to an investor's broker/dealer in a secure, efficient manner? A) The Automated Confirmation Transaction (ACT) system B) The SEC through Form S-1 issuer registration C) The Depository Trust Company through the Direct Registration System (DRS) D) The Committee on Uniform Securities Identification Procedures (CUSIP)
Answer: C The Depository Trust Company (DTC) through the Direct Registration System (DRS) allows investors the choice of having securities registered and held in the name of the issuer or the issuer's transfer agent. It facilitates efficient and secure transfer between the issuer or transfer agent and the investor's broker/dealer.
When a customer instructs a registered representative to transfer and ship, the representative instructs the margin department to transfer ownership into the: A) brokerage firm's name and deliver the securities to the brokerage firm's commercial bank for safekeeping. B) customer's name and deliver the securities to the customer's bank for safekeeping. C) customer's name and deliver the securities to the customer. D) brokerage firm's name and deliver the securities to the customer.
Answer: C The term "transfer and ship" means to transfer the securities into the name of the customer and to ship (deliver) the securities to the customer. Hold in street name would require the securities to be transferred into the name of the broker/dealer and held in safekeeping.
Under the U.S.A PATRIOT Act, which of the following is CORRECT? A) Sharing information among financial institutions regarding suspected terrorist acts or money laundering activities is encouraged, except when such sharing violates the Gramm-Leach-Bliley Act. B) Sharing information regarding suspected terrorist acts or money laundering activity, while not necessarily illegal, is not considered a good practice. C) Financial institutions are encouraged to share information regarding suspected terrorist acts or money laundering activity. D) Information regarding suspected terrorist activity or money laundering may not be shared among financial institutions.
Answer: C Under the U.S.A PATRIOT Act, financial institutions, as well as regulatory and law enforcement authorities, are encouraged to share information. A financial institution or association that transmits, receives, or shares such information for the purposes of identifying and reporting activities that may involve terrorist acts or money laundering activities is generally safe from liability. Complying with the act and sharing information about money laundering activities will not violate the privacy provisions of the Gramm-Leach-Bliley Act.
A new client's name appears on the SDN list. After your broker/dealer notifies OFAC, the likely outcome will be A) OFAC will have the client arrested under federal law B) you will be directed by OFAC to continue doing business with the client but report all broker/dealer business dealings to OFAC C) the client's assets will be frozen and the broker/dealer will be directed to cease doing business with the client D) you, the registered representative, will be directed to let the client know that the client's name has appeared on the SDN list
Answer: C When the name of an individual or group appears on the specially designated nationals (SDNs) list, the individual's/group's assets will be blocked (frozen), and US financial institutions will be prohibited from doing business with them.
All of the following are characteristics associated with equity-linked notes (ELNs) EXCEPT: A) They have final payments at maturity linked to the return of an underlying stock or basket of stocks. B) They are considered to be nonconventional structured investments. C) They are equity securities. D) They can be exchange traded or traded OTC.
Answer: C Despite their name, equity-linked notes (ELNs) are debt instruments, not equity instruments. They have a partial fixed return as well as a final payment linked to the performance of a single stock or equity index. Some are exchange traded while others trade OTC. FINRA who considers ELNs to be nonconventional structured investments has expressed concerns that investors might not fully understand ELNs or the risks associated with them.
If a customer wishes to open a cash account in her name only and allow her husband to make purchases and receive checks in his name only, she must instruct her broker/dealer to open a: A) cash account with limited power of attorney. B) cash account. C) cash account with full power of attorney. D) margin account.
Answer: C For anyone other than the account owner, entering trades and withdrawing assets requires a full power of attorney. A limited power of attorney enables a nonaccount owner to enter trades but not to withdraw assets.
When a customer wishes to open an account as guardian, you would ask for: A) a full power of attorney. B) a signed customer account card, credit agreement, and loan consent. C) a copy of the court order and other guardianship papers. D) a limited power of attorney.
Answer: C Guardianship is one of several account titles that require legal papers to open the account. Because a guardian is appointed by court order, the broker/dealer would need a copy of that court order.
Which of the following characteristics describe a joint tenants with right of survivorship account? Orders may be given by either party. Checks must be made out in the name of the account. Mail may be sent to either party with the permission of the other party. In the event of the death of one of the tenants, the surviving party assumes control of the entire account. A) II and III. B) III and IV. C) I, II, III and IV. D) I and IV.
Answer: C In a JTWROS account, any party named on the account may enter orders for the account, but distributions from the account must be sent in the names of all of the owners.
Which of the following accounts allows the registered owner of the account to pass all or a portion of the account upon death to a named beneficiary avoiding probate? A) JTWROS. B) Partnership. C) TOD. D) Fiduciary.
Answer: C Of the choices given, only an account opened Transfer on Death (TOD) allows the registered owner of the account to pass all or a portion of the account upon death to a named beneficiary avoiding probate because the estate is bypassed. The assets in the account however do not avoid any estate tax that might be due.
In administering a joint account, a member firm's responsibilities concerning suitability determination and information disclosure apply to: A) the person with trading authority for the account. B) the person whose Social Security number is on the account. C) all persons who jointly own the account. D) the person with the greatest capital contribution.
Answer: C Suitability rules apply to all owners in a joint account.
If one of your clients dies, on notification of death you should immediately: mark the account "deceased" until proper documents are received. cancel all GTC orders for the account. obtain a letter from the attorney representing the estate with instructions for transfer. obtain the names and addresses of the beneficiaries of the estate. A) II and III. B) III and IV. C) I and II. D) I and III.
Answer: C The account's registered representative must cancel all open orders and mark the account "deceased." The firm must not permit any trades until proper documents are received from the estate representative. It is not the responsibility of the firm to contact the decedent's attorney or the beneficiaries
When a customer of a broker/dealer dies, all of the following documents may be required to release the decedent's assets EXCEPT: A) an inheritance tax waiver. B) a certified copy of the death certificate. C) a power of attorney. D) an affidavit of domicile.
Answer: C The power of attorney is the only document not required. If the decedent had executed a power of attorney, it would have become invalid upon death. An affidavit of domicile and an inheritance tax waiver may be required. A certified copy of the death certificate is always required.
Which of the following are acceptable for a fiduciary acting under the prudent investor rule? Purchasing AAA-rated debentures. Purchasing a growth mutual fund. Purchasing new issues of stock. Writing covered calls on dividend-paying stock. A) II and III. B) II and IV. C) I, II, III and IV. D) I and II.
Answer: C The prudent investor rule permits a fiduciary to invest in securities that a reasonably prudent investor, seeking income and preservation of capital, might buy for his own account.
Which of the following occurs in a partnership account if one partner dies? A) The surviving partners are considered joint tenants. B) The surviving partners are considered joint tenants and receive the deceased partner's share. C) The account is frozen until a new or amended partnership agreement is received. D) The surviving partners receive the deceased partner's share.
Answer: C Upon a partner's death, a partnership account is automatically frozen until a new or amended partnership agreement is received. The deceased partner's share usually goes to an estate, not to the other partners.
If a customer who has granted a durable power of attorney to her son dies, which of the following statements regarding the power of attorney is TRUE? A) It remains in effect until the son cancels it. B) It remains in effect only if the son is the sole heir to the estate. C) It is canceled on the death of either principal. D) It remains in effect until the executor of the estate cancels it.
Answer: C When the customer or her son dies, the power of attorney also expires. However, a durable power of attorney will survive a declaration of mental incompetence and is useful in those cases where a parent suffers from dementia.
If a new joint tenants with rights of survivorship account is opened, all of the following statements are true EXCEPT: A) mail may be sent to either party (with the permission of each 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) orders may be given by either party.
Answer: C While either party may enter an order, any money or securities delivered out of the account must be in the names of both owners.
Which of the following activities can take place in a cash account? A) Borrowing money. B) Short sale of stock. C) Uncovered option writing. D) Purchase of new issue common stock.
Answer: D A customer may only borrow money or securities from a broker/dealer in a margin account. Uncovered call options must occur in a margin account and uncovered put options can only occur in a cash account when certain criteria are met. Short sales must occur in a margin account.
If Alpha Enterprises, Inc. wants to open a cash account, a firm must have all of the following documents on file EXCEPT: A) a new account form. B) a copy of the corporate charter. C) a copy of the corporate resolution. D) a hypothecation agreement.
Answer: D Each cash account must have a new account form on file, and a corporation's charter must be provided as proof that the corporation exists. In addition, a resolution is needed to designate the officer(s) authorized to enter orders. A hypothecation agreement is only needed to open a margin account.
After opening a new account, how many days does a firm have to provide the customer with a copy of the account record? A) 45 B) 60 C) 90 D) 30
Answer: D Member firms must provide new customers with a copy of the account record (new account form) within 30 days of opening the account; this ensures the information the firm has on file is accurate.
A customer wishing to open a numbered account must be informed that: A) the account may only be opened with prior permission from the SEC. B) numbered accounts are restricted to cash accounts. C) he must supply proof of U.S. citizenship and reside permanently in the United States. D) he must supply a written statement attesting to his ownership of the account.
Answer: D Numbered, or symbol, accounts require a signed, written statement from the client, acknowledging ownership, to be kept on file.
Broker/dealers who reserve the right to disclose nonpublic private information about their customers to unaffiliated third parties must provide notice to customers at the time of the account opening provide notice to customers each time a transaction occurs within the account provide reasonable means for customers to opt out of such disclosures require that customers wishing to opt out send a written request with signature witnessed by a notary A) I and II B) II and III C) II and IV D) I and III
Answer: D Regulation S-P requires that if a broker/dealer reserves the right to disclose nonpublic personal information to third nonaffiliated parties, it must notify the customer at the time of the account opening and annually thereafter. Means to opt out of the disclosures must be reasonable and easy. Requiring a written request to opt out would not be considered reasonable means under the regulation.
Which of the following is required to be maintained by financial institutions such as banks and broker/dealers (BDs) by the USA PATRIOT Act to prevent the financing of terrorist operations and money laundering? A) Do-not-call lists B) Specially Designated Nationals list C) Privacy notices D) Customer identification programs (CIPs)
Answer: D The USA PATRIOT Act requires financial institutions to maintain customer identification programs (CIPs) to protect against financing terrorist operations or activities and potential money laundering activities. The Office of Foreign Asset Control (OFAC) publishes and maintains the "Specially Designated Nationals" list which financial institutions utilize to determine if any customers or potential customers have been identified by OFAC as posing a terroristic threat or are involved in money laundering activities.
If an agent is assigned to an account previously handled by an agent who has since left the firm, which of the following actions should the agent take first? A) Suggest the customer buy one of the stocks the firm is currently recommending. B) Liquidate the portfolio for immediate reinvestment in stocks the firm is currently recommending. C) Require the customer to sign a trading authorization naming the agent as the party with authority. D) Verify the account information.
Answer: D The agent must verify and update client information before recommending trades. Without knowledge of the client's needs and financial profile, the agent cannot make suitable recommendations.
When a customer opens an account with a financial institution, the institution is required to give a clear and conspicuous disclosure to the new customer regarding its policies and procedures for customer privacy. How often must the customer receive an updated notice containing the same information? A) At least on a monthly basis. B) At least on a quarterly basis. C) At least on a semiannual basis. D) At least on an annual basis.
Answer: D The institution is required to give a clear and conspicuous disclosure to the new customer regarding its policies and procedures for customer privacy. The customer must receive the information upon opening his account and at least annually thereafter.
Your broker/dealer acts as a prime broker for ABC fund. In this arrangement, your broker/dealer is likely to be providing which of the following services? Execution of all transactions for the fund portfolio Clearing services Lending for trades done on margin Ensuring that all exchange-trading rules are complied by A) II and IV B) I and IV C) I and III D) II and III
Answer: D The prime broker would supply clearing services, lending services for marginable transaction, as well as back office support including cash management, account statements, and transaction processing. Actual executions and abiding by all exchange rules when transactions occur is the responsibility of the executing broker/dealers.
If a customer wants to give a broker dealer permission to hold their mail while traveling, which of the following statements are TRUE? The customer initiates the process by written request. FINRA approval is required and granted on a case by case basis. The broker dealer may abide by the request as a courtesy to the customer in accordance with their own in-house rules regarding holding customer mail. As per FINRA's rules, once the request is made by the customer the broker dealer must abide by it. A) I and IV. B) II and III. C) II and IV. D) I and III.
Answer: D The process must be initiated by written request on the part of the customer. Broker/dealers may abide by the written request as a courtesy extended to the customer in accordance with their own in-house rules regarding holding customer mail. There is no industry rule requiring a broker/dealer to extend this courtesy to customers. The rule only stipulates the maximum length of time a broker/dealer can hold customer mail if it chooses to, depending on if the travel is domestic or abroad.
An employee of a firm registers to open an account at another member firm. Under FINRA rules, all of the following statements are true EXCEPT A) the employing member firm must be notified in writing B) the employee does not need written permission from the employing member firm C) the employing member firm must receive duplicate statements and confirmations if requested in writing D) FINRA must receive duplicate statements and confirmations
Answer: D Under FINRA rules, the employing member must be notified in writing of the prospective account and must be provided with duplicate statements and confirmations if they request so in writing. The employee does not need written permission from the employing member before opening the account. There is no requirement that FINRA be either notified or provided with duplicate statements and confirmations.
If a municipal dealer maintains an account for the employee of another municipal dealer and the employing dealer has not sent any written instructions, which of the following documents must be sent to the employing dealer? A) Monthly statement of all transactions in the account. B) Written notice of a security recommended for account purchase. C) Form RE-3. D) Duplicate confirmations of all securities purchased for the account.
Answer: D Unless instructed otherwise in writing, the municipal dealer must only send duplicate confirmations.
When a member firm opens an account for a registered representative of another member, the employer-member must be sent written notification: A) only if requested by the registered representative. B) either by the representative or by the firm opening the account. C) within 5 business days. D) before executing an order.
Answer: D When a registered representative of one member firm opens a brokerage account with another member firm, the firm opening the account must send written notification to the registered representative's employer before the execution of any transaction.
Which types of accounts are billed a single fee annually for a group of services? A) Margin account. B) Option account. C) Cash account. D) Wrap account.
Answer: D Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. Wrap accounts are generally investment advisory accounts.
Which of the statements regarding a member firm's handling of a discretionary account is TRUE? A) A principal must approve each discretionary order prior to execution. B) The registered representative must obtain written authorization from the customer before placing each order. . C) Margin may not be used in a discretionary account. D) The registered representative may not effect transactions excessive in size or frequency in view of the customer's resources.
Answer: D A discretionary account allows the registered representative to place orders without consulting the customer. It does not relieve him of the obligation to execute only suitable orders.
A person wishing to grant a registered representative the right to make investment decisions for his account does so by: A) providing a letter from an attorney. B) calling the representative each time he wants to place an order. C) providing a full power of attorney to someone other than the registered representative who will then instruct the representative as to investment decisions. D) providing a limited power of attorney giving discretionary powers.
Answer: D A discretionary account always requires prior written authorization from the customer in the form of a limited power of attorney (trading authorization).
Which of the following circumstances must be met for a fiduciary to trade options in a trust account? Special circumstances determined by the broker/dealer. The trust agreement states the trustee has the power to trade options. The trust's investment objectives are determined to be compatible with options trading. Only covered options may be traded by a fiduciary. A) I and III. B) I and IV. C) II and IV. D) II and III.
Answer: D A fiduciary account may only trade options if expressly authorized to do so and if suitable for the beneficial owner of the account.
If a registered representative opens a joint account for three people, the registered representative should obtain information on: A) the senior tenant in the account. B) the tenant with trading authority. C) a single tenant of the account holders choosing. D) all of the tenants.
Answer: D If a registered representative opens a joint account for any number of people, the registered representative must obtain information on all of the tenants in the account.
An unmarried couple wants to open a new account registered as joint tenants with rights of survivorship (JTWROS). Which of the following should occur? The registered representative should discuss the resulting consequences of opening an account registered as JTWROS should one party to the account die. A principal of the firm should be notified immediately so that a report can be filed with FINRA regarding the account registration. The registered representative must refuse to open the account. The registered representative may open the account. A) I and III. B) II and III. C) II and IV. D) I and IV.
Answer: D In an account registered JTWROS, if one party to the account dies, the deceased party's ownership interest in the account passes to the surviving tenant, rather than to the deceased party's estate. There are no rules prohibiting opening an account registered as joint tenants with rights of survivorship (JTWROS) for two unmarried persons but the registered representative should take all steps needed to be certain that the unmarried individuals understand the resulting consequences should one party to the account die.
A wealthy individual has established a trust and named you as the trustee. If you wish to establish an account that permits the trust to engage in margin transactions, which of the following statements regarding margin trading is TRUE? A) It is not permitted. B) It is permitted if the fiduciary observes the prudent investor rule. C) It is permitted if the fiduciary shares in the profits or losses. D) It is permitted if provided for in the underlying documentation.
Answer: D Margin trading in a trust account is permitted only if it is specifically provided for in the trust agreement.
Two friends want to open a joint account with your firm and they want equal trading authority. Each wants his portion of ownership in the account to revert to his estate if he dies. As a registered representative, you should open the account as: A) joint tenants with right of survivorship. B) tenants in entireties. C) community property tenants. D) joint tenants in common.
Answer: D The account should be opened as tenants in common because this type of ownership reverts the ownership in the account to the estate of a deceased tenant.
A customer will be leaving the country and asks his representative to watch his account. If his positions begin to decline in value, the registered representative should: A) close out the positions. B) write covered calls against the position. C) buy protective puts to reduce losses. D) talk to his manager.
Answer: D The registered representative may only place an order if the account owner has granted him discretionary authority.
A customer asks his registered representative to exercise discretion over her account. To do so, the representative must: obtain written authorization from the customer. obtain evidence of written acceptance of the account by a registered principal of the firm. have a principal initial each order promptly which may be before or after execution. effect no transaction beyond the customer's financial capability. A) I and II. B) I and III. C) II and IV. D) I, II, III and IV.
Answer: D The requirements for a discretionary account include a written authorization from the customer, a written acceptance by the firm, and close supervision of each transaction to ensure suitable transactions in light of the customer's objectives and financial situation.
Which of the following statements regarding discretionary accounts is NOT true? A) The customer must grant written authorization to the broker/dealer or a designated individual to exercise discretion in the account. B) The account may not be accepted unless approved in writing by a principal of the member firm. C) Each discretionary order must be reviewed promptly by a principal. D) The customer must approve each order before or after it is executed.
Answer: D 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 a 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) Customer's agreement. B) Options agreement. C) New account application. D) Trading authorization.
Answer: D 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.
One of your customers will be traveling extensively throughout Europe and asks you to not send statements to his home. Under the rules, you are permitted to hold his statements for how many months? A) 3. B) 1. C) 2. D) 6.
Answer: A Under the rules, if a customer is traveling domestically, you may hold his mail for up to 2 months. If traveling abroad, you may hold his mail for up to 3 months.
An employee of a FINRA member firm wishes to open an account at another member firm. The employee opening the account must A) give prior written notice to the employing broker/dealer before the account can be opened B) notify FINRA of the account C) obtain permission from FINRA to open the account D) notify the SEC
Answer: A Persons associated with one FINRA member firm may open securities accounts at other member firms as long as prior written notice was made to their employer broker/dealer. Prior written approval is not required.
If a customer wants his account designated by number, not by name, 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 the FINRA.
Answer: B For numbered accounts, the customer must sign a document attesting to ownership.
A hedge fund has contracted with your broker/dealer to handle all of its clearing functions and provide all back office support functions while it is executing transactions through numerous other broker/dealers whom your broker dealer will have agreements with. This type of account is known as A) a custodial account B) a prime account C) a joint account D) a numbered account
Answer: B In a prime account, a customer contracts with one broker, the prime broker, to provide a list of support services, such as clearing and settlement of transactions, while contracting with numerous other brokers for executions services.
A registered representative who learns of a customer's death should: A) notify FINRA. B) accept no orders to buy or sell securities unless coming from a third-party power of attorney. C) cancel open orders. D) liquidate the account.
Answer: C When a registered representative learns of a customer's death, he must mark the account deceased, cancel all open orders, and await the appropriate legal documents. He must not attempt to transfer or otherwise dispose of the assets nor can any orders be taken for the account. Third-party power of attorney authorization is revoked immediately upon death of the account holder.
