Series 6 : Account Opening and Suitability (Lesson 4) Practice Questions
Which of the following transactions is not permitted? A) A 1035 exchange from an outdated variable annuity to a variable life insurance product B) Holding an order to liquidate mutual fund shares until the next business day if received after market close C) Encouraging an investor to wait to purchase mutual fund shares until after a dividend has been paid D) The sale of short calls in an UGMA account when the underlying stock is owned
A) A 1035 exchange from an outdated variable annuity to a variable life insurance product Annuities cannot be exchanged for life insurance through a 1035 exchange. Allowable 1035 exchanges are annuity for annuity and life insurance for an annuity. Covered calls are permitted for UGMA or UTMA accounts. A mutual fund order must be held until the next calculation of NAV, which occurs at market close Investors should be encouraged to purchase mutual fund shares after the ex-dividend to avoid a reduction in the value of shares and taxation of the dividend.
A high tax bracket investor that is just starting retirement needs to use his nest egg to provide income. Which type of mutual fund is likely to provide the highest income stream? A) A municipal bond fund B) A US government bond fund C) A high grade corporate bond fund D) An equity income fund
A) A municipal bond fund A high tax bracket investor is likely to benefit from an investment in a municipal bond fund. The income will not be taxed at the federal level and may be exempt at the state and local level depending on whether the investor resides in the state of the bonds' issuance.
All of the following statements about new account approvals are true EXCEPT A) Approval must take place before any trading in the account. B) Credit references and financial information, if required, should be verified by someone other than the representative who opened the account. C) Net worth information (excluding the value of the personal residence) must be collected for personal accounts to determine whether the account is suitable. D) The written account approval must become part of the permanent account record.
A) Approval must take place before any trading in the account. The account approval must take place prior to or promptly after the first trade in a new account.
When must a broker-dealer ensure that a recommended security is suitable for its customer? A) At the point of sale B) At the point of sale and for one year following the sale C) As long as the customer stays with the firm D) For the life of the investment
A) At the point of sale Broker-dealers must apply suitability and fair-dealing standards and rules at the point of sale. The sale can be a recommendation to purchase, hold or sell a security. However, broker-dealers and their representatives usually do not have responsibilities to monitor customers' investments beyond the point of sale.
A customer that opens a prime brokerage account will benefit from which of the following? A) Concierge services and a consolidated account that aggregates transactions completed through multiple executing brokerage firms B) Limited account review and fewer new account agreements C) Complete anonymity in execution and reporting of all transactions D) The lowest possible transaction costs in the execution of both domestic and international trades
A) Concierge services and a consolidated account that aggregates transactions completed through multiple executing brokerage firms Prime brokerage accounts consolidate accounts with multiple executing broker-dealers and offer additional services to customers.
In the securities brokerage industry, what type of account allows an adviser or planner place trades without the customer's prior approval? A) Discretionary B) Custodial C) Joint authority D) Contingency
A) Discretionary "Discretion" means the ability to designate which buy and sell trades are placed. In a discretionary account, customers explicitly give discretion to another person under a power-of-attorney.
A grandfather opens a brokerage account for the benefit of his 14- year-old grandson. Which of the following account titles will it have? A) Guardianship B) Community property C) Tenancy in common D) JTWROS
A) Guardianship A Guardianship account is set up for a minor or an incapacitated adult who is not able to manage his/her own affairs. A guardian is appointed with a power-of-attorney to conduct business on behalf of the minor or incapacitated adult, including opening and trading in a securities account. Also, minor's cannot open individuals or joint accounts until reaching the age of majority.
Which TWO of the following statements are TRUE of a principal's approval of a new opened account? I. It must be in writing. II. It indicates that all the account information is complete and correct. III. It indicates that the account is appropriate for the person opening the account based on the information collected. IV. It must be kept in the customer account file that is maintained by the representative who opened the account. A) I and III B) I and IV C) II and III D) II and IV
A) I and III A principal must give written approval for new accounts. By approving the account, the principal has confirmed that the account is appropriate based on the information gathered in during the account opening process. The principal who is approving the account does not confirm the accuracy of the information
Which of the following investments would be least suitable for an UGMA account? A) Interval fund shares B) S&P 500 index fund shares C) Units in a blue chip growth portfolio UIT D) Covered calls
A) Interval fund shares Custodians of UGMA accounts have fiduciary responsibility to select assets for the best interest of the minor. A high level of risk or lack of liquidity is generally not appropriate. Interval funds are not always liquid, so are the least appropriate investment of these choices
What type of investment relationship would subject a securities professional to a fiduciary duty? A) Investment advisory account B) Discretionary brokerage account C) Non-discretionary brokerage account D) ERISA retirement plan account
A) Investment advisory account Investment advisors owe their clients a fiduciary duty. Broker-dealers do not, they must adhere to a suitability standard in making recommendation.
A customer opens an individual account and wishes to bypass probate by naming her two children as equal beneficiaries to the account at her death. This account should be set up as a A) TOD account. B) tenants by the entirety account. C) limited power of attorney account. D) custodial account.
A) TOD account. An individual may establish a transfer on death (TOD) account to allow ownership of funds and securities to transfer outside of probate, though the assets are still subject to applicable taxation. It requires the naming of a prim
A husband and wife wish to open a brokerage account in which the husband will own 60% and the wife 40%. At either owner's death, the owner's portion will be liquidated and distributed to his/her beneficiary. Assuming they don't live in a community property state, what type of account should they open? A) Tenancy in common B) Joint Tenancy with Rights of Survivorship C) Partnership D) Tenancy by the Entirety
A) Tenancy in common Under a Tenancy in Common (or Joints Tenants in Common account), each owner has a specified percentage of the entire account. At each owner's death, his/her portion of the account is liquidated and distributed to his/her beneficiary
A husband and wife wish to open a brokerage account in which the husband will own 60% and the wife 40%. At either owner's death, the owner's portion will be liquidated and distributed to his/her beneficiary. Assuming they don't live in a community property state, what type of account should they open? A) Tenancy in common B) Joint Tenancy with Rights of Survivorship C) Partnership D) Tenancy by the Entirety
A) Tenancy in common Under a Tenancy in Common (or Joints Tenants in Common account), each owner has a specified percentage of the entire account. At each owner's death, his/her portion of the account is liquidated and distributed to his/her beneficiary.
A prospective client has received a copy of the customer relationship summary (Form CRS) of a broker-dealer who she is considering doing business with. This summary is mandated by Regulation Best Interest (BI). Information pertaining to which of the following items is unlikely to appear in this document? A) The business background of the principal officers of the firm B) Reportable disciplinary or legal history of the firm and its professionals C) The fee structure maintained by the firm in connection with its products and services D) The type of services the firm provides, and the costs associated with those services.
A) The business background of the principal officers of the firm The Customer Relationship Summary (Form CRS) is a document mandated by Regulation Best Interest (BI) and must be provided to every prospective and existing retail customer of a broker-dealer before any recommendation may be made. Within this document the individual will learn information about the services offered by the firm, as well as the fees and costs associated with those services. Additionally, the summary provides information about reportable legal or disciplinary events in connection with the firm and its professionals. The summary will not typically provide information about the business background of the officers of the firm, although the summary must provide guidance on how an individual can ascertain additional information about the firm.
According to industry rules, which of the following evidence supports the suitability of an investment recommendation? A) The recommendation was based on facts disclosed by the customer. B) The investment product has a history of long-term gain. C) The recommendation was based on an evaluation of the latest research reports. D) The firm has evidence indicating that customers are satisfied with the investment.
A) The recommendation was based on facts disclosed by the customer. The recommendations of a registered representative must be suitable for each particular client; suitability is determined based on facts disclosed by the customer.
All of the following statements about new account approvals are true EXCEPT A) approval must take place before any trading in the account. B) credit references and financial information, if required, should be verified by someone other than the representative who opened the account. C) net worth information (excluding the value of the personal residence) must be collected for personal accounts to determine whether the account is suitable. D) the written account approval must become part of the permanent account record
A) approval must take place before any trading in the account. The account approval must take place prior to or promptly after the first trade in a new account.
When a decision on a dispute between a representative and a member firm is reached through an arbitration proceeding, the decision A) is final and binding on all parties B) may be appealed through the court system C) must be reviewed and approved by NAMC before parties are required to pay awards that are due D) may be reviewed and renegotiated in a mediation proceeding
A) is final and binding on all parties An arbitration proceeding results in a final decision that is binding on all parties. The decision is rendered within 30 days, and any monetary awards are payable by the parties within 30 days of the decision
A customer calls his broker-dealer to report that he has lost his job. As a result, the broker-dealer must A) send an updated account record for verification within 30 days of the receipt of the customer's notification. B) close the account if it is no longer suitable for the customer based on the change in situation. C) require the representative to ask the customer to make notification of this change in writing. D) verify account information with this customer on an annual basis to ensure that the account continues to be appropriate for the customer.
A) send an updated account record for verification within 30 days of the receipt of the customer's notification. The broker-dealer must send an updated account record for verification within 30 days of receipt of the customer's notification of a change in account information.
When is a quantitative suitability violation most likely to occur? A) when trading turnover and costs are high B) when the account holds speculative investments C) when the account holds illiquid investments D) when the investor is elderly
A) when trading turnover and costs are high Quantitative suitability considers the pattern of transactions in an account, rather than just a single trade or recommendation. If a recommendation is part of a pattern of trades that is excessive based on timing, frequency or transaction quantity, a suitability violation may occur
All of the following documentation is required for the opening of an estate account except a A) will. B) certified copy of the death certificate. C) certified copy of appointment. D) new account form established under the tax ID of the estate or the Social Security number of the decedent.
A) will. A will is not required for establishing an estate account. If the account owner dies intestate (without a will), the distribution of assets will proceed in accordance with state law.
Investments in a small cap mutual fund and a business development company fund are most appropriate for which investor? A) A 70-year-old retiree with a nest egg of $750,000 B) A 35-year-old single dentist making $250,000 per year with no debt C) A 55-year old business executive making $300,000 per year with a moderate risk tolerance D) A new retiree rolling over a $1 million 401(k) balance who has no current income need
B) A 35-year-old single dentist making $250,000 per year with no debt Small cap fund and business development company investments are highly aggressive. These are appropriate for investors who have a longer time horizon and can sustain market loss
Who supervises the assets held in a Uniform Gift to Minors Act (UGMA) account? A) A guardian B) A custodian C) A trustee D) A mutual fund company
B) A custodian A gift made to a child in a UGMA or UTMA must be irrevocable and assets must be supervised by one (and only one) adult custodian until the child turns majority age
A customer wishes to grant discretionary trading authorization to his representative. All of the following will apply EXCEPT A) The account must be approved by a principal for discretionary authority prior to the first trade B) A registered representative can withdraw funds from the account C) A registered representative can decide which stock to buy and sell and when D) This account will be subject to closer scrutiny for churning in the account review process
B) A registered representative can withdraw funds from the account Discretionary trading authority permits a representative to make trades on behalf of the account, but not to withdraw funds or securities from the account. When discretionary authority is requested, the principal who reviews the account must approve it as discretionary before the first trade. Churning, or making excess trades to generate commissions, is a risk in discretionary accounts, which should be monitored in the account review process.
A sector fund has which of the following characteristics? A) Classification as a non-diversified investment company B) A stock portfolio with investments concentrated within a single industry C) A bond portfolio with investments concentrated within a single industry D) A stock or bond portfolio that is classified as a diversified investment company, but with a narrow focus
B) A stock portfolio with investments concentrated within a single industry Sector funds are stock funds with portfolios that are concentrated within a single market sector or industry. They may still be classified as diversified companies if they meet the 75-5-10 diversification rule specified by the Investment Company Act of 1940.
If a broker-dealer customer wants to open a trust account, what documentation will be required? A) A will B) A trust agreement C) A general liability release D) A perpetual power-of-attorney
B) A trust agreement A trust account is controlled by a trustee, who acts under powers and limits set forth in a trust agreement. Clients who wish to set up trust accounts must give the broker-dealer a copy of the trust agreement
A financial representative must apply a suitability standard in which of the following situations? A) Both solicited and unsolicited orders for mutual fund products and all forms of life insurance and annuity products B) All solicited orders of investment company and variable products C) Both solicited and unsolicited orders of investment company and variable products D) Solicited orders of investment company but not insurance company products
B) All solicited orders of investment company and variable products FINRA's standards of suitability apply to solicited orders for registered products. This requirement applies to the sale of both investment company and variable products. A customer may initiate, and the firm may execute, unsuitable transactions. However, all solicited transactions must comply with FINRA suitability rules.
Which of the following characteristics is required of a trusted contact named for a customer's account? A) Written agreement to acknowledge acceptance of the responsibility B) At least 18 years of age C) A family relationship D) Approval by a principal of the firm
B) At least 18 years of age A trusted contact must be 18 or older, but firms are not required to verify age.
A financial consultant is meeting with a client to recommend alternative securities products to fund the client's Roth IRA. In this situation, FINRA requires which of the following standards? A) Suitability standard B) Best interest standard C) Fair and reasonable standard D) Know your customer standard
B) Best interest standard Because the representative is recommending a change in product or strategy to a retail customer, the best interest standard applies.
Which of the following types of brokerage accounts will NOT specify a beneficiary? A) Partnership B) Corporation C) Sole proprietor D) Personal
B) Corporation Corporations have unlimited life, so there is no need to name an account beneficiary.
Which of the following is the least accurate statement with regard to Regulation Best Interest (BI)? A) Recommendations made to a person holding power of attorney over a retail client account are subject to Regulation Best Interest (BI). B) It is usually evident that excessive trading has occurred in a retail client account by analyzing the single most important element within the account, which is the turnover rate of the clients portfolio. C) If account monitoring services are provided to the client, any subsequent updates or recommendations must comply with the Rule. D) Records of each retail recommendation for a specific transaction or investment strategy must be maintained by the firm for at least six years.
B) It is usually evident that excessive trading has occurred in a retail client account by analyzing the single most important element within the account, which is the turnover rate of the clients portfolio. There are several factors which are used to determine whether excessive trading has occurred in a retail client account. In general, the client investment profile is used to analyze instances of potential trading abuses, or churning. Specific data that may be used to perform this analysis include the turnover rate, cost - to-equity ratio, and in and out trading figures.
At what rate do states tax withdrawals from Traditional IRAs? A) Zero in all cases B) It varies by states C) From 5% to 12.5% D) The same as the federal government
B) It varies by states Nine states do not have any state income tax. Other states fully tax IRA withdrawals at their ordinary income tax rates.
A couple live in California, a community property state. They own a brokerage account worth $1 million, and it is considered community property. If they get a divorce, what will happen to the account? A) It will be contested in community court. B) It will be split 50-50. C) It will be divided based on their respective investments and contributions. D) It will be divided 40-40-20, with California getting the 20% share to hold in escrow.
B) It will be split 50-50. Nine states recognize community property, which consists of assets acquired by a married couple during marriage. Upon the death of either owner, his/her share passes to a designated beneficiary or through his/her will or trust. Upon divorce, community property is equally divided
A married couple want to open a joint brokerage account in which each owner has an undivided interest in the entire property. If one spouse dies, the other will retain rights to the entire account. This account will be labeled as A) tenancy by the entirety B) JTWROS C) conservatorship of the whole D) free and clear rights of survivorship
B) JTWROS Joint Tenancy with Rights of Survivorship (JTWROS) is a method of titling an account in which each owner has an undivided interest in the entire property. If one dies, any remaining holders retain their rights to the entire account
A married couple want to open a joint brokerage account in which each owner has an undivided interest in the entire property. If one spouse dies, the other will retain rights to the entire account. This account will be labeled as A) tenancy by the entirety. B) JTWROS. C) conservatorship of the whole. D) free and clear rights of survivorship.
B) JTWROS. Joint Tenancy with Rights of Survivorship (JTWROS) is a method of titling an account in which each owner has an undivided interest in the entire property. If one dies, any remaining holders retain their rights to the entire account.
An investor that is retiring would like to invest $250,000 in investment company securities that would keep pace with inflation. The investor can tolerate a medium degree of market risk. Which of these choices best meets his goal? A) Balanced fund B) Mid cap fund C) Interval fund D) High yield unit investment trust
B) Mid cap fund Equity investments are best suited for returning growth to keep pace with inflation. For investors with some tolerance for risk, a mid cap fund is appropriate. Interval funds offer exposure to alternative asset classes and may offer appreciation and/or income but are considered appropriate for investors with a higher risk tolerance
The tax liability in a custodial account rests with the A) Custodian B) Minor C) Guardian D) Parent
B) Minor The minor is responsible for the tax liability in a custodial account. The custodian, having a fiduciary duty to the minor, must ensure that the minor's taxes are properly paid in a timely manner.
How do community property states define "community property?" A) Property acquired by any two people through agreement B) Property acquired by a married couple during marriage C) Any commingled account held by a married couple D) Property acquired by a married couple prior to marriage
B) Property acquired by a married couple during marriage Community property states define community property as assets acquired by a married couple during marriage.
Broker dealers and their representatives are held to suitability standards that apply to virtually all securities A) Transactions B) Recommendations C) Purchases D) Accounts
B) Recommendations It is the recommendation to buy, sell, exchange or hold securities that triggers suitability rules. When clients direct reps to complete a transaction (without a recommendation), suitability rules may not apply.
You are holding an annual update meeting with a customer and determine that no trusted contact information has been provided for her accounts. What should you do? A) Explain that this information is now required and that additional trades cannot be made until the information is provided. B) Request that she provide this information as part of the process of updating her accounts with any other changes in her situation. C) Inform her that she must provide this information within 30 days or the account will be frozen until the information is received D) Proceed with updating her account for other changes in her situation. You are not required to request this information for existing accounts
B) Request that she provide this information as part of the process of updating her accounts with any other changes in her situation. Firms should attempt to collect trusted contact information for all retail accounts. For existing accounts, firms should request this information as part of their normal account update process.
A co-owner in a joint account requests a distribution from the account. The broker-dealer must do which of the following? A) Send the distribution as requested and make it payable to the owner who made the request B) Send the distribution as requested and make it payable to both of the joint owners C) Explain that the distribution cannot be sent unless requested in writing D) Explain that the distribution can only be sent upon written request signed by both joint owners
B) Send the distribution as requested and make it payable to both of the joint owners A distribution from a joint account may be requested by only one of the account owners, but must be made payable to all owners.
Which of the following factors would be least relevant in determining the suitability of a customer? A) The client's tax status B) The client's educational background C) The client's liquidity needs D) The client's investment experience
B) The client's educational background A client's tax status, investment experience, liquidity needs, time horizon, and objectives are all relevant factors in determining the suitability. The customer's educational background would not be relevant.
IRAs are defined as what type of accounts? A) Segregated B) Trust or custodial C) Commingled D) Discretionary
B) Trust or custodial IRAs are trust or custodial accounts established in the U.S. Their assets must be used exclusively for the account owner and his/her beneficiary.
When des the money in an UGMA account become the property of the minor? A) 18 B) When Given C) 21 D) Age of Majori
B) When Given In a UGMA account, he child is the owner, therefore the account is the property of the child. The child gains access to and control over assets at that age of majority
The naming of a trusted contact is requested at account opening for all of the following accounts except an A) UGMA account for a minor child. B) account of an institutional customer. C) account owned by a 55-yearold suffering from early onset dementia. D) account opened by a 25-yearold who is investing for the first time.
B) account of an institutional customer. FINRA requires firms to make reasonable efforts to obtain the name of and contact information for a "trusted contact" when opening accounts for non-institutional customers.
For settlement of disputes between a representative and a member firm, FINRA requires A) mediation B) arbitration C) adjudication D) intercession
B) arbitration Arbitration is the required means of dispute settlement for securities industry firms and representatives. Customers must agree in writing to arbitration.
A client wants her account designated by number, not by her name. The registered rep A) cannot open the account in this manner B) can open the account with a written statement of ownership from the client C) can open this account with a written statement of ownership and approval from an authorized delegate of the client D) can open this account without additional documentation
B) can open the account with a written statement of ownership from the client Accounts can be opened with a name or a symbol as long as the owner provides a written statement of ownership. This may be done when the individual wishes to remain anonymous
Arbitration is required as the means of settlement for all of the following EXCEPT A) disputes between two member firms B) disputes between a member firm and a customer C) disputes between a member firm and a registered representative D) disputes between a member firm and another member firm who only clears transactions
B) disputes between a member firm and a customer Arbitration is required for settlement of monetary disputes between member firms and representatives. It can only be required for settlement of disputes with customers if have agreed in writing to forego their opportunity to take the firm to court.
A principal who is reviewing the suitability of an account in order to accept it on behalf of the broker-dealer must A) verify all financial information. B) ensure that the investment objective of the account is appropriately aligned with the risk profile of the customer. C) confirm the objectives with the representative before approving the account. D) wait 30 days for the customer to verify the account suitability information before the account can be approved.
B) ensure that the investment objective of the account is appropriately aligned with the risk profile of the customer. In the account approval process, the principal or designated person who is reviewing the account must ensure that the account objectives of the account are consistent with the risk profile. Verification of all financial information is not required. Although the firm must send verification of the account information within 30 days of account opening, the account can be approved for trading before this occurs.
When opening a margin account, the agreement that customers sign to pledge their securities as collateral for a loan from the broker-dealer is the A) margin agreement. B) hypothecation agreement. C) re-hypothecation agreement. D) loan agreement.
B) hypothecation agreement. Customers that open margin accounts must sign a hypothecation agreement to pledge their securities as collateral for loans from the broker-dealer for margin account purchases. The broker-dealer may then re-hypothecate the securities to the bank, meaning that they are pledged to the bank as collateral for loans to the broker-dealer for lending to customers.
Investors purchase common stock primarily for A) the income stream it generates B) its appreciation potential C) its relative safety D) its resistance to business risk
B) its appreciation potential Common stock is purchased by investors for its capital appreciation potential. Historically it has kept pace with the rate of inflation and is used to meet growth objectives. It is most junior in terms of claims to assets in a corporate liquidation, and does not protect investors from investment risk
A customer is requesting a recommendation from a registered representative regarding a rollover from a 401(k) plan to an IRA account. In working with this customer, the representative A) is subject to the FINRA customer specific standard of suitability but not to the quantitative standard. B) must apply the best interest standard because the recommendation involves a change to retirement accounts. C) must apply the three FINRA suitability standards and ensure that any advice to buy, sell or hold securities meets the investor's needs and risk tolerance level. D) must apply a suitability standard since a rollover is not subject to the more stringent fiduciary standard that applies to retirement planning.
B) must apply the best interest standard because the recommendation involves a change to retirement accounts. The best interest standard applies when representatives are encouraging changes to retirement accounts of retail customers.
An individual has opened a new account with a broker-dealer and provided all requested information. To confirm the account information, the broker-dealer must A) do a background check and provide disclosure to the customer regarding the Fair Credit Reporting Act. B) send a copy of the account documentation within 30 days of the account opening, and request that customer return any requested changes within 30 days. C) require that the customer send written confirmation of the accuracy of the account information within 30 days of the request. D) call the customer within 24 hours to verify the accuracy of the account information
B) send a copy of the account documentation within 30 days of the account opening, and request that customer return any requested changes within 30 days. Broker-dealers are required to request verification of account information in writing within 30 days of the account opening. If the customer wishes to make changes, the new information must be supplied to the broker-dealer within 30 days of the request. If the customer does not respond, it is assumed that the information collected to open the account is accurate.
A limited power of attorney would allow a registered representative to do all of the following on behalf of a client except A) make investment decisions. B) withdraw cash from the account. C) buy stock on behalf of the customer. D) sell stock on behalf of the customer.
B) withdraw cash from the account. A limited power of attorney would allow a registered representative to make investment decisions, such as buying and selling securities on behalf of the customer. However, only a full power of attorney would allow a registered representative to withdraw funds from the client's account
An investor that is retiring would like to invest $100,000 in mutual funds that would keep pace with inflation without high risk. Which of these choices best meets his goal? A) A high yield bond fund B) A sector fund C) A blue chip stock fund D) An equity income fund
C) A blue chip stock fund Because there is no mention of an income requirement, the best choice for growth without high risk is a blue chip stock fund. The sector fund is riskier due to concentration in a single segment.
A low tax bracket investor that is just starting retirement needs to use his nest egg to provide income. Which type of mutual fund is likely to provide the highest income stream? A) A municipal bond fund B) A balanced fund C) A corporate bond fund D) A U.S. government bond fund
C) A corporate bond fund A corporate bond fund has the potential to provide the highest income but will also include higher risk. A municipal bond fund is not appropriate for investors in a low tax bracket
An investor that is retiring is looking for your guidance on how to invest $100,000 of 401(k) funds. If the investor needs no income, but is concerned about long-term market risk and inflation, which of the following choices is the best recommendation for her situation? A) A government bond fund B) A balanced fund C) A large cap stock fund D) A technology sector fund
C) A large cap stock fund This investor's objective of growth with concern for market risk is best met with a large cap stock fund, which includes stock of recognized companies with strong performance records.
What legal instrument will a customer execute to give a financial planner discretionary trading authority, until such time it is revoked by the customer? A) A revocable living trust B) A revocable collateral assignment C) A limited power-of-attorney D) A notarized advisory contract
C) A limited power-of-attorney To authorize discretionary trading, the customer grants an adviser or planner a limited power-of-attorney to place trades. A discretionary authority created through a limited power-of-attorney may be revoked by the customer at any time.
A new account may be opened by any of the following EXCEPT A) An investment club B) A trust C) A minor D) A limited liability corporation
C) A minor A minor is not a legal entity or person in the eyes of the law. An account may be opened on behalf of a minor (UTMA or UGMA), but not by a minor.
A separate risk disclosure statement is required when all of the following types of accounts are opened for non-institutional investors EXCEPT A) Options accounts B) Margin accounts C) Custodial accounts D) Day trading accounts
C) Custodial accounts Separate account disclosure is required when the account risk may be relatively high, as in options accounts, margin accounts and day trading accounts. Custodial accounts require additional documentation but not additional disclosure.
In a joint tenants with rights of survivorship account (JTWROS), which two of the following apply? I. At death the account proceeds pass to the estate II. At death the account proceeds pass to the joint owner III. Joint owners have an undivided interest in the account IV. There can be no more than two joint owners A) I and II B) I and III C) II and III D) II and IV
C) II and III In a JTWROS account, all account owners have and undivided interest, or equal ownership of all the assets in the account. There must be at least two account owners in a joint account, but may be more. At the death of the account holder, the account proceeds pass to the surviving account owners with no probate
Which of the following securities products can a broker-dealer recommend without making reasonable efforts to determine suitability? A) Exchange-traded stocks B) U.S. Treasury securities C) Money market mutual funds D) Municipal securities
C) Money market mutual funds Broker-dealers are not required to make reasonable efforts to obtain customer information when making recommendations where investments limited to money market mutual funds. The reason for this is because money market mutual funds are thought to have almost no price risk.
Three people are listed as owners of a brokerage account that is titled JTWROS. If one of the three dies and the account is then liquidated, how much will be distributed to each of the survivors? A) It depends on their ownership shares B) One-third of the total C) One-half of the total D) It must be decided by the probate court
C) One-half of the total If two people own a JTWROS account and one dies, the survivor inherits 100% of the account. If three people own a JTWROS account and one dies, the survivors will each retain a 50% stake in the account.
In an UGMA account, all of the following are required EXCEPT A) One minor only B) One adult custodian only C) Parental approval if the account is to be opened by another adult on behalf of the minor D) Social Security number of the minor
C) Parental approval if the account is to be opened by another adult on behalf of the minor An UGMA or UTMA custodial account does not require parental approval. In UGMA or UTMA accounts there must be one adult custodian and one minor only, and the account must be registered under the Social Security number of the minor.
At account opening, a customer is asked to provide the name of a trusted contact and refuses to do so. What should you do? A) Advise the customer that you cannot open the account without this information B) Proceed with opening the account but report the situation to your supervisor for further follow up C) Proceed with opening the account and provide written disclosure about the purpose of the trusted contact D) Proceed with opening the account. No further written disclosure about the purpose of the trusted contact is required since you attempted to gather the information.
C) Proceed with opening the account and provide written disclosure about the purpose of the trusted contact When opening an account, representatives should make a reasonable effort to obtain trusted contact information. If a customer refuses to provide this information, the account can be opened, but written disclosure about the purpose of the trusted contact is still required.
As you attempt to update account information for an existing customer's retirement account, the customer refuses to provide trusted contact information. What should you do? A) Explain that this account must be closed if this information is not immediately provided B) Explain that she must provide this information within 30 days or the account will be closed C) Provide her with written disclosure explaining the purpose of a trusted contact, and proceed with updating all other account information D) Explain that the account will be frozen until this information is received because this is a new regulatory requirement for all accounts
C) Provide her with written disclosure explaining the purpose of a trusted contact, and proceed with updating all other account information Firms should attempt to collect trusted contact information for all retail accounts. For existing accounts, firms should request this information as part of their normal account update process. The customer should be given written disclosure about the purpose of naming the trusted contact. Normal account activity can continue if the customer does not provide this information.
An existing retail customer's account does not include trusted contact information. FINRA rules require which of the following? A) The firm must freeze the account until trusted contact information is provided B) The firm must send a written request for this information within 30 days of noticing the deficiency C) The firm should attempt to collect this information as part of its routine process for updating account information D) The firm is not required to attempt to collect this information for existing accounts
C) The firm should attempt to collect this information as part of its routine process for updating account information Firms should attempt to collect trusted contact information for all retail accounts. For existing accounts, firms should request this information as part of the
All of the following statements are true regarding the opening of customer accounts EXCEPT A) Margin account trading is permissible in corporate accounts if authorized. B) The financial information of all partners must be collected when opening a partnership account. C) The social security number of the custodian is required for the opening of an UGMA account. D) Court documentation is required to name a conservator as the responsible party for the account of an incompetent adult.
C) The social security number of the custodian is required for the opening of an UGMA account. An UGMA/UTMA account must include the custodian's name, and the name and Social Security number of the minor.
Which of the following is NOT a characteristic of a power of attorney form? A) It can be used to grant full trading authorization B) It must be signed by the account holder and the authorized person C) There is a standardized form that is used for granting the authority D) It is no longer in effect when the account holder dies
C) There is a standardized form that is used for granting the authority A power of attorney form must be carefully reviewed during the account approval process because there is no standard format. It can grant full or limited trading authorization that remains in effect until the death of the account holder who granted the authority
An account in which an individual has been appointed by a court to manage assets of a bankrupt entity such as a corporation, is a A) trust account. B) guardian account. C) conservator account. D) custodial account.
C) conservator account. A conservator account is opened upon court authorization. The court appoints a conservator to liquidate assets of a business in bankruptcy, or in situations such as for management of the finances of an incompetent individual who needs court protection
When a mentally incapacitated person owns assets in a brokerage account, a guardian usually is appointed by the court and given a power-of-attorney to conduct business in the account. In this context, the guardian may also be called the A) advocate. B) surrogate. C) conservator. D) ombudsman.
C) conservator. In some states, courts appoint guardians and guardianships. In others, they appoint conservators and conservatorships. The roles and responsibilities are much the same, regardless of the term used.
In a corporate account, the document that identifies the persons who are permitted to make trades on behalf of the corporation is the A) power of attorney. B) corporate charter. C) corporate resolution. D) articles of incorporation.
C) corporate resolution. When a corporate account is opened, a copy of the corporate resolution is required to identify the person(s) authorize
In a corporate account, the document that identifies the persons who are permitted to make trades on behalf of the corporation is the A) power of attorney. B) corporate charter. C) corporate resolution. D) articles of incorporation
C) corporate resolution. When a corporate account is opened, a copy of the corporate resolution is required to identify the person(s) authorized to trade on the corporation's behalf.
A customer contacts a registered representative to request general information about opening a Roth IRA. The registered representative responds with an email that summarizes key Roth provisions. This is an example of A) general educational material which is not subject to FINRA public communications rules. B) a retail communication that must be approved by a principal prior to use. C) correspondence that is not subject to prior principal approval but must be monitored. D) a customer communication that can be sent on a firm-issued device only.
C) correspondence that is not subject to prior principal approval but must be monitored. Providing general educational information by email is an example of a correspondence that must be monitored by the firm. Principal approval before use is not required unless the communication will be used with more than 25 persons in a 30-day period. These communications may be sent on personal or firm-issued devices, but firms must have the ability to monitor them
For existing customer accounts, how often do broker-dealers required to send a written notice to the customer for verification of account information? A) annually. B) every two years. C) every 3 years. D) every 5 years
C) every 3 years. Firms must verify customer information at least once every 36 months. The point of this requirement is to ensure that the account is still appropriate and the information on file is still accurate
To exercise trading authority over a discretionary account, a broker-dealer's registered representative must A) have written permission from their manager only. B) be registered as a principal. C) have written authorization from the client. D) have an Authorized Trading Contract(ATC).
C) have written authorization from the client. To exercise trading authority over discretionary accounts, a broker-dealer agent must have written authorization from the client, traditionally via a Power of Attorney (POA).
A customer wants to add funds to her brokerage account to buy stock. She wants these funds to come from the line of credit attached to her Visa credit card. Can she do this? If so, how? A) this is not allowed B) she can write a Visa account check and mail it to her brokerage firm C) she can transfer the line-of-credit funds to her personal checking account, write a check, and send it to her brokerage firm D) she can ask VISA to make a direct transfer of the funds to her brokerage firm
C) she can transfer the line-of-credit funds to her personal checking account, write a check, and send it to her brokerage firm The Federal Reserve regulates the use of borrowed funds to purchase securities ? e.g., as in margin accounts. When customers use other types of credit to buy securities, it circumvents Fed regulation. That is one reason why brokerage firms can't accept for payment checks drawn against credit lines (Visa, Master Card, Discover). However, the rules don't prevent her from transferring funds from her credit line to her personal checking account, writing a personal check, and sending it to her broker.
If three people own a brokerage account that is registered as Joint Tenancy with Rights of Survivorship (JTWROS), and two of them then die at the same time, how much of the account does the survivor own? A) None, because the decedents' heirs assume ownership. B) 33 percent C) 67 percent D) 100 percent
D) 100 percent Each owner in a JTWROS has an undivided interest in the entire property. If one dies, any remaining holders retain their rights to the entire account.
If three people own a brokerage account that is registered as Joint Tenancy with Rights of Survivorship (JTWROS), and two of them then die at the same time, how much of the account does the survivor inherit? A) None, because the decedents' heirs assume ownership. B) 33% C) 66% D) 100%
D) 100% Each owner in a JTWROS has an undivided interest in the entire property. If one dies, any remaining holders retain their rights to the entire account.
When must a broker-dealer or its registered representatives obtain suitability information from customers? A) At the time they become clients B) Any time the client's status changes C) Before the recommendation is made D) Before execution of each recommended transaction
D) Before execution of each recommended transaction Suitability must be determined before execution of any recommended transaction.
All of the following statements regarding confirmations of trades in online trading accounts are true EXCEPT A) Customers must log in to a secured site with a user name and password to access account confirmations. B) A customer may request printed copies of confirmations, but the firm may charge a service charge for complying with this request. C) The average price of the security that was bought or sold is included in the confirmation. D) Confirmations of transactions cannot be made available online unless the trade was executed through an online trading platform.
D) Confirmations of transactions cannot be made available online unless the trade was executed through an online trading platform. Confirmations of transactions can be made available to customers in print form or online form regardless of how the trade was entered.
Which of the following terms does not define a customer's investment objective? A) Growth B) Income C) Preservation D) Conservative
D) Conservative Investment objectives can typically be described as either growth, income, preservation, or some combination of these terms. Conservative is a category of risk tolerance.
Which entity appoints a guardian or conservator to manage a brokerage account for a minor or incapacitated adult? A) FINRA B) Chief Compliance Office C) County clerk D) Court
D) Court A guardian or conservator is appointed by the court, and granted a power-of-attorney to conduct business on behalf of the minor or incapacitated adult. Courts often continue to oversee guardianships and conservatorships after they are established.
Failing to consider an investor's low tax bracket when recommending an investment in the shares of a municipal bond fund is most likely a violation of which of the following? A) FINRA best execution rules B) Know your Customer rules C) Quantitative suitability requirements D) Customer specific suitability requirements
D) Customer specific suitability requirements Customer specific suitability requires that a recommendation consider the customer's individual financial situation and objectives.
A high-net-worth investor in a high tax bracket may consider which of the following to maximize the tax benefit? A) International equity closed-end funds B) Corporate bond closed-end funds C) Mortgage-backed closed-end funds D) Municipal closed-end funds
D) Municipal closed-end funds This investor would benefit from tax-free income from municipal bonds or a municipal bond fund, whether open- or closed-end. The other three choices do not offer tax benefit.
A representative recommends that a customer make three different trades in mutual funds this month. These are the first transactions in this customer's account in three years. These transactions are most likely to trigger concern for which of the following? A) Best execution responsibility B) Reasonable basis suitability C) Customer specific suitability D) Quantitative suitability
D) Quantitative suitability Quantitative suitability requires that a series of recommended transactions is appropriate, and not excessive or unsuitable, when reviewing them in light of the customer's profile. These transactions may be deemed excessive given the customer's past transaction history
The stock of a company with no earnings history, but high potential for appreciation is most likely classified as a(n) A) Income stock B) Cyclical stock C) Mid-cap stock D) Speculative stock
D) Speculative stock Speculative stocks generally have no earnings history, or widely varying earnings, but they have high potential for appreciation because of their future promise.
Which of the following statements is true regarding a mutual fund account with a TOD designation? A) Either the account owner(s) or the beneficiary may make trades in the account B) An account with this designation is subject to probate C) This designation can only be used in conjunction with joint accounts D) The beneficiary is not protected from claims of creditors
D) The beneficiary is not protected from claims of creditors A TOD designation does not protect the assets from claims by creditors. A transfer on death (TOD) account passes to the beneficiary at death, bypassing the probate process. The beneficiary has no rights to the account while the owner is alive. A TOD designation can apply to joint or individual accounts.
Which of the following factors is least important in determining a suitable recommendation? A) The investment objectives of the client B) The time horizon for the investment C) The client's tax status D) The client's marital status
D) The client's marital status The client's tax status, investment objectives, and the time horizon for the investment are all important factors in determining the suitability of an investment recommendation. Marital status is not as important.
In a non-discretionary brokerage account, who must approve all buy and sell trades before they are executed? A) The broker-of-record B) The office of supervisory jurisdiction C) The FINOP D) The customer
D) The customer In a non-discretionary account, the customer must approve all buy and sell trades before they are executed. All brokerage accounts are nondiscretionary unless the customer explicitly grants discretionary trading authority to another entity, such as a Registered Investment Adviser or feebased financial planner. All trades must also be approved by a supervisor, though this can be done promptly after execution.
How does a corporation indicate who is authorized to trade for a corporate brokerage account? A) Through a limited power-of-attorney B) Through a designated, standing power-of-attorney C) Through an amendment to its charter D) Through a resolution of the board of directors
D) Through a resolution of the board of directors A corporation passes a resolution of the board of directors to set up a brokerage account. The resolution specifies who will have trading authority for the account.
All of the following statements about FINRA requirements for discretionary accounts are true EXCEPT A) A principal must approve each discretionary transaction after the trade. B) A registered representative must have the client's prior written authorization before exercising any discretionary power. C) Transactions in discretionary accounts cannot be excessive in size. D) Transactions in a discretionary account must be approved by the client prior to execution of the trade.
D) Transactions in a discretionary account must be approved by the client prior to execution of the trade. FINRA Conduct Rules state that a registered rep must receive written authorization from a customer before exercising any discretionary authority. Additionally, all trades in discretionary accounts must be approved by a supervisor in writing (but not before the execution of the trade), and must be supervised diligently to detect any excessive trades or churning
For which children can a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account be set up? A) children under the age of 21 B) children under the age of 25 C) children under the age of 25 and any child who is a full-time college student D) children under the legal age of majority, as determined by the state of residence
D) children under the legal age of majority, as determined by the state of residence UGMA and UTMA accounts are custodial accounts set up to hold, protect and invest assets for children until they turn majority age in their state of residence. That age currently is 18 in most states, 19 in a few states, and 21 in Mississippi. However, in six states children reach majority when they graduate from high school, if that happens before 18. At majority, assets in a minor's account become the property of the child.
To ensure that suitable recommendations are made to customers, broker-dealers are required to make reasonable efforts to obtain all of the following types of customer information except A) investment objectives. B) tax status. C) financial status. D) educational background.
D) educational background. The suitability rule focuses on whether each specific recommendation is suitable for the client's financial and tax status, as well as the client's investment objectives. It does not require a broker-dealer to inquire about a client's educational background
The FINRA suitability standard applies to all of the following transactions EXCEPT A) recommending the purchase of mutual funds for an UGMA account. B) assisting a customer in choosing the funding for a 529 plan. C) encouraging a customer to choose a UIT investments over closed end company shares. D) executing an order to purchase shares in a high-cost and aggressive mutual fund requested by a retired investor.
D) executing an order to purchase shares in a high-cost and aggressive mutual fund requested by a retired investor. The FINRA suitability standard applies to securities recommendations, but not unsolicited transactions.
A brokerage firm can open an account for all of the following EXCEPT a(n) A) pension fund B) insurance company C) estate D) minor
D) minor A brokerage firm cannot open an individual account for a minor. It can open a UGMA account with an adult as the custodian for one minor.
In attempting to protect customers from financial exploitation, a broker-dealer is required to do all the following EXCEPT A) request that a retail customer name a trusted contact. B) hold disbursements from the accounts of specified adults if financial exploitation is suspected. C) establish and maintain written supervisory procedures for addressing financial exploitation. D) place trades in accounts of specified adults if financial exploitation is suspected.
D) place trades in accounts of specified adults if financial exploitation is suspected. To protect seniors and other vulnerable adults from financial exploitation, FINRA requires that firms attempt to obtain trusted contact information and hold transactions (orders to buy or sell securities) and/or disbursements from these accounts if they appear suspicious. Firms must also establish and maintain written supervisory procedures and keep appropriate records.
Regulation Best Interest (BI) provides that a customer relationship summary (Form CRS) be provided to prospective and existing retail clients A) prior to the execution of a recommended transaction. B) within 24 hours of the delivery of a recommendation but prior to the execution of a recommended transaction. C) prior to the delivery of a prospectus for a recommended mutual fund transaction. D) prior to a recommendation for a particular investment product or strategy.
D) prior to a recommendation for a particular investment product or strategy. Regulation BI requires that a customer relationship summary (Form CRS) be provided to a prospective and existing retail customer prior to any recommendations being made. The purpose of this summary is to give clients the opportunity to compare products and services across multiple service providers. To that end, this summary must comply with various requirements as proscribed by SEC rules, to promote ease of comparison of products and services.
A couple wishes to open a trust account for the benefit of their children. The terms of the account may be altered under certain specified conditions outlined in the trust documentation. This is an example of a A) testamentary trust account. B) discretionary trust account. C) custodial trust account. D) revocable trust account.
D) revocable trust account. Because this trust has been created while the trustors are alive, and because the terms of the trust can be altered, it is a revocable intervivos trust. Trustors generally receive fewer tax benefits from revocable trusts, but retain more control over the trust assets.
A married couple have an account through a form of account title that is available only to married couples. As a couple, they are considered a single legal entity, and each spouse can receive the entire account on the death of the other. Creditors may not attach the account to satisfy a debt of either individual, only the couple. This is called: A) JTWROS. B) FBO. C) community property. D) tenancy by the entirety.
D) tenancy by the entirety. A tenancy by the entirety account is owned by the couple as a single legal entity, and each spouse has a right of survivorship. Creditors may not attach the account to satisfy a debt of either individual spouse, only the couple. Neither spouse may give or sell an interest in the property without the consent of the other
