Series 7 Chapter 6
A client at your firm has given their registered representative limited trading authority over her account. If this is the case, which of the following are ACCURATE of this scenario? I. Discretionary stop orders may not be entered by the RR for this account. II. No checks or withdrawals may be issued from the account in the RR's name. III. The account and orders made in the account are subject to the review of a principal of the firm on a frequent basis. IV. Account statements and all confirmations are directed toward the RR for the account, rather than the customer.
(II & III) Limited trading authority or discretionary accounts allow a broker to decide when to buy and sell, what to buy and sell, and at what price. Both NYSE and FINRA rules require that these accounts be reviewed frequently by a principal of the firm who checks that securities be in the name of the customer and that the customer receive confirmations and account statements.
Under the Investment Advisors Act of 1940, which of the following persons would be included in the definition of an Investment Advisor: I. An accountant who gives general investment advice as an incidental part of their accounting service II. A registered representative who gives clients specific investment advice, but does not charge clients a management fee for such advice III. An accountant who gives specific investment advice and who charges the client a fee for such advice IV. A registered representative who does not give specific investment advice, but solicits client's funds for managed accounts of the broker/dealer and who is paid a wrap fee for such clients
(III & IV) When specific advice is given for a fee, registration as an investment advisor would be required.
FINRA Rules state that a broker/dealer cannot carry a securities account for which of the following: I. A minor II. In the name of a person other than the customer III. A principal or officer of another broker/dealer
A broker/dealer CANNIT carry a securities account in the name of a minor or a securities account in the name of a person other than the customer. However, a broker/dealer can carry a securities account for a principal or officer of another broker/dealer. The broker/dealer for whom the principal or officer works would also be notified prior to the account being established.
What should a registered representative emphasize when making investment recommendations to a customer with $25,000 to invest for a child's future college education?
A registered representative should emphasize CAPITAL GROWTH when making investment recommendations to a customer with $25,000 to invest for a college education.
What information MUST a telemarketer disclose to the recipient of a cold call according to the Telephone Consumer Protection Act of 1991? [A] The caller's and the firm's names and the firm's address or telephone numbers. [B] How the caller got the recipient's name and telephone number. [C] The purpose of the call [D] That the recipient is not on the caller's do-not-call list
A. The Cold Calling rules require telemarketers to disclose the caller's name, the firms name and the address or telephone number from where the call is being made.
When a customer transfers his/her account from one registered representative to another registered representative within the same firm, the document that must be reviewed and updated is: [A] The New Account Report Form [B] The Customer Agreement [C] The Letters of Authorization [D] The Hypothecation Agreement
A. The New Account Report Form must be reviewed and signed a Principal or Branch Manager of the firm.
Which of the following must be considered by the donor when making a gift under the Uniform Gifts to Minors Act? I. That completion of the transaction occurs when the securities are registered in the name of the custodian for benefit of the minor. II. The exact age of the person to whom the gift is made. III. That a gift is completely irrevocable. IV. That certain states permit gifts of money, life insurance policies and annuity contracts.
ALL
One of your elderly clients recently passed away. A family member is now attempting to open an account to invest the assets of the deceased. In order to open such an account, which of the following would be necessary? [A] The individual would need to verify the deceased individual's name, address, and tax id number. [B] The names of the beneficiaries of the deceased individual's estate would need to be presented by the individual. [C] A certificate or court order verifying the executor status of the individual would need to be presented. [D] The name of the deceased individual's attorney would need to be presented.
After a client has passed away, the executor of the client's estate is responsible for trading or distributing the client's assets. In order for an executor to invest the assets of a deceased individual, the executor would have to provide a court order or certificate verifying their executor status.
On a customer confirmation, firms must disclose whether they acted as a(an): I. Customer's agent II. Agent for another person III. Bona fide market maker IV. Principal
All choices are correct
Which of the following are true if a customer has granted limited trading authorization to a third party in writing? I. The death of the owner of the account would immediately terminate trading authorization. II. Confirmations and monthly statements will be sent to the agent only, if the owner waives his right to receive them in writing. III. Any checks paid out of the account must be to the order of the owner.
All choices are true.
Which of the following is FALSE concerning a limited trading authority in a customer's account? [A] The account is subject to frequent review by a supervisory person. [B] If the owner of the discretionary account dies, trading authorization terminates immediately. [C] The owner of the account cannot initiate orders. [D] Checks paid out of the account must be payable to the owner
Although a customer may have a discretionary account, they would still be allowed to enter orders for themselves, if they chose to do so.
Which of the following statements concerning the SIPC coverage is FALSE? [A] It provides protection of up to $250,000 per separate customer for cash claims. [B] It covers balances in commodity accounts. [C] SIPC members are assessed a percentage of their gross revenues from the securities business or a nominal annual fee and this represents the principal source of revenues for the SIPC fund. [D] If a customer's claim exceeds the maximum protected by SIPC, the customer becomes a general creditor of the firm.
B. SIPC does NOT cover commodity claims.
The maximum amount of SIPC coverage for cash in a customer's account is [A] $250,000 per account. [B] $250,000 per "separate customer." [C] $500,000 per "separate customer." [D] $500,000 per account.
B. SIPC will provide protection for customers of up to $500,000 per separate customer for cash and securities, but no more than $250,000 may be paid for a cash claim.
Which of the following customers usually cannot issue a trading authorization to third party? [A] Corporation [B] Individual [C] Custodian [D] Joint tenant
C. A custodian is already acting as a third party for the account, therefore it could not issue such authorization to another person.
In order to open a securities account for a corporation, all of the following documents are needed EXCEPT: [A] Corporate Resolution [B] New Account Form [C] Affidavit of Domicile [D] Copy of By-Laws
C. Affidavit of Domicile is required when a customer is DECEASED, therefore it would not be needed for a corporate account.
All of the following statements regarding the SIPC are true except: [A] Membership is mandatory for all general securities broker/dealers. [B] SIPC funding is through assessments on the revenues generated by brokerage firms. [C] SIPC is an agency sponsored by the U.S. government. [D] SIPC coverage is based on the market value of the customer's equity on the day liquidation proceedings begin.
C. SIPC is not sponsored by the U.S. Government. It is a non-profit organization.
If a broker-dealer fails the trustee appointed by SIPC will [A] secure temporary financing for the broker-dealer with the Federal Reserve. [B] freeze the assets of the broker-dealer and recover damages in bankruptcy court. [C] liquidate the assets of the broker-dealer in an orderly fashion and notify customers on how they can file their claims. [D] hire an investment banker to seek a suitable merger partner with the failing broker-dealer.
C. The SIPC trustee will liquidate the assets and notify customers on the procedures to file a claim. The other three choices are not responsibilities of the SIPC trustee.
When opening an account for a customer, which of the following is necessary? I.New Account Report Form II.A completed proxy III.The person's exact age IV.Whether the person is a citizen
Changes in new account for requirements took place after the Patriot Act and it is now a requirement to have all of the options listed except for a completed proxy.
The Customer Identification Program CIP requires a Broker/Dealer who opens an account for a new customer to do all of the following except: [A] Verify the identity of the customer. [B] Maintain customer identity records. [C] To check that the customer does not appear on any terrorist list or on a list of embargoed countries. [D] Verify that the customer has sufficient knowledge and experience to understand the risks relating to investments.
D. A, B, and C would have to be verified under CIP rules. Choice D would be required in determining suitability but not CIP.
In handling Joint Tenant with Rights of Survivorship Accounts: I.Any correspondence may be mailed to either party. II.Either party may place orders. III.The checks must be drawn to the name of the account. IV.If one party dies, ownership passes to the survivor. [A] I and II [B] III and IV [C] I, II, and IV [D] I, II, III, and IV
D. All choices are correct.
A customer of a failed firm files a claim for $350,000 in securities and $100,000 in cash. What amount of this claim will be covered under SIPC Rules? [A] $ 40,000 [B] $100,000 [C] $350,000 [D] $450,000
D. The customer is covered for $350,000 in securities and $100,000 in cash a total of $450,000. SIPC coverage is a total of $500,000 of which the most that will be paid in cash is $250,000
Under the Telephone Solicitation Act of 1991, a fax sent to a customer must contain all of the following information EXCEPT: [A] The date and time the transmission is sent [B] The identity of the sender [C] The telephone number of the sender or sending machine [D] The number of pages in the fax
Does NOT require the number of pages sent.
A day trader of blue chip common stocks would be most concerned with which of the following risks? [A] purchasing power risk [B] timing risk [C] default risk [D] interest rate risk
Generally day traders are most concerned with timing.
If a client, who is an officer of a commercial bank, opens a margin account with an NYSE member firm he: I. can trade during and after the time his new account papers are received and are in good order. II. must notify the exchange by separate letter that he is an officer of a commercial bank. III. must receive prior written consent from this employer before the account can be opened. IV. must have duplicate confirmations and report sent to his employer. [A] I only [B] I and II [C] III only [D] II and IV
I. ONLY he can trade after everything is in good order
If a client, who is an officer of a commercial bank, opens a margin account with an NYSE member firm he: I. can trade during and after the time his new account papers are received and are in good order. II. must notify the exchange by separate letter that he is an officer of a commercial bank. III. must receive prior written consent from this employer before the account can be opened. IV. must have duplicate confirmations and report sent to his employer.
I. can trade during and after the time his new account papers are received and are in good order.
When an investor's SIPC claim exceeds SIPC limits, which of the following takes place? [A] Extended coverage of the investor's account may be granted by the designated SIPC trustee. [B] Claims exceeding the SIPC limits are combined with the total claims for the firm in default and reduced according to the investor's total percentage of claimed losses. [C] If claims exceed SIPC limits, SIPC member firms are assessed for the difference. [D] In the event that there is an unsatisfied portion of an investor's claim that exceeds SIPC limits, that investor becomes a general creditor of the troubled firm for that amount.
If an investor's claim exceeds SIPC limits, the investor ends up becoming a general creditor to the troubled firm for the amount of the claim that was not satisfied by SIPC.
Under the provisions of the Securities Investor Protection Act of 1970, what occurs if an investor's claim exceeds the maximum limit? [A] A special assessment will be made against other SIPC member firms in order to cover the claim in full. [B] The investor becomes a general creditor of the firm. [C] The investor may apply to the SIPC trustee for extended coverage. [D] The investor's total claim will be paid by FDIC.
If an investor's claim exceeds the maximum limits, the investor becomes a general creditor of the firm.
Under the provisions of the Securities Investor Protection Act of 1970, what occurs if an investor's claim exceeds the maximum limit? [A] A special assessment will be made against other SIPC member firms in order to cover the claim in full. [B] The investor becomes a general creditor of the firm. [C] The investor may apply to the SIPC trustee for extended coverage. [D] The investor's total claim will be paid by FDIC.
If an investor's claim exceeds the maximum limits, the investor becomes a general creditor of the firm.
Mrs. Smith set up a Uniform Gifts to Minors Account for her daughter and the custodial account has done very well this past year. The profits and earnings on this account would be reportable on which person's tax return? [A] Mrs. Smith's [B] Mrs. Smith's daughter [C] Mr. Smith [D] Mr. and Mrs. Smith's joint tax return
In a UGMA/UTMA account the CHILD'S social security number is used and the profits and earnings on the account will be filed on the tax return of the minor. These profits and returns are NOT filed on the donor's or custodian's return.
All of the following orders can be accepted for a custodian account under the Uniform Gifts to Minor's Act EXCEPT: [A] The purchase of a municipal bond [B] The purchase of a warrant on common stock [C] The short sale of a listed common stock [D] The sale of preemptive stock rights held in the account
In a custodian account securities may not be purchased on margin.
A customer has not executed any options orders for the past 60 days and maintains a money balance. If the customer continues to not execute any options orders and maintain a money balance in this account FINRA rules require that the customer receive the account statement at least:
In short, if the customer has done no option trading and has a balance in the account, the statement must be sent quarterly. If the customer effects a trade each month, he or she will receive the statement monthly.
In a Uniform Gifts to Minor's Account, income received from investments and capital gains is the tax responsibility of the [A] custodian. [B] donor. [C] minor. [D] guardian of the minor.
Income received from investments and capital gains are the tax responsibility of the Minor.
Customers that buy securities and hold their positions for long period of time could benefit from all of the following except? [A] Blue Chip common stock [B] Variable Annuities [C] Long Term Growth Fund [D] Non-Managed Fee-based Account Program
Investors that buy and hold securities for long periods of time generally would NOT benefit from a Non-Managed Fee-based Account since they are not active traders.
All of the following characteristics of the Uniform Transfers to Minor Act (formerly the Uniform Gift to Minors Act) are true EXCEPT: [A] The donor may be the custodian [B] Only an adult may make a gift [C] Custodial property may only be used for the benefit of the minor [D] Securities in a custodial account may be held in a margin account
Margin accounts are NOT allowed for minors.
A trustee of a trust account must have which of the following to conduct margin transactions: [A] authorization in the trust agreement [B] the approval of the branch office manager [C] the approval of the branch margin manager [D] the approval of both the branch office manager and the branch margin manager
Margin transactions can be risky, Trust investments generally must be conservative. Therefore, the investment of trust assets in margin accounts is generally not permitted UNLESS specifically authorized in the trust agreement.
An uncle opens a Uniform Gifts to Minors Act for his nephew who is a minor. The uncle is both the donor and custodian for the account. What authority would the nephew's legal guardian have over the account?
ONLY the Custodian has authority over an account opened under the Uniform Gift to Minors Act.
When a client wishes to open an account to trade equities with a broker/dealer firm, certain signatures are required on the New Account Report form. Who must sign the form? I. The client opening the account II. The agent opening the account III. A principal at the broker/dealer
ONLY the principal would be required to sign the new account form but the customer and the RR would not.
The Securities Investor Protection Corporation was created primarily to protect [A] insurance company customers. [B] customers of broker/dealers against market risks. [C] customers against the bankruptcy of a broker/dealer. [D] customers of banks.
The SIPC was created for the purpose of protecting public customers against the risk of loss due to the failure of a broker/dealer.
What are the procedures that apply concerning a customer's proxy when securities are being held in street name?
The broker-dealer firm must send a proxy to the customer when the customer's securities are held in street name by the firm.
An individual broker at a broker-dealer firm is considering recommending a complex and possibly risky security to one of his more financially-sophisticated retail customers. Under FINRA Rule 2111 on suitability, before making such a recommendation, he should do all of the following EXCEPT: [A] Perform reasonable diligence to understand the potential risks and rewards of the product [B] Determine whether the product is suitable for at least some investors [C] Check the broker-dealer's list of "approved products" to see if the product is included [D] Determine if there is a risk and cost disclosure document available for delivery to the customer
The first two answer choices (A+B) are required by Rule 2111. The third choice (C) is not required, but is considered "extremely beneficial" in the official guidance to the rule. The fourth choice (D) is not required since there generally is not a risk/cost type of disclosure document.
Under the Uniform Gifts to Minors Act, which of the following is deemed to be the "owner" of the securities? [A] The custodian [B] The minor [C] An appointed trustee [D] The legal guardian
The minor is deemed to be the "owner" of the securities.
Written authorization would not be required for which of the following transactions?
The only form of discretionary authority that does NOT require written authorization by the customer is in relation to purchases and sales where only TIME and PRICE decisions are left to the agent over the course of a trading day. Here, the only example of time and price discretion is the answer where the agent is directed to sell a specific number of shares over the course of the day.
Under the FINRA rule on cold calling/telemarketing , all of the following are required EXCEPT: [A] Customer account numbers must be encrypted. [B] Calls may only be made between 8 am and 8 pm local time of the party called [C] If cold calling is outsourced to a third party, the broker-dealer must determine if the individual callers must be registered [D] Broker-dealers must have permission to contact individuals with pre-recorded messages
Under the FINRA rule on cold calling/ telemarketing (Rule 3230), calls may only be made between 8 am and 9 pm local time of the party called. The other choices in the question are required under the rule.
Throughout the process of establishing and opening an account for a client, suitability and investment objectives are a primary concern for registered representatives. In order to make determinations regarding these subjects, the RR is required to obtain certain information from the client. Which of the following fall into the category of REQUIRED information? I. The client's federal tax bracket for the preceding year II. The client's level of outstanding debt III. The market value of the client's home IV. The client's overall net worth
When establishing objectives and suitability for a client, the client's level of debt and overall net worth are both important. If the client has a substantial amount of debt, it may not be wise for the customer to be investing large amounts of money in risky securities, etc. The client's tax bracket/status for the previous year is not a primary concern, and the market value of the client's home gives no indication as to equity or debt associated with the property.
