Series 7: Unit 2 - Quiz Mistakes
Regulation BI contains four key component obligations. Which two of them apply to registered representatives? Disclosure Obligation Care Obligation Conflict of Interest Obligation Compliance Obligation A) I and II B) III and IV C) I and III D) II and III
A) I and II The obligation to disclose all material information and to exercise reasonable diligence, care, and skill in making any recommendation apply to both the member firm and the registered representative. The Conflict of Interest Obligation and the Compliance Obligation belong to the firm. That does not mean you do not have an obligation to disclose any conflicts of interest. That is part of the disclosure obligation. The specified Conflict of Interest Obligation includes the written supervisory procedures and training the firm must provide. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
A charge of churning would likely be brought against a registered representative who was found to have disregarded the FINRA rule on A) quantitative suitability. B) customer-specific suitability. C) reasonable-basis suitability. D) investment goal suitability.
A) Quantitative suitability FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. One of those obligations is quantitative suitability. Churning is generally defined as excessive trading in a customer's account. The registered representative, having control over a customer account, has to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together.
As the poet Robert Burns wrote, "The best-laid plans of mice and men often go awry." The same could be said for investment plans. The term used to describe those things that can have an impact on the ability of our plans to reach fulfillment is A) investment constraints. B) investment conditions. C) investment goals. D) investment decisions.
A) investment constraints. Investment constraints are those things that stand in the way of having our investment objectives reach their goals. Can bad decisions or unusual conditions do that? Yes, but those are not financial industry terms used on the exam.
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 any recommendations must be limited to suitability information the firm has on the customer. B) may open the account but must limit recommendations to investment-grade securities. C) must not open the account. D) may open the account but must limit recommendations to U.S. government securities.
A) may open the account, but any recommendations must be limited to suitability information the firm has on the customer. A recommendation may be made if the firm has a reasonable basis to believe it is suitable. This can be based on information that the firm knows about the customer. For example, you do know the customer's age and occupation. You do have the customer's home address. In the real world, firms rarely rely solely on this, but for test world purposes, limited recommendations may be made.
The customer relationship summary (Form CRS) is an integral part of Regulation Best Interest. For an existing cash account customer who received the initial Form CRS in early July 2020, a new Form CRS must be delivered no later than A) the opening of a new margin account. B) a change to the customer's investment objectives. C) the temporary withholding of a disbursement from the account under Rule 2165. D) a change to the beneficiary of an existing Roth IRA.
A) the opening of a new margin account Existing customers received their initial Form CRS no later than July 30, 2020. They must also be sent a revised copy at or before the opening of a new account that is different from the retail investor's existing account. An example of this would be the opening of a margin account. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
Which of the following circumstances must be met for a fiduciary to trade options in a trust account? Special circumstances are 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) II and IV B) II and III C) I and III D) I and IV
B) II and III A fiduciary account may only trade options if expressly authorized to do so and if suitable for the beneficial owner of the account.
One of your customers has become nervous about current stock market conditions and calls to discuss the matter with you. Which of the following would not meet Regulation BI's definition of a recommendation? A) Liquidate some of the losers for the tax benefit. B) Our top analysts tell us that the market is about to strengthen. C) You need to reallocate some of the equity portion of the portfolio to cash. D) This is not the time to sell. Hold what you have.
B) Our top analysts tell us that the market is about to strengthen Nothing in the statement about the analysts is telling the customer the steps to take. Regulation BI uses the phrase "a call to action" to describe the essence of a recommendation and there is no "call" in that statement. The firm or associated person must use language explicitly suggesting that the customer follow a certain behavior for it to be a recommendation. Regardless of the reason, telling a customer to sell specifically identified stock is a recommendation. Reallocating a portfolio means selling some assets and buying others. Although we tend to think of recommendations as a buy or a sell, Regulation BI points out that an explicit recommendation to hold a security (or securities) is a recommendation. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
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) can only enter the order with the prior approval of a principal. B) can enter the order. C) can only enter the order if the customer puts his verbal instructions into written form. D) cannot enter the order.
B) can enter the order. 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 registered representative sits down with a new customer to complete the customer account form. During this time, the customer expresses being comfortable with some risk to her initial investment in exchange for potentially higher returns. After the registered representative explains that the willingness to accept some risk may allow the account to keep pace with inflation, but that it also means the account could lose value, the customer acknowledges that she understands. This customer's risk tolerance would best be defined as A) speculative. B) moderate. C) aggressive. D) conservative
B) moderate An investment risk tolerance in which the customer is willing to accept some risk to the initial principal sum invested and the potential loss of the funds in exchange for the opportunity to earn higher returns is best defined as moderate.
The customer relationship summary (Form CRS) is an integral part of Regulation Best Interest. For an existing cash account customer who received the initial Form CRS in early July 2020, a new Form CRS must be delivered no later than A) the temporary withholding of a disbursement from the account under Rule 2165. B) the opening of a new margin account. C) a change to the customer's investment objectives. D) a change to the beneficiary of an existing Roth IRA.
B) the opening of a new margin account. Existing customers received their initial Form CRS no later than July 30, 2020. They must also be sent a revised copy at or before the opening of a new account that is different from the retail investor's existing account. An example of this would be the opening of a margin account. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
When opening an options account, the customer must be provided with A) the options arbitration agreement. B) the options disclosure document (ODD). C) the options risk disclosure document. D) the options prospectus.
B) the options disclosure document (ODD). Any prospective or new options customer must receive a copy of a booklet titled "Characteristics and Risks of Standardized Options." In every day usage (and on the exam), it is referred to as the options disclosure document (ODD). It serves the purpose of a prospectus and discloses the risks of investing in options. This is another case where you must select the most accurate choice.
Which of the following circumstances would not cause a registered representative to be identified as a fiduciary? A) A registered representative becomes a member of the board of directors of a charitable foundation. B) A registered representative holds himself out as a fiduciary for ERISA plans and pensions. C) A registered representative names one of his customers the executor of his estate D) A registered representative receives discretionary authorization from a client
C) A registered representative names one of his customers the executor of his estate Executors of an estate are included in the definition of a fiduciary. However, in this choice, the customer is the executor, not the registered representative. That customer has a fiduciary responsibility to the representative's heirs (when that time comes). The granting of discretionary authority over the account of a client is a form of having fiduciary responsibilitythe registered representative is in control of the customer's money. Being a board member of a foundation, or holding oneself out as a fiduciary for an ERISA plan, will generally find themselves being defined as a fiduciary.
A customer asks his registered representative to purchase $10,000 worth of shares in any pharmaceutical company that looks promising. Which type of account allows the registered representative to act in accordance with this instruction? A) Margin B) Custodial C) Discretionary D) Special cash
C) Discretionary 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.
A charge of churning would likely be brought against a registered representative who was found to have disregarded the FINRA rule on A) customer-specific suitability. B) investment goal suitability. C) quantitative suitability. D) reasonable-basis suitability.
C) Quantitative Suitability FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. One of those obligations is quantitative suitability. Churning is generally defined as excessive trading in a customer's account. The registered representative, having control over a customer account, has to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together.
A registered representative of a FINRA member broker-dealer is gathering information from a prospective customer. When the representative uses the information to prepare a financial profile, which of the following would not be included? A) Cash value in life insurance policies B) Outstanding credit card balances C) The individual's risk tolerance D) Current value of any IRAs
C) The individual's risk tolerance The financial profile includes items with numbers. While risk tolerance is one of the most important aspects of information gathering, it cannot be quantified in the manner that debts, cash value, and IRA accounts are.
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 her 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 written documentation of the situation. C) cannot enter a discretionary order. D) can enter a discretionary order with instructions that the order is not held.
C) cannot enter a discretionary order. A discretionary order cannot be entered until the signed discretionary account form has been received.
Which of the following oral orders can be accepted from a customer without additional documentation? A) Buy 200 shares of computer stock B) Buy $20,000 of quality bank stocks C) Increase my position in ABC D) Buy 100 shares of ABC when the price is right
D) Buy 100 shares of ABC when the price is right Prices and time of execution do not require discretionary authority.
Your customer, age 29, makes $42,000 annually and has $10,000 to invest. Although he has never invested before, he wants to invest in something exciting. Which of the following should you suggest? A) A growth and income fund because the customer has never invested before B) A balanced fund because when the stock market is declining, the bond market will perform well C) An aggressive growth fund because the customer is young and has many investing years ahead D) Customer should provide more information before you can make a suitable recommendation
D) Customer should provide more information before you can make a suitable recommendation It is necessary to get more information about this customer and his definitions of an exciting investment opportunity before making any recommendations. A suitability and risk-tolerance analysis should be performed before a recommendation is made.
Which of the following are governed by the prudent investor rule? I. Trustee II. Executor III. Custodian IV. Registered representative who has been granted discretionary authority
D) I, II, III, and IV The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. With these accounts, the fiduciary must act prudently. A registered representative who has been granted discretionary authority is acting in a fiduciary capacity.
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 III B) I and II C) II and IV D) III and IV
D) III and IV 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).
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 permitted if the fiduciary shares in the profits or losses. B) It is not permitted. C) It is permitted if the fiduciary observes the prudent investor rule. D) It is permitted if provided for in the underlying documentation.
D) It is permitted if provided for in the underlying documentation. Margin trading in a trust account is permitted only if it is specifically provided for in the trust agreement.
As a registered representative, it is important to be able to distinguish between investment goals and investment objectives. Which of the following would be an investment objective rather than an investment goal? A) Leaving a financial legacy B) Generating ample funds for retirement C) Saving for a child's education D) Preserving capital
D) Preserving capital Just as there are three primary colors, there are three primary investment objectives. Those three are growth, income, and capital preservation. Investors use those objectives to reach their goals. For example, a 40-year-old whose goal is ample funds for retirement will have growth of capital as the primary objective. Someone who is already retired and wishes to have the funds to pay the bills will have income as the investment objective.
A registered representative has a client who wants to save for college for her child. The child will be entering college in five years. This would be an example of A) planning too late. B) an investment objective. C) tactical asset allocation. D) an investment constraint.
D) an investment constraint. Time constraints include such conditions as liquidity and time horizon, both of which are in play here. It may be true that the client has started too late, but that is not what the exam would be looking for as the correct answer. This is an investment goal, not an investment objective.
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) can only enter the order if the customer puts his verbal instructions into written form. B) can only enter the order with the prior approval of a principal. C) cannot enter the order. D) can enter the order.
D) can enter the order. Under FINRA rules, the representative may execute the trade at the customer's request; the trade ticket should indicate that the order was unsolicited.
Regulation BI established a new standard of conduct under the Securities Exchange Act of 1934 for broker-dealers and associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer. All of the following are examples of account recommendations except A) opening a margin account to go along with an existing cash account. B) taking a distribution from an employer-sponsored plan and executing a rollover into a self-directed IRA. C) opening an UTMA account for a grandchild. D) changing the asset allocation in an existing account.
D) changing the asset allocation in an existing account. Account recommendations include recommendations of securities account types generally (e.g., to open an IRA or margin account), as well as recommendations to roll over or transfer assets from one type of account to another (e.g., a workplace retirement plan account to an IRA). It has nothing to do with changing the strategy in an existing account. Rather, the desired result of an account recommendation is a new account. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback
If a customer attempts to place an order for municipal securities that the registered representative deems completely unsuitable for the customer, the registered representative A) must refuse to execute the order. B) must obtain the permission of a municipal securities principal before executing the order. C) may execute the order on a not held basis. D) may execute the order and mark the order ticket as unsolicited.
D) may execute the order and mark the ticket as unsolicited
