Unit 05 - Practice Exam 3 <Customer Accounts>

One of your customers will be traveling extensively throughout Europe and asks you to not send statements to his home. Under the rules, you are permitted to hold his statements for how many months? A) 2. B) 3. C) 1. D) 6.

Your answer, 3., was correct!. Under the rules, if a customer is traveling domestically, you may hold his mail for up to 2 months. If traveling abroad, you may hold his mail for up to 3 months. Reference: 5.1.2.3 in the License Exam Manual.

Which of the following persons may legally open an account to trade on margin? A) An open-end investment company. B) A custodian of an UTMA account. C) A minor child with approval of a court-appointed guardian. D) A corporation.

Your answer, A minor child with approval of a court-appointed guardian., was incorrect. The correct answer was: A corporation. A corporation may open an account to trade on margin if provided for in the charter and authorized in the bylaws. Both UTMA and UGMA specifically prohibit custodians from either engaging in speculative trading or borrowing money or securities in the name of the minor through trading on margin. Mutual funds are also prohibited from trading on margin. Reference: 5.3.1.5 in the License Exam Manual.

Which of the following best describes the responsibility of the custodian regarding cash dividends received in an UGMA account? A) Cash dividends must be withdrawn and used for the minor's education. B) Cash dividends can remain in the account in anticipation of reinvestment. C) Cash dividends must be reinvested immediately. D) Cash dividends can be used to benefit the custodian.

Your answer, Cash dividends must be reinvested immediately., was incorrect. The correct answer was: Cash dividends can remain in the account in anticipation of reinvestment. Cash in the account can remain idle for only a short period of time. Leaving it totally idle for prolonged periods is not deemed prudent, because of the loss of interest earning power. Reference: 5.3.1.5 in the License Exam Manual.

If a municipal dealer maintains an account for the employee of another municipal dealer and the employing dealer has not sent any written instructions, which of the following documents must be sent to the employing dealer? A) Monthly statement of all transactions in the account. B) Duplicate confirmations of all securities purchased for the account. C) Written notice of a security recommended for account purchase. D) Form RE-3.

Your answer, Duplicate confirmations of all securities purchased for the account., was correct!. Unless instructed otherwise in writing, the municipal dealer must only send duplicate confirmations. Reference: 5.1.5.2 in the License Exam Manual.

Under the Uniform Transfer to Minors Act, which of the following gifts is allowable? A) From 2 donors to more than 1 child jointly. B) From 1 donor to 1 child. C) From 1 donor to 1 child with both parents named as custodians. D) From 1 donor to more than 1 child jointly.

Your answer, From 1 donor to 1 child., was correct!. Under UTMA, a donor may give unlimited money or securities to one child - with one person named as custodian. Reference: 5.3 in the License Exam Manual.

For a trust account not seeking appreciation, which of the following would be recommended? A) Large-cap common and preferred stocks. B) Common stock in small, highly profitable companies. C) Common stock, preferred stock, and debentures. D) Highly-rated, fixed-income securities.

Your answer, Highly-rated, fixed-income securities., was correct!. The only choice that is prudent and does not have a goal of appreciation is the purchase of highly rated, fixed-income securities. Reference: 5.2.1.4 in the License Exam Manual.

If a customer wants to give a broker dealer permission to hold their mail while traveling, which of the following statements are TRUE? The customer initiates the process by written request. FINRA approval is required and granted on a case by case basis. The broker dealer may abide by the request as a courtesy to the customer in accordance with their own in-house rules regarding holding customer mail. As per FINRA's rules, once the request is made by the customer the broker dealer must abide by it. A) II and III. B) II and IV. C) I and III. D) I and IV.

Your answer, I and III., was correct!. The process must be initiated by written request on the part of the customer. Broker/dealers may abide by the written request as a courtesy extended to the customer in accordance with their own in-house rules regarding holding customer mail. There is no industry rule requiring a broker/dealer to extend this courtesy to customers. The rule only stipulates the maximum length of time a broker/dealer can hold customer mail if it chooses to, depending on if the travel is domestic or abroad. Reference: 5.1.2.3 in the License Exam Manual.

A registered representative is opening both cash and margin accounts for a corporation. Which of the following documents will he need? The corporation's charter, account resolution, and bylaws. A copy of the corporation's most recent balance sheet. The corporation's last 3 profit and loss statements. The name(s) of natural persons authorized to trade the account. A) I and III. B) II and III. C) I and IV. D) II and IV.

Your answer, I and IV., was correct!. Corporate accounts are generally those established by the officers of a corporation. Such accounts require a copy of the corporate resolution naming the authorized person(s) and account trading limits (if any). If it is to be a margin account, a copy of the corporate charter and a signed margin agreement are also required.

Which of the following are acceptable for a fiduciary acting under the prudent investor rule? Purchasing AAA-rated debentures. Purchasing a growth mutual fund. Purchasing new issues of stock. Writing covered calls on dividend-paying stock. A) II and III. B) I and II. C) II and IV. D) I, II, III and IV.

Your answer, I, II, III and IV., was correct!. The prudent investor rule permits a fiduciary to invest in securities that a reasonably prudent investor, seeking income and preservation of capital, might buy for his own account. Reference: 5.2.1.4.1 in the License Exam Manual.

An agent may open a joint account for which of the following? Lee and his 13-year-old son, Tom. Mary and Kelley, two adult college roommates. Jerry and Mark, friends and partners in business for more than 20 years. Melinda and her minor nephew, John, for whom she is guardian. A) I and III. B) II and IV. C) II and III. D) I and IV.

Your answer, II and III., was correct!. Joint account owners share ownership of the account and must be adults. A minor may not legally exercise control over an account and may not be an owner of record of an account. Reference: 5.2.1.2 in the License Exam Manual.

Your broker/dealer acts as a prime broker for ABC fund. In this arrangement, your broker/dealer is likely to be providing which of the following services? Execution of all transactions for the fund portfolio Clearing services Lending for trades done on margin Ensuring that all exchange-trading rules are complied by A) II and III B) II and IV C) I and IV D) I and III

Your answer, II and IV, was incorrect. The correct answer was: II and III The prime broker would supply clearing services, lending services for marginable transaction, as well as back office support including cash management, account statements, and transaction processing. Actual executions and abiding by all exchange rules when transactions occur is the responsibility of the executing broker/dealers. Reference: 5.1.3.5 in the License Exam Manual.

According to FINRA rules, duplicate confirmations of transactions must be sent to an account owner's employer when establishing a margin account for: a bank officer. an employee of another broker/dealer. an independent insurance agent. an officer of another broker/dealer. A) I and II. B) I and III. C) II and IV. D) III and IV.

Your answer, II and IV., was correct!. According to FINRA rules, when an employee of a member firm opens an account with another member broker/dealer, duplicate confirmations and account statements must be sent to the employer. An officer of a broker/dealer is considered an employee. Reference: 5.1.5 in the License Exam Manual.

If a registered representative is opening a brokerage account for a partnership, in which order, from first to last, would the following events ordinarily take place? Representative obtains the partnership agreement Principal gives written acceptance of the account Representative fills out a new account card First trade is executed. A) III, I, II, IV. B) III, II, I, IV. C) I, III, IV, II. D) IV, III, II, I.

Your answer, III, I, II, IV., was correct!. When a registered representative opens a new account, the first step is to complete the new account form. In the case of a partnership account, a principal of the firm must see a copy of the partnership agreement before accepting the account. When the account has been accepted by the principal, trades may be entered. Reference: 5.2.1.3 in the License Exam Manual.

Whose Social Security number is required to open a custodial account? A) Custodian's. B) Minor's. C) Custodian, parent or guardian and minor. D) Parent's or guardian's.

Your answer, Minor's., was correct!. The minor's Social Security number is required because the account is fully owned by, and taxed to, the minor-not to either the custodian or the parent. Reference: 5.2.1.4 in the License Exam Manual.

Which of the following individuals could open an account at another member firm without his employer's knowledge? A registered representative of a member. A government security trader employed by a member. A purchases and sales clerk of a member. An insurance agent who sells variable annuities. A) I only B) None of these C) II and III D) II, III and IV

Your answer, None of these, was correct!. Whenever an employee of a FINRA member wants to open a securities account with another FINRA member firm, the employee must give prior written notice to his employer before the account can be opened. Prior approval is not required. Reference: 5.1.5.1 in the License Exam Manual.

Which of the following activities can take place in a cash account? A) Borrowing money. B) Short sale of stock. C) Purchase of new issue common stock. D) Uncovered option writing.

Your answer, Purchase of new issue common stock., was correct!. A customer may only borrow money or securities from a broker/dealer in a margin account. Uncovered call options must occur in a margin account and uncovered put options can only occur in a cash account when certain criteria are met. Short sales must occur in a margin account. Reference: 5.1.3.1 in the License Exam Manual

Which of the following statements regarding discretionary accounts is NOT true? A) Each discretionary order must be reviewed promptly by a principal. B) The customer must grant written authorization to the broker/dealer or a designated individual to exercise discretion in the account. C) The customer must approve each order before or after it is executed. D) The account may not be accepted unless approved in writing by a principal of the member firm.

Your answer, The customer must approve each order before or after it is executed., was correct!. To establish a discretionary account, a customer must grant trading authority in writing. Furthermore, the firm must indicate its willingness to handle the account on a discretionary basis through a signature of a principal of the firm. All orders, including those for discretionary accounts, must be reviewed and endorsed promptly, but not before execution. Reference: 5.2.2 in the License Exam Manual.

Tenants in common ownership provides that a deceased tenant's fractional interest in an account is retained by which of the following? A) The registered representative for the account. B) The surviving tenant. C) Will be decided during probate. D) The deceased tenant's estate.

Your answer, The deceased tenant's estate., was correct!. TIC (tenants in common) ownership of an account provides that a deceased tenant's interest in an account is retained by that tenant's estate and not passed on to the surviving tenant. Reference: 5.2.1.2.1 in the License Exam Manual.

When a customer gives limited power of attorney to his registered representative, which of the following statements is TRUE? A) The registered representative needs written permission from the customer for each trade. B) A principal must initial each order before it is entered. C) The power of attorney must have the customer's signature. D) The customer must renew the power of attorney each year.

Your answer, The power of attorney must have the customer's signature., was correct!. The registered representative must have prior written authority from the customer and approval from a principal before exercising discretionary authority. Although a designated principal must review the account frequently and review and approve all trades on a daily basis, prior approval of discretionary orders is not required. Reference: 5.2.1.5.2 in the License Exam Manual.

An arrangement in which the broker has the authority, or power-of-attorney, to make trades from funds in the account without prior approval from the investor is known as: A) a power-of-attorney account. B) a nonapproval account. C) a stop loss account. D) a discretionary account.

Your answer, a discretionary account., was correct!. Discretionary accounts are arrangements in which the registered representative has the authority, or power-of-attorney, to make trades from funds in the account without prior approval from the investor. Reference: 5.2.2.1 in the License Exam Manual.

A hedge fund has contracted with your broker/dealer to handle all of its clearing functions and provide all back office support functions while it is executing transactions through numerous other broker/dealers whom your broker dealer will have agreements with. This type of account is known as A) a numbered account B) a custodial account C) a prime account D) a joint account

Your answer, a prime account, was correct!. In a prime account, a customer contracts with one broker, the prime broker, to provide a list of support services, such as clearing and settlement of transactions, while contracting with numerous other brokers for executions services. Reference: 5.1.3.5 in the License Exam Manual.

A registered representative who learns of a customer's death should: A) cancel open orders. B) accept no orders to buy or sell securities unless coming from a third-party power of attorney. C) notify FINRA. D) liquidate the account.

Your answer, cancel open orders., was correct!. When a registered representative learns of a customer's death, he must mark the account deceased, cancel all open orders, and await the appropriate legal documents. He must not attempt to transfer or otherwise dispose of the assets nor can any orders be taken for the account. Third-party power of attorney authorization is revoked immediately upon death of the account holder. Reference: 5.2.3 in the License Exam Manual.

A customer wishing to open a numbered account must be informed that: A) the account may only be opened with prior permission from the SEC. B) he must supply proof of U.S. citizenship and reside permanently in the United States. C) he must supply a written statement attesting to his ownership of the account. D) numbered accounts are restricted to cash accounts.

Your answer, he must supply a written statement attesting to his ownership of the account., was correct!. Numbered, or symbol, accounts require a signed, written statement from the client, acknowledging ownership, to be kept on file. Reference: 5.1.4.1 in the License Exam Manual.

*In a discretionary account where the investment objective is preservation of capital and growth, all of the following practices are unsuitable EXCEPT:* A) marking order tickets solicited or unsolicited when discretion is used. B) marking the investment objective on the new account form as high risk. C) frequent and profitable short-term trading in volatile stocks. D) maintaining a fixed asset allocation mix which includes under-performing sectors.

Your answer, marking order tickets solicited or unsolicited when discretion is used., was incorrect. The correct answer was: maintaining a fixed asset allocation mix which includes under-performing sectors. Maintaining a fixed asset allocation mix is suitable in a discretionary account because it assumes that over time, some sectors will outperform while others underperform. Reference: 5.2.2.2 in the License Exam Manual.

Obtaining all of the following complies with the regulations regarding customer identification programs (CIPs) EXCEPT A) post office box, instead of a physical address, if it is the primary mailing address B) taxpayer identification number C) name D) date of birth

Your answer, post office box, instead of a physical address, if it is the primary mailing address, was correct!. A post office box is never acceptable without a physical address. Reference: 5.1.1.2 in the License Exam Manual.