Unit 2
Regulation BI
- Stricter standard than suitability - Applies to reccomendations on what to purchase, what type of account. - Clients can learn about BD using form CRS to make an informed decision. - Form CRS is delivered at account opening.
You are reviewing an investor's balance sheet. Which of the following items would be found on a balance sheet and help you determine the client's net worth?
401k plan, credit card bill (don't look for things on in income statement like an electric bill or monthly income)
Discretionary accounts
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.
You have been given the name of a new potential client who responded to a marketing piece sent out by your broker-dealer. Which of the following would be the most appropriate way to obtain information about the client's objectives and investment constraints?
A face to face meeting at their home
Which of the following activities are a registered representative's responsibilities?
A registered representative, in addition to entering orders, is primarily responsible for determining an investment's suitability and explaining different investments to prospective investors.
When do FINRA suitability rules not apply?
Accounts Over 50 Million (institutional, individual..)
Who cannot verfiy AI status
An investment adviser registered and in good standing under the laws of the state of its principal office (has to be SEC)
Tamika is a registered representative with Financial Engineers, LLC, a FINRA member broker-dealer. The firm uses an investment policy statement (IPS) to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat seven months from now. When using the IPS, this would be considered
An investment constraint Investment constraints are obstacles or restrictions that must be met in order to meet goals. In this case, we are dealing with a liquidity constraint—in seven months, cash will be necessary to make the purchase.
When opening an options account, the customer must be provided with
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.
When dealing with suitable recommendations to clients, it is important to distinguish between investment objectives and investment constraints. Which of the following would be an investment objective rather than a constraint?
Capital Appreciation
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
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.
A customer opening a margin account must be supplied with a special margin risk disclosure. Which of the following are specific risks disclosed?
Customers are not entitled to choose which securities can be sold if a maintenance call is not met. Customers can lose more money than initially deposited. Customers are not entitled to an extension of time to meet a margin call. Firms can increase their in-house margin requirements without advance notice. (All must be disclosed and must be provided on an annual basis.)
If a customer wants to place an order for a specific municipal bond and provides the bond's issuer, coupon, maturity date, and CUSIP number, but she has not disclosed her financial objectives or tax status, the representative must
Execute When a customer wants to buy a specific municipal bond and possesses all of the bond's material information, Municipal Securities Rulemaking Board Rule G-19 allows the representative to execute the order and mark it unsolicited. The representative may not recommend any municipal bond without first knowing the customer's financial objectives and tax status.
Which the following statements regarding customer accounts is not true?
Trading on margin is prohibited in fiduciary accounts except with the appropriate documentation. Numbered accounts are permitted with a letter signed by the customer. Stock held under JTWROS passes to the survivor(s) in the event of death of one of the tenants.
A customer wants to buy ABC bonds, and as his representative, you have advised him that the trade is unsuitable. If he decides to go ahead with the purchase, you must
If a customer wishes to purchase a security that the registered representative feels is unsuitable, the trade may be executed if the customer specifically directs it. The ticket should be marked unsolicited.
A power of attorney is not required for a registered representative to choose which of the following order instructions?
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). LO 2.g
In a discretionary account where the investment objective is preservation of capital with moderate income, all of the following practices are unsuitable except
Maintaining a fixed asset allocation mix. In some test questions, the best way to select the correct choice is when three of the four options are clearly wrong. This is an example of that case. Preservation of capital is certainly not a high-risk objective and does not call for frequent trading in any stock, volatile or not. Orders in a discretionary account are not considered unsolicited (the client is not the one placing the orders). Allocating the portfolio to fixed-income assets (bonds and preferred stock) would seem to be the most appropriate step to take.
Before making any recommendations to a client, basic client suitability information must be gathered. Many suggest beginning with a family balance sheet. Which of the following would be found on that document?
Net Worth The balance sheet includes the client's assets and liabilities. From these, the net worth is determined. It is the income statement that contains the salary and expenses. Goals are a nonfinancial consideration.
A customer asks her registered representative to exercise discretion over her account. To do so, the representative must do each of the following except
Obtain approval from FINRA. The requirements for a discretionary account include a written authorization from the customer, a written acceptance by a principal of the firm, and close supervision of each transaction to ensure suitable transactions in light of the customer's objectives and financial situation. No approval from FINRA is required.
SEC Regulation Best Interest (BI) focuses on
Recomendations to Customers Regulation BI became effective on June 30, 2020, and states, "When making such a recommendation to a retail customer, you must act in the best interest of the retail customer at the time the recommendation is made, without placing your financial or other interest ahead of the retail customer's interests." **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
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?
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.
As a registered representative, if you are assigned to an existing account that was previously handled by another registered representative who has since left your firm, which of the following actions should you take first?
The first action to take would be to verify and update the customer's information to make suitable investment recommendations.
Reasonable-basis suitability
The reasonable-basis obligation requires a member or associated person to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.
document describing how the interest on the margin debt is calculated
credit agreement
All of the following statements regarding liquidity are correct except
it is the inability to find willing buyers for an asset. Liquidity and marketability are often used synonymously. Liquidity is the ability to turn an asset into cash, whereas marketability is the ability to easily find buyers for an asset. If an asset is easily marketable, this would imply that it is also liquid
A customer wishes to open a new account but refuses to provide suitability information. Under FINRA rules, the member
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.
Three Main Suitability Obilgations
reasonable-basis suitability, customer-specific suitability, and quantitative suitability
Investment constraints
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.