Can structured products be margined? Why or why not? Show
No, they are not readily transferrable. Under FINRA rules, if a member suspects that a senior citizen is being financially exploited: A. a freeze can be placed on all disbursements from the account for up to 10 business days B. a freeze can be placed for up to 10 business days on suspicious disbursements from the account, but not on other non-suspicious disbursements C. a freeze can be placed on all disbursements from the account for up to 15 business days D. a freeze can be placed for up to 15 business days on suspicious disbursements from the account, but not on other non-suspicious disbursements The best answer is D. FINRA permits member firms to place a temporary hold on disbursements from customer accounts if the firm suspects that the account owner is being financially exploited. The initial hold can be for up to 15 business days. In addition, if the member's review of the situation supports this, the member can extend the hold for another 10 business days. A customer account holds $100,000 of Negotiable Certificates of Deposit that are maturing. The customer has inquired about alternative investments that can be made with these funds. To make a suitable recommendation, inquiry should be made as to the customer's: I Liquidity requirements II Tax bracket III Other investments The best answer is D. Common sense dictates that to make any recommendation to a customer, all of the choices should be evaluated - the customer's liquidity requirements, tax bracket, and other investments. A registered representative is notified by a previously single customer that she has just come back from her honeymoon. What should the registered representative do? A. Notify the branch manager immediately B. Update the customer's account file C. Add the spouse of the customer to the account D. Close the account The best answer is B. This customer was single, and now is married. The registered representative should update the customer's account file for this information, since it has a bearing on suitability of recommendations made to the customer. Which of the following is a TRUE statement about managed wrap accounts? The customer is charged: A. a single annual fee based on total assets in the account for account transactions and maintenance B. a commission for each transaction performed C. a commission for each recommendation that results in a transaction D. both a commission on each transaction performed and an annual maintenance fee based on total assets in the account The best answer is A. Wrap accounts are a type of customer account, where all services performed by the broker are "wrapped" into a single account; and a single annual fee based as a percentage of assets under management is charged. There is no commission charge for each transaction performed in such an account; all services are covered in the single "wrap" fee. An account registration that allows the customer to name the person into whose name securities in the account will be registered upon the death of the customer is known as: A. tenancy in common B. transfer on death C. joint tenants with rights of survivorship D. successor registration The best answer is B. Transfer on death is a relatively new type of account registration that allows the registered owner to name the person into whose name the securities will be transferred upon the death of the customer. Thus, the securities are not required to be transferred into the name of the estate; and then retransferred to the beneficiary; after the estate clears probate. Which of the following is a potential money laundering activity? A. Laddering B. Structuring C. Diversifying D. Amortizing The best answer is B. "Structuring" is the illegal patterning of cash transactions so they fall under the $10,000 reporting limit - such patterns require the filing of a "CTR" (Currency Transaction Report); and if the firm is suspicious about the customer, an "SAR" report (Suspicious Activities Report) must be filed as well. Approval of new accounts for MSRB member firms can be performed by the: I Branch Office Manager II Municipal Securities Principal III General
Securities Principal IV Financial and Operations Principal The best answer is C. The Municipal Principal (Series 53 license) approves accounts at municipal securities firms. In addition, the MSRB permits the General Principal (Series 24 license) or the Branch Office Manager (Series 9/10 license) to approve new accounts. The Financial and Operations Principal (Series
27 license) is the firm's accountant, and cannot approve the opening of customer accounts. Which of the following can open a joint account without restriction? A. Parent and minor B. Guardian and custodian C. 3 limited partners D. Registered representative and client The best answer is C. Minors cannot participate in a joint account - the only way to open an account for a minor is via a custodian, guardian, or trust account. A guardian and a custodian cannot open a joint account as such - the custodian opens an account for the benefit of the designated minor; the guardian opens the account for the benefit of the designated person whose assets need to be protected. A registered representative and a client cannot open a joint account unless the firm approves; and profit and loss is shared in proportion to capital contributed. As a practical matter, almost all firms prohibit such sharing outright. 3 limited partners could open a joint account (they could also open a partnership account). Which statement about SEC rules covering customer account information is FALSE? A. The customer must be sent a copy of the collected information for verification within 30 days of account opening B. Collected suitability information must be sent for verification, including income and net worth C. CIP (Customer Identification Procedures) information must be sent for verification, including date of birth and social security number D. The customer account profile must be resent to the customer every 36 months for reverification The best answer is C. SEC rules require that the basic customer account information collected at account opening be sent separately to the customer for verification within 30 days of account opening; and this information must be sent for reverification and updating (if needed) every 36 months thereafter. Any collected suitability information must be included, however the rule states that customer social security number and date of birth are not required to be verified to help protect the customer from potential identity theft. The contact information for customers who wish to report inaccuracies on their account statements CANNOT be the: A. representative servicing the account B. compliance department of the broker-dealer C. operations department of the broker-dealer D. office of supervisory jurisdiction of the broker-dealer The best answer is A. The issue at hand is that FINRA is concerned about registered representatives who do unauthorized trading in their customer accounts to
generate commission income, without the customer knowing about or authorizing the transactions. So FINRA requires that a legend be placed on customer account statements that any errors found must be reported to the member firm promptly. The person to whom the report cannot be made is the registered representative, since if he or she is effecting unauthorized trades, then the report just might get "lost." Which statements are TRUE about non-managed fee based accounts? I The customer must be provided with a
disclosure document prior to account opening II The customer must be provided with a disclosure document within 15 business days of account opening III The account must be reviewed at least annually for its appropriateness as a fee based account IV The account must be reviewed at least bi-annually for its appropriateness as a fee based account The best answer is A. To open a non-managed fee based account (NMFBA) for a customer, a disclosure document must be provided, at, or prior to, account opening. Each account must be reviewed at least annually for its appropriateness for the customer. If an employee of another municipal securities firm wishes to open an account at your firm, which of the following statements are TRUE? I Written notice of the opening of the account must
be sent to the MSRB II Written notice of the opening of the account must be sent to the employer member III Duplicate confirmations must be sent to the MSRB IV Duplicate confirmations must be sent to the employer member The best answer is D. To open an account for an employee of another municipal securities firm, the MSRB requires that prior notice be given to the employing firm; and that duplicate confirmations of each trade be sent to the employer. In contrast, FINRA requires that confirmations and/or statements be sent only if the employer requests in writing. If a customer requests in writing and no specific reason is given, that customer's mail can be held for a maximum of: A. one month B. two months C. three months D. six months The best answer is C. FINRA does not allow a customer's mail to be held unless the customer requests in writing. As long as the request does not exceed 3 months, no other information is needed. However, if the customer wants the mail held for more than 3 months, then a valid reason must be given in the request, such as safety or security concerns. In order to recommend a structured product to a customer, all of the following statements are true EXCEPT: A. The member firm must perform a "reasonable basis" suitability determination evaluating the characteristics of the product to be recommended against competing products B. Completion of the "reasonable basis" suitability determination means that the structured product can be recommended to all the firm's customers C. The member firm must perform a "customer specific" suitability determination prior to recommending a structured product to a customer D. The registered representative offering the product must understand the product's features and risks and be able to communicate these to the customer The best answer is B. Because of the complexity of structured products, this is where FINRA first came up with its "3 Level" suitability rule (Reasonable basis suitability; Customer-specific suitability; and Quantitative suitability). It proved so
successful that FINRA applied the same rule to all recommendations, but, of course, they did not rescind the separate rule for this product! Under FINRA rules, numbered accounts are: A. prohibited B. permitted with the prior approval of FINRA C. permitted if the firm maintains a written statement of the customer attesting to ownership D. permitted without any additional supporting documentation The best answer is C. FINRA requires that accounts be maintained in customer name; however it will allow a numbered account to be maintained if the firm keeps on file a written statement by the customer attesting to ownership. For example, professional traders might worry that if their trades are seen in their name in the firm, that unscrupulous employees might try to "ghost" their trades. If the account is maintained as a numbered account, then whoever sees the order does not know the identity of the customer. Credit on securities extended by brokers to customers is controlled by: A. Regulation T B. Regulation U C. Regulation Q D. Regulation G The best answer is A. Credit on securities from broker to customer is controlled by Regulation T of the Federal Reserve Board. A customer buys 100 shares of ABC stock at $30 as an initial transaction in a margin account. The customer must deposit: A. $750 B. $1,500 C. $2,000 D. $3,000 The best answer is C. Regulation T initial margin to buy stock is 50% of $3,000 = $1,500. However, since this is a new account, it must meet the minimum initial margin of $2,000 needed to open an account. Therefore, $2,000 must be deposited. If an investor does not pay within the time period specified under Regulation T, which of the following statements are TRUE? I The investor must pay cash in advance for additional purchases II No trading is permitted in the account for 90 days III The investor must deliver securities in advance for sales IV The account is frozen for a 90 day period The best answer is C. When an account is frozen, this means that the customer did not pay within the maximum time period specified under Regulation T. When an account is frozen, to buy securities, payment must be made in advance; and to sell securities, delivery of the security must be made in advance. The freeze lasts for 90 days. A customer sells short 1,000 shares of ABC stock at $4 in a margin account. The customer must deposit: A. $2,000 B. $2,500 C. $4,000 D. $5,000 The best answer is C. Under the "cheap stock rule," if a customer wishes to short a stock under $5 a share, he or she must put up the greater of 100% or $2.50 per share. 100% of $4 per share x 1,000 shares = $4,000. $2.50 x 1,000 shares = $2,500. The greater amount is $4,000. A customer buys 100 shares of ABC at $17 as the initial transaction in a new margin account. The customer must deposit: A. $850 B. $1,000 C. $1,700 D. $2,000 The best answer is C. Even though minimum equity to open a long margin account is $2,000, this does not apply if the securities in the account are fully paid. A customer cannot be asked to deposit more than 100% when buying since this is the maximum potential loss. The customer wants to buy $1,700 of stock, so 100% or $1,700 must be deposited. A pattern day trading account has a high market value during the day of $400,000 and has a "0" position at the end of the day. The minimum maintenance margin requirement is: A. 0 B. $25,000 C. $100,000 D. $200,000 The best answer is C. Regular margin rules do not apply to pattern day trading accounts. If regular margin rules were applied, because there are no positions in the account at the end of the day, the Regulation T margin would be "0." FINRA sets a minimum margin equal to the greater of $25,000 or 25% of the intra-day high market value. Since this account had a high market value for the day of $400,000 x 25% = $100,000, this is the minimum requirement. If a customer sells securities and fails to deliver on settlement date, the position must be bought in how many business days later? A. 3 B. 5 C. 10 D. 30 The best answer is C. If a customer fails to deliver on a sale, this is not known until settlement date. As of settlement, the customer has 10 business days to deliver the stock, or the position will be bought in by the brokerage firm. All of the following statements about margin requirements are true EXCEPT: A. initial margin percentages are the same for both long and short accounts B. maintenance margin percentages are the same for both long and short accounts C. $2,000 equity minimum is the same for both long and short accounts D. payment is required promptly, but no later than 4 business days after trade date, in a long and short account The best answer is B. Initial margin for both long and short positions is 50% under Reg. T. Minimum maintenance margins set by FINRA are 25% and 30% respectively for long and short positions. Minimum dollar equity in both a long and short account is $2,000, ignoring special situations. Regulation T requires payment "promptly" for both purchases and short sales, but no later than "S + 2," which is 4 business days after trade date. What are initial and minimum maintenance margins for stock positions in a short margin account? A. 50 / 50 B. 50 / 25 C. 50 / 30 D. 25 / 30 The best answer is C. Initial margin for a short margin account is set by the Federal Reserve (FRB is the Federal Reserve Board) under Regulation T at 50%. Maintenance margin is set by FINRA at 30%. An investor that buys on margin should be made aware that: A. percentage changes in equity for securities purchased on margin are greater than those for the same position held fully paid B. percentage changes in equity for securities purchased on margin are smaller than those for the same position held fully paid C. percentage changes in equity for securities purchased on margin are the same as those for the same position held fully paid D. no relationship exists between the percentage price changes of margined securities positions as compared to those that are fully paid The best answer is A. The use of margin is said to "leverage" an account. That is, if the market rises (or falls), the percentage change in equity will be greater for a margin account than for the same change
in a cash account. An example follows: As the initial transaction in a new
margin account, a customer buys 1,000 shares of XYZ stock at $30. The market value increases to $50. Which statements are TRUE? The best answer is D. In a long margin account for every $1 rise in market value, equity will increase by $1. Since initial margin is set at 50%, for every $1 rise in market value, SMA increases by $.50 (that is, 50% of the market value increase can be borrowed). This account's equity went up $20,000; so the SMA would go up by 1/2 that amount, or by $10,000. Which of the following statements are TRUE regarding maintenance margin calls? The best answer is A. Calls for maintenance margin must be met "promptly." If the monies are not deposited "promptly," enough securities will be sold out of the account to satisfy the maintenance call. All of the following will satisfy a Reg T margin call for $1,000 EXCEPT a deposit of: The best answer is B. To meet an initial margin call for $1,000, a customer can deposit $1,000 of cash or $2,000 of fully paid marginable stocks (which have a loan value of $1,000). $4,000 of fully paid options are not acceptable since their loan value is zero. A $2,000 deposit is acceptable and is actually $1,000 more than what is required. Which statements are TRUE about meeting a Regulation T call for initial margin? The best answer is D. To meet a Regulation T call, either the entire call amount must be deposited in cash; or twice the call amount must be deposited in fully paid securities (which have a loan value of 50% of the market value that is used to meet the call). Which statement is TRUE when a short sale is effected for a client? A. The broker-dealer can require the short seller to provide the stock to the lender within 3 business days B. The broker-dealer can require the short seller to provide the stock to the lender within 5 business days C. The broker-dealer can require the short seller to provide the stock to the lender at any time D. The broker-dealer can require the short seller to provide the stock to the lender only when the client has a loss The best answer is C. When a customer shorts stock, the shares to be sold are borrowed by the brokerage firm, usually from another client at the same firm who has signed a loan consent agreement. The short seller agrees that the broker has the right to demand, at anytime, that the short seller "close
out" the position by purchasing the shares in the market and returning them to the lender of the shares. As an example of why this could occur, maybe the customer (lender of the stock) who is long those shares now wants the stock transferred and shipped. A customer buys 1 ABC Jan 60 LEAP Call @ $8 that has 24 months left until expiration in a margin account. Regulation T requires that the customer deposit: A. $400 B. $600 C. $800 D. $6,000 The best answer is B. Regulation T sets the initial margin requirement to buy LEAP options with over 9 months to expiration at 75% of the purchase amount. 75% of $800 = $600 margin requirement. Under MSRB rules, new accounts must be approved, in writing, by the: A. Registered Representative B. Municipal Securities Principal C. Compliance Officer D. Supervisory Analyst The best answer is B. The Municipal Securities Principal (Series 53 license) is the person responsible for approving the opening of municipal new accounts. In addition, the MSRB permits the General Principal (Series 24 license) or the Branch Office Manager (Series 9/10 license) to approve new accounts. The Compliance Officer (Series 14 license) is a FINRA designation for the person responsible for overall compliance matters and overall supervision of accounts. This person typically resides in the home office. The Supervisory Analyst (Series 16 license) is a FINRA designation for the person who writes or approves research reports. A customer wishes to open a new account, but refuses to give his or her social security number and date of birth, claiming that the release of such information would allow the customer's identity to be stolen. Which statement is TRUE? The best answer is D. There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information. If the customer does not give this information, then the account cannot be opened. To determine the suitability of recommendations made to a customer, inquiry
should be made about which of the following? I Investment objective II Investment experience III Financial situation IV Financial needs The best answer is D. When performing a suitability determination for a customer, inquiry should be made as to: Investment Objective, Investment Experience, Financial Situation (e.g., existing portfolio of investments), and Financial Needs. All of the following actions by a custodian in an account opened under the Uniform Gifts to Minors Act are permitted EXCEPT: A. donating funds to the account to make additional investments B. withdrawing funds from the account for the custodian's use C. managing the investments in the account with the objective of generating enough income for college tuition D. selling securities in the account to generate proceeds for other investments The best answer is B. Custodians are obligated to manage the assets of the account in the best interests of the minor. Custodians cannot use account assets for their own benefit. When comparing fixed fee accounts to those that charge a per trade commission charge accounts: The best answer is C. Fixed fee accounts are considered to be "advisory products." Per trade commission charge accounts are brokerage products. If a firm offers fixed fee accounts, it must do so through a registered Investment Adviser subsidiary; and its representatives must be licensed as "IARs" - Investment Adviser Representatives. Which statements are TRUE about FINRA rules regarding the designation of accounts? I A record must be maintained of the actual customer's name II No record need be maintained of the actual
customer's name III Numbered accounts are prohibited IV Numbered accounts are permitted if the customer attests in writing to account ownership The best answer is B. FINRA requires that accounts be maintained in customer name; however it will allow a numbered account to be maintained if the firm keeps on file a written statement by the customer attesting to ownership. For example, professional traders might worry that if their trades are seen in their name in the firm, that unscrupulous employees might try to "ghost" their trades. If the account is maintained as a numbered account, then whoever sees the order does not know the identity of the customer. If a customer does not return a signed options agreement, which statement is TRUE? A. The account must be frozen for 90 days B. Opening transactions are permitted in the account C. Closing transactions are permitted in the account D. Payment in advance is required for any further transactions The best answer is C. If the customer does not return the signed options agreement within 15 days' of account opening, no new positions can be initiated in the account. Orders can be accepted only to close out existing positions. There is no requirement to liquidate the account, nor to freeze the account, nor is there a requirement that cash be paid in advance for any further transactions. A customer has a proprietary position in an account that he wishes to transfer. He would be notified that the account: A. transfer will take longer because of the proprietary position B. cannot be transferred because of the proprietary position C. proprietary position must either be liquidated or retained at the carrying firm D. assets must be liquidated and the proceeds used to establish new positions The best answer is C. If the assets are held in proprietary products of the carrying firm, these cannot be transferred - since they are only offered by the carrying firm. The customer would have to liquidate these positions and transfer the money proceeds of the liquidation; or the customer could retain the proprietary positions at the carrying firm. The FINRA suitability rule requires a progression of suitability determinations that must be completed in which order? I Quantitative suitability II Reasonable basis suitability III Customer specific suitability The best answer is C. FINRA requires that suitability determinations include multiple levels of review, which must occur in the following order: Reasonable Basis Suitability: This is a review of the features, returns, costs and risks of the recommended product or strategy. Only those products with the best combination can be recommended to clients. In essence, this rule requires that firms have an internal "recommended list" that has completed this review. In addition, in order to recommend the product, the registered representative must understand, and be able to communicate, the investment's features, returns, costs, and risks. Customer-Specific Suitability: Once the recommendation has completed "reasonable basis" suitability, that does not mean that it can be recommended to all customers. To recommend it to a customer requires that "customer-specific" suitability be determined. Quantitative Suitability: A single recommendation might be suitable for a customer, however a large number of similar recommendations might not be. It all depends of the customer's objectives, needs, and ability to pay for the recommended transactions. Note that the "Suitability" rule only applies to recommended transactions. It explicitly does not apply to unsolicited trades; and it also does not apply to institutional customers - only to retail customers. A registered representative is notified verbally by the nephew
of a client that his uncle has passed away. Which statements are TRUE regarding the actions that the registered representative can take based on this information? The best answer is C. A registered representative can act on verbal notice that a customer has died when that information is provided by an immediate family member and can freeze the account. However, a nephew is too far removed to be considered "immediate family." (Immediate family includes parents, children, siblings and spouses, including in-laws.) To take action, the representative would either need to contact an immediate family member to confirm that the customer has died; or if there is no immediate family, then proof of death (a certified copy of the death certificate) must be provided by the nephew. A registered representative makes it a regular practice to check in with his actively trading customers at least once a week and with his inactively trading customers at least once a month. Some of his less active customers are senior citizens who are getting on in years. He calls one of these elderly clients as part of his regular monthly contacting and finds that the customer does not recognize who he is and appears to be disoriented. The FIRST thing the representative should do is: A. nothing, since it is not the responsibility of the representative to deal with the personal matters of a customer B. contact the firm's compliance department for guidance on how to handle the situation C. contact the customer's next of kin to discuss the situation D. alert the appropriate government protective service authority The best answer is B. The SEC and FINRA are concerned about aging investors, who as their mental capacity
diminishes, are prey for investment scams. To protect senior investors, firms must train their employees to identify diminished mental capacity. FINRA requires that firms have an internal process to permit representatives to get advice from others as to what steps to take. These include: Prior to opening an account that will engage in day trading, the customer must be provided with a: A. Preliminary Prospectus B. Trust Indenture C. Disclosure Document D. Power of Attorney The best answer is C. Day traders take on greater risks than normal customers and are therefore subject to a more stringent suitability determination and must receive a risk disclosure document prior to account opening. As the first trade in a new cash account, a customer buys $4,000 of securities. The customer mails a check for $3,000. When this is received by the broker, the customer is called and asked "Where is the other $1,000?" The customer responds that the check is in the mail. 2 business days later, the check does not arrive. The registered representative should: A. do nothing, since the account is over the 50% initial margin requirement B. sell out all of the securities in the account C. sell enough securities to cover the $1,000 shortfall and freeze the account for 90 days D. lend the customer $1,000 until the monies are received The best answer is C. The customer has not paid in full for the position in a cash account. Regulation T requires that if the customer does not pay promptly, but no later than "Settlement + 2" business days, then the unpaid position must be liquidated and the account frozen for 90 days. During the freeze period, all purchases must be paid in advance. The minimum maintenance margin for short stock positions is set at: A. 25% of the short market value B. 30% of the short market value C. 50% of the short market value D. 100% of the short market value The best answer is B. The minimum maintenance margin requirement is set by the exchanges at 30% of the short market value. If the account falls below this level, then a "maintenance call" is sent to bring the account back up to the 30% minimum. Note that Regulation T sets initial margin at 50%. Thus, if the account loses value after the Reg. T amount is deposited, nothing happens unless the account falls below the 30% minimum. On the same day in a long margin account, a customer buys 3,000 shares of ABC at $10 and sells 1,000 shares of XYZ at $28. The customer's account shows a free credit balance of $500. The customer is required to deposit: A. 0 B. $500 C. $1,000 D. $2,000 The best answer is B. Transactions in a margin account are "netted" each day to determine if additional fund must be deposited. This customer bought 3,000 shares of ABC at $10 for a purchase of $30,000 and sold 1,000 shares of XYZ for a sale of $28,000. The net transaction is a "net" purchase of $2,000 of securities. With Reg. T. for common stocks at 50%, the Reg. T. requirement is $1,000. Since the customer has an unused cash balance (free credit balance) of $500, this can be used to meet the requirement. The customer need only deposit an additional $500 to meet the margin requirement. The formula for equity in a combined margin account is: A. long market value + short market value - credit balance - debit balance B. long market value + short market value + credit balance - debit balance C. long market value - short market value + credit balance - debit balance D. long market value - short market value - credit balance + debit balance A customer buys 1 ABC Jan 35 Call @ $3.50 and 1 ABC Jan 35 Put @ $.50 when the market price of ABC is at $36.75. The customer must deposit: A. $200 B. $300 C. $400 D. $2,000 The best answer is C. The customer has bought a call and a put on the same stock with the same strike price and expiration, so this is a long straddle that must be paid for in full. $350 for the call, plus $50 for the put, is a $400 deposit. A representative meets a potential client at a convention. The client is interested in an investment giving life-long income, and the representative recommends a variable annuity contract. The customer opens an account and completes the purchase, but 30 days later, the customer calls the representative, telling him that he is not happy and he wants to move to another firm. What action should the representative take? A. The representative should recommend another variable annuity to the client that better meets the customer's needs B. The representative should file a SAR report about the customer C. The representative should talk to the manager to determine if there was a Know Your Customer violation D. The representative should offer the customer a full refund of his investment The best answer is C. This question is judgmental, but this was a new client that was met at a convention. The client made an investment, and then 30 days later, wants it moved to another firm because he is "not happy." Before an account is opened for a client, the representative is supposed to go through extensive fact-finding to determine that the variable annuity recommended is suitable for the client. Since this client is "not happy" 30 days later with the investment, it appears that the KYC (Know Your Customer) rule was not followed. The situation should be discussed with the manager. A customer wishes to give a gift of securities to her nephew under the Uniform Transfers To Minors Act. Which statement is TRUE? A. When the minor reaches legal age in that state, the custodian can continue in that capacity with the express permission of the minor B. When the minor reaches legal age in that state, the: account must be transferred into the name of the minor C. At legal age, the account must be liquidated and the proceeds paid to the new adult D. The transfer age is set by the custodian, up to the maximum age permitted by the State The best answer is D. The main difference between UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) is that while the assets in an UGMA account transfer to the new adult at legal age, and an UTMA account, the custodian sets the transfer age (up to the maximum age set by that State - in most States, the maximum age is 21, a few have a maximum age of 25). A customer places an order to sell 100 shares of XYZ at the market. The initial execution report shows the trade occurring at $38.50 and this is reported to the client. The firm later discovers that the trade occurred at $38.25. Which statement is TRUE? A. The customer must be given the reported sale price of $38.50 B. The trade will be cancelled C. The customer must accept the actual sale price of $38.25 D. The customer will receive the average of the 2 prices The best answer is C. The customer placed a market order to sell which was executed at $38.25. The firm erroneously reported the trade as occurring at $38.50. If there is an error in confirmation or reporting (as happened in this case), the customer gets the actual trade price. Note, in contrast that if the firm made an error in execution, any loss due to the firm's error must be absorbed by the firm. If it is determined that a customer account that is paying an annual flat-fee would have been cheaper if the customer paid a commission on each trade, then the member firm: A. must refund the excess charges to the customer, with interest, based on the previous 12 months' trading experience B. is permitted to deduct the excess charges from the registered representative's paycheck and credit them to the customer's account C. must transfer the customer account to a discount broker that charges only on a per trade basis and that does not maintain fee based accounts D. must contact the customer, providing the information needed to determine if the customer should maintain the fee based account The best answer is D. Non-Managed Fee Based Accounts (NMFBA) must be reviewed annually for appropriateness for each customer. If, as a result of the review, it is determined that an NMFBA is more expensive, the customer must be contacted and given the information necessary to make a determination that he or she wishes to retain this type of account. Which of the following statements are TRUE if a customer signs a durable power of attorney? The best answer is B. A "durable" power of attorney continues if the grantor becomes mentally incapacitated. In contrast, a "non-durable" power of attorney ends if the grantor is incapacitated or becomes incompetent. However, upon the death of the grantor, any power of attorney (whether durable or non-durable) is void. Which statement is TRUE about making a recommendation to an elderly customer under the "Senior Citizen Rule?" A. Recommendations of specific designated securities that lack liquidity or that have withdrawal penalties are prohibited B. The customer must fully understand the benefits, risks and costs of the recommended product C. The firm has an obligation to shield the customer from risks that the customer wishes to take D. Recommendations to senior citizens are only permitted by registered representatives that qualify as "Certified Senior Advisers" The best answer is B. FINRA states that member firms do not have an obligation to shield their senior citizen customers from risks that they want to take, but the customer must fully understand the product being recommended. This must include a fair and balanced picture of the risks, costs, and benefits associated with the recommended product or transaction. A registered representative has been prospecting for new customers in neighboring states, and has contacted an individual who wishes to open an account with a $25,000 stock purchase. The customer is located 500 miles away from the representative's branch office. In order to open the account: A. the customer must physically appear at the registered representative's branch office with government issued identification documents such as a passport or driver's license B. the registered representative must visit the customer's residence and obtain a copy of government issued identification documents such as a passport or driver's license C. no physical contact is required between the customer and the registered representative, but the branch manager must speak to the customer prior to account opening and verify the account information provided by the customer D. no physical contact is required between the customer and the registered representative, but the broker-dealer must verify the customer's identity by comparing information provided by the customer to a public database The best answer is D. To open an account for a new customer, 4 critical pieces of information must be obtained before the account can be opened - customer name, mailing address, social security number, and birthdate. This information must be used to independently verify the customer's identity within a reasonable time after account opening. This verification can be done by matching the 4 critical pieces of information to a valid government issued identification (which cannot be expired); or by using a database service such as Equifax to do the matching. Thus, there is no need for physical contact with the customer to open the account.
Regarding arbitration agreements between member firms and customers, which statements are TRUE? The best answer is C. FINRA does not require arbitration agreements between customers and member firms. However, each member firm can require this (and usually does). FINRA does require that if a customer signs an arbitration agreement as part of the account opening process, then the customer must be sent a separate "stand alone" copy of the agreement and must sign an acknowledgement of receipt within 30 days of account opening. Note that there is no requirement to resend the customer a copy of the arbitration agreement annually. Industry arbitration is preferred over litigation as a means of settling disputes because it is cheaper and faster. A customer wishes to give a gift of securities to her nephew under the Uniform Gifts To Minors Act. Which of the following statements is TRUE? A. The account cannot be opened because only parents are permitted to be custodians B. The account can be opened only with the written permission of the minor C. The securities can only be donated if they are included on that state's "legal list" D. The account can be opened without further documentation The best answer is D. Any adult can open a custodian account for a minor - the adult does not have to be related in any way to the minor. Financial institutions and trusts are often limited to the type of investments that they can make because the state can restrict investment to those securities included on its "legal list." Legal list securities are generally Treasuries and investment grade municipal and corporate bonds. Legal list requirements are not imposed on custodian accounts. Since the minor is not of legal age, the minor is in no position to give permission to open the account. Which statement is TRUE about the sending of customer account statements and confirmations? A. Customer mailings are sent by physical paper mail unless the customer requests that e-mail be used B. Customer mailings are sent by e-mail unless the customer requests that physical paper mail be used C. Customer mailings can only be sent by physical paper mail D. Customer mailings can only be sent by e-mail The best answer is A. Customer mailings can be sent by e-mail instead of through the physical mail system if the customer provides a valid e-mail address. This is done by the customer e-mailing the request for electronic mailings. A pattern day trader is defined as a person who: I effects a minimum of 4 day trades II
effects a minimum of 5 day trades III in 4 business days IV in 5 business days The best answer is B. A "pattern day trader" is defined as a person who effects at least 4 day trades in a 5 business day period. To open a day trading account, the customer must be qualified with a very detailed suitability determination; must receive a risk disclosure document; and must post a higher minimum margin. Under FINRA rules, "suitability" means that: A. securities that are delivered on settlement are in "good" form B. investment recommendations made to a customer are appropriate for that investor C. new accounts that are opened at the firm are of a similar nature to existing accounts D. registered representatives hired by the firm have passed all appropriate licensing examinations The best answer is B. "Suitability" means that securities which are recommended to a customer are appropriate for that customer. A customer has opened a margin account and has signed both the hypothecation agreement and the loan consent agreement. The brokerage firm can do which of the following with the customer's securities? The best answer is C. When a customer signs a margin account agreement, he or she allows the brokerage firm to keep the securities in street name; to commingle them with other customers' margin securities; and to pledge those securities to a bank for a loan. The brokerage firm cannot commingle customer securities with its own stock positions. When the loan consent agreement is signed by the customer, the customer allows the securities in the account to be loaned out on short sales. All of the following are types of accounts in which securities transactions can be effected under Regulation T EXCEPT: A. Margin account B. Cash account C. Discretionary account D. Arbitrage account The best answer is C. Regulation T defines 3 types of accounts in which securities transactions can occur - a cash account where full payment is required; a margin account where partial payment is required; and an arbitrage account for going "short against the box." Discretionary accounts, and the rules for their operation, are defined by the regulations of the SROs (Self Regulatory Organizations such as FINRA). Long Margin Account The best answer is C. The account will be at maintenance if equity equals 25% of long market value. Since long market value minus the debit equals equity in a long account, at maintenance, the debit must be 75% of market value. Thus, with a $90,000 debit, the account will be at maintenance when the market value falls to $90,000 / .75 = $120,000. At this point, equity will be $30,000 in the account and the margin percentage would be $30,000 equity / $120,000 market value = 25%. On the same day, a customer buys 100 shares of ABC at $56 and sells short 200 shares of XYZ at $51 in a margin account. The customer then sells 1 ABC Jan 60 Call @ $1 and 2 XYZ Jan 50 Puts @ $4. The customer must deposit: A. $4,600 B. $5,500 C. $7,000 D. $7,900 The best answer is C. The customer must deposit 50% of $5,600 to buy the ABC stock = $2,800. The customer must deposit 50% of $10,200 to sell short the XYZ stock = $5,100. The short call is covered by the long stock position, so no margin is required. The short puts are covered by the short stock position, so no margin is required. Against the total requirement of $7,900, $100 was collected from selling the call and $800 from selling the puts. The cash deposit is $7,900 - $900 = $7,000. An 80-year old customer with an existing individual account comes into a branch office and tells his representative that: "My son has been telling me that I need to give him a power of attorney over my account because of my advanced age, and I want to keep him happy and keep him from putting me in a retirement home." What should the representative do? A. The representative should give the customer a power of attorney form, naming the son as attorney over the account, and have the customer sign the form B. The representative should contact the son and get permission to have the customer sign a power of attorney C. The representative should escalate the matter to the branch manager or compliance department of the firm D. The representative should freeze the account until it can be determined that the customer is not mentally incapacitated The
best answer is C. The SEC and FINRA are concerned about aging investors, who as their mental capacity diminishes, are prey for investment scams. To protect senior investors, firms must train their employees to identify diminished mental capacity. In this example, the red flag is that the 80-year old customer tells the representative that "if I don't give my son a power of attorney, he will put me in a home." It could be that the son really is acting in the customer's best interests; or the son
could be attempting to coerce the old man to give a power of attorney so the son can drain the account. From the initial information given, we just don't know the full details of the situation. FINRA requires that firms have an internal process to permit representatives to get advice from others as to what steps to take. These include: Order ticket information must be recorded by the member firm prior to order: A. entry B. execution C. cancellation D. confirmation The best answer is A. Under FINRA rules, order tickets (which are now electronic) must be prepared in writing prior to entry. Once an order has been executed, no alterations are permitted to the ticket unless a manager approves in writing. If a member firm believes that a senior citizen with an account at the firm is being financially exploited, the member would contact the client's A. attorney B. closest relative C. trusted contact person D. registered representative The best answer is C. To address growing problems with financial exploitation of vulnerable senior citizens, FINRA requires that "reasonable efforts" be made to obtain the name and contact information of a
"trusted contact person" when an account is being opened. Note that this requirement applies to any new account, not just to accounts opened by senior citizens (age 65 or older). A registered representative takes an order from a customer to buy 100 shares of EFFE stock at $40 and writes the order ticket for processing. The registered representative fails to include the customer account number on the ticket. Which statement is TRUE? A. The order will be processed for the firm's proprietary trading account B. The order will be returned to the representative for entry of the account number C. The order will be referred to the member firm's compliance department for resolution D. The order will be canceled without any further action taken The best answer is B. Incomplete order information on an order ticket will result in the ticket not being processed. It will be returned to the representative for entry of all of the required information. A customer has completed an account transfer instruction form at broker-dealer "B," instructing that his account be transferred from broker-dealer "A." Broker-dealer "A" has validated the positions, but has not yet completed the physical transfer. If the customer wishes to sell any of his securities positions prior to the physical transfer, which statement is TRUE? A. The sell order must be placed with broker-dealer "A" B. The sell order must be placed with broker-dealer "B" C. The sell order cannot be placed until the physical transfer is completed D. The sell order can be placed with either broker-dealer, but must be marked as a "short sale" The best answer is B. Once a customer has completed an account transfer instruction at a "new" broker-dealer ("B"), this form is sent by that firm to the old broker-dealer ("A"). Broker-dealer "A" must verify the positions on the form within 1 business day and complete the transfer within another 3 business days. Upon receipt of the transfer form, carrying broker-dealer "A" must freeze the account and cancel all open orders. Any new orders must be placed through the new receiving broker-dealer "B." To open a joint account for a husband and wife, the social security number to be used for IRS reporting purposes is: A. the husband's social security number B. the wife's social security number C. both the husband' and wife's social security number D. either the husband's or wife's social security number The best answer is D. The Internal Revenue Service requires that income from each brokerage account be reported on a Form 1099 under 1 social security number (the IRS can't handle more than 1!) In a joint account, the participants decide under whose number the report will be filed. Please note that the New Account Form generally requires the social security number of each account owner; however, reporting to the IRS is done only under one of these numbers. A customer buys 300 shares of ABC at $40, depositing the Regulation T requirement on the 3rd business day after trade date. He holds the position for two months, during which $100 of interest is charged on the debit balance. What is the adjusted debit balance at the end of the two month period? A. $5,900 B. $6,000 C. $6,100 D. $6,200 The best answer is C. Since the customer bought $12,000 worth of stock, he deposited $6,000 with margin at 50% and borrowed $6,000 (the debit). Interest is charged on the debit, just as interest is charged on a Mastercard loan. The interest is added to the loan amount, reducing the equity in the account. since $100 of interest was charged, the new debit balance is $6,100. A short margin account shows the following balances: The best answer is D. The formula to find the market value at which a short margin account is at the 30% maintenance level is: On the same day in a margin account, a customer sells short 100 shares of ABC at $49 and buys 1 ABC Jan 50 Call @ $3. The customer's transactions on this day will generate a margin call of: A. $2,000 B. $2,750 C. $4,900 D. $5,200 The best answer is B. To short the stock requires 50% margin. 50% of $4,900 equals a $2,450 to meet the Regulation T requirement. To buy the call requires the deposit of 100% of the premium or $300. Thus, the total Regulation T requirement is $2,750.
As the first trade in a new cash account, a customer buys $4,000 of securities. The customer mails a check for $3,000. When this is received by the broker, the customer is called and asked "Where is the other $1,000?" The customer responds that the check is in the mail. 2 business days later, the check does not arrive. The registered representative should: A. do nothing, since the account is over the 50% initial margin requirement B. sell out all of the securities in the account C. sell enough securities to cover the $1,000 shortfall and freeze the account for 90 days D. lend the customer $1,000 until the monies are received The best answer is C. The customer has not paid in full for the position in a cash account. Regulation T requires that if the customer does not pay promptly, but no later than "Settlement + 2" business days, then the unpaid position must be liquidated and the account frozen for 90 days. During the freeze period, all purchases must be paid in advance. The maximum amount of customer securities that can be rehypothecated by a broker is: The best answer is B. The maximum amount of customer securities that can be pledged to a bank by a broker is 140% of the customer's debit balance. This amount of securities results in the bank almost exactly funding the amount of money loaned by the broker to the customer. The broker is prohibited from obtaining a higher loan amount from the bank than he actually lends to the customer. ustomers must be given information about SIPC: A. at, or prior to, account opening B. on the first trade confirmation sent after account opening C. on the first account statement sent after account opening D. semi-annually on the account statement The best answer is A. At, or prior to, account opening, the customer must be provided with the telephone number and web site address of SIPC (Securities Investor Protection Corp., which insures customer accounts against broker-dealer failure), through which the customer can obtain a copy of the SIPC brochure. In addition, this information must be provided to the customer annually thereafter. Custodian accounts can be opened as a: I Cash account II Margin account III Arbitrage account A. I only B. I and II C. II and III D. I, II, III The best answer is A. The "default" setting of the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act is that custodian accounts can only be opened as cash accounts. They can be opened as margin accounts only if the State permits it in its version of the law (which some States do, most do not). For the exam, custodian accounts can only be opened as cash accounts, since this is the rule in most States. Which of the following are affected when securities are sold in a restricted margin account? I Long Market Value II Equity III SMA IV Debit Balance A. I only B. I and II only C. II and III only D. I, III and IV only The best answer is D. If securities are sold in a restricted margin account (one that is below 50% margin), the long market value must decline. The proceeds of the sale are used to reduce the debit balance, therefore the debit balance will decrease. When securities are sold from a restricted account, 50% of the proceeds may be withdrawn. This is accomplished by crediting 50% of the proceeds to SMA. Thus, this amount can be borrowed. The only choice that does not change is Equity - this stays the same. Equity will be affected only if the market value rises or falls - or if cash is paid into, or borrowed from, the account. Which of the following recommendations are "red-flags" that are usually unsuitable for seniors? I Variable annuities II Structured products III Mortgaging home equity for investment purposes IV Using retirement savings to invest in high-risk investments A. I and II only B. III and IV only C. I, II and IV D. I, II, III, IV The best answer is D. FINRA has stated that it does not prohibit any particular recommendation to a senior citizen as long as it is suitable, however certain types of recommendations are "red-flags" - meaning that the firm must be able to strongly defend such a recommendation to a senior citizen. Included on the list of "no-no's" are recommendations to seniors to: purchase variable annuities, equity indexed annuities, and real estate limited partnerships purchase variable life settlements purchase complex structured products such as CDOs (Collateralized Debt Obligations) mortgage their residence to obtain funds for investment purposes use retirement savings, including early withdrawals from IRAs, to invest in high-risk investments Transfer on Death registration would likely be used by which of the following? A. Elderly father and adult son B. Middle age mother and minor daughter C. Unrelated business partners D. Husband and wife The best answer is A. Transfer on Death (TOD) registration is designed for the elderly, who, in the past, would typically register securities with an adult son or daughter as "Joint Tenants with Rights of Survivorship." This led to instances where, for example, an elderly parent with ample resources wished to liquidate securities positions to pay for an expensive cruise and the son, whose name is also registered on the certificates as "JTWROS," refused to sign the certificates, preventing the sale from settling. Transfer on Death (TOD) registration allows the elderly parent to maintain full control over the certificates during his or her lifetime. Only upon the death of the owner do the certificates automatically transfer to the named beneficiary, avoiding probate. Under SEC rules, customer account information must be verified by the member firm: I within 15 days of account opening II within 30 days of account opening III every 12 months IV every 36 months A. I and III B. I and IV C. II and III D. II and IV The best answer is D. SEC rules require that the basic customer account information collected at account opening be sent separately to the customer for verification within 30 days of account opening; and this information must be sent for verification and updating (if needed) every 36 months thereafter. FINRA member firms are required to follow special procedures when opening accounts for all of the following EXCEPT an employee of a FINRA member firm who wishes to open a securities account at: A. that firm B. another FINRA member firm C. a non-member bank D. a non-member investment adviser The best answer is A. If an employee of a FINRA member firm wishes to open an account at that
firm, then no special procedures are required. However, if an employee of a FINRA member wishes to open an account at another member firm, or at a non-member bank or investment adviser, then: Under the Know Your Customer Rule, in order to open and maintain a customer account, each registered representative must: I know "every" fact concerning the customer II know "every essential fact" concerning the customer III follow KYC procedures as part of an effective Anti-Money Laundering (AML) Program IV follow KYC procedures as part of an effective Customer Privacy program A. I and III B. I and IV C.
II and III D. II and IV The best answer is C. The Know Your Customer rule is separate from the "Suitability" rule. The KYC rule requires that the essential facts about the customer be collected at account opening, so that the member firm can: effectively service the customer's account; act in accordance with any special handling instructions for the account; understand the authority of each person acting for the customer; and comply with applicable laws and regulations. This is a very general rule regarding collection of customer account information and it applies whether trades are recommended or not in the account. For example, the PATRIOT Act requires that customer citizenship be obtained, because if a non-U.S citizen opens an account, a copy of their foreign passport must be obtained. Thus, citizenship becomes an essential fact in order to "comply with applicable laws and regulations." In contrast, the Suitability rule only applies when recommendations are made. The Broker Loan Rate is best described as the rate at which: A. brokers loan money to banks which then purchase securities B. brokers borrow from banks using customer securities as collateral C. customers charge brokers for borrowing their securities for stock loans D. the Federal Reserve charges member banks for overnight loans The best answer is B. Brokers borrow from banks using customer securities as collateral at the Broker Loan rate. The interest charged to customers on loans made by brokers is based on this rate (e.g., the interest rate charged might be "Broker Loan Rate + 1/2%"). What paperwork is required for trades to be effected in an account for a deceased person who held an individual account at a brokerage firm? A. Court order or executor's authorization certificate B. Names of the beneficiaries of the estate C. Social security number and date of death of the decedent D. Approval of the attorney for the estate The best answer is A. When the holder of an individual account dies, the account is frozen and no more trading can occur. The account assets go to that individual's estate, which must go through
probate. A probate court clerk issues an "executor's letter," signed by a judge, which authorizes the named individual to act on behalf of the estate as the executor. Another name for this document is "letters testamentary." Recommendations by a registered representative to a customer about options strategies are unsuitable if the: I customer has not received the Options Disclosure Document II opening of the account has not been approved by the Registered Options Principal III representative is unsure about the client's ability to assume the risk associated with a specific options strategy IV customer has not signed the Options Agreement A. I and III B. I and IV C. I, II, III D. I, II, III, IV The best answer is C. Recommendations about options should not be made to a customer unless he has received an Options Disclosure Document (ODD); and the account has been approved by the Registered Options Principal; and the registered representative believes that the recommendations are suitable for the customer. The customer must sign and return the Options Agreement no later than 15 days after opening the account. There is no requirement to sign the Agreement prior to any recommendations being made. If the agreement is not returned within 15 days, new opening transactions in the account are prohibited - only closing transactions are allowed. In an existing margin account, a customer wishes to buy 400 shares of ABC stock at $20 per shares and 10 PDQ Nov 25 Calls @ $4. The customer wishes to deposit fully paid common shares which have a current market value of $80 per share. How many shares of the stock must be deposited? A. 100 shares B. 200 shares C. 300 shares D. 1,000 shares The best answer is B. The customer needs to deposit 50% of the purchase price to buy the stock and 100% of the purchase price to buy the calls. To buy $8,000 of stock, the Regulation T requirement is $4,000. To buy $4,000 of options, the Regulation T requirement is $4,000. Therefore, the margin call is for $8,000. Since the customer wishes to deposit fully paid marginable stock, twice the amount must be deposited or $16,000 worth (since the stock has a loan value of 50% or $8,000). $16,000 of stock / $80 per share = 200 shares to be deposited. The minimum maintenance margin requirement for short stock positions is: A. 30% of the price of the transaction B. 50% of the price of the transaction C. 30% of the closing price of the security that day D. 50% of the closing price of the security that day The best answer is C. The minimum maintenance margin requirement is set by the exchanges at 30% of the short market value. If the account falls below this level, then a "maintenance call" is sent to bring the account back up to the 30% minimum. Note that Regulation T sets initial margin at 50%. Thus, if the account loses value after the Reg. T amount is deposited, nothing happens unless the account falls below the 30% minimum. In order to determine suitability for a day trading account, the member firm must ascertain the essential facts relative to the customer's: I Investment objectives II Investment and trading experience III Financial situation, including tax status IV Age, marital status and number of dependents A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV The best answer is D. Prior to opening an account that will engage in day trading, the member firm must exercise reasonable diligence to ascertain the essential facts relative to the customer including investment objectives; investment and trading experience and knowledge; financial situation, including estimated annual income, net worth and liquid net worth; tax status and employment status; and age, marital status, and number of dependents. Which statements are TRUE regarding a customer account with a "full power" third party trading authorization? I The third party can enter orders in the account II Checks drawn on the account can only be made out to the customer, not to the third party III Upon the death of the customer, the power of attorney is revoked IV The customer can designate that confirmations be sent only to the third party A. I and II B. I, III, IV C. II, III, IV D. I, II, III, IV The best answer is D. All statements are true about full trading authorizations. The third party can enter orders; any checks must be drawn in the account name - not third party name; the power of attorney dies if the customer dies; and the customer can designate that confirms go to the third party only (this must be done in writing). If a customer sells securities and fails to deliver on settlement date, the position must be bought in how many business days later? A. 1 B. 5 C. 10 D. 90 The best answer is C. If a customer fails to deliver on a sale, this is not known until settlement date. As of settlement, the customer has 10 business days to deliver the stock, or the position will be bought in by the brokerage firm. An order ticket is filled out and sent for execution to the NYSE. After being executed on the NYSE, it is discovered that the account number is incorrect. Under FINRA rules, the account number may be changed to the correct one by the: A. Registered Representative B. Specialist (DMM) C. Branch office manager D. Floor Governor The best answer is C. Under FINRA rules, alterations to order tickets are prohibited, unless the alteration is approved in writing by a "designated person" such as a branch office manager. This person must understand all of the facts surrounding the alteration before approving of the change, and is responsible for the change. Under FINRA rules, a fee based account that is more expensive to a customer than a "per trade commission charge" account would be appropriate for that customer: A. under no circumstances B. if the registered representative recommended the fee based account to the customer C. if the customer chose the fee based account for reasons other than cost D. if the fee based account charges are easier for the customer to understand than a commission charge on each trade The best answer is C. Under FINRA rules, a fee based account that is more expensive than a per trade commission charge account can be appropriate for the customer, if the customer chooses such an account for reasons other than cost. For example, the customer may wish to more closely align his interests with those of the broker, since the broker has no incentive to recommend excessive trading in a fee based account. A customer sells short 100 shares of ABC stock at $60 as an initial transaction in a margin account. At the end of the day, the stock increases in value to $70 per share. The customer must deposit: A. $2,000 B. $3,000 C. $3,500 D. $6,000 The best answer is B. Initial deposit for a short stock position is 50% of the sale price. The customer must deposit 50% of the sale amount, or $50% X $6,000 = $3,000. The fact that the stock rises to $70 at the end of the day, giving the customer a $1,000 loss, has nothing to do with the margin call amount. Under FINRA rules, all of the following statements are true about each customer that is placed in an NMFBA EXCEPT: A. such an account type must be suitable for the customer taking into account services provided, anticipated costs and investment objectives B. a disclosure document must be provided to the customer prior to account opening C. account activity must be reviewed for appropriateness at least every 12 months D. the member firm must continuously compute account fees on a per trade basis, and if this is lower, charge that amount as the account fee The best answer is D. FINRA requires that when a "non-managed fee based account (NMFBA)" is recommended to a customer, the customer must be suitable for that account type; a disclosure document must be provided to the customer prior to account opening explaining how fees will be charged; and that all such accounts must be reviewed at least every 12 months for appropriateness. There is no requirement to compare account charges on fee based accounts to the charges that would have been incurred on a straight commission basis, and to charge the customer the lower amount. The formula for equity in a combined margin account is: A. long market value plus short market value minus credit balance minus debit balance B. long market value plus short market value plus credit balance minus debit balance C. long market value minus short market value plus credit balance minus debit balance D. long market value minus short market value minus credit balance plus debit balance The best answer is C. The formula for a long account is: The formula for a short account is: Rearranging these, the formula for a combined account is: To open a margin account for a partnership, all of the following documentation is required EXCEPT: A. New account form B. Customer's agreement C. Partnership agreement D. Joint account agreement The best answer is D. To open any account, a new account form must be completed. To open a margin account, the customer's agreement (margin agreement) must be signed, pledging the securities purchased in the account as collateral for the margin loan. In addition, to open a partnership account, a copy of the partnership agreement must be obtained. Joint account agreements are only used when individuals who are not part of a larger "business entity" wish to pool their monies in a single account. A customer has a restricted margin account with $5,000 of SMA. If the customer wishes to buy $15,000 of marginable common stock, the customer must deposit: A. 0 B. $2,500 C. $5,000 D. $10,000 The best answer is B. A restricted margin account is one that is below the 50% Regulation T. initial margin requirement. Restriction has no effect on purchases in the account. To buy a marginable security, the customer must deposit the Regulation T requirement. To buy $15,000 of a marginable stock, the customer must deposit $7,500 (50% Regulation T requirement). The existing $5,000 of SMA can be used to meet part of this requirement and the customer must deposit the additional $2,500. A pattern day trading account has a high market value during the day of $200,000 and has a "0" position at the end of the day. The minimum maintenance margin requirement is: A. 0 B. $25,000 C. $50,000 D. $100,000 The best answer is C. Regular margin rules do not apply to pattern day trading accounts. If regular margin rules were applied, because there are no positions in the account at the end of the day, the Regulation T margin would be "0." FINRA sets a minimum margin equal to the greater of $25,000 or 25% of the intra-day high market value. Since this account had a high market value for the day of $200,000 x 25% = $50,000, this is the minimum requirement. A registered representative receives an order to sell 100 shares of ABC stock that has been "transferred and shipped" to the customer. Before executing the order, the registered representative must: I Ascertain the location of the stock II Ascertain that the securities can be delivered in 3 business days III Validate that the securities are in "good form" IV Obtain physical possession of the securities A. I and II B. II and III C. IV only D. I, II, III, IV The best answer is A. FINRA rules require that orders to sell cannot be accepted unless the firm has reasonable assurance that the securities can be delivered in 3 business days. There is no requirement to obtain physical possession of the securities before placing the sell order, nor is there a requirement to validate the securities as "good for delivery."
Which TWO of the following customer activities should make a registered representative suspicious of potential money laundering? I Refusal to disclose information about his or her business activities II Ordering of wire transfers to an account in the same name at another broker-dealer III Acting as agent for another account without providing proper supporting documentation IV Ordering frequent withdrawals of funds from a money market account A. I and III B. I and IV C. II and III D. II and IV The best answer is A. Refusal by a customer to disclose information about his or her business is a potential indicator of illegal activities by that customer; the same is true of a customer who attempts to act as an agent (meaning a "front man") for another person without providing proper documentation - (meaning a legal power of attorney given by that person to the agent). Ordering wire transfers to another account in the same name at another brokerage firm is not, by itself, an indicator of potential money laundering. Wires to accounts in other names is a warning signal; as are wires to accounts in foreign countries that have bank secrecy laws. Ordering frequent withdrawals of funds from a money market account is, by itself, not a money laundering signal - maybe this person is using the money to live in retirement. Structuring a series of withdrawals to fall under the $10,000 reporting limit would be suspicious, however. A customer is long 100 shares of ABC stock at $50 per share in a margin account. The customer wishes to sell 1 ABC Jan 50 Call @ $5. The customer must deposit: A. 0 B. $500 C. $2,000 D. $5,000 The best answer is A. The existing long stock position covers the sale of the call. The customer does not deposit anything to sell the call; as a matter of fact, he or she can take the $500 premium received for selling the call from the account. Please note, however, that the long stock position must be properly margined. Which of the following will satisfy a Reg T margin call for $1,000? I Deposit of $1,000 cash II Deposit of $2,000 of fully paid marginable securities III Deposit of $2,000 of fully paid option contracts A. I only B. I and II C. II and III D. I, II, III The best answer is B. To meet an initial margin call for $1,000, a customer can deposit $1,000 of cash or $2,000 of fully paid marginable stocks (which have a loan value of $1,000). $2,000 of fully paid options are not acceptable since their loan value is zero. SEC Regulation SP covers: A. notification to customers of a member firm's privacy policies and practices B. selective disclosure of material non-public information by issuers C. standardization of disclosure of financial and non-financial information by issuers D. registration filings with the SEC by small business issuers The best answer is A. Regulation SP ("Statement of Privacy"), passed in 2000, requires financial institutions to provide customers with a copy of their privacy policies and procedures, including whether customer information is provided to third parties; and requires that customers be given the ability to "opt out" of any such disclosures. If there is no trading activity in a customer's account, a statement must be mailed: A. that month B. that quarter C. semi-annually D. annually The best answer is B. If there is no activity in a customer's account, statements are mailed quarterly. However, if trades take place, a statement must be sent for that month. Under FINRA rules, fixed fee accounts should be reviewed for appropriateness for customers at a minimum: A. monthly B. quarterly C. semi-annually D. annually The best answer is D. Fixed fee account activity should be reviewed at least annually for appropriateness for each customer. Under FINRA rules, if a member suspects that a senior citizen is being financially exploited: I a temporary hold may be placed on disbursements from the account for up to 10 business days II a temporary hold may be placed on disbursements from the account for up to 15 business days III any hold placed on the account, if supported by the member's review of the situation, can be extended for another 10 business days IV any hold placed on the account, if supported by the member's review of the situation, can be extended for another 15 business days A. I and III B. I and IV C. II and III D. II and IV The best answer is C. FINRA permits member firms to place a temporary hold on disbursements from customer accounts if the firm suspects that the account owner is being financially exploited. The initial hold can be for up to 15 business days. In addition, if the member's review of the situation supports this, the member can extend the hold for another 10 business days. The margin requirement to buy a 300% Leveraged ETF is: A. 25% B. 50% C. 75% D. 100% The best answer is C. Leveraged ETFs are designed to have volatile price movements and, because of this, FINRA sets higher minimum margins. FINRA sets the minimum margin for leveraged ETFs at the leverage percentage times the minimum maintenance margin requirement. Since this is a 300% leveraged ETF, the minimum margin is 3 times the FINRA 25% minimum = 75%. A registered representative is notified that a customer has just died. The registered representative must do all of the following EXCEPT: A. Mark account "deceased" B. Close out all short positions C. Wait for executor/administrator instructions D. Cancel all open orders The best answer is B. If a customer dies, the procedure is: Cancel all open orders; Note the date of death on the account; Freeze the account from removal of assets; and Wait for instructions. All of the following securities can be sold by an individual holding an investment companies/variable annuities registered representative's license (Series 6) EXCEPT: A. Municipal Investment Trusts B. Common Stock Funds C. Municipal Bond Funds D. Real Estate Investment Trusts The best answer is D. A person holding an investment companies/variable annuities (Series 6) license is only allowed to sell mutual funds, unit investment trusts, and variable annuities. To sell other securities such as Real Estate Investment Trusts, municipal bonds, corporate bonds, common stock, options etc., the broader Series 7 general securities license is required. In an existing margin account, a customer wishes to buy 200 shares of ABC stock at $20 per shares and 10 PDQ Nov 25 Calls @ $2. Instead of paying cash, the customer wants to deposit fully paid common shares of XYZ which have a current market value of $40 per share (the customer paid $20 per share). How many shares of XYZ must be deposited? A. 200 shares B. 300 shares C. 400 shares D. 600 shares The best answer is A. The customer needs to deposit 50% of the purchase price to buy the stock and 100% of the purchase price to buy the calls. To buy $4,000 of stock, the Regulation T requirement is $2,000. To buy $2,000 of options, the Regulation T requirement is $2,000. Therefore, the total deposit amount must be $4,000. To meet this requirement, the customer must deposit $4,000 in cash or $8,000 of fully paid marginable stock (against which the $4,000 requirement can be borrowed). $8,000 of stock / $40 per share value = 200 shares of XYZ must be deposited. A customer is long 400 shares of fully paid XYZ stock, valued at $150 per share. The customer sells "short against the box" another 400 shares of XYZ. XYZ is listed on the New York Stock Exchange. The minimum maintenance margin requirement is: A. 0 B. $3,000 C. $57,000 D. $60,000 The best answer is B. The margin in an arbitrage account is 5% minimum maintenance on the long side under FINRA rules. There is no Regulation T requirement, since the customer has no risk - his net position = "0." Since the market value of the securities is $60,000, the minimum margin is 5% = $3,000. The customer can borrow the remaining $57,000. A customer has opened an individual account held TOD with 3 named beneficiaries who are to share equally in the account upon the client's death. The customer dies and the beneficiaries call the representative, asking that they be sent checks for their respective amounts. What should the representative do? A. Send the checks upon receipt of written instructions from the beneficiaries B. Deny the transactions C. Wait for a copy of the death certificate and any other necessary paperwork and then send a check to each beneficiary D. Wait for a copy of the death certificate and any other necessary paperwork and then open an account in the name of each beneficiary holding 1/3rd of the assets from the deceased client's now-closed account The best answer is D. First of all, you must have proof that the customer died in the form of the death certificate. Upon receipt of the death certificate, the deceased account is now frozen and checks cannot be drawn from the account. The assets must be transferred to 3 new accounts - 1 for each beneficiary - and then the beneficiary can issue instructions regarding the assets in the newly created account in that individual's name. Which of the following are types of joint accounts? I Tenancy by Entireties account II Tenancy in Common account III Joint Tenants with Rights of Survivorship account IV Partnership account A. I and IV B. II and III C. I, II, III D. I, II, III, IV The best answer is C. In a joint account, each owner can trade the account and can draw checks in the account's name. The joint account ownership options are Tenants in Common - each person has a divided interest with a specified ownership percentage for each party; and Joint Tenancy With Rights of Survivorship - each person has an undivided interest with each owning 100% of the account (another name for such an account is "Tenants by Entireties"). Partnership accounts are not joint accounts - only the designated partner(s) authorized in the partnership agreement can trade the account and draw checks - each individual partner is not permitted to do so. A customer has combined margin account that shows the following: The best answer is B. The customer has the following long position: A customer opens a long margin account with only 1 position, consisting of 100 shares of ABC stock valued at $20 per share. There is no debit balance in the account. If the customer buys 100 shares of XYZ at $60 per share, the margin call will be: A. $500 B. $1,000 C. $2,000 D. $3,000 The best answer is C. Prior to making the new purchase, the margin account
held 100 shares of ABC at $20, fully paid, for equity of $2,000 in the account. There is $1,000 of SMA from this position that cannot be used currently, since minimum margin to open an account is $2,000 of equity or the account being "fully paid," whichever is less. Now the customer wishes to buy another $6,000 of stock, which would generate a Regulation T call of $3,000. Since there is $1,000 of SMA in the account, the customer need only deposit $2,000. After all this, the account will show:
In order to open a discretionary margin account, which of the following procedures are required? I Completed Customer New Account Form II Signed Trading Authorization III Signed Customer's Agreement IV Signature of Manager on New Account Form A. I and IV only B. II and III only C. I, II, IV D. I, II, III, IV The best answer is D. Every new account must have a new account form, which is approved by the manager. A signed customer's agreement is required for a margin account, as this is the case with this account (the customer's agreement is the hypothecation agreement). To open a discretionary account, the customer must provide a signed trading authorization to the firm (first party trading authorization) allowing discretionary trades. Under the Know Your Customer Rule, in order to open and maintain a customer account, each registered representative must: I know "every" fact concerning the customer II know "every essential fact" concerning the customer III follow KYC procedures only when making recommended transactions to a customer IV follow KYC procedures regardless of whether transactions in the account are recommended or not recommended A. I and III B. I and IV C. II and III D. II and IV The best answer is D. The Know Your Customer rule is separate from the "Suitability" rule. The KYC rule requires that the essential facts about the customer be collected at account opening, so that the member firm can: effectively service the customer's account; act in accordance with any special handling instructions for the account; understand the authority of each person acting for the customer; and comply with applicable laws and regulations. This is a very general rule regarding collection of customer account information and it applies whether trades are recommended or not in the account. For example, the PATRIOT Act requires that customer citizenship be obtained, because if a non-U.S citizen opens an account, a copy of their foreign passport must be obtained. Thus, citizenship becomes an essential fact in order to "comply with applicable laws and regulations." In contrast, the Suitability rule only applies when recommendations are made. A 35-year old customer in the 15% tax bracket tells her representative that she wants to buy a tax-sheltered investment. The representative explains that this is not suitable, but the customer insists that the representative execute the trade, The representative should: A. refuse the order B. submit the order to FINRA for approval prior to executing the order C. execute the order, but note his or her exception in the customer account file D. close the account The best answer is C. If the customer tells you to do something, do it! It's the customer's account, not yours. Since you don't agree with the customer's decision, cover your actions by documenting your exception to the trade in the customer file. Credit from bank to broker is controlled under: A. Regulation T B. Regulation U C. Regulation X D. Regulation Z The best answer is B. Regulation U controls credit from bank to broker. Regulation T controls credit from broker to customer. All of the following are types of fiduciary accounts EXCEPT: A. Trust Account B. Custodian Account C. Executor of Estate Account D. Partnership Account The best answer is D. Trust accounts, Custodian accounts, Executor of Estate accounts are all types of fiduciary accounts, where a third party is designated to manage the account in the best interests of the account owner. Partnership accounts are directly managed by those partners authorized to trade in the account. To buy a listed stock in a margin account requires a deposit of: A. 25% of the price of the transaction B. 50% of the price of the transaction C. 25% of the closing price of the security that day D. 50% of the closing price of the security that day The best answer is B. Regulation T requires that 50% of the purchase amount, based on the price of the trade, be deposited. The closing price has no effect on the deposit amount required. Which of the following positions would receive the greatest benefit of reduced margin requirements from portfolio margining? A. Short naked call B. Long stock/Long put C. Short stock/Short put D. Long call/Long put The best answer is B. Portfolio margin is based on the risk of a portfolio, rather than applying a fixed margin percentage to each security position.
When a stock position is hedged by an option, as is the case with a long stock/long put position, then the maximum loss on the stock position is reduced to approximately the premium paid for the put (net of any difference between the stock cost and the put strike price). Thus, portfolio margin results in a much lower margin requirement for stock positions that are hedged by options. A customer
has an existing margin account with the following positions: The best answer is A. For purposes of computing equity in a margin account, long option positions should be excluded since they must be fully
paid. Think of long options as being purchased in a cash account with no loan value. Long Market Value - Debit = Equity % Stock $20,000 $15,000 $5,000 25% A customer has opened a NMFBA but is not trading very much and the cost of the account is higher than if the account was based on a per trade commission charge. Which statement is TRUE? A. The account can be maintained as a NMFBA if the customer places a high value on aligning his interests with those of the broker B. The account can be maintained as a NMFBA if the customer receives a disclosure document that explains how the account fees are charged C. The account must be converted to one that charges a per trade commission D. No action can be taken unless the customer initiates a conversation about the relevant costs and services provided in the account The best answer is A. A NMFBA is a "Non-Managed Fee Based Account." This type of account charges a flat annual fee for all trading, but the annual fee does not include recommendations or asset management. Typically, such an account is only suitable for an active trader. However, a customer that trades infrequently can still be suitable for such an account, if the customer places a high value on aligning his or her interests with those of the broker. (This means that the customer is happy to pay the flat annual fee because he knows that the broker does not have an incentive to churn the account!) "Non-Managed Fee Based Account." Which of the following are defined as products offered by investment advisers? I Non-managed fee based accounts II Managed fee based accounts (wrap accounts) III Per trade commission charge accounts A. I only B. I and II only C. II and III only D. I, II, III The best answer is B. Fixed fee accounts (non-managed fee based accounts) only cover trading costs. They do not include charges for asset allocation and portfolio management. Wrap accounts include asset allocation and portfolio management. Any fixed fee product is defined as an "investment adviser" product. Per trade commission charge accounts are brokerage products. If a firm offers fixed fee accounts, it must do so through a registered Investment Adviser subsidiary; and its representatives must be licensed as "IARs" - Investment Adviser Representatives. If a customer wishes to open an account for a minor without additional documentation, the account must be opened as a: A. guardian account B. cash account C. margin account D. conservator account The best answer is B. The "default" setting of the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act is that custodian accounts can only be opened as cash accounts. They can be opened as margin accounts only if the State permits it in its version of the law (which some States do, most do not). For the exam, custodian accounts can only be opened as cash accounts, since this is the rule in most States. The FINRA suitability rule requires all of the following EXCEPT: A. Reasonable Basis Suitability B. Customer-Specific Suitability C. Quantitative Suitability D. Qualitative Suitability
The best answer is D. FINRA requires that suitability determinations include multiple levels of review. These are: Reasonable Basis Suitability: This is a review of the features, returns, costs and risks of the recommended product or strategy. Only those products with the best combination can be recommended to clients. In essence, this rule requires that firms have an internal "recommended list" that has completed this review. Customer-Specific Suitability: Once the recommendation has completed "reasonable basis" suitability, that does not mean that it can be recommended to all customers. To recommend it to a customer requires that "customer-specific" suitability be determined. Quantitative Suitability: A single recommendation might be suitable for a customer, however a large number of similar recommendations might not be. It all depends of the customer's objectives, needs, and ability to pay for the recommended transactions. There is no such thing as "Qualitative" suitability. A firm holds a joint cash account for a husband and wife. The wife calls the registered representative and says "Sell 500 shares of ABC out of the account immediately and send a check for the proceeds made out to my name". The representative should inform the wife that: A. her instructions will be followed exactly B. the transaction requires approval of the husband since it is a joint account C. the trade can be performed but the check must be made out to both names on the account D. a written power of attorney must be on file to perform the trade The best answer is C. Any party in a joint account can enter orders. However, any checks drawn on the account must be made out to all names on the account. The best way to ensure that a brokerage firm has an effective AML program is to: A. perform a credit check on each customer B. have strong KYC procedures C. make sure that all new accounts are approved by a manager or principal D. file an SAR report on each new customer The best answer is B. FINRA states that the best way to ensure that a member firm has an effective anti-money laundering program is to have strong "KYC" - Know Your Customer - procedures. For every $1 that the market value of a long account rises above initial Regulation T margin, SMA will be credited with: A. $0 B. $.25 C. $.50 D. $1.00 The best answer is C. For every $1 increase in equity for a long account, the SMA will increase by $.50 or 50%. In essence, for every $1 rise in market value, $.50 of the increase can be borrowed from the account. Prior to opening an account that will engage in day trading, the customer must be provided with a: A. Preliminary Prospectus B. Trust Indenture C. Disclosure Document D. Power of Attorney The best answer is C. Day traders take on greater risks than normal customers and are therefore subject to a more stringent suitability determination and must receive a risk disclosure document prior to account opening. When opening an account to buy options Which of the following signatures are needed?The options new account form, required for options trading, is signed by the registered representative, who is attesting to the fact that the information on the form is true; and must be approved before the account is traded by the registered options principal (Series 4 license).
When opening an account to trade stocks and options Which of the following signatures are needed on the new account forms?The regular new account form for equity securities requires the signature of the registered representative and the general principal (Series 24 license).
When opening an account for a customer which of the following is necessary?There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number.
Who approves the opening of a customers option account?When an investor wants to open an options account, FINRA Rule 2360 requires a very specific process: Customer fills out a new account form. Financial representative provides ODD. Account is approved by an options supervisor.
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Which of the following procedures are required to open and maintain an options account?
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