Chapter 11 - Customer Accounts

Question 1

In order to execute a short sale,
A) a cash or margin account may utilized.
B) the prior written approval of a principal must be secured due to the inherent risks involved.
C) a cash account must be utilized.
D) a margin account must be utilized.

Answer 1

D) a margin account must be utilized

Answer Explanation
All short sales must be executed in a margin account.

Textbook Reference
Please see textbook section 11.2.2

Question 2

For an equity trade, which of the following is not included on a customer confirmation?
A) Quantity of shares
B) Customer’s bid or ask price
C) Trade date
D) Transaction price

Answer 2

B) Customer’s bid or ask price

Answer Explanation
The confirmation includes the trade date, amount and price. It does not include the customer’s bid or ask price on a limit order.

Textbook Reference
Please see textbook section 11.5.2

Question 3

Paul’s broker recommends that he buy 300 shares of Microsoft stock. However, he does not specify any recommended price. Paul pays the broker a commission on the trade. The customer confirmation will show that this order is
A) A solicited trade
B) A principal trade
C) An unsolicited trade
D) A trade with a markup

Answer 3

A - solicited trade

Answer Explanation
A solicited trade is one in which the registered representative makes a recommendation. The recommendation need not include all essential elements of the trade – e.g., price, quantity, security. A trade that shows a commission on the confirmation is an agency trade, not a principal trade.

Textbook Reference
Please see textbook section 11.5.2

Question 4

All of the following types of information are required to be included on an account statement EXCEPT
A) Securities positions
B) Purchases, sales, transfers and distributions in the account
C) Cash balances
D) Portfolio analysis showing diversification of assets among sectors or styles

Answer 4

D - portfolio analysis

Answer Explanation
Customer statements include any account activity - including purchases, sales, transfers, and distributions - as well as the customer’s securities positions and any cash balance. Some firms also offer customers performance reports that go beyond the basic information and include portfolio analysis, diversification statistics, and performance comparisons with benchmarks, but this information is not required.

Textbook Reference
Please see textbook section 11.5.1

Question 5

The new account form must be signed by
A) the customer and the registered representative.
B) the registered representative and a designated principal.
C) the customer and a designated principal.
D) only a designated principal.

Answer 5

D - only a designated principal

Answer Explanation
The customer and registered representative do not need to sign the new account form. It must be reviewed, approved and signed by a designated principal prior to any trading in the account.

Textbook Reference
Please see textbook section 11.1.4

Question 6

Mr. Smith and Mr. Jones have a joint business account. The address of their company has changed, and Mr. Smith phones his representative with this information. The broker-dealer must
A) contact Mr. Jones to verify the address change before updating the permanent record.
B) include this information in the written verification of account information that the broker-dealer makes every three years, and send it to both of the account owners.
C) update the permanent record with this information and send a written notice requesting verification to both of the account owners.
D) update the permanent record with this information and send a written notice requesting verification to one of the account owners.

Answer 6

C - update permanent record with this information and send a written notice requesting verification to both of the account owners

Answer Explanation
When a change is made to joint account information, the firm must send a written request for verification to all owners, and request any changes within 30 days.

Textbook Reference
Please see textbook section 11.1.5

Question 7

A customer has opened a cash account and purchased 100 shares of stock. If the transaction is subject to regular way settlement, payment for the stock must be made
A) three business days after the trade date.
B) on the date the trade is made.
C) four business days after the trade.
D) on the business day after the trade date.

Answer 7

C - four business days after the trade

Answer Explanation
According to Reg T, a stock purchase settled regular way must be paid for by T+4, or 4 business days after the trade date. Regular way settlement for stocks is T+2, and payment is required two business days after settlement, T+4.

Textbook Reference
Please see textbook section 11.2.1.1

Question 8

All of the following are permitted to open accounts with broker-dealers EXCEPT
A) A married couple
B) A trust
C) A minor
D) A partnership

Answer 8

C - a minor

Answer Explanation
A minor is considered a legal non-individual and is not permitted to open an account with a broker-dealer.

Textbook Reference
Please see textbook section 11.3.3.1

Question 9

What legal instrument will a customer execute to give a financial planner discretionary trading authority, until such time it is revoked by the customer?
A) A revocable living trust
B) A power-of-attorney
C) A revocable collateral assignment
D) A notarized advisory contract

Answer 9

B - a power-of-attorney

Answer Explanation
To authorize discretionary trading, the customer grants an adviser or planner a power-of-attorney to place trades. A discretionary authority created through a power-of-attorney may be revoked by the customer at any time.

Textbook Reference
Please see textbook section 11.2.4

Question 10

The wife of a customer who has an individual IRA account calls the broker-dealer to request that the account statements be held by the firm while the family is vacationing in Europe over the summer. In this situation the firm is permitted to
A) hold the statements for three months.
B) ask the wife to put the request in writing and mail or email it to the firm as documentation for the account.
C) continue to mail the statements to the customer’s home unless the husband makes the request.
D) hold the statements for two months.

Answer 10

C - continue to mail the statements to the customer’s home unless the husband makes the request

Answer Explanation
Because this is an individual account, the firm may honor a request to hold mail from that individual only.

Textbook Reference
Please see textbook section 11.5.4

Question 11

When opening a minor’s account, the social security number to be used is that of the
A) parent.
B) registered rep.
C) minor.
D) custodian.

Answer 11

C - minor

Answer Explanation
The social security number of the minor is used, as the minor is the legal owner of the assets.

Textbook Reference
Please see textbook section 11.3.3.1

Question 12

Which TWO of the following statements are TRUE of a principal’s approval of a new opened account?

I. It must be in writing.
II. It indicates that all the account information is complete and correct.
III. It indicates that the account is appropriate for the person opening the account based on the information collected.
IV. It must be kept in the customer account file that is maintained by the representative who opened the account.
A) I and III
B) II and IV
C) II and III
D) I and IV

Answer 12

A - I and III

Answer Explanation
A principal must give written approval for new accounts. By approving the account, the principal has confirmed that the account is appropriate based on the information gathered in during the account opening process. The principal who is approving the account does not confirm the accuracy of the information.

Textbook Reference
Please see textbook section 11.1.4

Question 13

Fee-based accounts are most appropriate for customers who will
A) Buy and sell stocks and bonds based on suggestions provided on investing websites.
B) Create a diversified portfolio and monitor it on a quarterly basis.
C) Place trade orders every day
D) Trade only when major news is released on a company.

Answer 13

C - Place trade orders every day

Answer Explanation
Fee-based accounts are most appropriate for customers who will be trading frequently. For customers trading less often, a commission schedule may be more suitable.

Textbook Reference
Please see textbook section 11.2.5

Question 14

John, a municipal representative, calls Jacob, who is on the national do-not-call list. Which of the following is true?
A) This is allowed as long as the call was made between 8am and 9pm in Jacob’s time zone
B) This is allowed if John and Jacob are friends
C) This is allowed as long as John had received Jacob’s verbal consent
D) This is prohibited under all circumstances

Answer 14

B

Answer Explanation
There are a few exceptions to the do not call list, which include 1) existing customers of the firm, 2) contacts made to other firms, 3) if a personal relationship exists between the two parties and 4) prior written consent of the individual

Textbook Reference
Please see textbook section 11.1.1

Question 15

Upon signing a loan consent agreement, a customer of a broker-dealer is
A) allowing their securities to be used for collateral at a bank in order to secure a margin loan.
B) allowing their securities to be sold at a time of the broker-dealer’s choosing.
C) providing consent for their securities to be used to facilitate short sales.
D) pledging their securities as collateral for other customers’ margin calls.

Answer 15

C

Answer Explanation
A Loan Consent Form or agreement allows the firm to use the customer’s securities to facilitate short selling by other clients of the firm.

Textbook Reference
Please see textbook section 11.2.2.5

Question 16

A client with early-stage dementia who wants his sister to manage his accounts until his death would choose which of the following powers of attorney?
A) Irrevocable
B) Limited
C) Full
D) Durable

Answer 16

D

Answer Explanation
Durable POA survives the grantor becoming mentally incapacitated. Traditional POA, whether limited or full, is invalid if the grantor becomes incapacitated. “Irrevocable” designates a type of trust; not a type of POA.

Textbook Reference
Please see textbook section 11.2.4

Question 17

A broker-dealer offers its customers an arrangement under which the customer pays an annual fee of 1.2% of assets under management, instead of per-trade commissions. This arrangement is called
A) a wholesale fee arrangement.
B) a fee-based account.
C) a fiduciary account.
D) a discretionary account.

Answer 17

B

Answer Explanation
Some broker-dealers offer clients a choice of fee-based accounts, in which customers pay a fixed fee or percentage of assets under management, rather than per-trade commissions. These accounts are not appropriate for buy-and-hold investors.

Textbook Reference
Please see textbook section 11.2.5

Question 18

A broker-dealer that fills a customer purchase order from its inventory must include which TWO of the following items on the trade confirmation?

I. Agent capacity

II. Principal capacity

III. Commission charged

IV. Markup charged
A) II and III
B) I and III
C) I and IV
D) II and IV

Answer 18

D- II and IV

Answer Explanation
If a firm fills a customer purchase order from its own inventory, it has acted as principal in the transaction and must disclose the markup that was charged.

Textbook Reference
Please see textbook section 11.5.2

Question 19

The FDIC is responsible for all of the following functions EXCEPT:
A) Insuring bank deposits
B) Managing receiverships that involve insured institutions
C) Examining and supervising financial institutions for safety and soundness
D) Protecting against the bankruptcy of broker-dealers

Answer 19

D

Answer Explanation
The FDIC is an independent agency created by Congress to maintain financial stability and public confidence in the U.S. banking system. SIPC, not FDIC, protects investors against the bankruptcy of broker-dealers.

Textbook Reference
Please see textbook section 11.6.4

Question 20

What entity stands behind the deposit insurance offered by the Federal Deposit Insurance Corporation (FDIC)?
A) Private insurance companies
B) The U.S. Government
C) The Federal Reserve
D) A consortium of financial institutions

Answer 20

B

Answer Explanation
The FDIC is a U.S. Government corporation that insures the deposit accounts of member banks, up to limits. The FDIC increases confidence in the banking system by putting a U.S. Government guarantee behind all insured deposit accounts, including CDs, up to limits prescribed by law.

Textbook Reference
Please see textbook section 11.6.4

Question 21

Which of the following types of brokerage accounts will NOT specify a beneficiary?
A) Partnership
B) Sole proprietor
C) Personal
D) Corporation

Answer 21

D

Answer Explanation
Corporations have unlimited life, so there is no need to name an account beneficiary.

Textbook Reference
Please see textbook section 11.4.1

Question 22

The Securities Investor Protection Corporation (SIPC) protects customers from
A) identity theft compromising customer accounts or the broker-dealer.
B) issuer bankruptcy.
C) broker-dealer financial failure.
D) market loss.

Answer 22

C

Answer Explanation
SIPC coverage protects customers from financial loss in the event of the financial failure of a broker-dealer.

Textbook Reference
Please see textbook section 11.6.3

Question 23

Under SIPC, each customer’s account is insured for
A) $500,000, with cash not to exceed $250,000
B) $500,000 on bonds
C) $600,000 in bonds and cash
D) $250,000 in cash

Answer 23

A

Answer Explanation
The Securities Investors Protection Corporation (SIPC) protects each separate customer account for up to $500,000, with a maximum of $250,000 in cash. Note that an individual with a cash account and a margin account is one customer, but an individual with a cash account, a joint account and a UGMA account would be considered 3 different customers under SIPC.

Textbook Reference
Please see textbook section 11.6.3

Question 24

What is the maximum amount of stocks a customer can buy when opening a new margin account with a cash deposit of $25,000?
A) 12500
B) 25000
C) 50000
D) 2000

Answer 24

C

Answer Explanation
A customer can buy double the amount of cash deposited to open the account (with a minimum deposit of $2,000). In other words, cash must be worth at least 50% of the securities purchase price.

Textbook Reference
Please see textbook section 11.2.2.1

Question 25

The provisions of the MSRB’s Telemarketing Rule

I. Apply to telephone communication only
II. Apply to telephone and fax communication
III. Require firms to maintain a do not call list
IV. Apply to existing customers of the firm
A) I and IV
B) I and III
C) II and III
D) II and IV

Answer 25

C - II and III

Answer Explanation
The MSRB’s telemarketing rule applies to both telephone and fax communications. Firms must maintain a do not call list and cannot contact persons added to the list. The rule does not apply to existing customers of the firm.

Textbook Reference
Please see textbook section 11.1.1

Question 26

To determine margin calls and equity balances, margin accounts are marked to market
A) once per month.
B) at the close of each week.
C) on an hourly basis for heavily traded accounts.
D) at the close of each day.

Answer 26

D

Answer Explanation
Margin accounts are marked to market on a daily basis to determine margin calls and equity positions.

Textbook Reference
Please see textbook section 11.2.2.3

Question 27

TOD and JTWROS account designations are similar in that they both
A) allow tax deferred treatment of dividends and interest income.
B) permit the beneficiary to enter orders on behalf of the account.
C) avoid probate when an account holder dies.
D) offer tax-free distributions at the time of the account holder’s death.

Answer 27

C

Answer Explanation
These two account designations avoid probate, meaning any assets will bypass the estate settlement process and transfer directly at death.

Textbook Reference
Please see textbook section 11.3.2.2

Question 28

All of the following information must be included on a customer confirmation EXCEPT
A) Whether the broker-dealer is a market maker in the security
B) The identity of the SROs that regulate the broker-dealer and its businesses
C) Whether there is a control relationship between the broker-dealer and the issuer of the securities
D) Whether payment was made for order flow

Answer 28

B

Answer Explanation
The confirmation is not required to disclose the identity of the SROs that regulate the firm. It must, however, disclose potential conflicts of interest, such as whether the firm makes market in the security, receives payment for order flow, or is in a control relationship with the issuer.

Textbook Reference
Please see textbook section 11.5.2

Question 29

A customer sells XYZ stock, which was purchased by the broker-dealer’s inventory. The customer’s confirmation must report that the firm
A) acted as agent and received a markdown.
B) acted as principal and received a markup.
C) acted as agent and received a commission.
D) acted as principal and received a markdown.

Answer 29

D

Answer Explanation
When stock is sold to the broker-dealer’s inventory it is marked down. The confirmation must reflect the principal transaction and the amount of the markdown.

Textbook Reference
Please see textbook section 11.5.2

Question 30

A separate risk disclosure statement is required when all of the following types of accounts are opened for non-institutional investors EXCEPT
A) Margin accounts
B) Day trading accounts
C) Options accounts
D) Custodial accounts

Answer 30

D

Answer Explanation
Separate account disclosure is required when the account risk may be relatively high, as in options accounts, margin accounts and day trading accounts. Custodial accounts require additional documentation but not additional disclosure.

Textbook Reference
Please see textbook section 11.2

Question 31

Which regulator requires broker-dealers to deliver a Margin Disclosure Statement on an individual basis, to non-institutional customers, before any margin account is opened?
A) FDIC
B) SEC
C) Comptroller of the Currency
D) FINRA

Answer 31

D

Answer Explanation
FINRA Rule 2264 requires firms to provide a margin disclosure statement to each customer prior to or at the time of opening a margin account.

Textbook Reference
Please see textbook section 11.2.2.1

Question 32

A fee-based account is not appropriate for
A) a buy-and-hold investor.
B) an investor who frequently trades stocks.
C) an investor who needs professional guidance and recommendations.
D) an investor who is in a high tax bracket.

Answer 32

A - a buy and hold investor

Answer Explanation
In fee-based accounts, customers pay a fixed fee or percentage of assets under management rather than per-trade commissions. These accounts are not appropriate for investors with buy-and-hold objectives.

Textbook Reference
Please see textbook section 11.2.5

Question 33

Which TWO of the following statements about broker-dealer requirements for sending account statements are TRUE

I. Firms are required to send account statements at least once per quarter.

II. Firms are required to send account statements at least once per year.

III. Firms typically send account statements for active accounts on a monthly basis.

IV. Firms typically send account statements for active accounts on a quarterly basis.

A) I and IV
B) I and III
C) II and IV
D) II and III

Answer 33

B - I and III

Answer Explanation
Firms are required to send account statements a minimum of once per quarter. Active accounts typically receive account statements once per month.

Textbook Reference
Please see textbook section 11.5.2

Question 34

The number that is assigned to an issue of securities to identify and track them is the
A) certificate number.
B) series number.
C) CUSIP number.
D) catalog number.

Answer 34

C

Answer Explanation
CUSIP stands for Committee on Uniform Securities Identification Procedures. A CUSIP number identifies most securities, including stocks of all registered U.S. and Canadian companies, and U.S. government and municipal bonds. It facilitates the clearing and settlement process of securities.

Textbook Reference
Please see textbook section 11.5.2

Question 35

Who normally has trading authority in an individual brokerage account?
A) The broker-dealer
B) The named fiduciary
C) The registered representative
D) The account owner

Answer 35

D the account owner

Answer Explanation
The owner of an individual trading account normally has trading authority, including the ability to place buy and sell trades in the account.

Textbook Reference
Please see textbook section 11.3.1

Question 36

When do equity trades made in a cash account usually settle?
A) The fifth day after trade date (T+5)
B) The third day after trade date (T+3)
C) The second day after trade date (T+2)
D) The day after trade date (T+1)

Answer 36

C - the second day after trade date (T+2)

Answer Explanation
Trades made in a cash account usually settle regular way T+2 (the second day after trade day). However, most brokers require customers to pay for securities purchased prior to settlement. In cash accounts, payment must be made in full.

Textbook Reference
Please see textbook section 11.2.1

Question 37

A customer who has an individual IRA account calls his broker-dealer to request that the account statements be held by the firm while the family is vacationing in Europe. The firm will take which two of the following actions?

I. Honor the request over the phone

II. Ask the customer to put request in writing

III. Hold the mail for a maximum two months

IV. Hold the mail for a maximum of three months
A) II and IV
B) I and III
C) I and IV
D) II and III

Answer 37

A - II and IV

Answer Explanation
A firm will hold customer mail upon written request. Mail can be held for up to three months.

Textbook Reference
Please see textbook section 11.5.4

Question 38

A trust may be invalidated subsequent to its creation if
A) the beneficiary of the trust had not provided their date of birth at the time the trust documents were signed.
B) the trust was created in a state that did not recognize the UGMA.
C) it was created under coercion or the signing party was considered mentally incompetent at the time of its creation.
D) the party signing the trust documents was not a resident of the same state where the trust beneficiary resides.

Answer 38

C

Answer Explanation
A trust may be considered legally invalid if the party signing the trust documents was being coerced or forced to sign or was considered legally incompetent at the time of signing.

Textbook Reference
Please see textbook section 11.3.3.2

Question 39

In a joint tenants with rights of survivorship account (JTWROS), which two of the following apply?

I. At death the account proceeds pass to the estate
II. At death the account proceeds pass to the joint owner
III. Joint owners have an undivided interest in the account
IV. There can be no more than two joint owners
A) I and II
B) I and III
C) II and III
D) II and IV

Answer 39

C

Answer Explanation
In a JTWROS account, all account owners have and undivided interest, or equal ownership of all the assets in the account. There must be at least two account owners in a joint account, but may be more. At the death of the account holder, the account proceeds pass to the surviving account owners with no probate.

Textbook Reference
Please see textbook section 11.3.2.2

Question 40

A married couple has set up an account designated as JTWROS. Trading instructions for this account
A) may be provided by either party, with any disbursements payable to both parties.
B) must be established prior to the placement of the first order in the account.
C) must be established at the time the account is opened.
D) must be provided and confirmed by both parties.

Answer 40

A

Answer Explanation
Accounts opened under the designation of JTWROS or JTIC permit any party to provide trading instructions, with any disbursements (checks) payable to all parties on the account.

Textbook Reference
Please see textbook section 11.3.2

Question 41

The act of combining customer and broker-dealer securities together is
A) combining
B) commingling
C) aggregating
D) integration

Answer 41

B

Answer Explanation
This is known as commingling, and is prohibited by securities industry regulations.

Textbook Reference
Please see textbook section 11.6.2

Question 42

When customer and firm owned securities are combined, this is a practice known as
A) commingling and is acceptable.
B) commingling and is a violation.
C) integration and must be approved by a principal of the firm.
D) Insider trading which should be avoided.

Answer 42

B

Answer Explanation
This is a practice known as commingling and is strictly prohibited by industry regulations.

Textbook Reference
Please see textbook section 11.6.2

Question 43

In a cash account, if a customer has not met a Reg T call for $1,000, the broker-dealer
A) must sell out securities in the account to meet the outstanding amount due.
B) may choose to disregard the payment shortage.
C) must request an extension from its SRO.
D) must freeze the account.

Answer 43

B

Answer Explanation
A payment shortage of $1,000 or less may be disregarded at the discretion of the broker-dealer.

Textbook Reference
Please see textbook section 11.2.1.1

Question 44

Which of the following types of brokerage account would be appropriate for a group of people who share investment ideas and pool their money to make common investments?
A) Investment Club
B) Proprietorship
C) Trust
D) Conservatorship

Answer 44

A

Answer Explanation
Investment clubs are formed by a group of people who share investment ideas and pool their money to make common investments. They often are formed as partnerships. However, broker-dealers may require that they open a special investment club account.

Textbook Reference
Please see textbook section 11.4.2

Question 45

In a short account, if the equity position in the account falls below 30%, a call for additional funds will be issued and must be satisfied
A) As soon as the customer is able to deposit the funds.
B) Within two business days.
C) Promptly.
D) Within the hour.

Answer 45

C

Answer Explanation
This call for additional cash must be satisfied promptly. No specific timeline is indicated.

Textbook Reference
Please see textbook section 11.2.2.3

Question 46

A customer calls to insist on placing an order for municipal securities that you believe is inappropriate for the investment objectives of the account. You should
A) Refuse to place the order and document your reason in writing. Documentation should be dated and kept in the customer’s file with your signature.
B) Place the order and mark the order ticket unsolicited
C) Place the order, mark the order ticket unsolicited and obtain signed and dated documentation from the customer for their file that specifies circumstances of the trade.
D) Refuse to place the order

Answer 46

C

Answer Explanation
If customers initiate trades for their accounts, the rules of suitable recommendations technically do not apply. However, in these situations, the order ticket should be marked unsolicited, and the representative should ensure the customer file is properly documented with the date, signature, and circumstances of the trade.

Textbook Reference
Please see textbook section 11.1.3

Question 47

A well- known individual would like to open a securities account at Broker-dealer A. Is there a way for this person to open this account but remain anonymous on the firm’s records to protect their privacy?
A) No, as SEC insider trading rules require that all eligible adults provide their legal identities along with acceptable documentation of this information.
B) Yes, but she would need to provide an IRS tax waiver to the firm in order for her identity to remain anonymous on the firm’s records.
C) Yes, she may open a “numbered” account and sign a statement evidencing her legal ownership of the account.
D) No, as all accounts must prominently carry the account holder’s name and address and other required information.

Answer 47

C

Answer Explanation
An individual may open a “numbered” account for the purpose of remaining anonymous. They would be required to provide a written statement of their identity and ownership of the account.

Textbook Reference
Please see textbook section 11.1.2

Question 48

For existing customer accounts, how often are broker-dealers required to send a written notice to the customer for verification of account information?
A) every two years.
B) every 5 years.
C) every 3 years.
D) annually.

Answer 48

C

Answer Explanation
Firms must verify customer information at least once every 36 months. The point of this requirement is to ensure that the account is still appropriate and the information on file is still accurate.

Textbook Reference
Please see textbook section 11.1.5

Question 49

Tom is customer of a failed broker-dealer. SIPC can not locate the assets he had in his account, including $1 million in securities and $200,000 in cash. How much protection will SIPC give him?
A) All $1 million of securities and $200,000 in cash
B) All $1 million of securities, but no cash
C) $500,000, including all $200,000 in cash
D) $300,000, including all $200,000 in cash

Answer 49

C

Answer Explanation
SIPC protects claims of lost or misplaced assets up to $500,000, with a maximum of $250,000 for cash claims. Here, Tom will receive a claim for $500,000, of which $300,000 will be for lost securities and $200,000 will be for cash.

Textbook Reference
Please see textbook section 11.6.3

Question 50

A broker-dealer has frozen a cash account because the customer has not paid for a securities purchase. When must the broker-dealer sell out the securities?
A) after 10 business days.
B) after the frozen account status is lifted.
C) on the morning of the fifth business day after the trade was made.
D) on the Reg T settlement date.

Answer 50

C

Answer Explanation
If no extension is received, the position must be sold out on the morning of the fifth business day after the trade was made, and the account must be frozen for 90 days.

Textbook Reference
Please see textbook section 11.2.1.1

Question 51

John contacts Larry, his municipal securities representative requesting to purchase XYZ County Municipal Bonds. After reviewing John’s investment profile, Larry tells John that he does not believe that the XYZ bonds are a suitable investment. John does not care and again requests that the XYZ bonds be purchased. What is the best course of action for Larry?
A) Refuse to execute the trade
B) Freeze the client’s account
C) Execute the transaction and mark the order ticket solicited
D) Execute the transaction and mark the order ticket unsolicited

Answer 51

D

Answer Explanation
A municipal securities representative’s suitability obligation does not apply if the customer initiates a trade without a recommendation. In this situation, the best course of action is to follow the customer’s instructions, making sure to mark the order ticket unsolicited.

Textbook Reference
Please see textbook section 11.1.3

Question 52

With respect to a “not held order”, the registered rep is selecting the
A) Asset and price
B) Price and quantity
C) Quantity and time
D) Price and/or time

Answer 52

D

Answer Explanation
A “not held” order is one where the registered rep is selecting the price and/or time only. The customer has provided all of the other instructions for the trade.

Textbook Reference
Please see textbook section 11.2.4

Question 53

In a cash account, a customer purchases a security and sells the same security without first paying for the original purchase. This transaction
A) will cause the account to be frozen, but the sales proceeds may be used to cover the cost of the original purchase.
B) is a violation of Reg T and FINRA freeriding rules, and the account must be suspended.
C) is a violation of Reg T and FINRA freeriding rules, and will cause the account to be frozen, and the broker-dealer will hold the sale proceeds until the original transaction has been paid for.
D) is permissible as long as the sales proceeds cover the purchase amount.

Answer 53

C

Answer Explanation
If a customer purchases a security and sells the same security without first paying for the original purchase, the broker-dealer will freeze the customer’s account, and will not release the sales proceeds to the customer until the customer pays for the original purchase.

Textbook Reference
Please see textbook section 11.2.1.1

Question 54

A customer wishes to open a margin account and purchase 300 shares of XYZ stock, which is trading at $30 per share. The customer must deposit
A) 3000
B) 1500
C) 2000
D) 4500

Answer 54

D

Answer Explanation
For the first purchase in a long margin account, the customer must pay $2,000 or meet the Reg T requirement, whichever is greater. The total purchase amount is $9,000 (300 shares at $30/share). The Reg T requirement is 50% of $9,000, or $4,500.

Textbook Reference
Please see textbook section 11.2.2.1

Question 55

If suspicious activity is suspected in a customer’s account,
A) all trading activity may be suspended for 15 days to allow for a proper investigation.
B) disbursements from the account may be withheld for up to 15 days.
C) the chief financial officer of the firm must notify FINRA within 24 hours.
D) the firm must notify the FBI promptly.

Answer 55

B

Answer Explanation
If suspicious activity is suspected in a client’s account, the firm may suspend distributions from the account for up to 15 days.

Textbook Reference
Please see textbook section 11.6.5

Question 56

A principal who is reviewing the suitability of an account in order to accept it on behalf of the broker-dealer must
A) ensure that the investment objective of the account is appropriately aligned with the risk profile of the customer.
B) confirm the objectives with the representative before approving the account.
C) wait 30 days for the customer to verify the account suitability information before the account can be approved.
D) verify all financial information.

Answer 56

A

Answer Explanation
In the account approval process, the principal or designated person who is reviewing the account must ensure that the account objectives of the account are consistent with the risk profile. Verification of all financial information is not required. Although the firm must send verification of the account information within 30 days of account opening, the account can be approved for trading before this occurs.

Textbook Reference
Please see textbook section 11.1.4

Question 57

A broker-dealer has just received the new account paperwork for an UGMA account. Which of the following parties’ names appears on the account form?
A) The custodian of the account
B) The primary donor to the account
C) The beneficiary of the account
D) A principal of the firm

Answer 57

A

Answer Explanation
In an UGMA, the name of the custodian would appear on the new account registration form. The name of the donor would not appear on the paperwork, unless the donor was also the custodian.

Textbook Reference
Please see textbook section 11.3.3.1

Question 58

All of the following statements regarding the margin account disclosure statement are true EXCEPT
A) Margin account disclosure delivery can take place physically in hard copy form or electronically
B) A follow-up margin disclosure must be delivered to all margin customers at least once every 3 years in writing or electronically
C) The margin account disclosure must inform the customer that the firm can force the sale of assets without the customer’s approval to meet a margin call
D) Delivery of the margin account disclosure statement is required at or prior to the opening of the account

Answer 58

B

Answer Explanation
The margin account disclosure document is required at or prior to account approval and annually thereafter. These disclosures must include the following:
* You can lose more funds than you deposit in the margin account.
* The firm can force the sale of securities or other assets in your account(s).
* The firm can sell your securities or other assets without contacting you.
* You are not entitled to choose which securities or other assets in your account(s) are liquidated or sold to meet a margin call.
* The firm can increase its “house” maintenance margin requirements at any time and is not required to provide you advance written notice.
* You are not entitled to an extension of time on a margin call.

Textbook Reference
Please see textbook section 11.2.2.6

Question 59

An investor that wishes to open an account to trade options on margin must receive which of the following disclosure documents?
A) An Options Prospectus and a Margin Disclosure Statement
B) An Options Disclosure Document only
C) An Options Disclosure Document and a Margin Disclosure Statement
D) An Options Disclosure Document, a Margin Disclosure Statement and a Day Trading Disclosure Statement

Answer 59

C

Answer Explanation
All customers who wish to engage in options trading must receive an Options Disclosure Document at or before the account approval. A margin disclosure
statement must be provided to margin
customers in a separate document
prior to or at the opening of a
margin account, and in an abbreviated form on an annual
basis. Pattern day trading disclosure is required only if customers engage in day trading, which means they transacts four or more stock or options day-trades within a five-day period in a margin account.

Textbook Reference
Please see textbook section 11.2.3

Question 60

An investor has a fee-based account at a broker-dealer. Under this system, the customer
A) can execute a maximum number of trades for a flat fee
B) must pay a fee for every trade.
C) receives a fee for placing trades with the firm.
D) pays a flat fee regardless of the number of trades executed.

Answer 60

D

Answer Explanation
In a fee-based account, the customer pays a flat fee (typically assessed quarterly or annually) and is permitted to execute as many trades as they wish. This arrangement is not usually suitable for a “buy and hold investor”.

Textbook Reference
Please see textbook section 11.2.5

Question 61

The standard amount of FDIC coverage is how much per depositor, per insured bank, per ownership category?
A) $400,000
B) $100,000
C) $250,000
D) $150,000

Answer 61

C

Answer Explanation
The standard FDIC coverage is $250,000 per deposit, per insured bank, for each ownership category. There are four ownership categories: single, joint, retirement plan, and revocable trust/POD.

Textbook Reference
Please see textbook section 11.6.4

Question 62

A broker-dealer is attempting to convert all customers who currently receive printed statements to e-statements. Which of the following is correct?
A) The firm must receive the customer’s written or electronic approval to receive statements in electronic format before it discontinues sending printed statements.
B) The firm may proceed with electronic statements; no customer response is needed.
C) This is not permitted; confirmations of transactions may be sent electronically, but statements may not be.
D) The firm can discontinue mailing printed statements to all customers after it has provided written notice.

Answer 62

A

Answer Explanation
Customers must give either electronic or written approval to receive statements of accounts online.

Textbook Reference
Please see textbook section 11.5.3

Question 63

Maxwell is a sophisticated investor who is sick of getting cold calls from different brokerage firms. How can he legally prevent any brokerage firm from calling him on the phone to offer investment ideas?
A) Put a do-not-call message on his answering machine
B) Put his name on the FTC’s do-not-call registry and request that his two brokerage firms do not call
C) Request that one of his two brokerage firms does not call; all other securities firms must honor this instruction.
D) Put his name on FINRA’s do-not-call list

Answer 63

B

Answer Explanation
By putting his name on the do-not-call registry of the Federal Trade Commission (FTC), he legally prevents firms with which he does not have a relationship from cold-calling, for any reason. If they do call, they can be subject to fines. However, the registry does not block firms with which he already has a relationship from calling. He will have to make a do-not-call request to each of these firms also.

Textbook Reference
Please see textbook section 11.1.1

Question 64

Broker-dealers are prohibited from charging service fees for which two of the following activities?

I. Sending proxy statements to customers

II. Collecting dividends

III. Providing research reports

IV. Safekeeping of securities
A) II and IV
B) I and IV
C) I and III
D) II and III

Answer 64

C

Answer Explanation
Although broker-dealers may charge reasonable services charges for some services, they are prohibited from charging customers for mailing proxy statements and providing research reports.

Textbook Reference
Please see textbook section 11.5.3

Question 65

A broker-dealer plans to discontinue mailing hard copies of annual statements and instead will distribute the statements electronically. In order to begin electronic delivery of annual statements, the broker-dealer
A) can only furnish annual statements electronically to person who have online accounts.
B) must confirm customer acceptance of this delivery method electronically, and continue mailing hard copy statements to those who do not wish to accept electronic delivery.
C) must request permission of FINRA and can then discontinue hard copy delivery after providing advance written notice.
D) must send written notice of its intention 60 days in advance of the distribution of the statements.

Answer 65

B

Answer Explanation
Broker-dealers can deliver annual statements electronically only if customers have given electronic consent to receive delivery of account information in this way.

Textbook Reference
Please see textbook section 11.5.3

Question 66

Instructions have been received from the trusted contact to wire $100,000 from a 72-year-old client’s account at a broker-dealer to a designated bank account. To determine that this is a legitimate action not intended to exploit the interests of the client, the broker-dealer
A) must alert its chief compliance officer that such a request was received.
B) must place a 10 - business day hold on the request until confirming the request is legitimate.
C) must promptly notify FINRA of its suspicion that financial exploitation may be occurring at the firm.
D) may impose a 15- business day hold on the wire request.

Answer 66

D

Answer Explanation
To protect the interests of vulnerable investors who have accounts at a broker-dealer, the firm may place a temporary hold on the account for up to 15 business days, so that it may further investigate what it deems potential suspicious activity. This FINRA rule is designed to protect specified adults against financial exploitation by person who have control over their account. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes.

Textbook Reference
Please see textbook section 11.6.5

Question 67

A representative’s personal account has been identified for review because of account activity in which securities were bought and quickly sold, often on the following day. This may be evidence of the prohibited practice called
A) commingling.
B) freeriding.
C) front-running.
D) selling away.

Answer 67

B

Answer Explanation
Freeriding is the prohibited practice of entering a trade to buy securities, then selling them the following day without having had sufficient funds in the account to pay for the trade.

Textbook Reference
Please see textbook section 11.2.1.1

Question 68

An investor has $200,000 of cash in a brokerage account with a broker-dealer that goes bankrupt and SIPC reimburses all of it. What is the maximum additional value of lost securities for which SIPC will reimburse the same investor in his account with the same broker-dealer?
A) None
B) 50000
C) 800000
D) 300000

Answer 68

D

Answer Explanation
After replacing securities, SIPC covers any remaining claims up to a maximum of $500,000, including not more than $250,000 in cash. If SIPC covers $200,000 in cash it then can cover up to $300,000 per investor in lost securities up to the $500,000 total limit.

Textbook Reference
Please see textbook section 11.6.3

Question 69

In an UGMA account, all of the following are required EXCEPT
A) Parental approval if the account is to be opened by another adult on behalf of the minor
B) One adult custodian only
C) One minor only
D) Social Security number of the minor

Answer 69

A

Answer Explanation
An UGMA or UTMA custodial account does not require parental approval. In UGMA or UTMA accounts there must be one adult custodian and one minor only, and the account must be registered under the Social Security number of the minor.

Textbook Reference
Please see textbook section 11.3.3.1

Question 70

A registered representative located in California makes a 7:30pm cold call to a potential customer in New Jersey. This is
A) prohibited because cold calls can only be made between 8am and 9pm in the potential customer’s time zone.
B) permitted because the call occurred between the hours of 8am and 9pm.
C) permitted as long as the potential customer is not on the do-not-call-list.
D) permitted as long as the registered rep had prior verbal consent from the potential customer.

Answer 70

A

Answer Explanation
Cold calls can be made between 8am and 9pm in the customer’s time zone. Although it is 7:30pm in California, it is actually 10:30pm in New Jersey because of the difference in time zones. Therefore, this call is prohibited.

Textbook Reference
Please see textbook section 11.1.1

Question 71

Last year a client opened a new account, giving discretion to his son for all trades. Last month the client was declared legally incompetent in court. What is the status of the power of attorney the client originally signed when the account was first opened?
A) The power of attorney remains in force until the client passes away.
B) The power of attorney remains in force if it was a durable power of attorney.
C) The power of attorney is no longer in effect.
D) The power of attorney must be renewed by an officer of the court.

Answer 71

B

Answer Explanation
A durable power of attorney will remain in force if a client is declared legally incompetent in a court; otherwise it will be cancelled. All powers of attorney will be terminated upon the death of the customer.

Textbook Reference
Please see textbook section 11.2.4

Question 72

A customer does not meet the Reg T call in a cash account. The broker-dealer has sold out securities in the account, and must freeze the account for
A) 30 days.
B) ten business days.
C) five business days.
D) 90 days.

Answer 72

D

Answer Explanation
If a sell-out occurs, the broker-dealer is required to freeze the customer’s account for 90 days.

Textbook Reference
Please see textbook section 11.2.1.1

Question 73

When must a confirmation of purchase of equity securities be sent to the customer?

A) One business day after the settlement date
B) No later than the date of settlement
C) Within five business days after the date of settlement
D) Upon request

Answer 73

B

Answer Explanation
A customer confirmation must be delivered after the trade and before the settlement date.

Textbook Reference
Please see textbook section 11.5.2

Question 74

When must the brokerage firm deliver a customer confirmation to the customer?
A) Within three days of trade date
B) Upon the customer’s request
C) At or before completion of each transaction
D) When an order is placed

Answer 74

C

Answer Explanation
Confirmations must be delivered to customers at or before completion of each transaction.

Textbook Reference
Please see textbook section 11.5.2

Question 75

The securities lending unit of a broker-dealer borrows shares owned by a mutual fund and loans them to its customer, who then sells them short to another investor. Which entity has the least amount of price risk associated with these securities, under this arrangement?
A) The broker-dealer
B) The customer who sells short
C) The mutual fund
D) The investor who purchases the shares sold short

Answer 75

A

Answer Explanation
The securities lending units of broker-dealers act as middle-man in these transactions, with no price risk. The mutual fund and the investor who purchases the short shares have price risk if shares decline in value. The customer who sells short has risk if shares rise in value.

Textbook Reference
Please see textbook section 11.2.2.5

Question 76

A registered representative is asked by an 80-year-old customer to liquidate her brokerage account. The representative believes she could be vulnerable to financial exploitation. He should
A) delay distributions from the account for up to 15 days to investigate.
B) request that a guardian be named to manage the account.
C) notify the Financial Crimes Enforcement Network (FINCEN) immediately.
D) notify local law enforcement immediately.

Answer 76

A

Answer Explanation
FINRA rules protect vulnerable investors (age 65 and older and those with mental or physical impairment) against financial exploitation. Firms can delay distributions for up to 15 days if they believe these customers are vulnerable.

Textbook Reference
Please see textbook section 11.6.5

Question 77

A customer expects to be living abroad and requests in writing that his brokerage firm hold his mail for a period of six months. The firm must
A) decline the request.
B) hold the customer’s mail, but not for more than one month.
C) accept the request in all cases.
D) ask the customer to verify an acceptable reason for holding mail beyond three months.

Answer 77

D

Answer Explanation
Broker-dealers are permitted, but not required to hold customer mail for up to three months, based on written instructions from the customer. If customers wish mail to be held longer, they must provide an acceptable reason, such as safety or security concerns.

Textbook Reference
Please see textbook section 11.5.4

Question 78

A customer would be permitted to place only unsolicited orders in an account if
A) the client’s account was opened within the last ten days.
B) the client did not provide certain financial information on the new account form.
C) there are insufficient funds in the account.
D) he did not indicate whether he has securities accounts at other broker-dealers.

Answer 78

B

Answer Explanation
A client may place unsolicited orders only, if she did not provide required financial information to the firm.

Textbook Reference
Please see textbook section 11.1.3

Question 79

What is the maximum amount of FDIC insurance coverage normally available to a corporation in one bank?
A) $150,000
B) $250,000
C) $1 million
D) There is no limit

Answer 79

B

Answer Explanation
In most cases, a corporation can only open CDs or deposit accounts in its own name. Corporations, partnerships and unincorporated associations fall into one FDIC coverage category, which has maximum insurance coverage of $250,000.

Textbook Reference
Please see textbook section 11.6.4