11 Customers and Brokerage Procedures Flashcards
1
Q
Which of the following is true of margin accounts?
A. AlI purchases within a margin account must be done on margin
B. Congress and the President set Reg-T
C. Reg T only covers common stock of exempt issuers
D. Margin and maintenance are not inherently synonymous
A
D. Margin and maintenance are not inherently synonymous
Rationale:
You know from the margin chapter that options, IPO’s, mutual funds, and penny stocks have to be paid in full, so eliminate the choice saying all purchases are done “on margin.” Another choice says that Reg T only covers common stock of exempt issuers. Actually, Reg T doesn’t cover exempt securities (T-bills, municipal securities, bank securities, et cetera), and most exempt securities are debt securities, not common stock.
2
Q
Which of the following would be considered the most important when opening an account?
A. Customer prefers bonds
B. Customer is over 30 years old
C. Customer’s wife works for an FINRA member firm
D. Customer is a registered Democrat
A
C. Customer’s wife works for an FINRA member firm
Rationale:
Whenever the customer or the customer’s spouse works for an FINRA member firm, certain special handling of the account must be undertaken.
3
Q
Which of the following is a true statement concerning the opening of a new account?
A. The customer’s spouse is automatically granted trading
authorization
B. The customer can not be asked to provide net worth and income level
C The customer can not be asked for bank or brokerage references
D. The customer does not have to sign the new account form
A
D. The customer does not have to sign the new account form
Rationale:
You definitely ask for financial information, including bank and brokerage references. The spouse does not automatically have trading authorization. If they want to set that up, they have to fill out the proper form(s).
4
Q
When opening a new account, if your customer wants to trade options:
A. He must submit to a polygraph administered by a licensed law enforcement professional
B. He may not trade options if his net worth is below $1.5 million
C. He must provide information to help determine suitability
D. He must submit to a polygraph administered by an FINRA member
A
C. He must provide information to help determine suitability
Rationale:
Polygraphs? No.
5
Q
If a customer refuses to provide a tax ID number or social security number:
A. Backup with holding will result
B. The account can not be opened under SEC rules
C. The account can not be opened under FINRA rules
D. She must pre-file electronically
A
A. Backup with holding will result
Rationale:
No idea why someone would refuse to give you a tax number or why you’d open an account for somebody so uncooperative, but if they don’t give that information, the firm will have to withhold some income every year for your friends and mine at the IRS.
6
Q
All of the following would require special handling when opening a new account except when the account owner is:
A. An employee of a member firm
B. The spouse of an associate of a member firm
C. The president of a bank
D. The minor child of a registered representative of a member firm
A
C. The president of a bank
Rationale:
Banks are not broker-dealers and are not members of FINRA. Lots of banks have set up separate entities that function as broker-dealers, but the bank is a bank. The broker- dealer is a broker-dealer.
7
Q
Your customer tells you to buy 1,000 shares XYZ at a good price today. This order:
A. Can not be executed 10 minutes before market close
B. Can not be executed under any circumstances
C. Requires written discretionary authorization
D. Does not require written discretionary authorization
A
D. Does not require written discretionary authorization
Rationale:
Time/price do not require written discretionary authorization.
8
Q
Your customer has read an enticing article extolling the many advantages of investing in real estate; therefore, she calls and says, “I want you to buy as many REITS as you think I can afford right now.” This is an example of:
A. A discretionary order
B. Front loading
C. Painting the tape
D. A non-discretionary order
A
A. A discretionary order
Rationale:
The rep would have to choose the Asset (which REITS) and the Amount (how many shares), so this is definitely a discretionary order. Without written discretionary authorization, all the rep can choose is time of day and the price to pay.
9
Q
When the account is non- discretionary, the registered representative may not determine:
A. All choices listed
B. Time
C. Price
D. Number of shares
A
D. Number of shares
Rationale:
Without discretion, all the rep can choose is time of day and the price to pay.
10
Q
If a corporation wishes to open a trading account as a margin account:
A. This can not occur under any circumstances
B. This can only occur if the NYSE and FINRA approve the arrangement
C. Only US treasury and agency securities may be purchased
D. The corporate charter and bylaws must be provided
A
D. The corporate charter and bylaws must be provided
Rationale:
The “default setting” for corporations wanting to trade on margin is “okay.” But you have to make sure there’s no prohibition against margin in the charter/bylaws. It’s the opposite of a trust account, where the default setting is “no way” when it comes to margin. The only way to do it in a trust account is if the trust agreement specifically permits it.
11
Q
When you discover that one of your customers has died, you must do all of the following except:
A. Freeze the account
B. Marked the account “deceased”
C. Cancel all sell stop and buy limit orders
D. Liquidate all positions
A
D. Liquidate all positions
Rationale:
Don’t liquidate positions yet. Just stop trading the account, which is called “freezing” the account. And don’t start passing anything out until the appropriate legal documents
have come in: death certificate, trust document, will, etc.
12
Q
The husband of a customer calls and tells you his wife wants to sell 1,000 shares of ORCL immediately. What should you do?
A. Execute the order in a timely fashion
B. Mark the order “unsolicited”
C. Refuse the order
D. Mark the order “joint and several”
A
C. Refuse the order
Rationale:
Only accept this order if the husband has been granted trading authorization (power of attorney) and you have that on file.
13
Q
A registered rep learns that two former college roommates now sharing an investment account as joint tenants in common have each moved to opposite coasts and rarely see each other. The representative holds a conference call and discovers that Joann, in Philadelphia, prefers dividends while Barbara, in San Rafael, prefers interest payments. Therefore, the rep decides to start sending checks to Joann for the dividend income and checks to Barbara for the interest income received in the account. This is:
A. Perfectly acceptable as long as the agreement is duly notarized
B. Improper procedure for joint accounts
C. Standard operating procedure
D. A violation known as “painting the tape”
A
B. Improper procedure for joint accounts
Rationale:
All “distributions” have to be made out to all names on the account. The firm doesn’t send part to one tenant and part to another. They’re joint tenants—it’s not your problem how they share things. Just send the proceeds to both names on the account.
14
Q
As the custodian for her nephew’s account, Marilyn Mason would rather not charge a fee for her services. Rather, she would like to receive 10% of the account’s appreciation each year so that she receives no benefit in poor performing years. This arrangement is:
A. A violation known as “painting the tape”
B. Improper procedure for UGMA/UTMA accounts
C. Standard operating procedure
D. Perfectly acceptable as long as the agreement is duly notarized
A
B. Improper procedure for UGMA/UTMA accounts
Rationale:
If the custodian for the UGMA is appointed by a donor, then a reasonable fee can be charged to the account. But no way can the custodian receive gains or appreciation on the account.
15
Q
Which of the following statements concerning discretionary accounts is/are true?
A. Discretion allows the registered representative to change the investment objectives of the customer
B. Discretionary orders must be identified as such at the time of entry
C. Discretionary orders must be approved by a principal before execution
D. Discretionary accounts can not also be margin accounts
A
B. Discretionary orders must be identified as such at the time of entry
Rationale:
Believe it or not, a discretionary account could also be a margin account, and wouldn’t it be fun to make that maintenance call? “Sorry, sir. I made a really bad trade for you—please come up with twenty grand at your earliest
convenience or we’ll have to start getting nasty.” The orders have to be okayed at the end of the day, not before they’re entered. And the order ticket must definitely indicate whether it’s discretionary or not. A rep would never have the power to change the investment objectives of a customer.
16
Q
Without contacting the customer, a registered rep managing a discretionary account could purchase all of the following except:
A. Preferred stock
B. Municipal securities where a control relationship exists
C. Speculative options
D. Common stock
A
B. Municipal securities where a control relationship exists
Rationale:
If a rep has discretion, he can buy any security he wants, as long as it’s suitable. But whenever a control relationship exists, customers have to be informed of this before buying a municipal bond.
17
Q
All of the following may open investment accounts except a:
A. Corporation
B. Non-U.S. citizen
C. Minor
D. Partnership
A
C. Minor
Rationale:
A minor is not a legal “person” or entity, which is why we have UGMA/UTMA and trust accounts opened on behalf of minors by a legal adult.
18
Q
A husband and wife have a JTWROS account. The wife invested $20,000, while the husband invested $80,000. With the account valued at $150,000 the husband dies. Therefore, the wife will:
A. Own all the assets in the account
B. Receive her 20% or $30,000 which ever is greater
C. Make the appropriate application to probate court
D. Receive her original $20,000 back, plus interest
A
A. Own all the assets in the account
Rationale:
Don’t let a question distract you with extraneous information. It’s JTWROS, so whoever survives owns everything, period.
19
Q
One of your customers is named L&P Partnership. If one of the partners is declared mentally incompetent by a court of law, you should:
A. Execute all open orders
B. Liquidate the account
C. Freeze the account
D. Attend the legal proceeding and/or file a “friend of the court” petition
A
C. Freeze the account
Rationale:
To “freeze” the account means that no purchase or sale orders will be taken. This happens when an owner dies or is declared mentally incompetent.
20
Q
One of your customers has granted full trading authorization to his brother-in-law and would like all account statements and other mailings to be sent only to the brother-in-law. You should:
A. Comply with the customer's reasonable request B. Report the customer to the SEC C. Refuse to comply with the request D. Report the customer to the DEA for possible money laundering activities
A
C. Refuse to comply with the request
Rationale:
You have to send account statements to the account owner.
21
Q
All of the following may be purchased in an UGMA account except:
A. Commodity futures
B. Convertible preferred stock
C. Junk bonds
D. Preferred stock
A
A. commodity futures
Rationale:
Junk bonds make me a little nervous for an UGMA account, but absolutely no margin can be used, which is why commodities are out. Commodities use margin and are the only thing I know of that can cause me to lose more money than I ever put in.
22
Q
What is true of the taxation of an UGMA account?
A. Only bond interest is taxable
B. All earnings grow tax deferred
C. The account is taxable
D. All earnings subject to a 10% penalty tax
A
C. The account is taxable
Rationale:
UGMA’s are taxable.
23
Q
Your customer has an individual account with $280,000 in securities and $280,000 cash. He and his wife have a joint account with $420,000 in securities and $90,000 cash. Total SIPC coverage for these accounts is:
A. $1,070,000
B. $500,000
C. $1,030,000
D. $1,000,000
A
D. $1,000,000
Rationale:
SIPC now covers 250K of cash, but also only a total of $500,000 per account. So for the first account, $500,000 is covered, and for the joint account, $500,000 is covered. Total of $1 million coverage.
24
Q
SIPC covers:
A. Losses in commodities
B. Investment losses on common stock
C. Investment losses on preferred stock
D. Broker-dealer failure
A
D. Broker-dealer failure
Rationale:
SIPC (Securities Investor Protection Corporation) covers missing assets, meaning stocks, bonds, and money that have been seized by creditors, or otherwise missing from customer accounts.
25
Under Regulation T a customer must pay for stock:
A. No later than three business days after the transaction
B. No more than 2 business days following regular way settlement
C. No later than the business day following the transaction
D. At the seller's option
B. No more than 2 business days following regular way settlement
Rationale:
Another way to put it is that customers have to pay T + 5. If not, the B/D has to request an extension from their SRO, like FINRA or NYSE.
26
When must a principal approve an order ticket?
A. T + 5
B. Before execution
C. T+3
D. On the day of execution
D. On the day of execution
Rationale:
The principal okays the order on the same day it's filled. So, the rep has to fill out the order "ticket" prior to executing the order, and the principal has to approve that order by the end of the day. Someofthe trades put through will be nixed by the principal for various reasons you can save for your Series 24, or 9/10.
27
Your customer asks you to buy 1,000 shares of Cisco. On the trade confirmation, your fir mistakenly indicates that 1,000 shares of Sysco were purchased, when in fact 1,000 shares of Cisco were purchased. What is true in this case?
A. Automatic submission to arbitration
B. This is still the customer's trade
C. Automatic submission to Code of Procedure
D. This is no longer the customer's trade
B. This is still the customer's trade
Rationale:
If the firm did, in fact, buy what the customer ordered, it's still the customer's trade. A trade confirmation can always be done over again.
28
A customer inquires what "BOT" means on her trade confirmation.
A. It means Billed On Time
B. It means Bid Over Threshold
C. It means Best Of Three
D. It means "bought"
D. It means "bought"
Rationale:
BOT means bought.
29
In the heat of the trading day, your firm accidentally bought 1,000 shares of Cisco, when your customer really wanted to purchase 1,000 shares of Sysco. In this case:
A. Automatic submission to arbitration
B. Automatic submission to Code Of Procedure
C. The customer does not have to accept the trade
D. The customer must still accept the trade
C. The customer does not have to accept the trade
Rationale:
If the firm buys the wrong stock, that's not the customer's problem.
30
If your customer inquires what "AE" means on her trade confirmation. Tell her:
A. It means"account executive"
B. The content of customer confirmations are not to be discussed without a principal of the firm present
C. It means "alternative investment"
D. The content of the customer confirmations are not to be discussed without a principal and a branch manager present
A. It means "account executive
Rationale:
Watch out for bogus answer choices and do not assume that two opposites imply that one-or-the-other must be correct.
31
Account statements have to be sent out at least:
A. Monthly
B. Weekly
C. Quarterly
D. Annually
C. Quarterly
Rationale:
Account statements are usually sent out monthly and have to be sent out at least quarterly. They can be sent out quarterly if there are no penny stocks in the account and no trading has occurred. Otherwise, it's monthly.
32
Your customer's account contains four penny stocks. How often must you send account statements?
A. Monthly
B. Quarterly
C. Weekly
D. Annually
A. Monthly
Rationale:
Account statements are usually sent out monthly and have to be sent out at least quarterly. They can be sent out quarterly if there are no penny stocks in the account, no credits/debits to the account, and no trading has occurred. Otherwise, it's monthly.
33
Since ARQ Broker-Dealership does a mixture of brokering transactions and dealing securities, the principals have decided to add commissions to markups on principal transactions. This practice is:
A. Acceptable provided nobody finds out
B. Perfectly acceptable market manipulation
C. Not acceptable
D. Perfectly acceptable market arbitrage
C. Not acceptable
Rationale:
The word "broker-dealer" is hyphenated for a reason the firm can act as a broker for a commission or act as a dealer for a markup. If they do both on the same transaction, they're committing a major violation.
34
Upon customer request, a broker-dealer must provide its:
A. Results of a polygraph administered by a duly authorized FBI/SEC official
B. Most recent income statement
C. Results of a polygraph administered by a duly authorized FINRA official
D. Most recent balance sheet
D. Most recent balance sheet
Rationale:
It's the most recent balance sheet. If the exam tries to snag you with a "trial balance sheet," don't pick it. Save that topic for your Series 27.
35
DVP stands for:
A. Divestiture proceedings
B. Delivery versus payment
C. Distressed viable parties
D. Divestiture procedures
B. Delivery versus payment
Rationale:
When the securities are delivered, payment will be made—not before.
36
Which of the following is a true statement?
A. A member firm may vote street name securities as they see fit
B. If a customer does not return the proxy within 10 business days, the broker-dealer may vote the shares in a proxy contest
C. If a customer does not return the proxy within 10 business days, the broker-dealer may vote the shares in a matter of minor importance
D. A member firm may charge a reasonable fee for forwarding proxies
C. If a customer does not return the proxy within 10 business days, the broker-dealer may vote the shares in a matter of minor importance
Rationale:
If it's a matter of minor importance the broker-dealer can indicate the vote, but a proxy contest is a major matter of importance.
37
If a stock is purchased before the ex-date but settles after the record date, the buying party should:
A. Claim a tax credit on their federal return
B. Submit a claim to arbitration
C. Refuse payment on the transaction
D. Submit a due bill
D. Submit a due bill
Rationale:
If you buy before the ex-date, the dividend should go to you. If it doesn't, that means it went to the wrong party. Send a due bill, because you are due/owed that dividend that was incorrectly sent to the seller. This is not a cause for legal action.
38
For a trade of 320 shares, all of the following would be good delivery except:
A. Three certificates for 100 shares, one certificate for 20 shares
B. Four certificates for 80 shares
C. Three certificates for 80 shares, three certificates for 20 shares, one certificate for 20 shares
D. One certificate for 300 shares, one certificate for 20 shares
B. Four certificates for 80 shares
Rationale:
Look for a case where two certificates are stacked and immediately make something bigger than 100 but still not a round lot. 80 + 80 = 160. Bam! That's what you're looking for. Or, maybe the question is about a 270-share trade. If so, you can't take three certificates for 90 each and stack them. When the first 90 goes on top of the next 90—bam! Problem. That's 180. It has to slack into a round lot. Or at least into a multiple of 100. Now, if it was a 100-share trade, we could take 10 certificates for 10 shares each. They would slack into a round lot without ever going over a round lot, right?
39
Your customer sells 1,000 shares of stock and mails the certificates to you at the firm. When you turn the certificates over, you notice that your customer forgot to sign them. What should you do?
A. Send the customer a power of substitution
B. Submit a claim to arbitration
C. Invoke power of attorney
D. Invoke your reciprocal fiduciary rights in this instance
A. Send the customer a power of substitution
Rationale:
Also known as a "stock power," the power of substitution can be signed in lieu of signing the actual certificate.
40
Jackson and Jackson Company may endorse stock certificates in all of the following ways except:
A. J&J Company
B. Jackson & Jackson Co,
C. Jackson and Jackson Co.
D. Jackson and Jackson Company
A. J&J Company
Rationale:
If the company has the name "Jackson" in it—twice in fact—we have to see that.
41
What is true of a CUSIP number?
A. Each issue has one CUSIP number
B. Each issuer has one CUSIP number
C. CUSIP stands for Certificate Under Services Implemented Promptly
D. The CUSIP number is a barcode
A. Each issue has one CUSIP number
Rationale:
Some stuff is better left to memorization. Save your curiosity for inverted yield curves and debit put spreads.
42
Which of the following is required on the New Account Form?
A. Customer's highest level of education attained
B. Customer's signature
C. Registered rep's signature
D. Customer's level of options trading experience
C. Registered rep's signature
Rationale:
No rule that says you need the customer's signature on the new account form. The rep and his/her supervisor must sign the form. The exam might call the rep's boss the principal, supervisor, or branch manager, because everything needs at least three names on this test.
43
Your client purchases 300 shares of GRT on June 1st when the record date is June 2nd. The buyer is:
l. Entitled to the dividend if the transaction settles regular way.
II. Entitled to the dividend if the transaction is settled in cash.
III. Not entitled to the dividend if the transaction settles in cash.
IV. Not entitled to the dividend if the transaction settles regular way.

A. II, lII
B. II, IV
C. I, III
D. I, II
B. II, IV
Rationale:
If it's a cash settlement, the buyer will get the dividend—the buyer would have got the dividend even if he/she bought on the record date. Cash settlement means "same day" settlement, and the record date is the date by which settlement must occur for the buyer to get the dividend. Obviously, though, the buyer would not get the dividend if the transaction settled regular way. Even the ex-date is too late for that.
44
All of the following statements are true except:
A. A registered rep may take orders from either party in a JTWROS account
B. A registered rep may take orders
C. As long as the signature is witnessed and/or notarized, the signature of a customer now deceased is considered good delivery
D. A stock certificate registered in the names of three joint tenants must be signed by all three tenants before it can be sold/transferred to another party
C. As long as the signature is witnessed and/or notarized, the signature of a customer now deceased is considered good delivery
Rationale:
Shockingly, the signature of a deceased person is not considered valid.
45
After failing to make payment on a transaction, a customer learns that her account has been frozen, which means that she:
A. May not purchase securities over the next 90 days before depositing cash for the full amount of the trade
B. Must appear before the SEC
C. Must appear before the DOE
D. Must close her account within 90 days
A. May not purchase securities over the next 90 days before depositing cash for the full amount of the trade
Rationale:
That's all a "frozen account" means in this sense—no credit for 90 days, you slow paying little...
46
Which of the following is least likely a margin account?
A. Trust
B. JTWROS
C. Corporate
D. Partnership
A. Trust
Rationale:
Trust accounts are seldom margin accounts. Only if the trust agreement specifically permits it would you open a trust account as a margin account.
47
Your niece is 11 years old and displays vast musical talents, which, you are convinced, will propel her to international stardom as a concert cellist someday. Her parents are destitute, and you would like to make sure your niece has the funds for music camps, private lessons, etc. Unfortunately, when you offer to help your niece, her parents respond with anger and tell you not to set up any accounts for the benefit of your niece. Therefore:
A. You must petition the SEC for a custodial over-ride hearing
B. You must petition the court for a hearing before opening the account
C. You may set up an UGMA account if you have the child's SS #
D. You must petition FINRA/NYSE for a custodial over-ride proceeding
C. You may set up an UGMA account if you have the child's SS #
Rationale:
You don't need anyone's permission, and you definitely don't need a hearing. Just open the account. All accounts require a tax ID number, so you will need to somehow obtain that. But you'd be surprised how cooperative an 11 - year-old can be when she finds out you want to make her rich behind her parents' backs.
48
Whose social security number appears on a custodial account?
A. Minor's
B. Custodian's
C. Parent's
D. Guardian's
A. Minor's
Rationale:
The child is the beneficial owner. The custodian just manages the account and makes sure the taxes get paid.
49
If a customer dies, all of the following documents must be presented before your firm releases assets except:
A. Birth certificate
B. Affidavit of domicile
C. Certified copy of the death certificate
D. Inheritance tax waiver
A. Birth certificate
Rationale:
Good one to just memorize.
50
Nancy Newberry buys a new issue F & A general obligation bond on Thursday, September 10th. The dated date is September 1st. How many days of accrued interest will be added to the price of each bond that Nancy Newberry newly bought?
A. 14
B. 44
C. 43
D. 15
A. 14
Rationale:
For a new issue count from the dated date up to the day before settlement. The bond settles on the 15th (T + 3), so there are 14 days of accrued interest.
51
Nancy Newberry buys a new issue F & A general obligation bond on Thursday, September 10th. The dated date is September 1st. How many days of accrued interest will Nancy receive?
A. 15
B. 14
C. 43
D. None of the choices listed
D. None of the choices listed
Rationale:
Buyers don't receive accrued interest—they pay it to the seller of the bond.
52
The ex-dividend date for a closed-end fund is set by:
I. NYSE
II. FINRA
III. Fund's Board of Directors
IV. MSRB
A. Ill only
B. I, II, III, IV
C. I, II, II
D. I, II only
D. I, II only
Rationale:
They are simply shares of stock. They trade OTC or on the exchanges, so their ex-date is set the same way it's set for any common stock trading OTC or on the exchanges. It's the mutual fund that has the board setting the ex- date. Why? Mutual funds don't trade on exchanges or OTC. They are, rather, redeemable.
53
The ex-dividend date for an open-end mutual fund is set by:
I. NYSE
II. FINRA
III. Fund's Bard of Directors
IV. MSRB
A. I, II, III, IV
B. Ill only
C. I, II, III
D. I, II only
B. Ill only
Rationale:
Mutual funds don't trade on exchanges or OTC, so the Board of Directors establishes the ex-date, typically the day after the record date.
54
One of your customers is a partnership. If one of the partners with a minority stake dies, what should you do?
A. Liquidate the account and hold the proceeds in escrow
B. Distribute the deceased partner's assets evenly among the surviving partners
C. Freeze the account until you receive an amended partnership agreement
D. Issue a power of substitution
C. Freeze the account until you receive an amended partnership agreement
Rationale:
Don't do anything drastic—just "freeze" the account, which means to stop buying and selling. Stop trading the account.
55
A stock certificate registered to Joseph B. Kuhl must be endorsed as:
A. "Joseph B. Kuhl" or any reasonable facsimile
B. "Joey Kuhl" or "JBK
C. "Joseph B. Kuhl" or "Joe Kuhl"
D. "Joseph B. Kuhl" only
D. "Joseph B. Kuhl" only
Rationale:
The stock certificate must be signed exactly as registered. Only companies can use a few abbreviations LLC, LLP, Co., &.
56
For a market order, all of the following must be included on the order ticket except:
A. Time Stamp
B. Stock Price
C. Number of shares
D. Stock Symbol
B. Stock Price
Rationale:
Market orders aren't executed at a specified price—they're executed at the next available price. The limit and stop orders have to have a specified price.
57
In order to open a guardian account, registered reps would need all of the following paperwork except:
A. Limited power of attorney
B. Court papers appointing the guardian
C. Bank references
D. New account form
A. Limited power of attorney
Rationale:
Memorize and keep moving.
58
When your customer enters an order to sell and maintains possession of the certificates herself, what must your firm determine before accepting the order?
A. Whether the certificates are in deliverable form
B. All choices listed
C. Whether delivery can be made promptly
D. Location of the securities
B. All choices listed
Rationale:
Seems reasonable, doesn't it? Make sure the customer knows where the certificates are and that he can get his hands on them in a reasonable time frame.
59
Tamara Teasdale purchased a 6.5% T-bond that pays interest every February 1st and August 1 st. If Tamara's trade was made on Friday, July 10th, how many days of accrued interest will she pay per bond?
A. 161 days
B. 162 days
C. 164 days
D. 165days
B. 162 days
Rationale:
Step one when does the trade settle? Monday, July 13th, so there are 12 days of AI for July. June = 30 days. May = 31. Apr = 30. Mar = 31. February = 28. Add it all up, and you get 162 days of accrued interest.
60
What is the daily interest paid on a 7½s debenture?
A. 7.5 cents
B. 20.8 cents
C. 75 cents
D. 20.5 cents
B. 20.8 cents
Rationale:
7½s = 7.5% of par or $75 per year. $75 divided by 360 days (debenture = corporate) equals 20.83 cents per day.
61
What is the daily interest paid on a 5s T-note maturing in 2017?
A. 5.0 cents
B. $50.00
C. 13.69 cents
D. 50 cents
C. 13.69 cents
Rationale:
5s = 5% of par or $50 per year. $50 divided by 365 days = 13.69 cents.
62
Trades in which of the following securities require that the broker-dealer disclose the markup on the trade confirmation?
I. Municipal bonds
II. NASDAQ stocks
III. OTCBB stocks
IV. Pink-sheet stocks
A. I, II, III, IV
B. II
C. Ill, IV
D. III
B. II
Rationale:
Memorize and keep moving.
63
In order to open a guardian account, the registered rep needs:
A. Discretionary authorization
B. Partnership agreement
C. Full power of attorney
D. Copy of the court-ordered guardianship papers
D. Copy of the court-ordered guardianship papers
Rationale:
Seems reasonable, yes? Make sure this person is, in fact, the court-appointed guardian of the other individual.
64
When must trade confirmations be delivered?
A. By the ex-dividend date
B. Before the ex-dividend date
C. By the settlement date
D. By close of business on the trade date
C. By the settlement date
Rationale:
Avery likely testable point. Trade confirmation are sent no later than the settlement for the trade.
65
If a bond trades "and interest" the:
I. Buyer adds accrued interest to her cost base
II. Seller subtracts accrued interest from her proceeds
III. Buyer subtracts accrued interest from her cost base
IV. Seller adds accrued interest to her proceeds
A. II, lII
B. I, II
C. II, IV
D. I, IV
D. I, IV
Rationale:
This question is often missed. People usually want to add the accrued interest to the buyer's price but, somehow, subtract it from the seller's proceeds? Actually, you would ADD the accrued interest to both, right?
66
DWBZ is effecting a 1:7 reverse split. An investor long 140 shares DWBZ @20 will, after the stock split is effected, be:
I. Long 980 shares
II. Long 20 shares
III. @$20 per share
IV. @$140 per share
A. I, IV
B. II, III
C. II, IV
D. I, III
C. II, IV
Rationale:
140 shares would become just 20 shares. $2,800 divided by 20 shares = $140 per share.
67
You may open a joint account for all of the following except:
A. Three CPA's
B. Three attorneys
C. Husband and wife
D. Mother and minor child
D. Mother and minor child
Rationale:
The mother would need to open some type of custodial account for the minor.
68
When a registered representative discovers that a customer is now deceased, she must:
A. Cancel all open orders
B. All choices listed
C. Mark the account "deceased"
D. Freeze the account
B. All choices listed
Rationale:
Memorize and keep moving.
69
If your firm receives mutilated municipal bond certificates, which of the following may validate the certificates for purposes of good delivery?
I. Any bank within the Federal Reserve system
II. Issuer
III. Paying agent
IV. Transfer agent
A. I, II, III, IV
B. IV only
C. II only
D. II, III, IV
D. II, III, IV
Rationale:
Memorize and keep moving.
70
Oneofyourcustomerskeeps pestering you to buy a stock that is clearly unsuitable given the customer's objectives as indicated on the new account form. You:
A. Can not enter the order without prior principal approval
B. Can not enter the order
C. Can enter the order
D. Can not enter the order unless the customer signs a due bill
C. Can enter the order
Rationale:
And make it "unsolicited," getting the customer to sign off on that fact. Principals approve orders at the end of the day.
71
All of the following securities settle regular way T + 3 except:
A. Debentures
B. GNMA
C. T-notes
D. General obligation bonds
C. T-notes
Rationale:
Treasury securities settle T + 1. GNMA, for whatever reason, settles T + 3.
72
Yourfirmhasanewcustomer who refuses to provide suitability information. In this case your firm, a member of FINRA,
A. May open the account but provide no recommendations of any kind
B. Must report this activity to the SEC
C. May open the account but restrict all recommendations to money market mutual funds
D. Must initiate an arbitration proceeding within 25 days
C. May open the account but restrict all recommendations to money market mutual funds
Rationale:
You could take unsolicited orders, and you can park the money in a money market mutual fund so that it isn't just sitting there doing nothing.
73
Which of the following TWO should be taken as signs by a broker-dealer member firm that a customer may be engaged in money laundering?
I. Currency recently deposited appears damp to the touch
II. Lack of concern for risk, commissions, and other transaction costs
III. Excessive journal entries/wire transfers between unrelated accounts
IV. Excessive journal entries/wire transfers between related accounts
A. II, III
B. II, IV
C. Ill, IV
D. I, II
A. II, III
Rationale:
If the customer is transferring money around from all sorts of accounts and doesn't seem to care what he's investing in or how much it costs . . . can you say "red flag"?
74
Which of the following TWO should be taken as signs by a broker-dealer member firm that a customer may be engaged in money laundering?
I. Currency recently deposited appears damp to the touch
II. Lack of concern for risk, commissions, and other transaction cost
III. Excessive journal entries/wire transfers between unrelated accounts
IV. Excessive journal entries/wire transfers between related accounts
A. Retained by the deceased tenant's estate
B. Retained by the surviving tenant(s)
C. Determined by a probate court
D. Retained by any immediate family member submitting an affidavit of domicile
A. Retained by the deceased tenant's estate
Rationale:
The joint account agreement indicates what % each tenant owned. When that tenant goes to meet that great margin call in the sky, her % is "retained" by her estate.
75
An advantage of a TOD (transfer on death) account is that:
A. Estate taxes are typically reduced
B. Probate is avoided
C. Beneficiaries, once named, may not be altered
D. Stipulates the transfer of all financial assets owned by the decedent
B. Probate is avoided
Rationale:
A TOD account allows the brokerage account assets to transfer to the beneficiary, but it has nothing to do with other financial assets (checking, savings, real estate, etc.). The beneficiary can be changed frequently and easily. Estate taxes are not reduced via a TOD account. Trusts generally need to be established in order to reduce estate taxes.
76
If one of your firm's customers has been making deposits of $5,000 every Thursday for the past several weeks, your firm would be expected to file:
A. A CTR (currency transaction report)
B. A Form 144
C. A SAR (suspicious activity report)
D. A Form D
C. A SAR (suspicious activity report)
Rationale:
There could be something fishy going on, so the firm should file a Suspicious Activity Report to the Treasury Department's "FinCen." A CTR (Form 104) is filed for cash deposits above $10,000.
77
You opened an UGMA account for your son, 9 years old currently. Your son's Aunt Judy and Uncle Jim funded the account with $10,000 to be used toward their nephew's education. Therefore, as custodian for the account you are allowed to:
A. Charge the account a reasonable fee for your stewardship of the account
B. Charge the account for your attendance of an HVAC training program in order to better provide for your son
C. Neither choice listed
D. Either choice listed
A. Charge the account a reasonable fee for your stewardship of the account
Rationale:
If the custodian is not the donor, he can charge a reasonable fee to manage the account. The "benefit" to the child is not direct enough to justify using $ to pay for tuition to college or a trade school.
78
The customer of your broker-dealer may inspect which of the following upon request?
A. Income statement
B. Balance sheet
C. All choices listed
D. Personal holdings of all officers and directors
B. Balance sheet
Rationale:
Customers have the right to verify that the broker-dealer holding their cash and securities is on solid footing. A balance sheet is also called a "statement of financial condition," and the customer can verify that the financial condition is sound.
79
When your firm opens an account with a new customer all of the following must be verified except:
A. Whether he appears on a list of known of suspected terrorist
B. Citizenship
C. Whether he has an investment account with another broker-dealer
D. Whether he is employed by another broker-dealer
C. Whether he has an investment account with another broker-dealer
Rationale:
While the firm would definitely ask about other accounts and financial assets, there is no burden placed on them to verify whether he owns other accounts.
80
As a registered representative you receive an order from the custodian for an UGMA account set up for the benefit of a 9- year-old daughter. The order is for a highly speculative, money- losing technology firm. Therefore, you should:
A. Consult with your principal before placing the trade
B. Advise the custodian that the purchase is unsuitable but place the trade if he insists
C. Refuse the order as a fiduciary on the account
D. Advise the custodian that the purchase is unsuitable and refuse to place the trade
B. Advise the custodian that the purchase is unsuitable but place the trade if he insists
Rationale:
It's an unsolicited order, so you can't really get in trouble over suitability. You don't refuse to place the trade, but you should advise him how stupid you think the trade is. The "consult with your principal" choice is tempting, and it's tough to say for sure that it's wrong. Well, it's tough for us to be this subjective--your exam has no such qualms. If the exam says the answer is "D," the answer is "D.
81
The account below which always represents a single owner is known as:
A. Fiduciary
B. JTWROS
C. TOD
D. JTIC
C. TOD
Rationale:
In a transfer on death (TOD) account the individual owner stipulates the beneficiary to whom the assets will be transferred upon death. The two joint accounts have at least 2 owners.
82
The marketability of a block of municipal bonds is least affected by:
A. Price and date of any call provisions
B. Term to maturity
C. Credit rating
D. Dated date
D. Dated date
Rationale:
The dated date has no significance, but the quality of the bond as well as its maturity date and how soon it can be called (and at what price) are highly relevant.
83
When an account executive has written discretionary authority over a customer's account, all of the following are requirements EXCEPT:
A. The account executive must obtain written evidence of acceptance of the account by a principal
B. The first transaction may occur only after written authorization is received from the customer
C. The account executive may trade only in a manner consistent with the character of the account
D. A principal must approve each order bcket before execution
D. A principal must approve each order bcket before execution
Rationale:
Actually, the principal must approve the order tickets promptly after the orders are executed.
84
When entering a sell order ticket, the account executive must:
A. Indicate the commission amount
B. Indicate whether a "long" or "short sale"
C. Indicate whether the securities are in street name
D. Mark the ticket only if a short sale
B. Indicate whether a "long" or "short sale"
Rationale:
The commission will be indicated later, on the trade confirmation. For now, just enter the order, and always clarify whether the sale is a long" sale or a "short" sale. If it's a "long" sale, then the customer has the shares and is ready to sell them. If it's a "short" sale, the customer needs to borrow shares to sell, and the firm has to first locate them.
85
What should an account executive do if the custodian of an UTMA account calls this afternoon expressing intrerest in an IPO for a social media networking company?
A. Discuss suitability wtih the customer
B. Since he wants to buy stock, interest him in a solid, blue chip company
C. Refuse the order
D. Explain that fiduciaries are not allowed to purchase speculative IPOs
A. Discuss suitability wtih the customer
Rationale:
It would be hard to eliminate an answer choice like "discuss suitability with the customer," right? Go with the most likely answer, always.
86
When opening a brokerage account for a limited or general partnership, the following steps should occur in which order?
I. Representative fills out new account form
II. Principal gives written acceptance of the account
III. The first trade is executed
IV. Registered rep obtains partnership agreement
A. I, II, IV, III
B. I, IV, II, III
C. II, I, IV, III
D. II, III, IV, I
B. I, IV, II, III
Rationale:
87
Which of the following are considered "joint accounts"?
A. Father acting as custodian for her daughter in an UGMA account
B. Husband's and wife's IRA accounts in those years which a non-working spouse makes a contribution based on the other spouse's earned income
C. Three college buddies sharing an account unequally
D. Mother acting as custodian for her daughter in an UGMA account
C. Three college buddies sharing an account unequally
Rationale:
Parents and minor children cant have joint accounts-only adults can own investment accounts.
88
Which of the following is/are the custodian allowed to do when managing an UTMA account?
A. Purchase junk bonds
B. Withdraw dividends to pay taxes due the account
C. All choices listed
D. Automatically reinvest dividend and capital gains distributions within mutual fund investments
C. All choices listed
Rationale:
Fiduciaries can purchase junk bonds if they are somehow prudent within the makeup of the overall portfolio. Dividends can be withdrawn to pay taxes due or to benefit the child.
89
A registered representative with a discretionary account may not do which of the following?
A. Mark a discretionary order as "unsolicited."
B. Purchase high-risk junk bonds
C. Shift funds among several mutual funds with a fund family based on the firm's expectation of market developments
D. All choices listed
A. Mark a discretionary order as "unsolicited."
Rationale:
One of the biggest shenanigans pulled by unscrupulous RRs is trying to mark an order ticket "unsolicited" to either pass the blame to the customer or-worse—to execute an unauthorized trade wtihout the customer finding out. The mutual fund shifting would not be a problem within one fund family-even if there were sales charges, there would be none imposed here. Just make sure the shifting is happening so often that it triggers unnecessary short-term capital gains taxes.
90
A margin account maybe opened by:
A. A custodian in a UGMA account
B. A registered open-end investment company
C. A partnership
D. The customer's spouse without supporting documentation
C. A partnership
Rationale:
Margin wouldn't be prudent for a custodial account, and open- end funds don't trade on margin.
91
What is true of ALL transactions executed by a registered representative for a customer's account?
I. Must be approved by FINRA
II. Must be approved by a principal after the trade is placed III. Must be transmitted to the firm by the customer in writing
IV. May be cancelled at settlement due to unfavorable market movements
A. II, lII
B. I, IV
C. II
D. I, II, III
C. II
Rationale:
The orders are given by the customer to the rep verbally, but they are still a binding contract to buy or sell securities.
92
If a registered representative functions as the trustee for a client's irrevocable trust, in order for the account to participate in margin transactions:
A. The trust documentation must not prohibit the ability to use margin
B. The trust documentation must specifically grant the ability to use margin
C. As long as the account contains no short positions, the account may be approved for margin transaction
D. The firm may do so provided the RR follows prudent investor standards
B. The trust documentation must specifically grant the ability to use margin
Rationale:
Generally, margin is too risky for fiduciary accounts, but if the trust documents stipulate that it's okay, then the account can be approved for margin.
93
As a registered representative, you will be registered in at least one state. If one of your customers moves to another state.
A. Take no further action beyond verifying the address change via USPS
B. You must register in that state if you are not already so registered
C. State securities regulators have no authority to demand registration not required by FINRA
D. Take no further action beyond obtaining the address change from the customer
B. You must register in that state if you are not already so registered
Rationale:
The state regulators do have authority to make you register, which explains why you'll also take the 63 or 66 exams.
94
Prudent investor standards apply to:
A. Trustees
B. Custodians
C. All choices listed
D. A registered representative with discretion over an account
C. All choices listed
Rationale:
If the rep can trade the account without talking to the client, he is acting in a fiduciary capacity, just like a
95
Murphy's Law is in full force at your firm this week. After explaining to a customer how a discretionary account works and getting his oral statement that he will be mailing in the authorization form immediately, his largest stock position craters on a bad earnings release. Frantic, you call the customer but can not reach him. At this point you should:
A. Sell up to 1/2 the stock position
B. Continue trying to reach the customer
C. Sell the entire position if consistent with the character of the account
D. Leave a voicemail informing the client that you have entered a protective sell-stop order on the stock
B. Continue trying to reach the customer
Rationale:
It's just an elaborate scenario to point out that you don't have discretionary authorization until you have it in writing. Period.
96
Which of the following accounts may be discretionary?
A. Neither UGMAs nor margin accounts may grant discretion
B. Margin account
C UGMA
D. Both UGMA and margin accounts may grant discretion
B. Margin account
Rationale:
The custodian generally can't pass off discretion to another party. While we can imagine very embarrassing margin calls to the client, it is possible to have a discretionary account also approved for margin.
97
One of your customers granted a durable power of attorney (POA) to her daughter three years ago. The customer dies, and, therefore, what is true of the power of attorney?
A. It is canceled in this case, or in case of the customer's declared mental incompetence
B. It is canceled
C. It passes to the broker-dealer
D. It remains in force until the estate is closed
B. It is canceled
Rationale:
The durable power of attorney lets someone make decisions for somebody else should that somebody else become mentally incapacitated. But when the customer dies, the power of attorney dies, too.
98
A customer on your book of business wishes to purchase tax-exempt municipal bonds within his SIMPLE IRA account. What is true of this situation?
A. You may accept/enter this order with prior principal approval only
B. You may not accept/enter this order
C. You may accept/enter this order only after receiving written instructions from the customer
D. You should try to dissuade the customer and explain the "unsolicited"
D. You should try to dissuade the customer and explain the "unsolicited"
Rationale:
Educate the customer, but it is his money.
99
One example of a non-fiduciary account is a:
A. UTMA (uniform transfers to minors act) account
B. Guardian account
C. TOD (transfer on death) account
D. Estate account
C. TOD (transfer on death) account
Rationale:
A TOD is an individual account that passes to a named individual upon death-it doesn't give authority to a fiduciary to enter trades.
100
All of the following securities settle among broker-dealers in "clearinghouse funds" except:
A. Corporate bond
B. Corporate stock
C. Municipal bonds
D. Treasury notes
D. Treasury notes
Rationale:
Securities issued or backed by the US Government settle in "federal funds."
101
What does it mean when a bond "trades flat"?
A. The bond is in default
B. The nominal yield is unchanged
C. The transaction involves no accrued interest
D. The current yield is unchanged from the previous close
C. The transaction involves no accrued interest
Rationale:
A bond transaction with no accrued interest to be added is "trading flat." Zero coupon bonds and bonds in default trade "flat."
102
Many customer securities are held in "street name" by the broker-dealer holding the account. When there is a proxy vote at a particular company whose stock is held by customers, which of the following is correct?
A. The broker-dealer must forward the proxy materials to their customers holding the issuer's stock
B. Proxy voting was suspended by the SEC on January 10th, 2010
C. The broker-dealer must vote on behalf of customers
D. The issuing corporation must send proxy materials to the shareholder
A. The broker-dealer must forward the proxy materials to their customers holding the issuer's stock
Rationale:
The broker-dealer must forward the proxy materials to the customers who own the issuer's stock.
103
When entering a market order, the broker-dealer must include all of the following on the trade ticket except:
A. Whether solicited, unsolicited, or discretionary
B. Price
C. Account number
D. Time stamp
B. Price
Rationale:
A market order is not executed at a named price... remember that for a stop or limit order, price WOULD be indicated.
104
Whenenteringasell-stoporder, the broker-dealer must include all of the following on the trade ticket except:
A. Commission
B. Time stamp
C. Stock symbol
D. Price
A. Commission
Rationale:
They'll worry about the commission later-putting it on the trade confirmation sent to the customer by settlement.
105
A broker-dealer customer has returned a proxy to the firm. Although she signed it, she did not indicate specifically how her shares are to be voted. Therefore:
A. The broker-dealer must vote her shares according to the issuer's management recommendations
B. The customer must indicate her vote, or the broker-dealer must destroy the proxy
C. The broker-dealer must vote her shares on her behalf
D. The broker-dealer may vote her shares on her behalf
A. The broker-dealer must vote her shares according to the issuer's management recommendations
Rationale:
The issuer's management recommends that shareholders vote this way or that way on each issue before them. If the shareholder returns the proxy without indicating how she wants to vote her shares, the shares must be voted according to management's recommendation.
106
This afternoon your broker- dealer receives certificates that were sold by Joel L. Stevens and endorsed on the back. Mr. Stevens has since passed away. Therefore:
A. The securities are not in good delivery form
B. The securities are in "good delivery" form if the signature was witnessed
C. The securities are in "good delivery" form if the signature was notarized
D. The securities are in "good delivery" form if the signature was witnessed by the executor of the estate
A. The securities are not in good delivery form
Rationale:
The signature of a dead guy doesnt count, not even in Chicago.
107
Securities sold from an UTMA account are in good delivery form if signed by the:
A. Beneficial owner
B. Parents of the beneficial owner
C. Custodian
D. Donor who set up the account
C. Custodian
Rationale:
You had to choose "custodian," right? If the kid can't open the account, his signature also doesnt count.
108
When securities are sold by the estate of the deceased, the securities must be signed by ____________ to effect "good delivery."
A. The registered rep and his principal
B. A principal of the firm
C. The executor
D. The deceased
C. The executor
Rationale:
The "executor" is the most logical answer choice, right? The least logical would be to require the dead guy to sign the certificates.
109
If a broker-dealer receives securities from the seller's broker-dealer that do not meet "good delivery" standards, the receiving broker-dealer would:
A. File an arbitration claim
B. File a reclamation
C. File a regulatory tip with FINRA
D. Send a due bill
B. File a reclamation
Rationale:
A little soon for an arbitration claim . . . although disputes do sometimes end up there. There is no reason to file a regulatory tip—the two firms need to work out the discrepancy. A due bill is sent when the other side owes a dividend or interest payment that was sent incorrectly to the wrong party.
110
Which of the following represents a reason for a broker-dealer to send a "DK" notice?
A. A broker-dealer receives 100 shares of XYZ common stock when they expected 100 shares of XYZ convertible preferred stock
B. A broker-dealer would like to increase the size of the trade
C. A dividend was received by the wrong party
D. A broker-dealer would like to settle a trade prior to regular way settlement
A. A broker-dealer receives 100 shares of XYZ common stock when they expected 100 shares of XYZ convertible preferred stock
Rationale:
DK stands for "don't know," and is sent when a broker- dealer receives delivery of securities that weren't expected or don't match what was expected.
111
All of the following securities frequently trade "and interest" except:
A. T-bonds
B. T-notes
C. STRIPS
D. GO bonds
C. STRIPS
Rationale:
Zero coupons, like STRIPS, don't pay out interest, so there is no accrued interest involved.
112
A customer sells $9,000 of ABC and a few hours later buys $15,000 of XYZ in a special cash account. Five business days then pass and the customer has not sent payment, nor has an extension been granted. Therefore, the broker- dealer must:
A. Liquidate $9,000 worth of ABC
B. Freeze the account 90 days and execute a buy-in
C. Liquidate $15,000 worth of XYZ
D. Liquidate $6,000 worth of securities and freeze the account 90 days
D. Liquidate $6,000 worth of securities and freeze the account 90 days
Rationale:
The difference of $6,000 now has to be covered, and the customer's credit will be cut off for 90 days.
113
An investor receives her account statement from her broker-dealer. Under "balances" she finds "long positions - $120,000" and "money market - $150,000." If the broker-dealer goes belly up, her account would be covered at what
amount?
A. $220,000
B. $120,000
C. $270,000
D. $500,000
C. $270,000
Rationale:
If it's in a "money market account," it is a security, not cash. Really, the question should say "money market mutual fund," but the exam is, unfortunately, not as precise as it requires test-takers to be.
114
What is the phrase used to describe the illegal process of turning illegally-gained assets into legitimate circulation?
A. Frontrunning
B. Wash sale
C. Money laundering
D. Interpositioning
C. Money laundering
Rationale:
Money laundering-trying to turn dirty money into clean money.
115
A "fidelity bond" is:
A. Required by the Trust Indenture Act of 1933
B. A synonym for a municipal "moral obligation" bond
C. A bond that protects customers from assets that are lost, stolen, or destroyed by officers and employees of a broker-dealer
D. A form of additional protection beyond basic SIPC coverage
C. A bond that protects customers from assets that are lost, stolen, or destroyed by officers and employees of a broker-dealer
Rationale:
Securities and cash can be embezzled by officers and employees, so the broker- dealer needs protection against that.
116
The transfer agent would require additional documentation to transfer stock in all of the following cases except:
A. When the executor of an estate account has signed the stock power
B. The GP of a partnership account has signed the stock power
C. When the custodian of an UTMA account has signed the stock power
D. An authorized officer of a corporation has signed the stock power
C. When the custodian of an UTMA account has signed the stock power
Rationale:
The custodian is the only one who can sign the stock power for an UTMA or UGMA account. The transfer agent would require documentation that the executor is really the executor, and the same for the GP or a corporate officer.
117
Types of joint accounts include:
I. UGMA
II. TOD
III. JTWROS
IV. Tenants in Common
A. III, IV
B. II
C. I, III, IV
D. I, II, III, IV
A. III, IV
Rationale:
Neither an UGMA nor an UTMA can be a joint account - they are custodial accounts managed for the benefit of the minor. A TOD account is an individual account that transfers on death (TOD) to another individual.
118
Which of the following is/are a true statement(s) concerning customers and PO boxes?
A. Both choices listed
B. A street address must be reflected on the new account form
C. Account statements and trade confirmations may be sent to a PO box
D. Neither choice listed
A. Both choices listed
Rationale:
The firm needs a street address on file, but the correspondence (account statements, proxies, trade confirms, 1099s) may be sent to a PO box at the customer's request.
119
Which of the following can take place within a customer's "cash account"?
A. Writing naked puts
B. Writing covered calls
C. All choices listed
D. Selling stock short
B. Writing covered calls
Rationale:
The only options transactions that can take place in a cash account would be to buy single options or write covered calls. Uncovered options and short sales take place in margin accounts.
120
Juan and Marta Martinez may act as custodians for their niece Yolanda's UTMA account:
A. Only with written permission from Yolanda's parents or legal guardian(s)
B. Only if they are also the donors to the account
C. Under no circumstances
D. Only with principal approval
C. Under no circumstances
Rationale:
Only one adult may serve as custodian.
121
One of the investment accounts on your book of business is a tenants in common account for a husband and wife. If the wife tries to enter an order for the account today you:
A. May accept the order after obtaining your principal's approval that the order is suitable
B. May accept the order only if the husband has granted the wife written trading authorization
C. May accept the order
D. May accept the order after speaking also to the husband
C. May accept the order
Rationale:
In a joint account, orders may be entered by either party.
122
One of your customers is an elderly widow who has granted her daughter power of attorney. If your customer dies, which of the following is accurate concerning the power of attorney?
A. It remains in force until canceled by the daughter
B. It remains in force provided the daughter is also sole heir to the estate
C. It is canceled upon death of the account owner
D. It remains in force until canceled by the proper probate court
C. It is canceled upon death of the account owner
Rationale:
Power of attorney dies when the person granting it dies. The person granting power of attorney can also be called the "principal" in order to create maximum confusion on the exam.
123
One of your customers is a partnership account for a local accounting firm. The partner who opened the account has died. You should therefore:
A. Open individual accounts for each/all of the remaining partners
B. Do nothing until you receive instructions from the executor of the partner's estate
C. Freeze the account
D. Liquidate all positions and transfer the proceeds to a money market mutual fund
C. Freeze the account
Rationale:
Freeze the account-no orders, no distributions for now.
124
To execute a customer's sell order of 300 shares of ABC, you would indicate all of the following on the trade ticket except:
A. Whether the order is solicited or unsolicited
B. Location of the securities
C. Account number
D. Cost basis on the stock
D. Cost basis on the stock
Rationale:
Cost basis isnt relevant to this trade. But, the firm does need to know which account this is for, whether the customer ordered it (unsolicited) or agreed to it (solicited), and whether the securities are in theaccountorheldbythe customer somewhere else.
125
One of your investing clients currently holds 1,200 shares of XYZ. Expecting a drop in price, the client wants to sell 1,000 XYZ. You would mark the order ticket:
A. sell to cover
B. sell short
C sell long
D. sell to close
D. sell long
Rationale:
The client wants to sell 1,000 of the shares he/she currently holds. "Sell long." He/she is not borrowing shares and selling them (sell short).
126
Trades in none of the following settle regular way at T + 3 except:
A. US Treasury notes
B. Cumulative preferred stock
C. US Treasury bonds
D. Listed equity options
B. Cumulative preferred stock
Rationale:
Corporate stocks and bonds settle T + 3.
