11 Customers and Brokerage Procedures Flashcards
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
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.
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
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.
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
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).
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
C. He must provide information to help determine suitability
Rationale:
Polygraphs? No.
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. 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.
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
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.
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
D. Does not require written discretionary authorization
Rationale:
Time/price do not require written discretionary authorization.
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 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.
When the account is non- discretionary, the registered representative may not determine:
A. All choices listed
B. Time
C. Price
D. Number of shares
D. Number of shares
Rationale:
Without discretion, all the rep can choose is time of day and the price to pay.
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
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.
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
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.
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”
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.
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”
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.
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
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.
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
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.
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
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.
All of the following may open investment accounts except a:
A. Corporation
B. Non-U.S. citizen
C. Minor
D. Partnership
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.
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. 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.
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
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.
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
C. Refuse to comply with the request
Rationale:
You have to send account statements to the account owner.
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. 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.
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
C. The account is taxable
Rationale:
UGMA’s are taxable.
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
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.
SIPC covers:
A. Losses in commodities
B. Investment losses on common stock
C. Investment losses on preferred stock
D. Broker-dealer failure
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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.
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.
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.
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.
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.
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…
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.
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.
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.
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.
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.
