Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

MY SERIES 7 > Ch 2: Suitability > Flashcards

Ch 2: Suitability Flashcards

You may prefer our related Brainscape-certified flashcards:
Series 7 Top-off Exam flashcards
1
Q

Suitability is found in the __ rule. (define the rule)

A

Know Your Customer rule (KYC)

This rule places an obligation on the member firm and associated persons to request info from customers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

BEFORE making a recommendation for a new customer, registered rep must try to find out as much as possible about that person’s fin and nonfin situation. The best way to get the proper info is to…

A

complete a customer profile

profile should contain both fin and nonfin info

taking ll this into consideration indicates to the sec professional the extent at which the client is bale to make a lump-sum investm (BS shows large amt of net assets available) and/or periodic investm (IS reveals positive CF aka money left at end of the month)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Financial vs Nonfin Info (Questions)

A

Financial info can be answered on a customer’s personal BS or IS.

Ex: asking “when would you like to retire” is NOT a fin question bc it does not appear on the BS or IS.

Fin investm considerations are ones that CAN be expressed as a sum of money (ie. total L) OR as a numerical CF (ie. gross income of $160k/yr). Nonfin info CANNOT be expressed this way.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

BS

A

snapshot of individuals’ fin condition at a point in time

customer’s BS involves:

  • cash, CDs, savings acct value
  • values of tangible assets?
  • value of sec you currently own?
  • value of those investm accts?
  • cash value of your life insurance?
  • How much you owe on your mortgage? (what are your liabilities)
  • are there any loans against insurance cash value?
  • how large is your credit card debt?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

customer’s net worth is determined by…

A

assets - liabilities = net worth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

IS

A

reps must know customer’s income situation to make appropriate recs. This includes customer’s marital status, fin responsibilities, projected inheritances, pending job changes.
ASK:
- what is your total gross income? total fam income?
- how much you pay in monthly expenses?
- what is your net spendable income after expenses? how much of this is available for investment?
- how secure is your employment?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

***Before recommending any investm to a customer, a RR must…

A

at a min, make. reasonable effort to obtain info concerning customers’s FIN STATUS, TAX STATUS, AND INVESTM OBJ.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

family BS only includes… not _

A

includes A and L. NOT income like salary, dividends, or interest, or amts paid for expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

what carries more weight - nonfin or fin info?

A

NONFIN

NO MATTER HOW MUCH AN ANALYSIS IS MADE ON FIN STATUS, IT’S THE CUSTOMER’S EMOTIONAL ACCEPTANCE OF INVESTING AND MOTIVATION TO INVEST, which molds the portfolio.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Nonfin Info includes…

A
  • age
  • marital status
  • # and ages of dependentsemploym
  • employm of family members
  • current and future fam edu + HC needs
  • risk tolerance
  • attitudes and values (ie. ESG investing)
  • tax status
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Questions to ask to find out customer’s EMOTIONAL/ATTITUDE to invest:

A
  • whta kinds of risks can you afford to take?
  • how liquid must your investm be?
  • how important are tax considerations?
  • are you seeking LT or ST considerations?
  • Do you get bored with stable investm?
  • how stable is your income? etc
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

words for risk averse levels…

A
  • low risk = conservative
  • some risk = moderate

- avg risk = moderately aggressive
- high risk = aggressive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

***A registered reps’ job is to assist customers in…

A

meeting their fin obj. Responsible reps must learn all the customers’ fin situations. Securities laws prohibit unsuitable recs.

if a customer contacts a RR and wants to buy x that the rep feels is unsuitable for client, the RR has responsibility to TELL CUSTOMER HOW THEY FEEL IT IS UNSUITABLE. If customer insists on the purchase, the RR can take and mark the trade as UNSOLICITED.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Steps for Getting Customer Profile Info

A
  1. have client complete a detailed questionnaire
  2. conduct a personal interview (great for qualitative info)
  3. data-gathering includes asking clients to bring in acct statem, insurance policies, 401k plan options, and maybe tax returns (easy to measure sophistication of investor)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

accredited investor

A

individual with Net Worth > $1M (excluding primary residence equity) OR any individual with income > $200K in each of the 2 recent yrs OR joint income with spouse > $300K in each of recent yrs

+ expectation of reaching same income level in the current yr

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How to VERIFY status of accredited investor?

A
  • tax returns or W-2s for previous 2 yrs
  • obtaining written rep from purchaser that he has a reasonable expectation of reaching the income level necessary to quality as an accredited investor during the current yr
  • if purchaser is an accredited investor on basis of $1M net worth, reviewing 1 or more of documentation (either bank/brokerage acct statem OR credit report from at least 1 of the nationwide consumer reporting agencies) dated within prior 3 months is useful

ALTERNATIVELY, member firm can get written confirm from 1 of these ppl (listed below) about the person taking reasonable steps to verify that the client/purchaser is an accredit investor:

  • registered BD
  • IA registered with SEC
  • licensed attorney who’s in good standing under laws
  • a certified public accountant who is duly registered and in good standing under the laws of the place of her residence/principal office
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

fin goal vs objective

A

goal - where you want to be (end game)

obj - steps taken to reach the goal (tools)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

3 primary investm objectives

A
  1. growth (aggressive, moderate, or conservative)
  2. income (current, future, or high risk)
  3. safety/stability (capital preserv) (safety/stability or speculation)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

investm constraints

A

investm OBSTACLES/limitations/restrictions that are specific to your client.
- liquidity needs, time horizon, ethical choices (no tabacco/alc stocks)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

word that means “max income” or “max growth” without regard to stability

A

speculation

21
Q

matching client objectives…

A

USE TRIANGLE.
Role of RR is to determine WHERE in this triangle the customer’s obj lie.

You CANNOT maximize all 3.

22
Q

preservation of capital

A

ppl want to avoid any drop in value of their investm

  • trade off: by reducing risk, investor sacrifices opp for higher income
  • rec: bank insured CDs = safety they’re looking for
  • rec: fixed income investm (risk: inflation/purchasing power risk)
23
Q

income

A

goal = income

  • goal is income. primary factor is the amt of risk the investor is willing and/or able to take
  • clear risk/reward principle
  • closer to income, farther away from safety (want to maximize income? risk safety by investing in HY/junk bonds)
24
Q

if investor wants both SAFETY and INCOME, the rec investm instrument is…

A

US Treasury

25
Q

growth/capital appreciation

A

obj where some ppl have high tolerance. some are conserv.

26
Q

speculation

A

obj

customer may want to speculate.
investors interested in this will frequently use margin, sell short, and trade in options/penny stocks.

27
Q

INVESTMENT CONSTRAINTS CHART

A
  • Time Horizon - time frame when goals must be attained; time horizon and liquidity needs will determine the level of volatility client is looking for
  • Liquidity - What is the cash need? High if close to goals (retirem/edu); low if LT horizon
  • Taxes - tax characteristic of investor + desired level of tax mgmt
  • Laws and regulations - any legal prohibitions on types of investm or transactions (some are only available to accredited investors)
  • Unique circumst and/or pref - investor pref/desires to avoid particular types of A OR they’re receiving a large inheritance/lottery win/bankruptcy/illness
28
Q

Liquid vs Illiquid Investm

A

Liquid vs Illiquid means how quickly you can get the current MV of the investm (NOT whether you’ll lose the money on your investm).

Liquid:

  • sec listed on exchange/NASDAQ
  • MFs, ETFs, most REITS

Illiquid:

  • annuities (when initially purchased and/or when the annuitant is under age 59.5)
  • real estate
  • private placem securities and DPPs
  • HFs
29
Q

Taxes

A

2 ways to reduce taxes: tax deferral and tax-free income

  1. tax deferral - contrib to IRA, qualified retirem plan, or a TSA may be tax deductible and are not taxed until withdrawn.
    - gives 2 benefits to investor: the investm are made with pretax money AND there are NO TAAXES on the income + growth until money is paid out
  2. tax free income - munis pay interest that’s free from fed tax. Munis usually pay interest at lower rate than taxable bonds (bc interest is tax free for munis!)
    - Roth IRA, Coverdell ESA, Section 529 plans are tax-free income
30
Q

Rule 2111

A

Composed of 3 main obligations for suitability.

  1. reasonable-basis suitability
  2. customer-specific suitability
  3. quant suitability
31
Q

reasonable-basis suitability

A

reasonable basis to believe that a rec is suitable for AT LEAST SOME INVESTORS.
- as a RR, you must be able to explain the risks and rewards of the rec security/strategy (or else you’re violating the rule)

32
Q

customer-specific suitability

A

have reasonable basis to believe that the rec is suitable for a specific customer

rec would be based on that customer’s investm profile

33
Q

quant suitability

A

reasonable basis for believing that a series of rec transactions (eve if suitable when viewed in isolation) are not excessive/unsuitable for customer WHEN TAKEN TG.

Factors: commissions generated, profits-to-cost ratio, use of in-and-out trading in a customer’s acct

34
Q

Options Acct doc requirem

A

This higher risk requires that a designated supervisory person with knowledge about options must approve the acct opening.

There is specials options disclosure doc (ODD) that must be provided to any prosecptive options customer. (this describes risks and rules of customer. This must be signed aand returned to member rWITHIN 15 DAYS AAFTER ACCT IS APPROVED)

To get a customer’s acct APPROVED for options trading, a member firm/RR associated with the BD must exercise due diligence.
- learn the essential facts relative to the customer (a question asked on new options aacct form that is NOT on regular acct is investm experience and knowledge, ie. number of yrs trading, size of trades)

35
Q

Acct APproval for Options Accts will indicate…

A
  • date the ODD is furnished to the customer
  • nature and types of transactions for which the acct is approved (ie. buying, covered writing, spreading, discretionary transactions)
  • name of RR assigned to acct
  • name of supervisor approving the acct
  • date of approval
  • dates of verification of currency of acct info
36
Q

***margin acct documentation

A

more doc needed than opening regular cash acct

  • **margin agreement includes 3 docs (customer agreem) AND RISK DISCLOSURE DOC.
    1. credit agreem - terms of credit extended by BD, such as interest computation, situations that interest rates may change
    2. hypothecation agreem - margin loans are backed by collateral (security purchased on margin); this agreement gives BD a lien on the customer’s argin sec
    3. loan consent (optional) - gives permission to firm to loan customer margin sec to other customers/BD for shorts

FINRA rules require that the client must SIGN MARGIN DOCS NO LATER THAN 1ST TRADE IN THE ACCT.

Risk Disclosure doc - Before opening margin acct, BD must provide customers with a risk disclosure doc AND provided annually. Doc discusses risks of margin trading.

37
Q

Risks of margin trading (included in risk disclosure doc)

A
  • customers are not entitled to choose which sec cn be sold if a maintenance call is not met
  • customers can lose more money than initially deposited
  • customers are not entitled to an extension of time to meet a margin call
  • firms can increase their in-house margin requirements without advance notice
38
Q

Discretionary acct

A

customer authorized BD or RR to make investm decisions in the acct

Discretionary is defined as authority to decide

  • Asset - what security
  • Amount - number of sh/units
  • Action - buy/sell

BDs usually paid by transaction (more trading int he acct = more income), which lessens potential for conflict of interest.

39
Q

FINRA prohibits the exercise of nay discretionary power in a customer’s acct UNLESS…

A
  • customer has given PRIOR WRITTEN AUTHORIZATION (PO) to a stated individual
  • AND acct has been accepted by brokerage firm through writing by the firm

NO DISCRETIONARY TRANS. CAN TAKE PLAACE WITHOUT THIS DOC ON FILE. When authorization is given, firm is legally empowered to make trading decisions for the acct, but customer is allowed to make orders too.

Discretionary must be written on ticket too.

40
Q

DISCRETION - TIME OR PRICE

A

***discretion does NOT apply to decisions regarding the timing of na investm or price at which it’s acquired.

this can be orally granted by customer to buy/sell specific amt of a security to “get the best price you can”

these are limited to END OF BIZ DAY on the day customer granted it. If the order is to last longer than that day, customer must state in WRITING. Any ex of time/price discretion must be reflected on the order ticket (same with regular discretion).

41
Q

Besides documentation, discretionary acct rules include:

A
  • each discrete order must be IDed as such when it’s entered for execution
  • an officer/partner of brokerage house must APPROVE EACH ORDER PROMPTLY AND IN WRITING (not necessarily before order entry)
  • record must be kept of LAL transactions
  • no excessive churning allowed in acct relative to size of acct and obj
  • acct must be checked regularly
42
Q

Fiduciaary accts

A

fiduciary = one who has legala power to act on behalf of another person

opening these accts requires evidence of individuals’ appt and authority (usually comes from a court)

  • court appointed guardian is another case where proof of capacity must be given
  • no documentation is required for an individual to open an UGMA/UTMA acct
  • discretionary authority usually makes one a fiduciary
43
Q

Trustee Acct must include…

A

Trust agreement detailing limitations placed on the fiduciary.

44
Q

***Fiduciaries are obligated to follow the…

A

Uniform Prudent investor Act (UPIA)

45
Q

RR who opens a corporate acct must establish…

A
  • biz’s legal right to open an investm acct
  • indication of any limitations that the owners, stockh, court, or any other entity has placed on the sec in which the biz can invest
  • and who will rep the biz in transactions involving the acct

when opening corp accts, firm must obtain. copy of the CORPORATE CHARTER AND CORPORATE RESOLUTION. Charter proves corp does exist, resolution authorized both the opening of the acct and the officers designated to enter orders.

46
Q

Partnership Accts

A

They frequently open cash, margin, retirem, etc accts for biz purposes.

Partnership must COMPLETE A PARTNERSHIP AGREEM stating which of the partners can make transactions for the acct. If partnership opens a margin acct, partnership must disclose any investm limitations.

Amended partnership agreem must be obtained ANNUALLY if changes have been made.

47
Q

Sole proprietorship accts

A

simplest form of biz organizations; opened like an individual acct

48
Q

Numbered Accts

A

customer’s acct may be identified by only a multi-digit number/symbols (preserve anonymity)

Customer must sign a form certifying that he owns the acct identified by those #/symbols.

Tax reporting is done the same as any other acct.

MY SERIES 7 (12 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions