Customer Account Questions Flashcards
Under FINRA rules, all of the following statements are true about each customer that is placed in an NMFBA EXCEPT:
A such an account type must be suitable for the customer taking into account services provided, anticipated costs and investment objectives
B a disclosure document must be provided to the customer prior to account opening
C account activity must be reviewed for appropriateness at least every 12 months
D the member firm must continuously compute account fees on a per trade basis, and if this is lower, charge that amount as the account fee
The best answer is D. FINRA requires that when a “non-managed fee based account (NMFBA)” is recommended to a customer, the customer must be suitable for that account type; a disclosure document must be provided to the customer prior to account opening explaining how fees will be charged; and that all such accounts must be reviewed at least every 12 months for appropriateness. There is no requirement to compare account charges on fee based accounts to the charges that would have been incurred on a straight commission basis, and to charge the customer the lower amount.
When recommending fee based accounts to customers, member firms should consider:
I Cost of trading in the account
II Anticipated level of trading activity in the account
III The importance that the customer places on aligning his interests with the broker
IV The customer’s fee structure preferences
A I and II only
B III and IV only
C I, II, III
D I, II, III, IV
The best answer is D. All of the statements are true. When recommending fee based accounts, member firms should consider, among other things, the cost of trading in the account; the anticipated level of trading activity in the account; the importance that the customer places on aligning his or her interests with the broker; and the customer’s fee structure preference.
A customer has an existing cash account that holds many different positions in blue chip stocks. The customer has an investment objective of moderate growth and income. The customer contacts his representative, stating that “I think the market will be flat for a while, but I don’t want to see my portfolio return drop.” The registered representative recommends that the customer sell covered calls against some of the stocks held in the customer account. The representative:
A can do so without any additional documentation as long as options positions taken do not exceed 15% of account value
B cannot do so unless the account is qualified to trade options
C cannot do so unless the stock positions are transferred to a margin account and the customer signs a margin agreement
D can do so without restriction because covered call writing is a conservative strategy that is permitted in a cash account
The best answer is B. This customer has a cash account holding blue chip stocks. The customer can only sell covered call options against those stock positions if the account is qualified to sell them. This means that the options new account form must be completed; the customer must be delivered the ODD (Options Disclosure Document); and the customer must be sent an Options Agreement for signature and return within 15 days of the first options transaction in the account.
All of the following persons can approve the opening of an account under MSRB rules EXCEPT the:
A Branch Office Manager
B Municipal Securities Principal
C General Principal
D Financial and Operations Principal
The best answer is D. Under MSRB rules, new accounts are approved by either a resident Branch Office Manager (Series 9/10 license); a General Securities Principal (Series 24 license) or by an individual with the MSRB’s full Municipal Principal (Series 53) license. The Financial and Operations Principal (Series 27 license) is the firm’s accountant, and cannot approve the opening of customer accounts.
Record Next Question:When opening an account to buy options, which of the following signatures are needed on the options new account form? I Registered options principal signature II General principal signature III Registered representative signature IV Customer signature A I and III B I and IV C II and III D II and IV
The best answer is A. The customer’s signature is not required on a new account form. It is required on the options agreement, margin agreement and loan consent agreement.
The regular new account form for equity securities requires the signature of the registered representative and the general principal (Series 24 license).
The options new account form, required for options trading, is signed by the registered representative, who is attesting to the fact that the information on the form is true; and must be approved before the account is traded by the registered options principal (Series 4 license).
The same person can hold both the Series 24 General Principal and Series 4 Registered Options Principal licenses.
Which of the following statements are TRUE regarding joint accounts?
I If a party in a Joint Tenants With Rights of Survivorship account dies, his or her share is excluded from his taxable estate
II If a party in a Joint Tenants With Rights of Survivorship account dies, his or her share is included in his taxable estate
III If a party in a Tenancy in Common account dies, his or her share is excluded from his taxable estate
IV If a party in a Tenancy in Common account dies, his or her share is included in his taxable estate
A I and III
B I and IV
C II and III
D II and IV
The best answer is D. If a joint account owned as “Tenancy In Common,” then if one person dies, that person’s share goes into his estate, and is subject to estate tax. Even though a “Joint Tenancy with Rights of Survivorship” gives each owner a legally undivided interest in an account, if one owner dies, the IRS assigns a portion of the account to that person and taxes it (nothing is so certain in life as death and taxes!) If the owners are married, then the unlimited marital exclusion stops the tax bill from hitting until the second spouse dies.
Where would you find the names of the persons authorized to trade a corporate account?
A Corporate charter
B Corporate resolution
C Proof of domicile
D New account form
The best answer is B. The corporate resolution is a “boilerplate” form at each brokerage firm that has blank spaces for filling in the name of the corporation, the names of the persons authorized to trade the account, signed by the Secretary of the corporation. So the names of the individuals authorized to trade a corporate account are found in the corporate resolution.
An individual customer places an order with a broker at 12:30 PM Eastern Time to “Buy 10,000 shares of ABC stock whenever you think the time is best.” This order:
I must be entered immediately by the representative as a “Market-Not Held” order
II should be entered by the representative at the moment that he or she thinks is appropriate for getting the best execution
III must be filled by the close of the market on that trading day
IV must be filled by 12:30 PM Eastern Time on the following trading day
The best answer is A. Discretion over price and time of execution can be given verbally. However, the order must be filled by the close of the market on that day or it is canceled. If price and time discretion are given for a time period that is longer than 1 day, then a written power of attorney from the customer is required to accept the order.
Custodial accounts opened by parents for their minor children that have substantial dividend or interest income are:
A not taxable until the child reaches the age of majority
B taxable at the parent’s tax bracket
C taxable at the minor’s tax bracket
D taxable at the trust and estate tax bracket
The best answer is B.
If a custodian account is opened by a parent for a minor who is age 18 or under; and if the income exceeds $2,200 in 2021; then the income is taxed at the parent’s tax rate - which is typically much higher.
This tax rule is attempting to stop parents from shifting income to their children, who would typically have less income and thus would be taxed at lower rates.
Which of the following transactions are permitted in a custodial account? I Short sale of common stock II Sale of pre-emptive rights III Purchase of warrants IV Purchase of mutual fund shares A I and II only B IV only C II, III, IV D I, II, III, IV
The best answer is C. Custodial accounts cannot be margin accounts - so short sales are prohibited. If securities are purchased, they must be paid in full. If securities are sold, they must be long sales with the proceeds being used for other investments or expenses that benefit the minor. Any type of security can be purchased in a custodial account, as long as the investment is “prudent.”
