Retail and Institutional Customer-Related Activities Flashcards
Who is responsible for gathering essential information from customers (profiling the customer) at the time of account opening?
The registered rep
After account opening, how often should essential customer information be updated in records (customer profile)?
Whenever it changes
Which customers of a broker-dealer are excluded from customer information requirements?
None
Who is responsible for reviewing the adequacy and accuracy of customer information and documenting these reviews?
A registered principal
T or F: A cash account must be opened before a customer can open a margin or options account.
T
T or F: A Series 24 principal can approve options accounts.
F
A registered options principal (Series 4) is responsible for supervising a broker-dealer’s options business, which includes account approvals and sales activity.
T or F: In a cash account, investors can’t buy securities valued above available cash held in the account.
T
T or F: A customer must sign and return an options agreement before conducting any options trades in the account.
F
The agreement must be returned within 15 days of account approval. The customer is permitted to transact in the interim.
T or F: Options contracts can be written (sold) in regular cash accounts. But to buy options, investors must have options accounts.
F
All types of listed options (writes and buys, puts and calls) must be transacted in options accounts, with principal approval.
Which of the following indicates that discretion was exercised by a registered representative? (Assume the customer did not give approval or disapproval for the representative’s actions.)
A. The representative decides what securities the customer sells.
B. The representative decides the quantity of shares the customer buys.
C. The representative sets the price of a securities trade.
D. The representative holds an order until he/she thinks the time is right for execution.
E. The representative evaluates a customer portfolio and picks certain stocks to buy and sell.
A, B, E
Discretion is triggered by buy/sell (action), choice of security or quantity. But not by time and price.
Tina opened a cash brokerage account by completing a new account form when she was 34 years old. When she was 39, she turned it into a margin account. She began withdrawals from the account when she was 65 and depleted it of securities and most cash at 72. She died when she was 75, at which time her account was closed. Her customer account records, including the new account form she signed at age 34, were required to be retained until:
A. When she was age 40.
B. When she was age 45.
C. When she was age 65.
D. 6 years after she died.
D
Customer account records, such as the new account form, are 6-year records. The 6-year retention requirement starts when the account is closed.
Is a broker-dealer required to process trades immediately, if it suspects that a trusted contact person may be financially exploiting a customer?
No
What action can the broker-dealer take to protect a customer’s assets after suspicions are raised about a trusted contact person?
A temporary hold on trades and disbursements
Who must the broker-dealer contact if it decides to take action to protect a customer who it suspects is being financially exploited by their trusted contact person?
No notification to anyone
What is the longest length of time the broker-dealer can place a temporary hold on an account if it suspects a trusted contact person is financally exploiting a customer, without obtaining additional legal or regulatory authority?
55 BDs
What is the required frequency for a broker-dealer’s sending of brokerage customer account statements to each of the following customers?
A. An active self-directed IRA brokerage account
B. An active jointly-held margin account
C. An inactive individual account with zero account balance
D. An active jointly-held cash account in which the customer has requested “hold mail”
E. A custodial account for the benefit of a minor child
F. An individual account with frequent trading in penny stocks
A. Quarterly
B. Quarterly
C. None
D. None
E. Quarterly
F. Monthly
Jeremy trades stocks in his brokerage account every day, sometimes several trades a day. But he generally holds positions at least a week or two before taking profits or losses. He tends to start positions at 100 or 200 shares and often adds to them if they are successful. He almost always sells the whole position if it reaches pre-determined profit targets or loss limits. Is he a “pattern day trader” according to the regulatory definition?
A. No, because he doesn’t trade in and out of positions during the same day.
B. No, because he trades with a disciplined strategy.
C. Yes, because he trades as often as he does.
D. Yes, because he is seeking short-term profits.
A
A “pattern day trader” executes 4 or more day trades within 5 BDs. Because he generally doesn’t trade in and out of positions during the same day, he would not be considered a pattern day trader.
The 2001 law that strengthened AML rules in the aftermath of the 9/11 attack was the [?].
USA PATRIOT Act
The Patriot Act required financial institutions to adhere to minimum standards for verifying their customers opening accounts. These standards are called [?].
Customer Identification Programs
Records relating to a broker-dealer’s identification and verification of customer identities must be kept for at least [?] years, at least [?] of which must be in a readily accessible location.
5, 2
For an individual retail customer who is a US citizen, which of the following items are acceptable to meet requirements of a broker-dealer’s Customer Identification Program?
A. SSN
B. PO Box number (as address)
C. Driver’s license, state of issue, expiration date and number
D. Street address
E. Full name
F. Race/ethnicity
G. Personal bank of record
H. TIN
A, D, E, H
The ID number may be from Social Security, a TIN or a passport – but not from a driver’s license.
T or F: SARs are used to report suspicious transactions involving $500 or more.
F
There is no transaction threshold necessary to trigger SAR reporting.
T or F: Suspicious activity must be reported within 10 BDs from the time when the activity was observed as suspicious.
F
Reports must be made within 30 CDs.
T or F: SARs are filed with a special unit of FINRA.
F
SARs are filed with FinCEN.
T or F: CTRs are required for a transaction totaling more than $10,000 in cash.
T
T or F: A series of transactions totaling more than $10,000, made the same business day, triggers a CTR filing.
T
T or F: CTRs are filed with FinCEN, a division of the U.S. Treasury.
T
Howard has a joint cash brokerage account with his spouse, Marilyn, at ABC Securities. However, they have just gotten divorced. Even after the divorce, they would like to maintain the joint account to help pay for their children’s college educations.
Who should notify the broker-dealer when a customer’s divorce is final?
Either customer
Howard has a joint cash brokerage account with his spouse, Marilyn, at ABC Securities. However, they have just gotten divorced. Even after the divorce, they would like to maintain the joint account to help pay for their children’s college educations.
When should this notification be given? To whom?
Immediately
To their registered rep
Howard has a joint cash brokerage account with his spouse, Marilyn, at ABC Securities. However, they have just gotten divorced. Even after the divorce, they would like to maintain the joint account to help pay for their children’s college educations.
Why is this notification required?
To update the customer’s account record
Howard has a joint cash brokerage account with his spouse, Marilyn, at ABC Securities. However, they have just gotten divorced. Even after the divorce, they would like to maintain the joint account to help pay for their children’s college educations.
After notification is given, what is the responsibility of the brokerage firm?
Note the changes on the customer’s account within 30 days
Members of a firm’s staff who are responsible for [?] compliance must report annually to [?], addressing the program’s effectiveness in [?] the firm’s policies and procedures relating to identity theft.
Identity Theft Prevention Programs
the Board of Directors
identifying, detecting, responding to and updating
Which one of the following types of information can a customer opt out of sharing, by checking a box on a privacy notice?
A. Information about personal risk tolerance and portfolio preferences
B. Information required by the IRS, to complete an investigation
C. Information shared with companies that provide priority services to the broker-dealer
D. Information used in marketing or products by the broker-dealer
A
There are just 3 categories of information sharing that customer’s can’t opt out of. Most other types of information can be blocked by checking an opt-out box on the firm’s privacy notice.
Is FINRA permission required to open a margin account?
No
When must the Options Disclosure Document be provided to a customer?
At or before a ROP’s approval of the customer’s options account
Customers must return signed options agreements within [?] days of account approval.
15
Must a customer new account form be signed by the principal prior to trading?
No, it must be signed prior to settlement
Must static content be approved by a registered principal prior to first use?
Yes
Must interactive communications be approved by a registered principal prior to first use?
No
Interactive content like DMs, tweets, and other types of short messaging, are viewed as retail correspondence.
Is content posted on a Facebook profile considered interactive?
No
Does statistical market data updated on a broker-dealer’s website every day require prior principal approval, on a daily basis?
No
There is an exception for statistical content.
Does “entanglement” mean that a broker-dealer has explicitly or implicitly endorsed or approved website content?
No
This is the definition for “adoption.” “Entanglement” means the firm has been involved in preparing the content.
ABC Securities, a broker-dealer, prepares a mailer designed to create investor interest in the Excalibur Bond Fund. Prior to first use, ABC files the mailer as retail communication with FINRA. AFter FINRA approval, ABC then sends the mailer to a list of 3,000 investors in its market. Another broker-dealer in the same market, XYZ Securities, sees the mailer and asks ABC’s permission to reprint it. The only changes XYZ makes to the mailer are to add its own name, logo and telephone number, while removing ABC’s information. Assuming ABC approves this usage, does SYZ need to refile the piece with FINRA prior to first use?
A. Yes, because important information was changed.
B. Only if the information is mailed to a different group of investors.
C. Only if the changes are considered material.
D. Only if the new mailing will be used more than 90 days after the original mailing.
C
Retail communications include any written or electronic communications distributed to more than [?] retail investors within any [?] calendar days. The FINRA requirement is [?] of [?] use.
25
30
within 10 days
first
Correspondence includes any written or electronic communications distributed to [?] or fewer retail investors in any [?] calendar days. The FINRA filing requirement is [?].
25
30
N/A
Institutional communications include any written or electronic communications distributed or made available to [?]. The FINRA filing requirement is [?].
Institutions only
N/A
Calvin is a new registered representative who needs to acquire new clients. At a social event, he bumps into Winston, an investor who gives Calvin his home phone number. Winston says he is in the market for stock tips, and he invites Calvin to call him at home, after work hours (9am-5pm), if such opportunities arise. Other than this, Calvin knows nothing about Winston’s situation.
Can Calvin call Winston at home at night to give him a stock tip?
Is there any time restriction on when such a call can occur?
Is Calvin required to verify that Winston is not on the FTC’s Do Not Call list before calling?
Yes
No
No
The key is that Winston has given Calvin permission (an invitation) to call. In this case, the restrictions on not calling prior to 8am or after 9pm do not apply and there is no restriction on calling people on a DNC list.
Can a Series 24 principal approve retail communications concerning options?
No
Retail communications concerning options must be approved prior to use by a Registered Options Principal.
Can research analysts participate in investment banking pitches (“bake-offs”?)
Yes
Can research analysts participate in road shows?
No (unless it is for an Emerging Growth Company)
What is the definition of a research report?
An investment analysis distributed to more than 15 people
Associated persons are not permitted to initiate outbound calls before [?] or after [?] in an individual’s time zone.
8am
9pm
Indicate which type of suitability requirement applies for this type of recommendation.
A registered rep recommends that her customer start a dollar cost averaging program to accumulate shares of ABC Growth Mutual Fund for a child’s college education fund through quarterly purchases.
Customer-specific
Indicate which type of suitability requirement applies for this type of recommendation.
A broker-dealer deicdes to sponsor a seminar to which about 50 of the firm’s top clients will be invited. The firm’s president will recommend that these clients consider investing in a specific real estate limited partnership.
Reasonable basis
Indicate which type of suitability requirement applies for this type of recommendation.
A registered rep recommends that a customer sell shares of Dynamic Energy, an electric utility, because the firm has announced plans to cut its dividend and the customer’s objective is current income.
Customer-specific
Indicate which type of suitability requirement applies for this type of recommendation.
A registered rep recommends that a client consider a portfolio hedging strategy that consists of buying and selling listed options several times per week.
Quantitative
Broker-dealers should create, monitor and enforce supervisory procedures that aim to prevent manipulative market timing activities. Which type of securities is market timing a special issue with?
A. Listed stocks
B. U.S. government bonds
C. Mutual fund shares
D. Exchange-traded fund shares
C
In which of the following types of trades must a broker-dealer disclose to the customer both the capacity in which it is acting (principal or agent) and the amount of commission it is charging?
A. Principal and agency transactions
B. Only principal transactions
C. Only agency transactions
D. Neither principal nor agency transactions
C
The firm must disclose its capacity in both principal and agency transactions. The firm must disclose in principal transactions its capacity and its markup or markdown. However, commissions are only charged in agency transactions.
Carolyn is an aggressive investor whose broker-dealer has identified as a pattern day-trading account. In her margin account, she holds $840,000 of stock with equity of $260,000.
What is the minimum equity she must have in the account to day trade?
How much maintenance margin excess does she have in the account?
What is ther maximum purchasing power?
$25,000
$50,000
$200,000
The maintenance requirement is equity equal to 25% of total account value. 25% of $840,000 = $210,000. $260,000 equity - $210,000 maintenance requirement = $50,000 excess equity. Maximum purchasing power is 4x maintenance margin excess at any time during the trading day.
Daniel is a retail customer of ABC Securities, a broker-dealer. He has one individual account that holds securities valued on February 1 at $350,000, plus $15,500 in cash. One day later, the firm declares itself insolvent due to its own negligence, and all accounts are frozen. Several months later, Daniel contacts SIPC and asks what coverage he is entitled to. However, in between February 1 and this time, there has been a bear market. At the time of his contact, the securities in his account are worth only $240,000. What is he most likely to receive in coverage from SIPC?
A. Nothing, because the firm was insolvent based on its own negligence.
B. A return or replacement of his securities and cash.
C. The market value of his securities as of February 1, but no return of his cash.
D. The market value of his securities and his cash on February 1.
B
SIPC covers up to $500,000 in securities, including up to $250,000 in cash. But the coverage usually means that any securities lost or stolen will be replaced with the same. If securities are frozen pending resolution, any market losses are not covered.
Monique is a registered rep working at DEF Brokerage. She has a limited power of attorney over her longtime client Rafael’s discretionary account. Monique believes that Ajax Oil and Gas Limited Partnership is an appropriate investment for Rafael, given his desire for speculation. Which of the following is most accurate?
A. Because of their speculative nature, limited partnerships can never be purchased in a discretionary account.
B. Because Monique has a limited power of attorney over the account, she can freely purchase Ajax on behalf of Rafael without obtaining his consent for this particular transaction.
C. Even though Monique has a limited power of attorney, Rafael must provide prior consent for the purchase of Ajax.
D. Even though Monique has a limited power of attorney, Rafael must provide consent for the purchase of Ajax prompty after execution.
C
What are the 4 obligations for Reg BI compliance?
Disclosure, care, conflict of interest, compliance
Changes to Form CRS must be filed with FINRA within [?] days.
30
Are market-timing activities illegal?
No
Is FINRA’s 5% Policy a guideline or a rule?
Guideline
Are payments in connection with the offer and sale of securities permitted to persons who are not registered?
No
Pattern day traders must maintain minimum equity of [?].
$25,000
