Section 4

Question 1

A person looking for preservation of capital and income would be suitable for bonds.

Answer 1

A person looking for preservation of capital and income would be suitable for bonds.

Question 2

A person looking for income would not want to buy growth stock.

Answer 2

A person looking for income would not want to buy growth stock.

Question 3

A person looking for income would want preferred stock.

Answer 3

A person looking for income would want preferred stock.

Question 4

Generally speaking, the older the client, the more conservative their investments should be.

Answer 4

Generally speaking, the older the client, the more conservative their investments should be.

Question 5

Stocks and bonds would be found in the portfolio of a balanced fund.

Answer 5

Stocks and bonds would be found in the portfolio of a balanced fund.

Question 6

On a risk spectrum you would find equities to the right of a balanced fund. Equities have higher risk/higher return than a balanced fund. A greater chance for loss.

Answer 6

On a risk spectrum you would find equities to the right of a balanced fund. Equities have higher risk/higher return than a balanced fund. A greater chance for loss.

Question 7

On a risk spectrum you would find fixed income securities (bonds/debt) to the left of a balanced fund. Fixed income securities offer a lower risk/lower return than a balanced fund. Fixed income securities have inflationary risk.

Answer 7

On a risk spectrum you would find fixed income securities (bonds/debt) to the left of a balanced fund. Fixed income securities offer a lower risk/lower return than a balanced fund. Fixed income securities have inflationary risk.

Question 8

Aggressive growth portfolios tend to have low yields.

Answer 8

Aggressive growth portfolios tend to have low yields.

Question 9

An unused line of credit is not considered to be an asset on a customer’s balance sheet.

Answer 9

An unused line of credit is not considered to be an asset on a customer’s balance sheet.

Question 10

Muni bonds are most suitable for investors in high tax brackets.

Answer 10

Muni bonds are most suitable for investors in high tax brackets.

Question 11

Common stocks are the most risky.

Answer 11

Common stocks are the most risky.

Question 12

An ‘equity’ mutual fund has a portfolio of common and preferred stocks.

Answer 12

An ‘equity’ mutual fund has a portfolio of common and preferred stocks.

Question 13

An income mutual fund with a portfolio of bonds has purchasing power risk.

Answer 13

An income mutual fund with a portfolio of bonds has purchasing power risk.

Question 14

An investor who inherits $300,000 and wants to invest for income and safety should invest in a portfolio of bonds, not stocks.

Answer 14

An investor who inherits $300,000 and wants to invest for income and safety should invest in a portfolio of bonds, not stocks.

Question 15

A young couple planning to buy a house soon and/or the parents of a high school senior planning on college would have an investment objective of preservation of capital.

Answer 15

A young couple planning to buy a house soon and/or the parents of a high school senior planning on college would have an investment objective of preservation of capital.

Question 16

An investor has $200,000 to invest. If you recommend that he invest in two different funds from different fund families, you should also mention that he will get a reduced sales charge if he invests all the money in one fund instead.

Answer 16

An investor has $200,000 to invest. If you recommend that he invest in two different funds from different fund families, you should also mention that he will get a reduced sales charge if he invests all the money in one fund instead.

Question 17

If a client wants to invest $300,000 long term in a mutual fund, you should recommend a ‘back-end load’ fund (rather than a front load) since more money will be used to buy shares right away.

Answer 17

If a client wants to invest $300,000 long term in a mutual fund, you should recommend a ‘back-end load’ fund (rather than a front load) since more money will be used to buy shares right away.

Question 18

An investor’s formal investment education is the least important factor when determining suitability. The most important is his investment objective.

Answer 18

An investor’s formal investment education is the least important factor when determining suitability. The most important is his investment objective.

Question 19

Fluctuating share prices are NOT a risk of Dollar Cost Averaging

Answer 19

Fluctuating share prices are NOT a risk of Dollar Cost Averaging

Question 20

Before accepting an order, know your client’s investment objectives (suitability).

Answer 20

Before accepting an order, know your client’s investment objectives (suitability).

Question 21

DCA (Dollar Cost Averaging) will result in the average cost per share being lower than the average price per share, but does not guarantee a profit.

Answer 21

DCA (Dollar Cost Averaging) will result in the average cost per share being lower than the average price per share, but does not guarantee a profit.

Question 22

Beta Factors: A security with a Beta Factor of one moves exactly with the market.

Answer 22

Beta Factors: A security with a Beta Factor of one moves exactly with the market.

Question 23

Financial risk (sometimes called default or credit risk) is greatest on common stock. This is the risk that you will lose your money due to default of the issuer.

Answer 23

Financial risk (sometimes called default or credit risk) is greatest on common stock. This is the risk that you will lose your money due to default of the issuer.

Question 24

Growth portfolios usually have very low yields (no dividends paid out), keep up with the rate of inflation and have a high appreciation potential.

Answer 24

Growth portfolios usually have very low yields (no dividends paid out), keep up with the rate of inflation and have a high appreciation potential.

Question 25

A customer interested in tax-free income would invest in a Muni bond mutual fund since interest is exempt from federal taxes.

Answer 25

A customer interested in tax-free income would invest in a Muni bond mutual fund since interest is exempt from federal taxes.

Question 26

Most information regarding suitability may be found on the new account form.

Answer 26

Most information regarding suitability may be found on the new account form.

Question 27

An investor seeking income without taxes would buy a Muni bond fund.

Answer 27

An investor seeking income without taxes would buy a Muni bond fund.

Question 28

Dollar cost averaging does not guarantee that the value of your shares will not drop below your cost basis.

Answer 28

Dollar cost averaging does not guarantee that the value of your shares will not drop below your cost basis.

Question 29

The greater the risk, the greater the potential reward.

Answer 29

The greater the risk, the greater the potential reward.

Question 30

An immediate annuity is least suitable for a retired investor who wants to invest short-term.

Answer 30

An immediate annuity is least suitable for a retired investor who wants to invest short-term.

Question 31

The amount of commission or sales charge is not a suitability concern.

Answer 31

The amount of commission or sales charge is not a suitability concern.

Question 32

FINRA Rule 2111 (Know Your Customer) requires that a firm or associated person have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.

Answer 32

FINRA Rule 2111 (Know Your Customer) requires that a firm or associated person have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.

Question 33

The customer’s investment profile includes, but is not limited to, the following:
The customer’s: o Age
o Otherinvestments
o Financialsituationandneeds
o Taxstatus
o Investmentobjective
o Investmentexperience
o Investmenttimehorizon
o Liquidityneeds
o Risktolerance
o Any other information the customer may disclose to the member or associated person in
connection with such recommendation

Answer 33

The customer’s investment profile includes, but is not limited to, the following:
The customer’s: o Age
o Otherinvestments
o Financialsituationandneeds
o Taxstatus
o Investmentobjective
o Investmentexperience
o Investmenttimehorizon
o Liquidityneeds
o Risktolerance
o Any other information the customer may disclose to the member or associated person in
connection with such recommendation

Question 34

The three main suitability obligations under FINRA Rule 2111 (Suitability) include: o Reasonable-basis
o Customer-specific
o Quantitativesuitability

Answer 34

The three main suitability obligations under FINRA Rule 2111 (Suitability) include: o Reasonable-basis
o Customer-specific
o Quantitativesuitability

Question 35

Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based upon reasonable diligence, that the recommendation is suitable for at least some investors.

Answer 35

Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based upon reasonable diligence, that the recommendation is suitable for at least some investors.

Question 36

reasonable diligence will vary depending upon, among other things, the complexity of and risks associated with the security or investment strategy and the firm’s or associated person’s familiarity with the security or investment strategy.

Answer 36

reasonable diligence will vary depending upon, among other things, the complexity of and risks associated with the security or investment strategy and the firm’s or associated person’s familiarity with the security or investment strategy.

Question 37

A firm’s or associated person’s reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy.

Answer 37

A firm’s or associated person’s reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy.

Question 38

Customer-specific suitability requires that a broker have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile.

Answer 38

Customer-specific suitability requires that a broker have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile.

Question 39

Quantitative suitability requires a broker who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.

Answer 39

Quantitative suitability requires a broker who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.

Question 40

FINRA Rule 2111 provides an exemption to customer-specific suitability for recommendations to institutional customers under certain circumstances. This exemptions main focus is whether the broker has a reasonable basis to believe that the customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies, and whether the institutional customer affirmatively acknowledges that it is exercising independent judgment.

Answer 40

FINRA Rule 2111 provides an exemption to customer-specific suitability for recommendations to institutional customers under certain circumstances. This exemptions main focus is whether the broker has a reasonable basis to believe that the customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies, and whether the institutional customer affirmatively acknowledges that it is exercising independent judgment.

Question 41

An institutional account for purposes of this rule exemption includes an account of: a bank, savings and loan association, insurance company, or registered investment company; an investment adviser; or any other entity (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50,000,000.

Answer 41

An institutional account for purposes of this rule exemption includes an account of: a bank, savings and loan association, insurance company, or registered investment company; an investment adviser; or any other entity (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50,000,000.

Question 42

The “Know Your Customer” obligation under FINRA Rule 2090 arises at the beginning of a customer/broker relationship and does not depend upon whether the broker has made a recommendation.

Answer 42

The “Know Your Customer” obligation under FINRA Rule 2090 arises at the beginning of a customer/broker relationship and does not depend upon whether the broker has made a recommendation.

Question 43

The “Know Your Customer” obligation requires that firms know the “essential facts” of every customer.

Answer 43

The “Know Your Customer” obligation requires that firms know the “essential facts” of every customer.

Question 44

“Essential facts” include those necessary to effectively service the customer’s account, act in accordance with any special handling instructions on the account, understand the authority of each person acting on behalf of the customer, and comply with applicable laws, regulations and rules.

Answer 44

“Essential facts” include those necessary to effectively service the customer’s account, act in accordance with any special handling instructions on the account, understand the authority of each person acting on behalf of the customer, and comply with applicable laws, regulations and rules.

Question 45

FINRA Rule 2090 requires firms to verify the “essential facts” of a customer’s account at regular intervals.

Answer 45

FINRA Rule 2090 requires firms to verify the “essential facts” of a customer’s account at regular intervals.

Question 46

The triggering event for the application of the suitability obligation found under FINRA Rule 2111 is a broker’s recommendation.

Answer 46

The triggering event for the application of the suitability obligation found under FINRA Rule 2111 is a broker’s recommendation.

Question 47

The “Suitability” obligation requires that firms and associated persons of firms have ascertained a customer’s investment profile to determine the reasonable basis for a recommendation.

Answer 47

The “Suitability” obligation requires that firms and associated persons of firms have ascertained a customer’s investment profile to determine the reasonable basis for a recommendation.

Question 48

• The customer’s investment profile includes, but is not limited to a customer’s: age, other investments, financial situation and needs, tax status, investment objective, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information that the customer may disclose to the member or associated person in connection with a recommendation.

Answer 48

• The customer’s investment profile includes, but is not limited to a customer’s: age, other investments, financial situation and needs, tax status, investment objective, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information that the customer may disclose to the member or associated person in connection with a recommendation.

Question 49

Firms are required to update a client’s investment profile at regular intervals under FINRA Rule 2111.

Answer 49

Firms are required to update a client’s investment profile at regular intervals under FINRA Rule 2111.

Question 50

RRs must have a clear understanding of both the product being recommended and the customer. Lack of
an understanding of either of these violates the Suitability Rule.

Answer 50

RRs must have a clear understanding of both the product being recommended and the customer. Lack of
an understanding of either of these violates the Suitability Rule.

Question 51

As a registered representative, you may process unsolicited requests at any time. The Suitability Rule does not apply

Answer 51

As a registered representative, you may process unsolicited requests at any time. The Suitability Rule does not apply

Question 52

You are only allowed to share your commission with another registered representative that is also employed by your broker/dealer or by a broker/dealer firm controlled by your firm.

Answer 52

You are only allowed to share your commission with another registered representative that is also employed by your broker/dealer or by a broker/dealer firm controlled by your firm.