Series 7 Customer Accounts (Ch. 2) Flashcards
In which of the following situations must a broker-dealer file a Currency Transaction Report (CTR)?
A customer deposits bearer bonds with a face value of $100,000
A customer purchases $20,000 of stock with a personal check
A customer opens an account and deposits $11,000 in cash
A customer opens an account with a credit card debit check that’s valued at $20,000
A customer opens an account and deposits $11,000 in cash
Currency Transaction Reports must be filed when a customer deposits cash in an amount that exceeds 10,000 in any one day.
Because a customer believes in the expertise of her registered representative (RR), she places an order for a stock. The order allows certain decisions to be made by the RR, but only during that trading day. All of the following elements must be specified by the customer for this order to be accepted without written authorization, EXCEPT:
The specific security
The quantity of shares
Whether to buy or sell
The price
The price
A registered representative may accept the customer’s request to make certain decisions regarding an order without it being considered discretionary. If a customer specifies (1) the security, (2) whether to buy or sell the security, and (3) the number of shares, thereby leaving discretion only as to time and/or price, it’s not considered a discretionary order and written authorization is not required. However, this time and/or price discretion is limited to the business day on which the order was placed. For the RR to determine the time and/or price of execution for a period beyond the day on which the order was placed, the customer must provide written instructions.
If a person who’s associated with a FINRA member firm wants to open a securities account at a different FINRA member firm:
The person must receive written consent from his employer prior to the account being opened
The person must receive verbal consent from his employer prior to the account being opened
The person only needs to notify his employer prior to the account being opened.
The person may open the account without any restrictions.
The person must receive written consent from his employer prior to the account being opened
An associated person of a FINRA member firm must receive prior written approval from his employing firm in order to open or maintain a securities account at a firm other than his employer. If approved, the executing firm must send duplicate confirmations and statements to the employing firm (if requested).
A registered representative (RR) opens a joint account for three brothers. According to the rules for opening joint accounts, the RR is required to obtain background and financial information from:
The parents of the brothers
One of the brothers
A majority of the brothers
All of the brothers
All of the brothers
According to the rules for opening joint accounts, background and financial information must be obtained from all of the participants in the account. All of the brothers must provide information concerning their background and financial information.
A registered representative has been granted limited discretion over a customer’s account. In this case, the registered representative:
May freely remove money from the account
May place orders before the order has been approved by a principal
Cannot enter buy stop orders
May have all confirmations of transactions sent only to himself
May place orders before the order has been approved by a principal
When a registered representative is granted limited discretion, it doesn’t mean that he’s permitted to freely withdraw funds. Also, if limited discretion over an account is provided, the account owner must receive confirmations of transactions and the entry of buy stop orders is permitted. With limited discretion, the representative may place orders before they’re approved; however, they must be approved promptly thereafter by a principal.
Which of the following statements is TRUE regarding accounts opened as Joint Tenants with Right of Survivorship (JTWROS) and those opened as Tenancy in Common (TIC)?
If an owner dies in a JTWROS account, the decedent’s interest passes to her estate; however, if an owner dies in a TIC account, the decedent’s interest passes to the remaining owner.
If an owner dies in either a JTWROS or TIC account, the decedent’s interest passes to her estate.
If an owner dies in either a JTWROS or TIC account, the decedent’s interest passes to the remaining owner.
If an owner dies in a JTWROS account, the decedent’s interest passes to the remaining owner; however, if an owner dies in a TIC account, the decedent’s interest passes to her estate.
If an owner dies in a JTWROS account, the decedent’s interest passes to the remaining owner; however, if an owner dies in a TIC account, the decedent’s interest passes to her estate.
JTWROS accounts are owned by at least two people in which all tenants have an equal right to the account’s assets and are afforded survivorship rights in the event of the death of another account holder (often created by spouses). Therefore, if one tenant dies, the ownership of the account will pass to the remaining tenant without being subject to probate. In a TIC (or TEN COM) account, each owner has a percentage of ownership and, at the time of death, the deceased person’s interest passes to his estate.
Which of the following statements is NOT TRUE regarding discretionary account?
When investigating the existence of churning, examining a customer’s investment objectives is vital.
Frequent trading and account turnover are generally acceptable for all customers.
Evidence of churning is generally determined by the frequency of trading.
Evidence of churning is not based on whether the client lost money.
Frequent trading and account turnover are generally acceptable for all customers.
Churning is considered excessive trading in an account without regard to the customer’s objectives. When investigating the evidence of churning, the determination is based on the frequency of trading.
All of the following statements are TRUE regarding a custodial account, EXCEPT:
The account is opened under the minor’s Social Security number.
The custodian of the account may authorize investment discretion to a competent third party.
Gifts to the account cannot exceed $18,000 per year.
Gifts of an unlimited dollar amount are permitted.
Gifts to the account cannot exceed $18,000 per year.
Although there’s no limitation on the amount of gifts that may be given, the donor will be subject to gift tax for any amount that exceeds $18,000 per year. The minor is considered the account owner and the account is opened using the minor’s Social Security number. For situations in which the custodian lacks investment experience and wants to take advantage of another person’s expertise, a custodian is permitted to authorize investment discretion to a competent third party (e.g., an RR or investment adviser representative).
A broker-dealer should file a Suspicious Activity Report (SAR):
Only if it has actual knowledge that a client is laundering money
If a transaction equals or exceeds $5,000 and the broker-dealer suspects illegal activity
Only for transactions that exceed $10,000
Only for transactions involving parties that are listed on the Specially Designated Nationals (SDN) List
If a transaction equals or exceeds $5,000 and the broker-dealer suspects illegal activity
A firm must file an SAR whenever a transaction (or a group of transactions) equals or exceeds $5,000 and the broker-dealer suspects any of the following:
The client is violating federal criminal laws.
The transaction involves funds related to illegal activity.
The transaction is designed as a structural transaction to evade the reporting requirements.
The transaction has no apparent business or other legitimate purpose and the broker-dealer cannot determine a reasonable explanation after examining all the available facts and circumstances surrounding the transaction.
Upon learning of the death of a customer, which of the following actions should NOT be taken by a registered representative?
Canceling all open orders
Marking the account deceased
Awaiting instructions from the executor of the customer’s estate
Liquidating all of the positions in the account if directed to do so by any member of the customer’s immediate family
Liquidating all of the positions in the account if directed to do so by any member of the customer’s immediate family
When a client dies, a registered representative (RR) should immediately cancel all open orders and mark the account deceased. Thereafter, the RR should await instructions from the executor of the estate, rather than just any member of the deceased’s immediate family.
Which of the following statements is NOT TRUE regarding the provisions of ERISA?
A fiduciary is any person that exercises investment discretion or control involving the management or disposition of plan assets.
Since plan assets grow tax-deferred, plan managers should avoid tax-free investments.
A penalty will be assessed if a person withdraws funds from a plan prior to reaching the age of 59 1/2.
All strategies involving option contracts are prohibited.
All strategies involving option contracts are prohibited.
According to ERISA, although aggressive derivative strategies are prohibited, certain conservative option strategies (e.g., covered call writing) are permissible. All of the other statements are true regarding ERISA provisions.
If a customer has a cash account with a broker-dealer, which of the following transactions is NOT permitted?
Writing a covered call or put option
Selling preferred stock
Selling stock short
Purchasing option contracts
Selling stock short
In a cash account all positions must be covered (i.e., fully paid). For that reason, selling stock short is only permitted in a margin account.
Individuals who fail to begin taking withdrawals from certain retirement accounts by a certain age may incur a tax penalty. The IRS will levy this penalty if the individual does not take her initial withdrawal by April 1 following the year in which she reaches the age of:
59 1/2
70 1/2
67
73
73
The IRS will levy a penalty if an individual doesn’t take her initial withdrawal by April 1 following the year in which she reaches the age of 73. Please note that this RMD provision doesn’t apply to Roth IRAs since they’re funded after-tax.
Which of the following is NOT considered an institutional account?
An account of a registered investment adviser
An account of an insurance company
An account of an individual who has net worth of $1.5 million
An account of a person with total assets of $75 million
An account of an individual who has net worth of $1.5 million
According to FINRA’s definition, an “institutional account” is an account of a bank, savings and loan association, insurance company, investment company, investment adviser, or any person with total assets of at least $50 million. An account of an individual who has net worth of $1.5 million doesn’t meet the standard for an institutional account.
A client recently opened a new account with a broker-dealer and provided all of the requested information. One month later, the client received a copy of the new account form in the mail, but called her registered representative (RR) to ask why it was sent. How should the RR respond?
That it’s firm policy to send the client a copy of her supplied information within 30 days so that she can verify that all of the information is correct
That the information is required to be sent within 30 days of the opening for information verification purposes
That the firm is under FINRA surveillance and must send all documentation it collects for the next 30 days
That the firm provides this service as a means of building goodwill with its clients
That the information is required to be sent within 30 days of the opening for information verification purposes
According to security industry regulations, broker-dealers are required to provide customers with a copy of the new account form within 30 days of account opening.This is done to ensure that the RR has properly characterized a client’s profile and investment objective.
From a customer perspective, which of the following is NOT an advantage to a prime brokerage relationship?
It enables them to centralize their clearing and custodial services.
It requires them to combine the information they receive from various accounts to understand their overall positions.
It allows them to receive one set of comprehensive reports regarding their portfolios.
If they use margin, it allows them to lower their cost of funds by concentrating their margin positions in one single account.
It requires them to combine the information they receive from various accounts to understand their overall positions.
In a prime brokerage arrangement, a client selects one firm as its prime broker to essentially consolidate the bookkeeping process. The client still uses several broker-dealers for execution, but all trades are ultimately handled through an account that’s maintained with its prime broker. Prime brokerage enables clients to centralize their clearing and custodial services, and allows them to receive one set of comprehensive reports regarding their portfolios. For customers who use margin accounts, they’re able to lower their cost of funds by concentrating their margin positions in one single account.
A durable power of attorney established on a customer’s account:
Gives another person the authority to manage the grantor’s account if the grantor becomes incapacitated
Generally cannot be revoked by the grantor
May take the place of a will in many states
Is automatically revoked if the grantor is declared incompetent
Gives another person the authority to manage the grantor’s account if the grantor becomes incapacitated
A durable power of attorney gives anther person the power to manage the grantor’s account on a discretionary basis if the grantor becomes incapacitated. A regular (non-durable) power of attorney terminates if the grantor becomes incapacitated. For an RR to exercise discretion for a person who becomes incapacitated, a durable power of attorney must be established.
A customer has a non-discretionary account and instructs her registered representative (RR) to purchase 500 shares of a specific stock. The RR is given permission to execute the stock when he believes he can get the best price. Which of the following actions is MOST appropriate for the RR to take?
Cancel the order if the stock is not trading at a good price
Wait until the next day’s trading session to determine if he can get a better price
Purchase the stock before the end of the day
Reject the order
Purchase the stock before the end of the day
Since the customer’s account is non-discretionary, no shares may be purchased unless the customer gives her registered representative authorization to purchase a specific quantity of a specific security. In some cases, a registered representative may accept the customer’s verbal authorization to make certain decisions without it being considered discretionary. If a customer specifies (1) the security, (2) whether to buy or sell the security, and (3) the number of shares, thereby leaving discretion only as to time and/or price, it’s not considered a discretionary order and written authorization is not required. In this question, since the customer specified all three of these details (“purchase 500 shares of a specific stock”), the time and/or price of execution may be decided by the RR. However, this time and/or price discretion is limited to the business day on which the order was placed. As a result of this, the order must be filled before the end of the trading day. For the RR to determine the time and/or price of execution for a period beyond the day on which the order was placed, the customer must provide written instructions. There’s no requirement for the order preapproved by a principal.
This year, an investor is able to begin taking distributions from his qualified retirement plan without incurring a penalty. Once the distributions begin:
The investor is not responsible for any taxes of the distributions taken
The distributions will be taxed as short-term capital gains
The portion representing contributions is tax-free, but the earnings portion is taxable as ordinary income.
The distributions will be fully taxed as ordinary income for the investor
The distributions will be fully taxed as ordinary income for the investor
Distributions from a qualified retirement plan, such as a 401(k) plan, are subject to ordinary income taxes. A qualified retirement account is one that’s funded with pre-tax dollars, thereby making it a tax deductible contribution for that year (subject to federal limits). Since no taxes were paid on these funds at the time of their investment, all distributions from these plans are fully taxable as ordinary income.
If a registered representative holds full trading authorization (full power of attorney), she’s permitted to do all of the following, EXCEPT:
Borrow assets from the customer’s account
Withdraw money from the account
Withdraw securities from the account
Buy or sell securities in the account without consulting with the customer
Borrow assets from the customer’s account
A registered representative who holds full trading authorization over a customer’s account may buy or sell securities in the account without consulting the customer, may withdraw money from the account, and may withdraw securities from the account. However, borrowing client assets is never permitted.
To adhere to the safeguarding procedures of Regulation SP when dealing with customers, a broker-dealer must do all of the following, EXCEPT:
Pledge to not disclose any of the customers’ public personal information
Allow customers to opt-out of having their non-public personal information disclosed to certain third parties
Establish privacy policies related to information it collects regarding customers
Notify customers of its privacy policies
Pledge to not disclose any of the customers’ public personal information
Under Regulation SP, all broker-dealers, investment companies, and SEC-registered investment advisers are required to:
Establish privacy policies with regard to information they collect regarding customers
Notify customers of those privacy policies, and
Give customers the right to opt-out of any disclosures of their non-public personal information to certain third parties (i.e., customers may instruct the financial institution that their information may not be disclosed to unaffiliated third parties)
Regulation SP is focused on the protection of a customer’s non-public personal information, not the customer’s public personal information.
Under the Customer Identification Program (CIP) requirements, when opening an account for a new customer, a broker-dealer must do all of the following, EXCEPT:
Maintain records of information that’s used to verify the person’s identity
Determine whether the person is listed as a known or suspected terrorist or criminal
Inform a supervising principal if a customer provides information that does not match her ID or public records
Rely on social media accounts to verify a person’s identity
Rely on social media accounts to verify a person’s identity
Firms must maintain records of information that’s used to verify a person’s identity and determine whether the person is listed as a known or suspected terrorist or an affiliated organization. If a new customer provides information that doesn’t match her ID or other public records, a supervising principal or the firm’s compliance department should be informed. It’s important to note that social media accounts cannot be used to verify a customer’s identity.
All of the following statements are TRUE regarding a custodial account for a minor, EXCEPT:
Until the minor reaches the age of majority, the account is in the custodian’s name.
The custodian cannot authorize investment discretion to a third party.
The account is opened under the minor’s Social Security number.
Any gifts made to the account are not limited to $18,000 per year.
The custodian cannot authorize investment discretion to a third party.
Due to an amendment made to the Uniform Prudent Investor Act (UPIA), a custodian is permitted to authorize investment discretion to a third party (e.g., an investment adviser representative). Gifts of $18,000 or less qualify for the gift tax exclusion. Although gifts may exceed this amount, any gift in excess of $18,000 per year will be subject to gift tax.
Which of the following statements is NOT TRUE regarding the Uniform Gifts to Minors Act (UGMA)?
Only one custodian is allowed for each account.
The minor is responsible for all taxes due on dividends and interest received from securities held in the account.
Only an adult may be a custodian.
Securities must be held in the name of the brokerage firm.
Securities must be held in the name of the brokerage firm.
All of the answers regarding the Uniform Gifts to Minors Act are true except that the securities must be held in the name of the brokerage firm (street name). All of the securities are required to be registered in the name of the custodian for the benefit of the minor.
Today, a customer informs her registered representative (RR) that she will be purchasing securities today with five separate payments of $9,500 in cash and each payment will be sent through wire transfers from different foreign countries. The registered representative cannot recognize a business purpose or rational explanation for paying for the transactions in this odd manner. In this case, the RR must contact her supervisor to:
File a Currency Transaction Report (CTR) only
File a Suspicious Activity Report (SAR) only
File both a Currency Transaction Report (CTR) and a Suspicious Activity Report (SAR)
Ask the supervisor to contact the customer to verify whether the customer’s name is on the Specially Designated Nationals (SDN) List
File both a Currency Transaction Report (CTR) and a Suspicious Activity Report (SAR)
Since the five cash deposits of $9,500 each exceed $10,000, a Currency Transaction Report (CTR) is required to be filed. Also, due to the suspicious nature of the transactions and the fact that the total exceeds $5,000, a Suspicious Activity Report (SAR) must be filed. Clients are not informed when an SAR is filed as a result of their activities. The Specially Designated Nationals (SDN) List is maintained by the Office of Foreign Assets Control (OFAC). The OFAC is a U.S. governmental office that was formed under the Department of the Treasury in 1950 to maintain a list of individuals who allegedly have ties to organized crime, terrorism, or other disreputable activities. Broker-dealers must compare their clients to individuals that appear on the OFAC list on an ongoing basis; however, they’re not responsible for adding names to the SDN List.
Which of the following is considered a pattern day trader?
A person who executes one day trade on Monday, two day trades on Wednesday, and three day trades on Friday.
A person who executes one day trade on Monday, one day trade on Tuesday, and one day trade on Friday.
A person who executes three day trades on Monday, and three more day trades on the following Monday.
A person who executes two day trades on Monday, and one more day trade on Friday.
A person who executes one day trade on Monday, two day trades on Wednesday, and three day trades on Friday.
A pattern day trader is any customer who executes four or more day-trades over a five-business-day period. The only person who’s considered a pattern day trader is the one who executes one day trade on Monday, two day trades on Wednesday, and three day trades on Friday. In this case, the person executed six day trades over a five-business-day period.
If an investor has contributed funds to his 401(k) plan on a zero cost basis, which of the following statements is TRUE?
The funds are contributed pre-tax and become taxable at the time of withdrawal.
The funds are contributed after-tax and become taxable at the time of withdrawal.
The funds are contributed after-tax and will not grow tax-deferred.
The funds are contributed pre-tax and any growth is tax-free.
The funds are contributed pre-tax and become taxable at the time of withdrawal.
When funds are contributed on a pre-tax basis (i.e., they have not yet been subject to tax), the investor is considered to have a zero cost basis. These pre-tax contributions are taxable at the time of withdrawal. On the other hand, if funds are contributed after-tax, the contributions establish the investor’s cost basis (i.e., they have already been taxed). Any contributions made to 401(k) plans grow on a tax-deferred basis.
An individual is the custodian for his niece’s Uniform Transfers to Minors Act (UTMA) account. The niece has just reached the age of majority. Under the provisions of the UTMA, which of the following statements is TRUE?
The custodian may continue to manage the account if he believes that his niece is incapable of doing so.
The custodian may continue to manage the account if his niece requests that he do so.
The custodian must sell the securities in the account and turn the proceeds over to his niece.
The custodian should arrange to have the securities transferred into his niece’s name.
The custodian should arrange to have the securities transferred into his niece’s name.
Under the UTMA, when the minor reaches the age of majority (as determined by the state), the custodian must transfer the account to the owner’s individual name. If the owner wants the former custodian to continue to manage the account, third-party trading authorization may be granted. However, the UTMA doesn’t provide for the continuation of the account as a custodial account.
