Series 7 STC Building an Investor Profile (Ch. 1) Flashcards
If an existing customer of a firm has a securities account and rolls over his 401(k) plan into an individual retirement account (IRA):
He’s not required to receive an updated Form CRS
He’s only required to receive an updated Form CRS if he’s retiring
He’s only required to receive an updated Form CRS if he will be charged a transfer fee
He’s required to receive an updated Form CRS
He’s required to receive an updated Form CRS
Existing customers must receive an updated copy of the form at any time they open a different type of account, roll over assets from a retirement account, or receive a recommendation for a new service or product that will not be held in their existing account (e.g., a variable annuity.) To satisfy this obligation, the form may be delivered electronically.
The “liabilities” section of a personal balance sheet will include all of the following items, EXCEPT:
Mortgage
Credit card balances
Automobiles
Student loans
Automobiles
On a personal balance sheet, the “liabilities” section identifies what a person owes. Liabilities include mortgages and home equity loans, automobile loans, credit card balances, and student loans. Automobiles (not the loans) are found in the “assets” section of the balance sheet.
According to Regulation Best interest, which of the following is permitted to be included on the business card of a financial services professional?
“Financial Adviser” as the title for a person who only transacts business with high-net-worth customers.
“Financial Adviser” as the title for a person who’s registered as an investment adviser representative.
“Financial Adviser” as the title for a person who’s only registered with a broker-dealer.
“Financial Adviser” as the title for a person who transacts business with retail customers.
“Financial Adviser” as the title for a person who’s registered as an investment adviser representative.
From a practical standpoint, if a registered representative is not Series 65 or Series 66 registered and currently uses the term “Financial Adviser” in her title, she must be provided with a different title that will be reflected in all of the marketing materials or she must take and pass either the Series 65 or Series 66 Exam to become an investment adviser representative.
Which of the following is NOT found in the “Assets” section of a personal balance sheet?
Stocks
Automobile loan
Primary residence
Savings account
Automobile loan
On a personal balance sheet, the “assets” section identifies what a person owns. Assets include primary residence, stocks, savings accounts, other investments, and personal possessions. Automobile loans are found in the “liabilities” section of the balance sheet.
Under the provisions of the SEC’s Regulation Best Interest, which of the following is considered a retail investor?
A registered investment company
An SEC-registered investment adviser
A guardian for an incapacitated person
A state-registered investment adviser
A guardian for an incapacitated person
According to Reg. BI, a retail customer is defined as a natural person, or this person’s non-professional legal representative, who:
Receives a recommendation of any securities transaction or investment strategy involving securities from a financial institution; and
Uses the recommendation primarily for personal, family, or household purposes
Any non-professional legal representatives of retail customers (e.g., guardians and/or trustees) are considered retail customers as long as they’re acting in a personal capacity and not a professional one. The definition also includes a person who holds power of attorney for a natural person or acts in the capacity of a guardian for an incapacitated person.
An institution (non-retail investor) includes the following:
A bank, savings and loan association, insurance company, or registered investment company
An investment adviser that’s registered either with the SEC or with a state securities commission
Reg BI allows for sales contests in which the compensation is based on all of the following metrics, EXCEPT:
Sales of specific proprietary securities
Asset growth or accumulation
Customer satisfaction
Total sales
Sales of specific proprietary securities
Regulation BI effectively bans all sales contests, quotas, bonuses, and other non-cash compensation payments that are tied to sales of specific securities or specific types of securities within a limited period. However, compensation that’s based on other metrics, such as total sales, asset growth or accumulation, or customer satisfaction is still permitted.
Regarding the tax treatment of certain investments, which of the following statements is TRUE?
Municipal bonds offer tax-exempt interest, while annuities offer tax-deferred earnings.
Municipal bonds offer tax-deferred interest, while annuities offer tax exempt earnings.
Municipal bonds offer tax-deferred interest, while annuities offer tax-free earnings.
Municipal bond interest and the earnings of annuities are both tax-free.
Municipal bonds offer tax-exempt interest, while annuities offer tax-deferred earnings.
Municipal bond interest is federally tax-exempt (i.e., not subject to federal tax). The earnings generated within an annuity are tax-deferred (i.e., subject to tax at a later date).
Which of the following is most helpful in determining the amount of money available for a person to invest?
Discretionary income
Total income
Passive income
Unearned income
Discretionary income
Discretionary income represents the amount of money available for investment. A person’s discretionary income is determined by adding up the person’s total income and then subtracting all taxes and other required payments.
Compliance with Reg BI applies when a financial professional:
Makes a recommendation to an institutional customer
Makes a recommendation to a retail customer
Communicates with a retail customer at a social event
Has a meeting with a retail customer
Makes a recommendation to a retail customer
Compliance with Reg BI only applies when a retail customer receives a recommendation of any securities transaction or investment strategy involving securities from a financial services firm; and uses the recommendation primarily for personal, family, or household purposes.
Which of the following statements is TRUE regarding interest earned on bond investments?
Corporate bond interest is exempt from state and local taxes.
U.S. government bond interest is fully tax exempt.
Municipal bond interest is exempt from federal tax.
Municipal bond interest is fully taxable.
Municipal bond interest is exempt from federal tax.
For some investors, a significant attraction to municipal bonds is the fact that the interest they pay is exempt from federal tax. Interest paid on U.S. government debt is exempt from state and local tax, but subject to federal tax. Interest paid on corporate bonds is fully taxable.
Under Reg BI, Form CRS must be:
A minimum of 10 pages in length
Written in complex and legal terminology
Approved by the SEC
Written in plain English
Written in plain English
The Customer Relationship Summary (Form CRS) must be written in plain English and cannot be longer than two pages. However, if a firm is dually registered as both a broker-dealer and an investment adviser, it may be four pages. A dual registrant is also permitted to have two separate forms, but will still be subject to a limit of two pages each.
A firm’s Customer Relationship Summary (Form CRS) is filed with:
NASAA
Securities exchanges
FINRA’s Central Registration Depository (CRD) and/or the Investment Adviser Registration Depository (IARD)
Social media websites
FINRA’s Central Registration Depository (CRD) and/or the Investment Adviser Registration Depository (IARD)
All broker-dealers must file Form CRS with both the SEC and FINRA through FINRA’s Central Registration Depository (Web CRD), while all investment advisers must file Form ADV Part 3 with the SEC and the Investment Adviser Registration Depository (IARD).
Which of the following is NOT one of the four general obligations established under Regulation Best Interest?
Revenue Obligation
Disclosure Obligation
Care Obligation
Conflict of Interest Obligation
Revenue Obligation
Although the SEC doesn’t provide an exact definition of the term “best interest,” the regulator does state that financial services firms must fulfill the following four specific obligations in order to satisfy their overall duty under Regulation BI:
Disclosure obligation
Care obligation
Conflicts of interest obligation
Compliance obligation
Please note, there’s no Revenue obligation under the provisions of Reg BI.
Which of the following investments does NOT provide for liquidity?
Money market instruments
Money market mutual funds
T-bills
Thinly traded equities
Thinly traded equities
Some investors have a significant need to be able to access their funds within a short period — in other words, they desire liquidity. While money-market mutual funds, T-bills, and various money market instruments provide a lower return than other investments, these products are relatively safe and allow investors to have ready access to their capital. On the other hand, thinly traded equities (e.g., OTC equities) can be very illiquid.
Which of the following is NOT an obligation established under FINRA’s suitability rule?
Reasonable basis obligation
Customer-specific obligation
Quantitative obligation
Specific profit obligation
Specific profit obligation
FINRA’s suitability rule has the following three main obligations:
The reasonable basis obligation
The customer-specific obligation and
The quantitative obligation
The formula (100% - a person’s age) may be used as a general approach in determining which of the following?
The percentage of a client’s portfolio that should be allocated to options
The percentage of a client’s portfolio that should be allocated to bonds
The percentage of a client’s portfolio that should be allocated to equities
The percentage of a client’s portfolio that’s subject to taxation
The percentage of a client’s portfolio that should be allocated to equities
A general approach that’s used by many professionals is to subtract a client’s age from 100 to determine the percentage of assets that should be invested in stocks. The assumption is that the older the client, the less the risk tolerance, and therefore the less money that should be invested in equities.
Which of the following is a type of compensation that’s earned by investment advisers, but not by broker-dealers?
Commissions
Sales charges
A fee based on assets under management
Markups
A fee based on assets under management
Investment advisers are entitled to a fee based on the advice and services provided to clients. In many cases, the fee is based on the amount of assets under management. Broker-dealers are entitled to either commission or markup based on the capacity in which they act in a transaction. Sales charges are paid to the brokers that sell and market mutual fund shares.
A person’s discretionary income is determined by:
Adding up the person’s total income and then subtracting all taxes and other required payments.
Determining the person’s total income
Finding the person’s ordinary income tax rate
Adding the person’s income to her monthly expenditures
Adding up the person’s total income and then subtracting all taxes and other required payments.
A person’s discretionary income is determined by adding up the person’s total income and then subtracting all taxes and other required payments. Discretionary income represents the amount of money available for investment.
To determine the suitability of a recommendation, which detail is NOT required to be obtained from the customer?
Investment objective
Educational background
Financial status
Age
Educational Background
To determine the suitability of a recommendation, a registered representative should consider the customer’s age, investment objective, financial status, and other securities holdings. However, the customer’s educational background is not a part of the suitability determination.
The SEC has suggested all of the following methods for determining an investor’s “accredited” status, EXCEPT:
Reviewing previously filed IRS tax documents to determine income
Reviewing the prior three months of bank and brokerage statements to determine net worth
Obtaining written confirmation of the investor’s accredited status from her broker-dealer, investment adviser, attorney, or accountant
Having the client sign a document on which she personally attests to her accredited status
Having the client sign a document on which she personally attests to her accredited status
The SEC has created the following suggested methods for verifying an investor’s accredited status:
Reviewing previously filed IRS tax records to determine income (e.g., Form W-2 or Schedule K-1)
Reviewing the prior three months of bank and brokerage statements to determine net worth
Obtaining written confirmation of the investor’s accredited status from her broker-dealer, investment adviser, attorney, or accountant
However, having the client sign a document on which she personally attests to her accredited status is not an accepted method.
Regarding the tax treatment of certain investments, which of the following statements is TRUE?
Municipal bonds offer tax-exempt interest, while annuities offer tax-deferred earnings.
Municipal bonds offer tax-deferred interest, while annuities offer tax exempt earnings.
Municipal bonds offer tax-deferred interest, while annuities offer tax-free earnings.
Municipal bond interest and the earnings of annuities are both tax-free.
Municipal bonds offer tax-exempt interest, while annuities offer tax-deferred earnings.
Municipal bond interest is federally tax-exempt (i.e., not subject to federal tax). The earnings generated within an annuity are tax-deferred (i.e., subject to tax at a later date).
Which of the following is most helpful in determining the amount of money available for a person to invest?
Discretionary income
Total income
Passive income
Unearned income
Discretionary income
Discretionary income represents the amount of money available for investment. A person’s discretionary income is determined by adding up the person’s total income and then subtracting all taxes and other required payments.
