Series 7 STC Resolving Disputes & Suitability (Ch. 20)

Question 1

Of the following factors, which is the MOST important to consider when analyzing the investment portfolio of a client who has indicated “retirement” as her primary investment objective?

Age

Net worth

Education level

Previous investment history

Answer 1

Age

When analyzing a client’s existing portfolio to determine how it affects potential investment recommendations, it’s important to consider the client’s investment objectives and the length of time available to attempt to meet those objectives. When retirement is the primary objective, it’s very important to know the client’s current age. The other items mentioned are also valuable for a registered representative to know, but they’re not as critical as knowing the client’s age.

Question 2

If a young couple is planning to buy a house in the near future, their investment objective is MOST likely:

Capital appreciation

Preservation of capital

Current income

Aggressive growth

Answer 2

Preservation of capital

Since the couple is saving to buy a house, they have a short time horizon and are primarily concerned with preservation of capital. On the other hand, investors whose objective is capital appreciation have a longer time horizon (e.g., saving for retirement). Current income is the objective for persons who are already retired. Aggressive growth is one of the riskier investment objectives and is not appropriate for a couple who’s planning to purchase a new home.

Question 3

T/F. RANs (Revenue Anticipation Notes) have short-term maturities

Answer 3

True

Question 4

After turning age 65, a client calls her registered representative to let him know that she’s retiring and expects to start drawing on her Social Security benefits and her savings. Which of the following asset allocations is the MOST appropriate for this client?

70% equities, 25% bonds, and 5% cash equivalents

10% equities, 90% bonds, and 0% cash equivalents

10% equities, 85% bonds, and 5% cash equivalents

35% equities, 60% bonds, and 5% cash equivalents

Answer 4

35% equities, 60% bonds, and 5% cash equivalents

When allocating assets, an estimate for the percentage of equities can be found by taking the investor’s age and subtracting it from 100. For example, a 65-year-old investor should have approximately 35% of her portfolio in stocks (i.e., 100 - 65). The remainder of the portfolio should be allocated to debt and money-market securities.

Question 5

What’s a suitable investment for a person who wants a long-term bond that pays interest based on a fluctuating short-term rate?

CMO (Collateralized Mortgage Obligation)

Commercial paper

VRDO (Variable Rate Demand Obligation)

RAN (Revenue Anticipation Note)

Answer 5

VRDO (Variable Rate Demand Obligation)

Variable rate demand obligations (VRDOs) are a type of long-term bond that’s issued by a municipality. VRDOs have a variable rate of interest that’s tied to a short-term interest rate (e.g., prime rate). Revenue anticipation notes (RANs) and commercial paper both have short-term maturities. Collateralized mortgage obligations (CMOs) are long-term securities which have a fixed interest rate and are backed by a pool of mortgages.

Question 6

T/F. VRDOs (Variable Rate Demand Obligations) are a type of long-term bond that’s issued by a municipality. VRDOs have a variable rate of interest that’s tied to a short-term interest rate (e.g., prime rate).

Answer 6

True

Question 6

A broker-dealer receives a written statement from a customer complaining about a transaction that was recommended by a registered representative. Which of the following statements is NOT TRUE?

The firm must keep a copy of the complaint.

The firm must investigate the complaint.

A memo must be prepared to describe any action taken in response to the complaint.

The firm must respond to the clients’ complaint immediately.

Answer 6

The firm must respond to the clients’ complaint immediately.

Under FINRA’s rules regarding books and records, written complaints must be kept on file at the appropriate OSJ, along with any correspondence related to the complaint. Although the firm is required to respond to written customer complaints, there’s no specific requirement regarding when the response must be made.

Question 6

Which option position is MOST suitable for a bearish investor who wants to limit her risk?

Credit call spread

Credit put spread

Uncovered put

Uncovered call

Answer 6

Credit call spread

Option spread positions always have limited gains and losses. Credit call spreads are bearish positions and the most suitable for the investor in this question. The reason that credit call spreads are bearish is because the spread’s dominant leg is the sale of a call option. Selling uncovered calls is also bearish; however, these positions have unlimited risk. Selling uncovered puts and credit put spreads are both bullish positions.

Question 7

A registered representative (RR) is meeting with a customer outside of the offices of the broker-dealer. During the meeting, the customer gives the registered representative a handwritten note that includes an objection to the price she received when she redeemed her mutual fund shares. The customer believes her redemption request was submitted early enough to receive the net asset value (NAV) calculated on the same day that the request was submitted. However, she received a lower NAV, which was calculated on the next business day. Which of the following statements is TRUE?

Since the note was received outside of the broker-dealer’s office, it’s not considered official business and the RR can ignore it.

The note is considered a complaint and the RR must forward it to his principal.

The note is considered a complaint about an action for which the mutual fund is responsible and it must be forwarded directly to the fund.

The RR is responsible for trying to satisfy the customer and can reimburse the client for the price difference.

Answer 7

The note is considered a complaint and the RR must forward it to his principal.

FINRA defines a complaint as any written statement by a customer that alleges a grievance involving the activities of a member firm or its employees in connection with any transaction involving that customer. The customer’s note is a complaint and the RR should forward it to his supervising principal.

Question 8

How many years must a BD keep a customer complaint on file?

Answer 8

4 years

Question 9

Decisions of the Hearing Panel that are appealed go to what?

Answer 9

The National Adjudicatory Council

Question 10

Under the Code of Procedure, the initial review of complaints is completed by the:

Hearing Panel

National Adjudicatory Council

SEC

Federal court

Answer 10

Hearing Panel

Under the Code of Procedure, the initial review of complaints is completed by the Hearing Panel. Decisions of the Hearing Panel can be appealed to the National Adjudicatory Council, which can then be appealed to the SEC, and the final appeal can go to the federal courts.

Question 11

Decisions of the National Adjudicatory Council that are appealed go to what?

Answer 11

The SEC

Question 12

Decisions of the SEC that are appealed go to what?

Answer 12

Federal Court

Question 12

T/F. FINRA’s Code of Procedure describes the DISCIPLINARY PROCESS used in the event that a member firm or any
of its associated persons violate FINRA rules, SEC rules, or fail to pay dues or assessments.

Answer 12

True

Question 13

T/F. The Code of Arbitration establishes the process that’s used for the SETTLEMENT OF DISPUTES between members
and other members, between members and any clearing corporation, or between member firms and persons
associated with a member, but NOT for disputes between a member firm and FINRA.

Answer 13

True

Question 13

For any disputes that involve statutory discrimination or sexual harassment
claims, is using arbitration is required?

Answer 13

No

Question 14

According to the Code of Arbitration, disputes must be filed
within ____ years of occurrence

Answer 14

6 years

Question 15

Simplified Arbitration can be used if the settlement doesn’t exceed $_______

Answer 15

$50,000

Question 16

A client recently retired at the age of 65. He’s receiving a large lump-sum retirement payout from his former employer. Although he has only a very small investment portfolio, he has accumulated savings that will cover six months of expenses. Which of the following is an appropriate allocation for his lump-sum payout if his primary interest is income and his secondary interest is growth for inflation protection?

100% cash

50% cash, 45% bonds, and 5% equities

85% bonds and 15% equities

25% cash and 75% equities

Answer 16

85% bonds and 15% equities

Although a portfolio that consists of 75% equities may be too volatile for a 65-year-old retiree, increased life expectancies have made some exposure to equities justifiable for such investors. Since equities provide much more inflation protection than bonds or cash (e.g., money-market investments), a small portion in stocks will generally be suitable. Also, since this investor already has a six-month liquidity cushion in the form of savings, a large additional allocation to cash may not provide enough income or inflation protection in the long run.

Question 16

Which of the following investors meets the suitability requirements of a hedge fund?

Non-accredited investors

Businesses that need liquidity

Knowledgeable investors who understand and are trying to diversify investment risks

Experienced investors with short-term investment goals

Answer 16

Knowledgeable investors who understand and are trying to diversify investment risks

Hedge funds are typically exempt from registration with the SEC and not traded on the exchanges. As a result, they’re illiquid investments and only suitable for long-term investors. Hedge funds also use more complex strategies and assess higher fees than registered investment companies. Hedge funds often use complex trading strategies and offer an investment that is not correlated with stocks and bonds (i.e., they offer a way to diversify investment risks).

Question 16

A 50-year-old woman just left the job she had held for 20 years. She has a substantial amount of money accumulated in her 401(k) plan and she intends to roll it over into an IRA. She’s planning to use this money to retire in 12 to 15 years. Which of the following investments is the MOST appropriate for her?

A bonus variable annuity

A fixed annuity

A stock fund

A municipal bond fund

Answer 16

A stock fund

The woman’s time horizon is long enough to make a stock fund an appropriate choice for her IRA. Since she’s already receiving the benefits of tax-deferred growth through her 401(k) plan, a variable annuity is not an appropriate option. In general, buying a variable annuity for a tax-deferred retirement account is often an expensive way of needlessly duplicating the tax benefits that most of these accounts already provide. Municipal bond funds are appropriate for investors who are seeking tax-exempt income.

Question 17

A married couple, both of whom are both in their mid 40s, wants to retire in 15 years. Their main objective is long-term growth. The MOST appropriate mutual fund for them is one with a portfolio that contains:

60% large-cap stocks, 20% mid-cap stocks, and 20% bonds

20% domestic stocks and 80% foreign stocks

100% money-market investments

10% large-cap stocks and 90% bonds

Answer 17

60% large-cap stocks, 20% mid-cap stocks, and 20% bonds

Equities are typically the most appropriate investment for investors who have an objective of long-term growth. A portfolio with 90% bonds is too heavily weighted in debt instruments, while a portfolio with 100% money-market instruments is too conservative. Also, neither portfolio will provide an acceptable level of long-term growth. The two choices that favor equities are preferable; however, a high concentration in foreign investments substantially increases risk (e.g., foreign currency and political risk). Therefore, the portfolio that’s likely to produce a better return is one that contains stocks along with an asset class (bonds) which is not highly correlated with stocks. This can produce a better risk/return trade-off than a portfolio that invests in stock only.

Question 17

An investor is seeking a fund that will supplement her current wages, but doesn’t add risk to her principal investment. Which of the following funds BEST suits this investor?

A growth fund

An income fund

A sector fund

A no-load fund

Answer 17

An income fund

A mutual fund investor who’s most interested in current yield (i.e., regular dividend checks) as an investment objective will most likely purchase an income fund. A growth fund invests in companies that are growing rapidly and pay out a small percentage of earnings in dividends. Investors who are seeking capital gains will most likely purchase a growth fund. A no-load fund is an open-end investment company that doesn’t assess a sales charge and whose investment objectives may be income or capital gains. A sector fund is a mutual fund that invests primarily in a particular industry or geographical area, such as the energy or high technology industries.

Question 18

A customer asks a registered representative (RR) for a recommendation as to how to invest a $150,000 inheritance. The customer needs to preserve the capital since he wants to use the funds to start a new business within the next year. Which of the following funds is the LEAST suitable recommendation for this customer?

A taxable money-market fund

A tax-exempt money-market fund

A short-term Treasury fund

A balanced fund

Answer 18

A balanced fund

Although all of these funds are somewhat conservative, because the balanced fund contains some equity investments and long-term bonds, the customer will be exposed to market risk. Given the customer’s short time horizon and objective of preservation of capital, the balanced fund is the least suitable of the choices listed.

Question 19

Decisions of the Board of Arbitration are:

Appealable

Not binding if either party contests the decision

Binding on all parties to the arbitration

Not binding if both parties agree not to accept the decisions

Answer 19

Binding on all parties to the arbitration

Decisions of the Board of Arbitration are binding on all parties to the arbitration. The parties agree to accept the findings of the arbitration board before submitting to arbitration.

Question 20

A customer calls to register a complaint against a registered representative (RR). The customer should be advised to:

Call FINRA

Call the RR

Call the appropriate principal

Put the complaint in writing

Answer 20

Put the complaint in writing

In order to be officially considered a complaint, the complaint should be put in writing. This mandates an appropriate response from the member firm.

Question 20

If the parties to a dispute consent to mediation, the mediator is selected by:
QID: 5051378Mark For Review
A
FINRA and this determination cannot be rejected
B
The defending party to the dispute
C
Randomly drawing a name from a FINRA approved list

An agreement between both parties to the dispute

Answer 20

An agreement between both parties to the dispute

Once two parties agree to use mediation to resolve a dispute, both parties must agree to a mediator. FINRA does have a list of mediators from which to choose, but the parties may also select their own based on a mutual agreement.

Question 20

A young couple wants to start investing in securities and their main objective is long-term growth. Of the following choices, the MOST appropriate mutual fund for them is a portfolio that contains:

10% stocks and 90% bonds

20% domestic stocks and 80% foreign stocks

100% money-market investments

40% large-cap stocks, 20% mid-cap stocks, 20% small-cap stocks, and 20% bonds

Answer 20

40% large-cap stocks, 20% mid-cap stocks, 20% small-cap stocks, and 20% bonds

Equities are generally the most appropriate investment for investors with an objective of long-term growth. Investing 10% in stocks and 90% in bonds is too heavily weighted in bonds, while 100% in money-market investments is extremely unlikely to produce acceptable long-term growth. Although the remaining two choices favor equities, a high concentration in foreign investments substantially increases risk (e.g., foreign currency and political risk). The choice with a diversified portfolio of different stocks and 20% bonds is most likely to produce a better return since it contains an asset class (bonds) which is not highly correlated with stocks. This choice can produce a better risk/return trade-off than a portfolio that invests in stock only.