Unit 16 | Types of Clients Flashcards
A new account is opened for joint tenants with right of survivorship. All of the following statements are true except
A. either party may give orders.
B. mail can be sent to either party with the other party’s permission.
C. checks can be drawn in the name of either party.
D. In death, the decedent’s interest in the account goes to the other party.
C. Although either party may enter an order, any money or securities delivered out of the account must be in the names of both owners. Right of survivorship means that the surviving owner (or owners) receives the deceased’s interest in the account.
Several investors open an account in joint tenancy. For suitability purposes, financial information is required on which of the following investors?
A. The majority of the investors
B. The largest investor only
C. Only the one authorized to trade the account
D. All of the investors
D. When a joint account is opened, to be able to make suitable recommendations, financial information should be obtained from all of the account owners.
Which of the following individuals may not open a joint account?
A. Two spouses
B. Three sisters
C. Two friends
D. A parent and a minor child
D. Two or more individuals with legal standing may open a joint account. A minor may not be a party in a joint account because minors are not legally considered persons (think back to Unit 9). A parent (or any other adult) can be a custodian for a minor, but that is a single account, not a joint account.
When an agent with a broker-dealer opens a new options account for a client, in which order must the following actions occur?
I. Obtain approval from a qualified supervisor.
II. Obtain essential facts from the customer.
III. Obtain a signed options agreement.
IV. Enter the initial order.
A. I, II, III, IV
B. I, II, IV, III
C. II, I, IV, III
D. II, I, III, IV
C. The steps in opening an options account occur in the following order: obtain essential facts about the customer; give the customer an options disclosure document; have the manager approve the account; enter the initial order; and have the customer sign and return the options agreement within 15 days.
If three individuals have a tenants in common account with a firm and one individual dies, then
A. the account must be liquidated, and the proceeds split evenly among the two survivors and the decedent’s estate.
B. the two survivors continue as co-tenants with the decedent’s estate.
C. trading is discontinued until the executor names a replacement for the deceased.
D. the account is converted to joint with right of survivorship.
B | In the case of a TIC account, the decedent’s estate becomes a tenant in common with the survivors.
LO 16.a
The Bank Secrecy Act requires that financial institutions, such as broker-dealers, make reasonable efforts to determine the true identity of those who wish to open an account. The primary vehicle for this is the customer identification program (CIP).
Information not required as part of the CIP would be the customer’s
A. full name.
B. complete date of birth.
C. physical address of birth location.
D. identification number.
C | Although the physical address of the customer’s residence is generally required, the CIP has no questions regarding the place of birth.
LO 16.a
Three friends plan to start a new business. It is anticipated several years before the company turns a profit. Which of the following types of business organizations would be best if they wish to limit their liability while at the same time being able to receive favorable tax treatment for the expected losses?
A. C corporation
B. S corporation
C. General partnership
D. Sole proprietorship
B. The only way to limit liability is through a corporation (or LLC or limited partnership—neither offered here as a choice). The S corporation allows for the flow-through of operating losses to the shareholders, while the C corporation does not.
Which of the following business structures is most appropriate for retaining money in the business?
A. A C corporation
B. A sole proprietorship
C. An LLC
D. An S corporation
A. Only in the case of a C corporation is money retained not subject to tax on the personal level. In all of the other choices, any income is passed through to the owners, making it inefficient to accumulate funds in the business.
Felix and Kathleen are two equal partners in a successful business. With surplus funds to invest, they contact a financial planner registered as an investment adviser.
One recommendation the adviser makes is that they restructure the business as a limited liability company (LLC). The most likely reason for that is
A. tax savings.
B. the ability to raise additional funds without giving up business control.
C. removing the unlimited liability from the two partners.
D. customers feel more comfortable dealing with an LLC than a partnership.
C. One problem with the partnership form of business is that the partners have unlimited personal liability. That is not the case with an LLC; liability is limited to the invested capital. The tax treatment for an LLC and a partnership are the same, so there would be no tax savings. Raising additional funds means bringing in more members with the possibility of losing control.
Most new businesses operate at a loss for some time. If several of your clients were forming a group to fund a start-up enterprise but wished to limit their liability and, at the same time, be able to receive favorable tax treatment for the expected losses, you would suggest forming which of the following?
A. C corporation
B. General partnership
C. LLC
D. Sole proprietorship
C. The only way to limit liability is through a corporation (C or S), LLC, or limited partnership. The LLC allows for the flow-through of operating losses to the shareholders, while the C corporation does not.
Which of the following business accounts requires a minimum of two owners?
A. A sole proprietorship
B. A general partnership
C. An LLC
D. An S corporation
B | The very definition of a partnership requires at least two persons. A sole proprietorship, by definition, is a single person. LLCs and S corporations can consist of a single owner.
LO 16.b
Which of the following business entities is directly responsible for paying taxes on its income?
A. A C corporation
B. A limited partnership
C. An LLC
D. An S corporation
A | It is the C corporation, filing Form 1120, that pays taxes. In each case, any income (or loss) flows through to the investors. Regarding the limited partnership and the LLC, Form 1065 is an information return, and the 1120S filed by an S corporation serves the same purpose. The amount of taxable income is reported to each investor on Schedule K-1.
LO 16.c
A living will is used to
A. avoid the cost and time of probate.
B. eliminate, or at least reduce, estate taxes.
C. ensure that the author’s assets are properly distributed after death.
D. express the author’s end-of-life wishes.
D. Sometimes referred to as a medical or advanced care directive, a living will expresses the author’s end-of-life wishes, such as organ donation, “pulling the plug,” and so forth. It has nothing to do with a living trust or a last will describing the distribution of assets after death.
Which of the following types of clients would the suitability requirements be somewhat more relaxed?
A. A guardian for an orphan
B. A charity
C. A foundation
D. An executor
C. Guardians and executors are fiduciaries controlling the assets of those who cannot speak for themselves. Charities raise funds from donors expecting that the money will be invested wisely. Foundations are generally funded by their founders, who usually give those managing the money greater flexibility.
A socially responsible mutual fund would probably invest in companies
A. generating high returns.
B. acting with high ethics and morality.
C. located in a single geographic area.
D. with a significant presence on social media.
B. SRI looks for companies with high ethical standards. A mutual fund promoting itself and being socially responsible will direct its portfolio investments to companies that meet the description.
