UNIT 24 QBANK

Question 1

Which of the following transactions, if any, cannot be done in a cash account?

A) Sell 100 ABC to close
B) Any of these could be done in a cash account
C) Sell 100 ABC to open
D) Buy 100 ABC to open

Answer 1

C) Sell 100 ABC to open

Explanation
Selling to open (a short sell) can only be done in a margin account. It cannot be done in a cash account.

Question 2

Which of the following must precede the first trade in an account?

A) Customer’s notarized signature on the new account form
B) Filing of the account information with the applicable self-regulatory organization (SRO)
C) Registered representative’s signature on the new account form
D) Approval of the new account by a principal

Answer 2

D) Approval of the new account by a principal

Explanation
All accounts must be approved by a principal before the first trade. Neither the customer nor the registered representative need sign the new account form, and no self-regulatory organization (SRO)—requires the filing of new account information with them.

Question 3

All of the following may be purchased on margin except

A) call and put contracts.
B) exchange-listed securities.
C) municipal securities.
D) Nasdaq listed stocks.

Answer 3

A) call and put contracts.

Explanation
Option contracts—calls and puts—are among those securities products that cannot serve as collateral for a margin loan and, therefore, may not be purchased on margin. In the case of options, their unpredictable intrinsic value, diminishing time value, and limited life make them inappropriate for securing any kind of loan.

Question 4

Hypothecation is

A) the closing of a securities initially position purchased on margin.
B) the pledging of customer securities as collateral for margin loans.
C) replacing shares that were borrowed to sell short in a margin account.
D) opening a position in a margin account.

Answer 4

B) the pledging of customer securities as collateral for margin loans.

Explanation
Hypothecation is agreed to in the margin account agreement. The customer agrees to pledge the securities to be purchased on margin to the broker-dealer so that the broker-dealer can then pledge them to a bank as collateral for the margin loan.

Question 5

The Conduct Rules permit specific types of lending arrangements between registered representatives and their firms and customers. Which arrangement below would not be permitted?

A) The firm lends the customer’s securities without a consent agreement.
B) The firm’s customer is a lending institution.
C) The registered representative and the customer are immediate family.
D) The customer and the registered representative are both registered persons with the same firm.

Answer 5

A) The firm lends the customer’s securities without a consent agreement.

Explanation
The Conduct Rules permit several types of lending arrangements. Among them; an immediate family relationship exists between the representative and the customer, the customer is in the business of lending money, the customer and the representatives are both registered persons with the same firm, the customer and the representative have a personal relationship or a business relationship outside the broker-customer relationship. Lending securities for use in short sales can only be done with a signed consent agreement from the customer.

Question 6

Regarding purchases on margin, which of the following is true?

A) Warrants can be purchased on margin, but rights cannot.
B) Rights can be purchased on margin, but warrants cannot.
C) Warrants and rights can both be purchased on margin.
D) Neither rights nor warrants can be purchased on margin.

Answer 6

A) Warrants can be purchased on margin, but rights cannot.

Explanation
Warrants are marginable securities, but rights are not.

Question 7

Which type of account fee structure is typically better for the buy and hold investor?

A) A narrow-based account
B) A broad-based account
C) A fee-based account
D) A commission-based account

Answer 7

D) A commission-based account

Explanation
With a fee-based account, the customer is charged a fixed fee regardless of the number of trades. With a commission-based account, the customer is charged a fee for each trade. If the customer follows a buy and hold strategy, he typically won’t be doing enough trades for the fee-based account to save him money. The other two are just made up names.

Question 8

In which of the following accounts would the use of margin always be prohibited?

A) Fiduciary accounts
B) Corporate accounts
C) Partnership accounts
D) Individual retirement accounts

Answer 8

D) Individual retirement accounts

Explanation
Of those listed, only qualified retirement accounts, such as IRAs, prohibit the use of margin. As long as the use of margin is not listed as being restricted, it is allowed in both corporate and partnership accounts, and as long as the use of margin is specifically listed as being allowed, a fiduciary account may do so.

Question 9

A client opens a new margin account and, as the initial trade, purchases 300 shares of MS Corporation common stock at $10 per share. The firm would send the client a margin call for

A) $3,000.
B) $1,000.
C) $2,000.
D) $1,500.

Answer 9

C) $2,000.

Explanation
No credit may be extended in a new margin account with less than $2,000 in equity. This purchase of $3,000 of stock would normally require 50% payment ($1,500) in accordance with Regulation T, but because it is the initial trade in the account, the $2,000 minimum must be met.

Question 10

Corporate accounts may trade on margin

A) only if it is specifically listed as being permitted to do so in the corporate charter.
B) only if it is not listed as being restricted from doing so in the corporate charter.
C) always.
D) never.

Answer 10

B) only if it is not listed as being restricted from doing so in the corporate charter.

Explanation
As long as there are no restrictions against trading on margin in the corporate charter, corporate accounts may trade on margin.

Question 11

The minimum initial requirement when purchasing 100 shares at $30 in a new account would be

A) $1,500.
B) $750.
C) $2,000.
D) $375.

Answer 11

C) $2,000.

Explanation
The requirement is normally 50% but not less than $2,000 unless the purchase price is less than $2,000. Then only 100% of the purchase price would be required.

Question 12

Borrowing money to buy securities is prohibited in all of the following accounts except

A) a margin account.
B) an individual IRA.
C) a Roth IRA.
D) a custodial account.

Answer 12

A) a margin account.

Explanation
Borrowing money to buy securities can only be done in a margin account. Retirement accounts and custodial accounts do not allow margin.

Question 13

A customer wanting to open a margin account is told that the securities will be held in street name. This means that the securities will be registered in

A) the name of the broker-dealer.
B) the name of the bank supplying the loan.
C) the names of the customer and the broker-dealer jointly.
D) the name of the customer.

Answer 13

A) the name of the broker-dealer.

Explanation
Securities held in street name are registered in the name of the broker-dealer, who is the named or nominal owner. The customer remains as the beneficial owner.

Question 14

When a client of a broker-dealer purchases stock on margin, in order to finance the loan, the broker-dealer

A) rehypothecates the stock to a bank.
B) lends a portion of the stock to a bank.
C) maintains possession of the stock.
D) must comply with the requirements of Regulation T.

Answer 14

A) rehypothecates the stock to a bank.

Explanation
Stock in a client’s margin account is hypothecated (pledged) to the broker-dealer. In order to obtain funds to carry the margin loan, the broker-dealer rehypothecates a portion of the stock to a bank. The shares pledged to the bank serve as collateral for the bank’s loan to the broker-dealer, which is made in accordance with Regulation U (not T).

Question 15

The minimum initial requirement when buying 100 shares at $15 in a new account would be

A) $1,500.
B) $375.
C) $2,000.
D) $750.

Answer 15

A) $1,500.

Explanation
The FINRA minimum initial deposit for a long purchase in a margin account is $2,000 or 100%, whichever is less.

Question 16

A customer is not required to sign which of the following when opening a margin account?

A) Margin agreement
B) Consent to loan form
C) Hypothecation agreement
D) Credit agreement

Answer 16

B) Consent to loan form

Explanation
Although most broker-dealers will not open the account without having the customer sign all of these, there is no rule that requires the customer to sign the consent to loan form.

Question 17

Which if the following may not be purchased on margin but can be used as collateral for a margin loan after being held for 30 days?

A) Mutual funds
B) Options
C) Warrants
D) Equities

Answer 17

A) Mutual funds

Explanation
Neither mutual funds nor new issues can be purchased on margin. However, both may be used as collateral for a margin loan after being held for 30 days. Options are not marginable securities, but equities, bonds, and warrants are.

Question 18

When customers open margin accounts, when must they be provided with a risk disclosure document?

I. Before initially opening the account
II. Quarterly
III. Semiannually
IV. Annually

A) I and II
B) I and IV
C) III and IV
D) I only

Answer 18

B) I and IV

I. Before initially opening the account
IV. Annually

Explanation
The risk disclosure document is required before opening the account and annually after opening the account.

Question 19

A customer wants to save some money for his grandson’s college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is true?

A) The customer may take a deduction for the amount contributed.
B) The maximum contribution permitted is $3,000 annually.
C) The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over.
D) The customer may make annual contributions until the grandson graduates from college.

Answer 19

C) The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over.

Explanation
The maximum annual contribution to an ESA is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Any unused balance must be rolled over or distributed by the time the beneficiary attains age 30. Amounts not used for one child may be rolled over tax free to the account of another child of the same family only once during any 12-month period.

Question 20

A customer receives a Regulation T margin call for $3,200. To meet the deposit requirement, which of the following can be deposited?

A) Fully paid for marginable securities totaling $6,400 in market value
B) Fully paid for marginable securities totaling $3,200 in market value
C) Cash in the amount of $1,600
D) Fully paid for marginable securities totaling $1,600 in market value

Answer 20

A) Fully paid for marginable securities totaling $6,400 in market value

Explanation
When meeting a Regulation T margin call with cash, 100% of the call must be deposited—in this case, $3,200. If using fully paid for marginable securities to meet the call, a deposit totaling twice the amount of the call must be made—in this case, $6,400. This is because securities are only marginable to 50% of their value.

Question 21

A broker-dealer firm has just rehypothecated a thousand shares of MMS stock. This means

A) a bank has pledged the stock to the firm, which now pledges it to the customer.
B) the customer withdraws the stock from the bank and pledges it directly to the firm.
C) the firm has withdrawn the stock from a bank and pledged it to the customer.
D) the customer pledged the stock to the firm, which has now pledged it to a bank.

Answer 21

D) the customer pledged the stock to the firm, which has now pledged it to a bank.

Explanation
In a long margin account, customers put up at least half the purchase price of securities, and the broker-dealer firm borrows the remainder on the customer’s behalf from a bank. The customer pledges the securities to the broker-dealer, which is known as hypothecating the securities. The broker-dealer then rehypothecates them to the bank as collateral for the margin loan.

Question 22

Borrowing money to buy securities is prohibited in all of the following accounts except

A) an individual IRA.
B) a Roth IRA.
C) a custodial account.
D) a margin account.

Answer 22

D) a margin account.

Explanation
Borrowing money to buy securities can only be done in a margin account. Retirement accounts and custodial accounts do not allow margin.

Question 23

If a margin deposit is late, an extension request made by the broker-dealer

A) is not permitted to be made in any circumstance.
B) is not required but can be made, and may or may not be granted.
C) is not required but, if made, will always be granted.
D) is required to be made but may not always be granted.

Answer 23

B) is not required but can be made, and may or may not be granted.

Explanation
Extension requests can be made by the broker-dealer but are not mandatorily required. When made to the firm’s designated examining authority (DEA), they may or may not be granted.

Question 24

Which of the following must be signed by a customer wanting to open a margin account?

A) Credit and loan consent agreements
B) Risk disclosure document and credit agreement
C) Loan consent and hypothecation agreements
D) Credit and hypothecation agreements

Answer 24

D) Credit and hypothecation agreements

Explanation
Opening a margin account requires that the customer sign the credit agreement and the hypothecation agreement. The loan consent form (agreement) is optional. While the risk disclosure document must be received and attested to as read by signing the credit agreement, it need not be signed.

Question 25

A registered representative is discussing fee-based and commission-based accounts with a customer. All of the following are true except

A) a commission based account bills for each transaction separately.
B) disclosure of what services the fees cover in a fee-based account must be made to the customer before the account is opened.
C) a fee-based account charges a single annual fee that can be a fixed dollar amount or a percentage of assets under management.
D) fee-based accounts are most suitable for those who do very little trading during the course of the year.

Answer 25

D) fee-based accounts are most suitable for those who do very little trading during the course of the year.

Explanation
Fee-based accounts charging a fixed dollar amount or a percentage of assets under management are more suitable for those doing at least a moderate amount of trading. Commission based accounts charging for each transaction on the other hand are better suited for those who do fewer transactions each year. For fee-based accounts full disclosure of what is covered by the annual fee must be made before the account can be opened.

Question 26

The minimum initial requirement when purchasing 100 shares at $30 in a new account would be

A) $1,500.
B) $2,000.
C) $375.
D) $750.

Answer 26

B) $2,000.

Explanation
The requirement is normally 50% but not less than $2,000, unless the purchase price is less than $2,000; then, only 100% of the purchase price would be required.

Question 27

A hypothecation agreement would be best described as

A) a loan consent form which gives permission to the firm to loan the customers margin securities to other customers or broker-dealers.
B) a written disclosure of the terms of the credit extended by the broker-dealer, including the method of interest computation and situations under which interest rates may change.
C) a contract allowing securities to be pledged for the loan.
D) a partnership agreement stating which of the partners can make transactions for a partnership account.

Answer 27

C) a contract allowing securities to be pledged for the loan.

Explanation
A signed hypothecation agreement permits the pledging of customer securities as collateral for margin loans.

Question 28

A customer wanting to open a margin account is told that the securities will be held in street name. This means that the securities will be registered in

A) the names of the customer and the broker-dealer jointly.
B) the name of the customer.
C) the name of the broker-dealer.
D) the name of the bank supplying the loan.

Answer 28

C) the name of the broker-dealer.

Explanation
Securities held in street name are registered in the name of the broker-dealer, who is the named or nominal owner. The customer remains as the beneficial owner.

Question 29

The Conduct Rules permit specific types of lending arrangements between registered representatives and their firms and customers. Which arrangement below would not be permitted?

A) The registered representative and the customer are immediate family.
B) The firm’s customer is a lending institution.
C) The customer and the registered representative are both registered persons with the same firm.
D) The firm lends the customer’s securities without a consent agreement.

Answer 29

D) The firm lends the customer’s securities without a consent agreement.

Explanation
The Conduct Rules permit several types of lending arrangements. Among them; an immediate family relationship exists between the representative and the customer, the customer is in the business of lending money, the customer and the representatives are both registered persons with the same firm, the customer and the representative have a personal relationship or a business relationship outside the broker-customer relationship. Lending securities for use in short sales can only be done with a signed consent agreement from the customer.

Question 30

The minimum initial requirement when purchasing 200 shares at $7.50 in a new account would be

A) $750.
B) $1,500.
C) $2,000.
D) $375.

Answer 30

B) $1,500.

Explanation
Normally it would be 50% of the purchase price or $2,000 whichever is greater, but the required deposit is never more than 100% of the purchase price in a long account.

Question 31

To meet a Regulation T margin call, a customer would have how long?

A) Trade date plus five additional calendar days
B) Trade date plus two additional business days
C) Settlement date plus two additional calendar days
D) Settlement plus two additional business days

Answer 31

D) Settlement plus two additional business days

Explanation
The rule requires that the call be met within two business days of the settlement date, referred to as S + 2. If regular way settlement was T + 2, adding two additional business days to the trade date would be T + 4.

Question 32

When customers open margin accounts, when must they be provided with a risk disclosure document?

I. Before initially opening the account
II. Quarterly
III. Semiannually
IV. Annually

A) I and IV
B) I and II
C) I only
D) III and IV

Answer 32

A) I and IV

I. Before initially opening the account
IV. Annually

Explanation
The risk disclosure document is required before opening the account and annually after opening the account.

Question 33

Which of the following is true regarding accounts trading on margin?

A) A fiduciary account may only trade on margin if it is specifically permitted in the trust or custodial agreement.
B) A partnership account may only trade on margin if it is specifically permitted in the partnership resolution.
C) Joint accounts or those with more than one party titled on the account may never trade on margin.
D) A corporate account may only trade on margin if it is specifically permitted in the corporate charter.

Answer 33

A) A fiduciary account may only trade on margin if it is specifically permitted in the trust or custodial agreement.

Explanation
Both individual and joint accounts may trade on margin. While corporate and partnership accounts may trade on margin as long as they are not specifically restricted from doing so, a fiduciary account may only trade on margin if permission is specifically granted in the trust or custodial agreement.

Question 34

All of the following are exempt from Regulation T except

A) T-bills.
B) New York City bonds.
C) NYSE-listed securities.
D) GNMAs.

Answer 34

C) NYSE-listed securities.

Explanation
Stocks that trade on the NYSE are subject to Regulation T. Municipals, treasuries, and agencies are exempt.

Question 35

Which of the following must be opened as a cash account?

I. Custodial accounts
II. Individual retirement accounts
III. Joint accounts
IV. Partnership accounts

A) I and II
B) II and IV
C) I and III
D) III and IV

Answer 35

A) I and II

I. Custodial accounts
II. Individual retirement accounts

Explanation
Certain accounts, such as IRAs, corporate retirement accounts, and custodial accounts, must be opened as cash accounts as opposed to margin accounts. For individual accounts, joint accounts, and corporate and partnership accounts, there is no such requirement, though the final decision on them is up to the broker-dealer carrying the account.

Question 36

Regulation T, the initial margin requirement, is set by

A) the president and Congress.
B) the Securities and Exchange Commission (SEC).
C) the Comptroller of the Currency.
D) the Federal Reserve Board (FRB).

Answer 36

D) the Federal Reserve Board (FRB).

Explanation
Regulation T, the initial margin requirement currently at 50%, is set by the Federal Reserve Board (FRB).

Question 37

Which of the following must precede the first trade in an account?

A) Registered representative’s signature on the new account form
B) Customer’s notarized signature on the new account form
C) Filing of the account information with the applicable self-regulatory organization (SRO)
D) Approval of the new account by a principal

Answer 37

D) Approval of the new account by a principal

Explanation
All accounts must be approved by a principal before the first trade. Neither the customer nor the registered representative need sign the new account form, and no self-regulatory organization (SRO)—requires the filing of new account information with them.

Question 38

Which of the following transactions, if any, cannot be done in a cash account?

A) Any of these could be done in a cash account
B) Sell 100 ABC to close
C) Buy 100 ABC to open
D) Sell 100 ABC to open

Answer 38

D) Sell 100 ABC to open

Explanation
Selling to open (a short sell) can only be done in a margin account. It cannot be done in a cash account.

Question 39

Which of the following would constitute improper use of a customer’s securities or funds?

I. Agreeing to a stock purchase the representative thinks is beyond the client’s means
II. Selling a bond at the client’s insistence during a period of high interest rates
III. Lending securities for a short sale when the client has agreed to it on the phone
IV. Borrowing a client’s funds without permission, though it will be repaid the same day

A) I and II
B) II and IV
C) I and III
D) III and IV

Answer 39

D) III and IV

III. Lending securities for a short sale when the client has agreed to it on the phone
IV. Borrowing a client’s funds without permission, though it will be repaid the same day

Explanation
Though a customer may be ill-advised, complying with it does not constitute improper use. To lend securities without a signed loan consent agreement does constitute improper use, as does borrowing the client’s funds without permission of the client, no matter how briefly the funds will be held.

Question 40

Regarding the Regulation T requirement, which of the following is true?

A) It is currently 30% and must remain unchanged unless mandated by Congress.
B) It is currently 25% but can be changed at any time by the FRB.
C) It is currently 50% and must remain unchanged unless mandated by Congress.
D) It is currently 50% but can be changed at any time by the Federal Reserve Board (FRB).

Answer 40

D) It is currently 50% but can be changed at any time by the Federal Reserve Board (FRB).

Explanation
The Regulation T initial margin requirement is currently 50%. While it has been so for many decades, it can be changed by the Federal Reserve Board anytime it deems appropriate to do so.