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43 Cards in this Set

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If SIPC does not cover a customer's account in a brokerage firm that has gone bankrupt, the investor would be a:
a. General creditor
b. Secured creditor
c. Preferred creditor
d. Guaranteed creditor
A
If SIPC does not cover a client's account in a brokerage firm that has gone bankrupt, the client would be a general creditor. The client would rank equally with all other general creditors. (3-8)
Which of the following would be most suitable for a Non-Managed Fee-Based Account?
a. Clients that buy and hold securities
b. Clients seeking professional advice from an investment adviser
c. Clients that buy many different types of mutual funds
d. Clients who use their own research and often rebalance their portfolios
D
A Non-Managed Fee-Based account is when a broker-dealer charges the client a fixed percentage fee for all transactions, which is based on the value of an account, instead of paying a commission per transaction. A client would be suitable for this type of account if they are not seeking investment advice and trade frequently. (3-5)
Which of the following could be found on a customer's confirmation?
I. If the firm acted as principal
II. If the firm acted as the customer's agent
III. If the firm acted for a third party
IV. If the firm is a bona fide market maker in the security
a. I and II only
b. I and IV only
c. II and III only
d. I, II, III, and IV
D
All of the items listed would be found on a customer's confirmation. An indication that the firm acted for a third party is given to the customer if requested. This information is detailed on the back of the confirmation. (3-4)
An investor who has granted power of attorney to his son dies. The power of attorney:
a. Remains in effect until cancelled by the executor of the estate
b. Remains in effect until cancelled by the son
c. Remains in effect only if the son is the sole heir to the estate
d. Is cancelled on the death of the principal in the account
D
If an individual who has granted power of attorney to another individual dies, the power of attorney automatically terminates. (3-3)
A client would like all trade confirmations sent to his investment adviser. This will require:
a. A written letter from the client
b. Approval by a partner in the firm
c. Approval by a branch manager
d. All of the above
A
Written approval is required only from the client. (3-4)
Which of the following proxy rules would be correct regarding customer securities held in "street name" by a brokerage firm?
a. The corporation would send the proxy to the customer.
b. The corporation would send the proxy to the NYSE who would then send it to the customer.
c. The corporation would send the proxy to the SEC who would then send it to the customer.
d. The corporation would send the proxy to the brokerage firm who would then send it to the customer.
D
A publicly held company must provide a means for shareholders who cannot attend company meetings to vote on important matters. This is done through a proxy which is a delegation of the shareholder's vote. The corporation will send the proxy to all stockholders of record who can then cast their votes without attending the meeting. When stock is held in street name (in the name of the brokerage firm), the corporation would send the proxy to the brokerage firm who is the stockholder of record on the corporate books. The brokerage firm would send the proxy to the customer and the corporation would pay the additional expenses. The SEC regulates the solicitations of proxy material. (3-2)
Fully paid customer securities held at a brokerage firm:
a. May be used as collateral for brokerage firm loans
b. May be commingled with other customers' securities
c. Must be segregated and identified as belonging to the customer
d. None of the above
C
Fully paid customer securities held at a brokerage firm must be segregated and identified as belonging to the customer. (3-2)
A registered representative wants to open a new account for a client who is a resident of Mexico. Which two of the following statements are correct?
I. Customer verification of the client's personal information is not required if the customer was referred by an existing client.
II. Customer verification of the client's personal information is required under any circumstances.
III. The client can have either a taxpayer identification number or a passport number and country of origin.
IV. The client must have a taxpayer identification number to open the account.
a. I and III
b. II and IV
c. I and IV
d. II and III
D
If a non-U.S. citizen wants to open a new account, the member firm is required to obtain certain information as part of its AML procedures under its customer identification program (CIP). For non-U.S. citizens the firm must obtain the client's name, address, date of birth and one of the following: passport and country of issuance, taxpayer identification number, or any other government issued document with a photograph. An RR would always need to verify the client's personal information regardless of whether or not the customer was referred by an existing client. (3-13)
SEC regulations state that a brokerage firm must provide a current financial statement (balance sheet) to:
a. A customer when requested by the customer
b. A noncustomer who requests it
c. Both of the above
d. None of the above
A
SEC regulations states that a brokerage firm must provide a current financial statement (balance sheet with net capital computation) to a customer upon request. The customer has the right to know the financial condition of the company with which he is doing business. (3-3)
Mr. Jones requests that his securities be held in street name. To honor his request, the broker-dealer must:
a. Have the customer sign a hypothecation agreement
b. Segregate the securities
c. Have the customer sign a margin agreement
d. Not honor his request since securities cannot be held in street name
B
The only requirement for holding securities in street name is that they must be segregated. A customer signs a margin agreement and hypothecation agreement only when opening a margin account. (3-2)
STREET NAME (S7) : Securities held in the name of a broker-dealer instead of the customer's name. This occurs when the securities have been bought on margin or when the customer (the beneficial owner) wishes the security to be held by the broker-dealer (the nominal owner).
HYPOTHECATION (S7) : The pledging of securities as collateral, for example, to secure the debit balance in a margin account.
A registered representative should update a customer's account records for a change in:
I. Address
II. Net worth
III. Employer
IV. Investment objectives
a. I and III only
b. II and IV only
c. I, II and IV only
d. I, II, III, and IV
D
Customer account records should be updated whenever there is a change to the original information given. (3-2)
Upon learning of the death of a customer, a registered representative should do all of the following EXCEPT:
a. Cancel all outstanding orders
b. Mark the account deceased
c. Await instructions from the executor of the customer's estate
d. Liquidate all positions in the account if directed to do so by any member of the customer's immediate family
D
When a client dies, a registered representative should immediately cancel all open orders and mark the account deceased. He should then await instructions from the executor of the estate. (3-3)
A customer of a member firm goes on vacation and notifies the member firm in writing as to what should be done with his mail. All of the following are true EXCEPT:
a. The member firm may hold the customer's mail for a period of two months if the customer is traveling in the U.S.
b. The member firm may hold the customer's mail for a period of three months if the customer is traveling abroad.
c. The member firm can forward the customer's mail to a general P.O. Box.
d. The mail can be forwarded to the registered representative.
D
The registered representative is not permitted to have a customer's mail forwarded to him as this would be a violation of exchange rules. All of the other choices are true. The member firm can hold the customer's mail for two months if the customer is traveling in the United States and can hold the mail for three months if the customer is traveling abroad. The mail can also be forwarded to a general P.O. Box if desired. (3-2)
Which of the following are true about SIPC?
I. It was created by an Act of Congress and is considered a U.S. government agency.
II. It is a nonprofit organization that only broker-dealers may join.
III. It provides insurance for customer accounts in the event of bankruptcy by a broker-dealer.
IV. It provides insurance for customer accounts for fraud, embezzlement, and counterfeiting.
a. I and II
b. I and IV
c. II and III
d. III and IV
C
SIPC can borrow from the U.S. government, but it is not an agency of the U.S. government. SIPC provides insurance coverage for customer accounts in the event of a brokerage firm's failure. Each brokerage firm must take out a separate insurance policy (known as a fidelity bond) to insure itself for fraud, embezzlement, and counterfeiting. This bonding is not provided by SIPC. (3-8)
A brokerage firm is holding $600,000 of securities for a customer. The securities are registered in the name of the customer. If the firm was being liquidated by SIPC, the customer would:
a. Be insured for $500,000 of securities
b. Receive the entire $600,000 of securities
c. Be insured for $100,000 of securities
d. Lose the entire $600,000
B
Securities registered in the names of customers are not part of SIPC coverage and are returned to the appropriate individuals. (3-8)
In which of the following situations must a broker-dealer file a Currency Transaction Report (CTR)?
a. A customer deposits bearer bonds with a face value of $100,000
b. A customer purchases stock with a $20,000 personal check
c. A customer opens an account with $11,000 in cash
d. A customer opens an account with a credit card debit check valued at $20,000
C
Currency Transaction Reports must be filed when a customer deposits a total of more than $10,000 in cash in any one day. (3-12)
If a client's account is inactive, how often does a statement have to be mailed?
a. Weekly
b. Monthly
c. Quarterly
d. Prior to the completion of the next transaction
C
If an account is inactive, a statement is mailed to the client quarterly. Clients with active accounts normally receive monthly statements. (3-3)
The Securities Investors Protection Corporation (SIPC) insures all of the following accounts EXCEPT:
a. A margin account
b. A joint account
c. A commodities account
d. A custodian account
C
SIPC insures all the accounts listed except a commodities account. Commodities are not securities and therefore are exempt from SIPC coverage. (3-8)
If a broker-dealer should go bankrupt, the trustee appointed under the Securities Investor Protection Act is responsible for:
I. Notifying the firm's customers that the firm is in the process of being liquidated
II. Distribution of securities owned by customers that are held by the firm
III. Seeing that the distribution of cash and securities are administered in an orderly manner
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
C
If a corporation should go bankrupt, it is the responsibility of the SIPC trustee to follow through on all of the items listed. (3-8)
A customer has $350,000 in securities and $300,000 in cash in his brokerage account. If the brokerage firm carrying the account was to go bankrupt, SIPC would cover:
a. The full $650,000 account value
b. $250,000 securities and $250,000 cash
c. $350,000 securities and no cash
d. $250,000 cash and no securities
B
SIPC provides protection to a maximum of $500,000, of which $250,000 may be used for cash. In this example, the customer has exceeded the $500,000 SIPC coverage for cash and securities, and would become a general creditor (for the $150,000 excess) of the firm. (3-8)
A registered representative is preparing to leave her firm. Her clients will be assigned to another representative at the same firm. To accomplish this:
a. A new account form must be completed
b. The customer must approve of the change
c. The account records must be amended to reflect the change
d. The SEC must be notified of the change
C
Account records must be amended whenever an internal transfer of an account is made. This change does not require approval of the customer, the completion of a new account form, or the notification of any regulatory authority. (3-4)
A broker-dealer has failed because it has a net capital deficiency. Which of the following parties would NOT be covered by SIPC?
a. A margin account with $300,000 of securities being held in street name
b. A customer account with a $70,000 cash balance
c. An IRA with securities valued at $400,000 and $100,000 of cash
d. A creditor of the broker-dealer who is owed $40,000
D
SIPC provides protection for customer accounts in the event of a broker-dealer's failure. Each account is covered for up to $500,000, of which $250,000 may be cash. SIPC does not insure creditors of the broker-dealer or the failed firm's own inventory account. (3-8)
According to AML procedures, which two of the following is a member firm required to obtain when opening a new account for a non-U.S. citizen?
I. Current employer
II. Passport number and country of issuance
III. Current address
IV. Telephone number
a. I and III
b. II and III
c. I and IV
d. II and IV
B
If a non-U.S. citizen wants to open a new account, the member firm is required to obtain certain information as part of its AML procedures under its customer identification program (CIP). For non-U.S. citizens the firm must obtain the client's name, address, date of birth and one of the following: passport and country of issuance, taxpayer identification number, or any other government issued document with a photograph. Employment information and telephone number are usually obtained by the member firm but are not required. (3-13)
Which two of the following are NOT SROs?
I. MSRB
II. SIPC
III. FINRA
IV. SEC
a. I and III
b. I and IV
c. II and III
d. II and IV
D
Self-regulatory organizations (SROs) have been formed by the industry to promote standards of fair trade. Examples of SROs are FINRA, CBOE, Chicago Stock Exchange, and the MSRB. All rules and regulations created by SROs must be approved by the SEC, a government sponsored agency (not an SRO) created by an act of Congress in 1934. SIPC, which insures customer accounts if a broker-dealer fails, is not considered to be an SRO. (3-8, 1-2)
One of your clients informs your firm that she will be traveling in Europe and would like your firm to hold all of her confirmations and statements. How long may your firm do this?
a. This cannot be done
b. One month
c. Two months
d. Three months
D
If the client is out of the country, the firm may hold all correspondence for three months per the client's written instructions. If traveling within the U.S., the firm can only hold the correspondence for two months. (3-2)
You are a registered representative servicing a joint tenants with rights of survivorship account for a married couple, Byron and Shelly Nelson. You also maintain an account for their adult son Frank. This morning you receive a phone call from Frank informing you that Byron has died. As part of helping his mother sort out the many details associated with his father's death, Frank requests that the assets in the account be transferred into an account in Shelly's name only. The first course of action would be to inform Frank that:
a. The request may only be made by the account survivor
b. Your firm must receive a death certificate before it may transfer the assets
c. The executor or administrator of Byron's estate must make this request in writing
d. The transfer will be processed as directed
B
The broker-dealer must receive a death certificate as proof of death before it may mark an account deceased, or change the account title in a joint account. (3-3)
All of the following would be included on an option confirmation EXCEPT:
a. The contra broker
b. The price of the option
c. The type and strike price
d. The name of the underlying security
A
The contra broker is the broker on the other side of the trade. The contra broker's name is not included on a confirmation. All of the other items are included on an option confirmation. (3-4)
Mr. Jones has a margin account in which there is activity each month. The firm would send Mr. Jones an account statement:
a. Each month when there is activity during the month
b. At the end of calendar quarter
c. Each week when there is activity during the week
d. After each trade is executed
A
Brokerage firms send customer statements monthly for accounts with activity during that month. For inactive accounts, statements must be sent at least quarterly. (3-3)
Mr. Smith is associated with two other partners in an insurance partnership. He opens a cash account for the partnership. If Mr. Smith dies, what would the firm do as far as the partnership account is concerned?
a. Freeze the assets of the account
b. Allow the account to continue trading as is
c. Open new separate accounts for the remaining partners
d. Await instructions from the executor of Mr. Smith's estate
A
If Mr. Smith died, the firm would freeze the assets of the account because the death of a partner terminates the partnership. The firm would then await the proper legal documents needed to release the assets. (3-3)
Lyle, Molly, and Seena have a joint account registered as Tenants in Common. In the event that Seena dies, which of the following is true?
a. The account would be liquidated as soon as the brokerage firm learns of Seena's death.
b. Lyle and Molly must change the arrangement to a Joint Tenants with Right of Survivorship.
c. Seena's estate has a claim on her portion of the account's assets.
d. Seena's share of the assets in the account are automatically transferred to Lyle and Molly.
C
Upon learning of Seena's death, the brokerage firm would freeze the account. Seena's executor would then provide documentation to establish authority to act on behalf of the estate. Typically, Seena's estate would become the third joint owner in the existing Tenants in Common arrangement. (3-3, 2-7)
Gavin, the captain of an ocean liner, just won $4,000,000 in a contest by hitting an eighty-two-foot basketball shot at the Smith and Wesson Longshot Sweepstakes. When his registered representative contacts him regarding these winnings, the rep should:
a. Suggest a sizable investment in municipal bonds
b. Determine if his investment objectives have changed
c. Encourage him to trade on margin
d. Solicit the sale of the underperforming issues Gavin is holding
B
Registered reps have a responsibility to periodically update customer information in case something has changed which would alter a customer's goals and objectives. Given that Gavin has just won $4,000,000, the rep should check to see if his investment objectives have changed before making any recommendations. (3-2)
Jim and his brother Ed have the following accounts at a brokerage firm:
• Jim's cash account with $175,000 in securities
• Ed's margin account with $150,000 in equity
• A cash account for Jim and Ed as JTWROS with $200,000 in securities
If the brokerage firm were to go bankrupt, SIPC would provide:
a. A maximum of $500,000 coverage for all three accounts combined
b. Full coverage for each account
c. Full coverage for Jim's cash account and the joint account
d. Full coverage for Jim's cash account, the joint account, and $100,000 coverage for the equity in Ed's margin account
B
SIPC provides maximum protection of $500,000 for each customer (different account title). Since each account has a different title, each would receive the maximum coverage and be protected for the full value in each account. In a margin account, the customer's equity is insured up to the $500,000 maximum. (3-8)
All of the following statements regarding the privacy notice of a broker dealer are true EXCEPT:
a. Customers must receive an updated privacy notice annually
b. A privacy notice does not need to be sent to a consumer
c. A privacy notice must be provided to all customers at the time a relationship is established with the firm
d. Clients may opt out from having their information shared with third parties
B
A consumer (anyone who has not yet established a relationship with the firm) must be provided with a privacy notice prior to disclosing any nonpublic personal information to any nonaffiliated third party. (3-9)
A customer's margin account has a market value of $750,000 and a debit balance of $400,000. He also has a commodities account that has equity of $150,000. If the firm went bankrupt, SIPC would provide coverage to this customer for:
a. $350,000 in the margin account and nothing for the commodities account
b. $150,000 in the commodities account and nothing for the margin account
c. $350,000 in the margin account and $150,000 in the commodities account
d. $500,000 in the margin account and $150,000 in the commodities account
A
SIPC will cover the customer's equity in the margin account ($350,000). SIPC does not provide coverage for commodities accounts. (3-8, 13-6)
SECURITIES INVESTOR PROTECTION CORPORATION (SIPC) (S7) : A nonprofit membership corporation created by an act of Congress to protect clients of brokerage firms that are forced into bankruptcy. Membership is composed of all brokers and dealers registered under the Securities Exchange Act of 1934, all members of national securities exchanges, and most members. SIPC provides customers of these firms protection of up to $500,000 of cash and securities, of which no more than $250,000 may be in cash.
Which of the following are TRUE regarding account statements that are sent by member firms to customers?
I. Active accounts get monthly statements.
II. Active accounts get quarterly statements.
III. Inactive accounts get monthly statements.
IV. Inactive accounts get quarterly statements.
a. I and III
b. I and IV
c. II and III
d. II and IV
B
Brokerage firms are required to send customer statements quarterly for accounts with no activity. If there is activity, statements are sent monthly. (3-3)
SIPC is a(n):
a. Not-for-profit corporation
b. Self-regulatory organization
c. U.S. government agency
d. Insurer of municipal bonds
A
The Securities Investor Protection Corporation (SIPC) is a nonprofit corporation that was created by an act of Congress in 1970. SIPC insures a customer's account for up to $500,000 in the event of a brokerage firm's failure. SIPC is not a government sponsored agency or a regulatory body. (3-8)
A registered representative receives a sell order from his customer. When he submits the order to the wire room he accidentally transposes two of the digits in the account number and the order is processed under the wrong account. This problem would be rectified:
a. By the registered representative
b. With a purchase of the security out of the wrong account
c. By placing the order in an error file
d. By the branch office manager
D
The branch office manager would rectify this by correcting the account number and crediting the sale in the proper account. The order would not be placed in the error file since it was properly executed, although in the wrong account. The registered representative does not rectify problems. The wrong account would not be responsible for anything related to the incorrect order. (3-5)
A Suspicious Activity Report (SAR) should be filed:
a. Only in the event that the firm has actual knowledge that the client is laundering money
b. If a transaction exceeds $5,000 and the firm suspects illegal activity
c. Only for transactions of more than $10,000
d. Only for transactions with parties on the OFAC list
Explanation:
B
A firm must file an SAR whenever a transaction (or a group of transactions) equals or exceeds $5,000 and the firm suspects any of the following.
• The client is violating federal criminal laws.
• The transaction involves funds related to illegal activity.
• The transaction is designed to evade the reporting requirements (structured transactions).
• The transaction has no apparent business or other legitimate purpose and the broker-dealer cannot determine any reasonable explanation after examining all the available facts and circumstances surrounding the transaction. (3-12)
A registered representative receives an order from her customer to sell 600 shares of BWGF to be executed in her IRA account. The RR mistakenly executes the order in the wrong account. What action should be taken to correct the error?
a. Cancel the transaction and reenter it in the correct account after receiving approval by the margin department
b. Cancel the transaction and reenter it in the correct account after receiving approval by a registered principal
c. Resend the order to the floor of the exchange
d. Cancel the order, but no other action is necessary
B
If a trade is executed in the wrong account due to an error on the part of the registered representative, the best course of action is to cancel the trade and reenter it to the correct account. This action must be approved by a registered principal or supervisor. (3-5)
A registered representative sells 1,500 shares of stock for a client and executes the transaction using the wrong account number. Which of the following actions should be taken?
a. Request a cancel and rebill after receiving principal approval
b. Request a cancel and rebill without principal approval
c. Contact the trader that executed the order and enter a new order
d. Cancel the order and take no other action
A
If a transaction is executed but the wrong account number is used, the error can be corrected without placing a new order. This is done by transferring the transaction to the correct account number with the permission of a registered principal. This transfer process is sometimes referred to as a cancel and rebill. In some cases the error is made using the correct account number for the client but the wrong account (margin account instead of an IRA account). The same process would be used to correct the situation. (3-5)
A registered representative enters an order for a client. In error, the RR purchases shares of the wrong security. Which of the following statements is TRUE?
a. The shares must be placed in the RR's error account.
b. The shares must be placed in the broker-dealer's error account.
c. The RR must contact the client and cancel the original transaction.
d. The firm is required to report the error to the market in which the order was executed.
B
All broker-dealers are required to maintain an error account. It is used by a broker-dealer if the firm or an RR executes a trade in error (e.g., the wrong security or the wrong side of the market). RRs do not have an error account. It is maintained by the firm. The firm should execute the original transaction immediately and maintain a record of the error. The firm is not required to notify the market where the order entered in error was executed. (3-5)
A client purchases $800,000 of stock in a margin account and deposits the Regulation T margin requirement. If the current value of the stock is $700,000 and the broker-dealer declares bankruptcy, SIPC would cover:
a. $100,000
b. $300,000
c. $400,000
d. $500,000
B
When the customer met the original Reg. T call, he deposited $400,000 (50%) and borrowed $400,000, which is the debit balance. Now the market value has fallen from $800,000 to $700,000, so the new equity level is $300,000 ($700,000 MV less the debit balance of $400,000 equals $300,000). SIPC will cover the customer's current equity in a margin account of $300,000. SIPC does not cover a decline in the market value of securities. (3-8, 13-16)
A client has a margin account with a long market value of $950,000 and a debit balance of $550,000. If the broker-dealer declares bankruptcy, which TWO of the following statements are TRUE?
I. The client is permitted to pay $550,000 and receive $950,000 of securities.
II. The client is permitted to pay $500,000 and receive $950,000 of securities.
III. The client is covered for $400,000 of securities.
IV. The client is covered for $500,000 of securities.
a. I and III
b. I and IV
c. II and III
d. II and IV
A
According to SIPC, if a client has a margin account, the net equity is covered (the long market value minus the debit balance). In this example, the client is covered for $400,000 of securities. A client is also permitted (but not required) to pay off the debit balance and receive the full value of the securities. If the client paid $500,000, he would only receive $900,000 of securities. (3-8)