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chapter 9 upload Flashcards

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1
Q

What are the three components to suitability?

A
  • Reasonable-basis suitability
  • Customer-specific suitability
  • Quantitative suitability

These components ensure that recommendations are appropriate for investors.

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2
Q

Define reasonable-basis suitability.

A

A belief that a recommendation is suitable for investors after applying reasonable diligence

It varies based on the complexity and risks of the security or investment strategy.

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3
Q

What does the customer-specific obligation require?

A

A reasonable basis to believe that a recommendation is suitable for a particular customer based on their investment profile

Factors include age, investment objectives, and risk tolerance.

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4
Q

List factors to consider when a customer’s age is an issue.

A
  • Investment objectives
  • Investment time horizon
  • Liquidity
  • Tax status change
  • Risk tolerance

These factors help in making sensible investment decisions for seniors.

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5
Q

True or false: A firm has 30 days to update a customer’s account form after a notice of change.

A

TRUE

This is a critical compliance requirement for member firms.

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6
Q

What is quantitative suitability?

A

A belief that a series of recommended transactions are not excessive and unsuitable for the customer

It considers the customer’s investment profile and overall account activity.

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7
Q

What must a registered representative collect for suitability information?

A
  • Customer’s income
  • Net worth (excluding primary residence)
  • Tax status
  • Number of dependents
  • Investment objectives
  • Risk tolerance
  • Time horizon
  • Other holdings

This information is necessary for making suitable recommendations.

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8
Q

What is the Regulation Best Interest (BI) requirement?

A

Act in the best interest of the retail customer at the time of recommendation

This regulation enhances the suitability standard for retail customers.

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9
Q

What must firms disclose under Regulation BI?

A
  • Potential risks
  • Rewards
  • Costs associated with any recommendation

This ensures transparency and informed decision-making for customers.

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10
Q

What is the primary job of a supervisor in a brokerage firm?

A

Ensure compliance with written supervisory procedures and regulations

Supervisors must also ensure that representatives make suitable recommendations.

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11
Q

List items that must be considered for suitable recommendations.

A
  • Customer’s employment status
  • Duration until retirement
  • Existing mortgage
  • Other income sources
  • Income needed for expenses
  • Personal goals

These factors are crucial for assessing suitability, especially for senior investors.

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12
Q

What is a custodian’s responsibility in a minor’s securities account?

A

Maximize yield by selecting suitable securities from a state’s legal list

Custodians have a fiduciary duty to act in the best interest of the minor.

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13
Q

What should be avoided in seminar materials?

A
  • Inaccurate claims
  • Misrepresentations
  • Material omissions about investments
  • Misleading testimonials

Supervisors must ensure that seminar materials are accurate and compliant.

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14
Q

What is the suitable recommendation for preservation of capital?

A
  • Insured bank CDs
  • Money market instruments or funds
  • T-bills

These options provide safety and capital preservation.

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15
Q

If a customer is risk averse, what type of investments should be considered?

A

Fixed-income securities

Safer securities are preferred over equities for risk-averse customers.

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16
Q

What is the suitable recommendation for income?

A
  • Bonds
  • Preferred stock
  • Utility stocks

These options are typically chosen for generating income.

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17
Q

What must be done if a customer refuses to provide financial information?

A

Use available information to decide on account opening; no recommendations can be made

This ensures compliance with suitability requirements.

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18
Q

What is the fiduciary responsibility of a custodian of a minor’s securities account?

A

To take the best interest of the account owner in mind, especially a minor

Custodians should select securities that may improve yield over the account’s current results.

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19
Q

In selling securities, what must the custodian do to effect good delivery?

A

Sign securities in a custodial account

This is a necessary step in the transaction process.

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20
Q

What is Rule 2121, also known as the 5% policy?

A

A guideline to ensure fair treatment and reasonable rates for brokerage services

It applies to nonexempt securities in both OTC and exchange markets.

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21
Q

The 5% policy does not apply to which types of securities?

A
  • Exempt securities (e.g., municipal bonds)
  • Prospectus offerings (e.g., new issues, mutual funds)

These exceptions are important for understanding the scope of the policy.

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22
Q

When a dealer sells a security to a customer, what does the price include?

A

The dealer’s markup

Conversely, when buying from a customer, the dealer applies a markdown.

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23
Q

What constitutes a violation of the Securities Exchange Act of 1934?

A

Charging excessive markups without disclosure

This is considered fraudulent behavior.

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24
Q

Who is exempt from the 5% policy regarding markups?

Study These Flashcards
A

Qualified institutional buyers (QIBs) for non-investment grade securities

This exemption allows for different transaction practices.

25
What factors does FINRA consider when assessing the fairness of a member's **commission and markup practices**?
* Type of security * Availability * Price * Dollar amount * Pattern of markups * Disclosure ## Footnote These factors help determine if the charges are reasonable.
26
In an **active, competitive market**, how is the prevailing market price determined?
The inside market at time of sale ## Footnote This reflects the most current trading conditions.
27
In an **inactive, competitive market**, how should a market maker calculate markdowns?
Using contemporaneous purchases from other dealers ## Footnote This approach is necessary due to limited trading activity.
28
What is a **proceeds transaction**?
A transaction where a customer sells and uses the proceeds to make a purchase ## Footnote FINRA views this as a single trade for markup/commission purposes.
29
What must a member do to compute percentage markup in a **proceeds transaction**?
* Determine compensation on the sell side * Determine compensation on the buy side * Add the two and apply to the inside market on the buy side ## Footnote This ensures accurate calculation of fees.
30
What is the **best indication** of the prevailing market price in the absence of other evidence?
A member's own contemporaneous cost ## Footnote This reflects the price at which the firm last bought as principal.
31
What are some **prohibited activities** in trading?
* Setting up fictitious accounts * Unauthorized trading * Trading on a discretionary basis without authorization * Circulating false information ## Footnote These actions can lead to disciplinary action by FINRA.
32
What is **churning** in the context of trading?
Excessive trading activity in terms of frequency or size ## Footnote This practice is prohibited and can lead to regulatory scrutiny.
33
What is the consequence of **excessive trading** that generates a profit?
It does not mitigate the offense ## Footnote Profitability does not justify excessive trading practices.
34
What is **marking the opening or close**?
A prohibited practice of affecting transactions to influence a security's price ## Footnote This is considered manipulative behavior.
35
What must general securities principals have in place to prevent **fraudulent behavior**?
* Written supervisory procedures * Robust surveillance * Training and retraining representatives ## Footnote These measures help identify and curtail manipulative practices.
36
What is prohibited in customer transactions to ensure fairness and prevent fraud?
* Trading ahead * Crossing stock * Marking the close * High-pressure sales tactics * Pump-and-dump schemes * Interpositioning ## Footnote These activities are deemed violations subjecting firms or associated persons to sanctions.
37
What must general securities principals have in place to identify and curtail fraudulent behavior?
* Training and retraining representatives * Written supervisory procedures * Robust surveillance * Continual monitoring for red flags * Testing procedures ## Footnote Supervisors must document their work to show compliance to FINRA examiners.
38
True or false: Engaging in contradictory recommendations to different investors with similar objectives could be deemed fraudulent.
TRUE ## Footnote This practice is considered a violation if not justified by unique circumstances.
39
What are **breakpoints** in mutual fund purchases?
Quantity discounts based on the dollar amount of a purchase ## Footnote Higher investments lead to lower sales charges.
40
What must a member firm do regarding breakpoints?
* Advise customers about breakpoint schedules * Help customers reach a breakpoint ## Footnote Members must ensure customers are aware of potential savings.
41
What is a **net transaction**?
A principal transaction where a market maker buys at one price and sells to the customer at a different price ## Footnote Written consent is required from noninstitutional customers.
42
What must member firms do before opening a **day trading account** for a noninstitutional customer?
* Provide a risk disclosure statement * Approve the account for day trading strategy * Gather essential customer facts ## Footnote This includes investment objectives, financial status, and trading experience.
43
What is the minimum equity requirement for **pattern day traders**?
$25,000 ## Footnote Accounts falling below this amount must be restricted.
44
What must member firms provide to customers regarding **day trading risks**?
A risk disclosure statement outlining the risks involved ## Footnote This must be provided before implementing any day trading strategy.
45
What are the risks associated with **trading on margin**?
* Lose more funds than deposited * Forced sale of securities * No requirement for firm to contact before selling * No choice in which securities are sold ## Footnote Margin trading can lead to significant financial losses.
46
What must member firms provide in **customer trade confirmations**?
* Whether acted as agent or principal * Identity of shares and price * Commission or markup/markdown * Payment for order flow details ## Footnote Confirmations must comply with SEC Rule 106-10.
47
What is required for **DVP/RVP trades** confirmations?
Must be delivered no later than T+1 ## Footnote Assurance from the bank regarding funds availability is needed before delivery.
48
What is the requirement for **confirmations for DVP/RVP trades** according to SEC Rule lOb-10?
Delivered to customers no later than T+1 ## Footnote Prior to delivery, assurance from the bank that funds are available to pay upon delivery must be received.
49
True or false: There is a requirement to disclose **yield** on a trade confirmation for CMOs.
FALSE ## Footnote If disclosed, additional information would be required, but nominal face amount, interest rate, maturity date, settlement date, and weighted average coupon (WAC) should be included.
50
What must a firm have to **electronically send documents** to customers?
* Procedures to ensure delivery * Protection of confidentiality and security * Written consent from customers ## Footnote Customers must also be provided with paper form information upon request.
51
Member firms must act as **forwarding agents** for what type of materials?
* Proxies * Quarterly reports * Other corporate materials ## Footnote This is for customers whose stock is held in street name.
52
What must a member firm do if a customer signs and returns a **proxy statement** without indicating how to vote?
Vote the shares as recommended by management ## Footnote Member firms are reimbursed by issuers for costs related to forwarding proxy materials.
53
What is required for a member firm to hold a customer's **mail**?
* Written instructions from the customer * Time period for holding mail * Acceptable reason if over three months ## Footnote Convenience is not an acceptable reason for holding mail longer than three months.
54
A general securities member must include in a customer account statement a **per-share estimated value** of what types of securities?
* Direct participation programs (DPP) * Unlisted real estate investment trust (REIT) securities ## Footnote The estimate must be reliable and disclose that these securities are not listed and largely illiquid.
55
What does the **Securities Act of 1933** provide for regarding securities sold in error?
Right of rescission ## Footnote This allows the right to buy back securities at the original purchase price plus interest.
56
What is a **discretionary account**?
An account where the customer gives the member trading authorization ## Footnote The customer signs a power of attorney, which can be revoked at any time.
57
In a discretionary account, what must the member firm choose?
* Action (buy or sell) * Asset (security) * Amount (number of shares or dollar amount) ## Footnote If the member chooses price or timing, it is termed a not-held order.
58
What must be obtained before exercising **discretionary authority**?
Approval by a principal ## Footnote The e-signature of the grantee must also be obtained.
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