21 Customer Accounts & Suitability Practice Questions & Answers

1. 1. A brokerage account is registered as tenants in common (TIC) between two unrelated adults. One of the owners dies. What happens to that owner's interest in the account?

   • A.The entire account must be liquidated and the proceeds sent to the surviving owner.
   • B.It passes automatically to the surviving co-owner outside of probate.
   • C.The account converts by operation of law into a joint tenants with right of survivorship registration.
   • D.The decedent's stated fractional share passes to the decedent's estate and is distributed through probate.✓ Answer

   In a tenants-in-common registration each owner holds a stated fractional interest that becomes part of that owner's estate at death and is distributed through probate. Only a joint tenants with right of survivorship (JTWROS) registration gives the survivor the entire account outside probate.

   Source: FINRA Series 7 Content Outline, Function 2 (account registration types); FINRA Rule 4512Report a problem with this question

2. 2. Which statement correctly describes a custodial account opened under the Uniform Transfers to Minors Act (UTMA)?

   • A.The account is registered under the minor's Social Security number, the minor is the beneficial owner, and the custodian acts as a fiduciary.✓ Answer
   • B.One custodian may hold a single account for two or more minor children of the same family.
   • C.The custodian may open the account on margin in order to increase the minor's long-term return.
   • D.The donor may revoke the gift at any time before the minor reaches the age of majority.

   A UGMA/UTMA account follows the rule of one custodian, one minor, one account. The gift is irrevocable and complete when made, the minor is the beneficial owner and the income is reported under the minor's own Social Security number, and the custodian must manage the assets as a fiduciary in a cash account, since margin is not permitted.

   Source: Uniform Transfers to Minors Act (UTMA); FINRA Series 7 Content Outline, Function 2 (account registration types)Report a problem with this question

3. 3. A corporation wants to open a cash account at a broker-dealer and have its treasurer enter orders. Which document must the firm obtain to establish who is authorized to trade the account?

   • A.The partnership agreement identifying the general partners.
   • B.Letters testamentary naming the treasurer.
   • C.A corporate resolution, supported by the charter or bylaws, naming the individuals authorized to transact business.✓ Answer
   • D.A personal guarantee signed by the chief executive officer.

   A firm must record the names of the persons authorized to transact business for a corporate account, and that authority comes from a corporate resolution supported by the charter or bylaws. The same documents control whether the corporation may trade on margin or in options, because those activities are permitted only if the corporation's governing documents allow them.

   Source: FINRA Rule 4512(a)(1) (Customer Account Information); FINRA Series 7 Content Outline, Function 2Report a problem with this question

4. 4. An individual account carries a transfer on death (TOD) beneficiary designation. Which statement about the named beneficiary is correct?

   • A.The beneficiary has no ownership or trading rights while the account owner is alive, but receives the assets at the owner's death outside of probate.✓ Answer
   • B.The beneficiary becomes a joint owner and may request distributions immediately.
   • C.The designation is valid only if the beneficiary is the owner's spouse or child.
   • D.The beneficiary must approve any change in the account's stated investment objectives.

   A TOD designation is only a beneficiary instruction attached to an individual account. The owner keeps complete control and may trade, withdraw or change the beneficiary at any time; the beneficiary acquires rights only at the owner's death, at which point the assets transfer by contract and bypass probate.

   Source: FINRA Series 7 Content Outline, Function 2 (account registration types)Report a problem with this question

5. 5. A customer telephones her registered representative and says: "Buy 500 shares of the common stock I already hold in my account — you decide the price and the time of execution today." What authority does the representative need?

   • A.None beyond the customer's verbal instruction, because the customer specified the action, the asset and the amount; price and time discretion is not discretion, and the verbal authority expires at the end of that business day.✓ Answer
   • B.Verbal authority is sufficient provided a principal approves the order after it has been executed.
   • C.Prior written discretionary authority, because choosing the execution price is by definition discretion.
   • D.No authority at all, and the instruction remains in force until the customer cancels it.

   An order is discretionary only if the representative chooses the action (buy or sell), the asset or the amount. Because the customer supplied all three, the representative is exercising only price and time discretion, which requires no written authorization — but that verbal authority is good only until the close of the business day on which it was given unless the customer signs and dates written instructions.

   Source: FINRA Rule 3260 (Discretionary Accounts); Securities Exchange Act of 1934, Section 3(a)(35)Report a problem with this question

6. 6. Before a registered representative may exercise discretion in a customer's account, what does FINRA require?

   • A.Written authorization from the customer, plus a review of the account by a principal at least once each calendar quarter.
   • B.Written authorization from the customer only if the account holds at least $50 million in total assets.
   • C.Prior written authorization from the customer naming the individual who will exercise discretion, and prompt written approval by a designated principal of each discretionary order.✓ Answer
   • D.Verbal authorization from the customer, confirmed in writing by the firm within 30 calendar days.

   FINRA Rule 3260 prohibits the exercise of discretionary power unless the customer has given prior written authorization naming a stated individual, and it requires a designated principal to approve each discretionary order promptly in writing. The rule also requires frequent review of discretionary accounts so that excessive trading is detected.

   Source: FINRA Rule 3260 (Discretionary Accounts)Report a problem with this question

7. 7. A customer dies leaving a valid will. The person named in the will as executor asks to open an estate account at the firm. Which documents must the firm obtain?

   • A.A court order of guardianship together with the death certificate.
   • B.Letters of administration issued by the probate court.
   • C.A certified copy of the death certificate together with letters testamentary.✓ Answer
   • D.The trust agreement and a corporate resolution.

   Letters testamentary are the court document that empowers an executor named in a will to act for the estate; letters of administration are issued instead when a person dies without a will and the court appoints an administrator. The firm needs a certified death certificate together with the appropriate letters before it may accept instructions on the estate account.

   Source: FINRA Series 7 Content Outline, Function 2 (fiduciary account documentation)Report a problem with this question

8. 8. A customer executes a limited (trading) power of attorney in favor of her adult son. Which statement is correct?

   • A.The son automatically becomes a joint owner of the account with right of survivorship.
   • B.If the power of attorney is durable, it remains in effect after the customer's death.
   • C.The son may enter orders in the account but may not withdraw cash or securities, and the authorization ends at the customer's death.✓ Answer
   • D.The son may both enter orders and request that cash be wired out of the account to his own bank.

   A limited power of attorney conveys trading authority only; a full power of attorney is required before a third party may withdraw cash or securities. A durable power of attorney survives the grantor's incapacity, but every power of attorney terminates on the grantor's death, at which point the firm cancels open orders, freezes the account and awaits instructions from the estate representative.

   Source: FINRA Series 7 Content Outline, Function 2 (trading authorization and powers of attorney)Report a problem with this question

9. 9. What does FINRA require of a member firm with respect to a trusted contact person for a non-institutional customer account?

   • A.Naming a trusted contact grants that person limited trading authority over the account.
   • B.The trusted contact must be at least 65 years old and must sign the new account form.
   • C.The firm must obtain a trusted contact and may not open the account until one is named.
   • D.The firm must make reasonable efforts to obtain the name and contact information of a person aged 18 or older, and the account may be opened even if the customer declines to provide one.✓ Answer

   FINRA Rule 4512(a)(1)(F) requires only reasonable efforts to obtain a trusted contact aged 18 or older, along with written disclosure that the firm may contact that person about suspected financial exploitation, the customer's current contact information or health status, or the identity of a legal guardian, executor, trustee or holder of a power of attorney. The trusted contact has no authority over the account and the customer may decline to name one.

   Source: FINRA Rule 4512(a)(1)(F)Report a problem with this question

10. 10. Under a broker-dealer's Customer Identification Program, which set of information must be obtained from a natural person before the account is opened?

    • A.Name, date of birth, a residential or business street address, and a Social Security or other taxpayer identification number.✓ Answer
    • B.Name, address, estimated net worth, and stated investment objectives.
    • C.Name, employer, credit score, and taxpayer identification number.
    • D.Name, a post office box address, date of birth, and mother's maiden name.

    The Customer Identification Program required by the USA PATRIOT Act and the Bank Secrecy Act rules obliges the firm to collect name, date of birth, a physical street address (a post office box alone is not acceptable) and a taxpayer identification number, to verify identity within a reasonable time, and to retain the identifying information for five years after the account is closed. Net worth and investment objectives are suitability information, not CIP information.

    Source: USA PATRIOT Act Section 326; Customer Identification Program rule (31 CFR Chapter X)Report a problem with this question

11. 11. A customer applies to trade options. Which statement about opening and approving the options account is correct?

    • A.Options trading may begin as soon as the signed options account agreement has been mailed to the customer.
    • B.The current options disclosure document must be furnished at or before the time the account is approved, a Registered Options Principal must approve the account before any options trade, and the signed options account agreement must be obtained within 15 days after approval.✓ Answer
    • C.The options disclosure document must be delivered within 15 days after the customer's first options trade.
    • D.A branch manager may approve the account up to 30 days after the first options transaction.

    Options approval is a pre-trade requirement: the customer must receive the current "Characteristics and Risks of Standardized Options" no later than account approval, and a Registered Options Principal must specifically approve the account before any options order is accepted. The signed agreement, and the verification of the background and financial information relied on for approval, follow within 15 days after approval.

    Source: FINRA Rule 2360 (Options); Cboe Rule 9.1 (Opening of Accounts); Options Clearing Corporation options disclosure documentReport a problem with this question

12. 12. A customer in a high tax bracket asks that the bonds in her traditional IRA be switched into a municipal bond fund so that the interest will be federally tax-exempt. Which reasoning best explains why this is generally an unsuitable strategy inside the IRA?

    • A.Municipal bonds carry more market risk than any other fixed income security and are therefore never appropriate for retirement money.
    • B.Income earned inside the IRA is already sheltered from current tax, so the lower tax-exempt yield adds nothing, and every dollar distributed from a traditional IRA is taxed as ordinary income anyway.✓ Answer
    • C.An IRA may hold only equity securities and mutual funds that invest in equities.
    • D.Federal law prohibits an IRA from holding any municipal security.

    A traditional IRA already defers tax on all income earned inside it, so holding a tax-exempt investment there wastes the exemption while accepting the lower yield that tax-exempt issues normally pay, and the eventual distribution is taxed as ordinary income regardless of its source. Placing a tax-advantaged product inside a tax-advantaged account is redundant rather than illegal, which is why the objection is one of suitability.

    Source: FINRA Rule 2111 (Suitability); Internal Revenue Code Section 408 (individual retirement accounts)Report a problem with this question

13. 13. A registered representative recommends a long series of transactions to a customer. Each individual recommendation fits the customer's investment profile, but taken together the frequency and the resulting costs are excessive in light of that profile. Which suitability obligation has been violated?

    • A.The quantitative suitability obligation.✓ Answer
    • B.The reasonable-basis obligation.
    • C.None of them, because each recommendation was individually suitable.
    • D.The customer-specific obligation.

    FINRA Rule 2111 imposes three obligations: reasonable-basis (the product is suitable for at least some investors), customer-specific (it suits this particular customer's profile), and quantitative (a series of recommended transactions is not excessive in number, size or frequency for that profile). Excessive trading violates the quantitative obligation even when every single trade would pass on its own, and it is prohibited whether or not the account made money.

    Source: FINRA Rule 2111 (Suitability), Supplementary Material .05Report a problem with this question

14. 14. Regulation Best Interest applies to which of the following?

    • A.Any recommendation of a specific security, but only when the account is discretionary.
    • B.A recommendation of a securities transaction, an investment strategy, an account type, or a rollover made to a retail customer — a natural person who uses the recommendation primarily for personal, family or household purposes.✓ Answer
    • C.Recommendations made to institutional customers with at least $50 million in total assets.
    • D.Only recommendations to purchase a security, never a recommendation to sell or to hold.

    Regulation Best Interest (Exchange Act Rule 15l-1) attaches whenever a broker-dealer or an associated person makes a recommendation to a retail customer, and the SEC expressly includes recommendations about account type and about rollovers or transfers within its scope. Recommendations made to non-natural persons such as corporations and institutions remain governed by FINRA Rule 2111.

    Source: Securities Exchange Act Rule 15l-1 (Regulation Best Interest)Report a problem with this question

15. 15. Which statement about the Care Obligation of Regulation Best Interest is correct?

    • A.It is satisfied as long as all material conflicts of interest are disclosed to the customer in writing.
    • B.It requires the broker-dealer to recommend the lowest cost product available in every case.
    • C.It applies only when the representative exercises discretion over the account.
    • D.It requires the representative to understand the recommendation's risks and costs and to consider reasonably available alternatives, and it cannot be satisfied by disclosure alone.✓ Answer

    The Care Obligation goes beyond traditional suitability by requiring consideration of the cost of a recommendation and of reasonably available alternatives. Regulation Best Interest's four obligations — Disclosure, Care, Conflict of Interest and Compliance — are cumulative, so disclosing a conflict never substitutes for acting in the retail customer's best interest; cost is one factor among several, so the cheapest product is not automatically required.

    Source: Securities Exchange Act Rule 15l-1 (Regulation Best Interest — Care Obligation)Report a problem with this question

16. 16. A firm opens and services an account for a customer who directs every one of her own trades; the firm has never made a recommendation to her. Which FINRA rule nevertheless obligates the firm to know the essential facts about this customer?

    • A.FINRA Rule 2090, the know your customer rule.✓ Answer
    • B.No FINRA rule applies, because no recommendation was made.
    • C.FINRA Rule 3260, governing discretionary accounts.
    • D.FINRA Rule 2111, the suitability rule.

    FINRA Rule 2090 requires reasonable diligence, in regard to the opening and maintenance of every account, to know the essential facts about every customer and the authority of each person acting on the customer's behalf — it is triggered by the account relationship itself and needs no recommendation. Rule 2111 and Regulation Best Interest attach only when a recommendation of a transaction or strategy, including a recommendation to hold, is made.

    Source: FINRA Rule 2090 (Know Your Customer); FINRA Rule 2111 (Suitability)Report a problem with this question

17. 17. Which statement correctly describes the tax mechanics of a Roth IRA compared with a traditional IRA?

    • A.Contributions to a Roth IRA are not deductible, and all distributions are taxed as ordinary income when received.
    • B.Contributions to a Roth IRA are deductible, and qualified distributions are also received tax free.
    • C.Contributions to a Roth IRA are not deductible, qualified distributions including earnings are received tax free once the five-year period and a qualifying event are satisfied, and the original owner is not subject to required minimum distributions during life.✓ Answer
    • D.Contributions to a Roth IRA are deductible, and earnings are taxed at long-term capital gains rates on withdrawal.

    A Roth IRA is funded with after-tax dollars, so no deduction is available, but the account grows and distributes tax free provided the five-year holding period has run and the distribution follows a qualifying event such as attaining age 59½, death or disability. Unlike a traditional IRA, a Roth imposes no required minimum distributions on the original owner during their lifetime.

    Source: Internal Revenue Code Section 408A (Roth IRAs)Report a problem with this question

18. 18. Which statement about moving assets between retirement accounts is correct?

    • A.A direct trustee-to-trustee transfer is limited to one per year and is subject to 20% mandatory withholding.
    • B.Both direct transfers and 60-day rollovers are limited to one in any 12-month period.
    • C.A direct trustee-to-trustee transfer may be made as often as the owner wishes and is not subject to withholding, while an indirect 60-day rollover between IRAs is permitted only once in any 12-month period and an employer plan distribution paid to the participant is subject to 20% mandatory federal withholding.✓ Answer
    • D.All rollovers must be completed within 30 days and are always received free of tax.

    A direct transfer never passes through the owner's hands, so it is neither a distribution nor subject to withholding and may be repeated without limit. An indirect rollover is a distribution the owner must redeposit within 60 days, it may be done only once per 12-month period across all of the owner's IRAs, and when the money comes from an employer plan the plan must withhold 20% for federal income tax.

    Source: Internal Revenue Code Sections 402 and 408; Internal Revenue Code Section 3405(c) (mandatory withholding)Report a problem with this question

19. 19. Which statement about employer-sponsored retirement arrangements is correct?

    • A.ERISA covers private-sector plans but not federal, state or local government plans, and a non-qualified deferred compensation arrangement is not an ERISA-qualified plan, leaving the employee a general creditor of the employer.✓ Answer
    • B.A 403(b) tax-sheltered annuity may be offered by any employer, including a for-profit corporation.
    • C.ERISA governs private-sector plans as well as state and municipal government plans.
    • D.A non-qualified deferred compensation plan gives the employer an immediate tax deduction in the year the compensation is deferred.

    ERISA was enacted to protect participants in private-sector plans; governmental plans and most church plans are excluded, as are non-qualified arrangements. Because a non-qualified deferred compensation promise is unfunded and may lawfully discriminate in favor of selected executives, the employee holds only the employer's unsecured promise and bears the risk of the employer's insolvency, and the employer takes its deduction only when the compensation is actually paid. A 403(b) plan is limited to 501(c)(3) organizations and public school systems.

    Source: Employee Retirement Income Security Act of 1974 (ERISA); Internal Revenue Code Section 403(b)Report a problem with this question

20. 20. A customer signs a transfer initiation form to move her account from one member firm to another. Under FINRA's customer account transfer rule, what are the carrying firm's deadlines?

    • A.Validate within two business days of receipt, and complete the transfer within five business days following validation.
    • B.Validate the instruction or take exception to it within one business day of receipt, and complete the transfer within three business days following validation.✓ Answer
    • C.Validate within three business days of receipt, and complete the transfer within one business day following validation.
    • D.Validate within one business day of receipt, and complete the transfer within ten business days following validation.

    FINRA Rule 11870 requires the carrying member to validate the transfer instruction or take exception to it within one business day of receipt and, once validated, to complete the transfer within three business days. Assets that cannot be transferred must be liquidated or re-registered according to the customer's instructions.

    Source: FINRA Rule 11870 (Customer Account Transfer Contracts)Report a problem with this question

21. 21. A firm reasonably believes that an 80-year-old customer is being financially exploited by a caller who is demanding a large wire out of her account. Which statement about a temporary hold is correct?

    • A.The firm may place a hold only if the customer has previously named a trusted contact person.
    • B.The firm may, but is not required to, place a temporary hold on the disbursement; it must notify the parties authorized to transact business on the account and the trusted contact person within two business days, and the hold expires 15 business days after it was first placed unless it is extended.✓ Answer
    • C.The firm is required to place a hold and must notify the state securities regulator within two business days.
    • D.The firm may place a hold and must notify the parties authorized to transact business within 15 business days, and the hold expires after 2 business days.

    FINRA Rule 2165 is permissive: a member may place a temporary hold on a disbursement or on a securities transaction when it reasonably believes that financial exploitation of a specified adult — a person aged 65 or older, or aged 18 or older with an impairment that prevents self-protection — has occurred or is being attempted. The member must notify all parties authorized to transact business and the trusted contact (unless that person is suspected of the exploitation) within two business days, conduct an internal review, and the hold lapses 15 business days after it was first placed unless extended under the rule.

    Source: FINRA Rule 2165 (Financial Exploitation of Specified Adults)Report a problem with this question

Practice questions based on the FINRA Series 7 content outline and on named federal securities statutes and FINRA, MSRB and SEC rules. Not affiliated with or endorsed by FINRA, and not investment advice. Amounts that are re-set periodically — rates, fee schedules, contribution limits and penalty amounts — are deliberately kept out of the answers; where a computation needs such a figure, the question supplies it. Confirm current requirements with FINRA and your firm before testing. About the Series 7 exam (FINRA) →