Assessment and Evaluation Flashcards

Under Regulation Best Interest (Reg BI), how does the standard for broker-dealers differ from the traditional FINRA suitability standard?

Answer: Reg BI imposes a 'best interest' standard that is higher than mere suitability

Reg BI requires broker-dealers to act in the retail customer's best interest and not place their own financial interests ahead of the customer's, exceeding the older suitability standard.

When assessing a complex product's suitability, what is a 'reasonable basis' determination?

Answer: The broker has conducted reasonable diligence to understand the product's risks and rewards before recommending it

Reasonable basis suitability requires the registered representative to understand the product well enough to determine that it could be suitable for at least some investors before recommending it.

A firm's supervisory review of a registered representative's recommendations reveals a pattern of recommending highly illiquid private placements to customers with stated short-term liquidity needs. This most directly violates which FINRA obligation?

Answer: Customer-specific suitability under Rule 2111

Recommending illiquid products to customers with documented short-term liquidity needs violates customer-specific suitability under FINRA Rule 2111.

What is the primary purpose of collecting a customer's 'investment objectives' during account opening?

Answer: To tailor investment recommendations to align with what the customer is trying to achieve financially

Investment objectives such as growth, income, or capital preservation guide brokers in making recommendations that align with a customer's financial goals.

A registered representative recommends a municipal bond to a customer in the 10% marginal tax bracket. What evaluation concern does this raise?

Answer: Municipal bonds' tax advantage may provide little benefit to low-bracket taxpayers, making taxable alternatives potentially more suitable

The tax-exempt benefit of municipal bonds primarily benefits high-bracket investors; for low-bracket customers, taxable securities may offer better after-tax yields.

Under FINRA rules, which of the following customers is presumed NOT to need basic suitability protections when receiving institutional recommendations?

Answer: An institutional investor with $50 million in assets that has an independent investment adviser

FINRA Rule 2111 allows firms to limit customer-specific suitability obligations for institutional customers with $50M+ in assets who use independent investment advisers.

When evaluating whether leveraged ETFs are suitable for a buy-and-hold retail investor, which characteristic is most critical to disclose?

Answer: Leveraged ETFs are designed for short-term trading and experience decay over time due to daily rebalancing

Daily rebalancing causes leveraged ETFs to experience compounding decay in volatile markets, making them unsuitable for long-term buy-and-hold strategies.