FINRA Assessment and Evaluation 2 — Questions and Answers
Question 1: A registered representative is assessing a client's risk tolerance for a new account. Which factor is LEAST relevant to this evaluation?
- Investment time horizon
- Current market index levels (Correct answer)
- Income and net worth
- Prior investment experience
Correct answer: Current market index levels
Current market index levels are a market condition, not a client-specific factor relevant to individual risk tolerance assessment.
Question 2: Under FINRA Rule 2111, what does the 'quantitative suitability' obligation require of a broker?
- Ensuring each individual transaction is suitable
- Avoiding excessive trading in a customer's account (Correct answer)
- Recommending products with the lowest fees
- Disclosing all conflicts of interest before trading
Correct answer: Avoiding excessive trading in a customer's account
Quantitative suitability prohibits a broker who controls an account from making excessive trades that are unsuitable even if each individual trade might be suitable.
Question 3: When evaluating a customer's financial profile, which best describes 'liquidity needs'?
- The customer's desire to invest in liquid markets
- The ease with which the customer can convert investments to cash without loss (Correct answer)
- The customer's preference for short-term securities only
- The broker-dealer's ability to execute trades quickly
Correct answer: The ease with which the customer can convert investments to cash without loss
Liquidity needs refer to how readily a customer may need to access funds, affecting which investments are appropriate.
Question 4: A customer states she has a 'moderate' risk profile but her portfolio consists entirely of speculative penny stocks. What must a registered representative do?
- Accept the portfolio as-is since the customer approved it
- Reassess suitability and discuss the inconsistency with the customer (Correct answer)
- Immediately liquidate all positions without consulting the customer
- File a SAR (Suspicious Activity Report) with FinCEN
Correct answer: Reassess suitability and discuss the inconsistency with the customer
A registered representative must identify and discuss discrepancies between stated risk tolerance and actual holdings to ensure suitability.
Question 5: In evaluating whether an annuity recommendation is suitable under FINRA guidance, which of the following must be specifically considered?
- The issuing insurance company's stock price
- Whether the customer has other retirement assets outside the annuity (Correct answer)
- The registered representative's commission structure on the sale
- The annuity's historical performance relative to the S&P 500
Correct answer: Whether the customer has other retirement assets outside the annuity
FINRA guidance on annuity suitability requires evaluating a customer's entire financial picture, including other retirement assets, to avoid over-concentration.
Question 6: Which of the following best describes the 'customer-specific' component of suitability under FINRA Rule 2111?
- The recommendation must be suitable for the general investing public
- The recommendation must be suitable based on that particular customer's investment profile (Correct answer)
- The product must have a track record of positive returns for most customers
- The recommendation must align with the firm's current product offerings
Correct answer: The recommendation must be suitable based on that particular customer's investment profile
Customer-specific suitability requires that a recommendation be appropriate for that individual customer's unique investment profile, not just investors generally.
Question 7: A broker recommends a high-yield bond fund to an 80-year-old widow living on a fixed income with no other investments. Which suitability element is most likely violated?
- Reasonable basis suitability
- Customer-specific suitability (Correct answer)
- Quantitative suitability
- Product complexity suitability
Correct answer: Customer-specific suitability
Customer-specific suitability is violated because the high-risk, volatile nature of high-yield bonds is inconsistent with the client's age, income dependency, and lack of other assets.
FINRA Assessment and Evaluation 2
A registered representative is assessing a client's risk tolerance for a new account.
Which factor is LEAST relevant to this evaluation?