S-12 Client Relations and Account Management 1 — Questions and Answers
Question 1: When opening a new account, a broker-dealer must obtain which of the following from the customer?
- Only the customer's name and address
- Name, address, date of birth, and Social Security Number (or taxpayer ID) (Correct answer)
- Only a government-issued ID number
- Only employment information
Correct answer: Name, address, date of birth, and Social Security Number (or taxpayer ID)
FINRA rules and CIP requirements mandate collecting name, address, date of birth, and taxpayer identification number for new accounts.
Question 2: A 'discretionary account' allows:
- The customer to trade without broker approval
- The broker to make trading decisions without contacting the customer for each trade (Correct answer)
- Unlimited margin borrowing
- The broker to share profits with the customer
Correct answer: The broker to make trading decisions without contacting the customer for each trade
In a discretionary account, the registered representative has written authorization to make trading decisions (security, quantity, price) without prior customer approval for each trade.
Question 3: Which type of account allows assets to transfer directly to a named beneficiary upon the account holder's death without going through probate?
- Joint tenancy with right of survivorship (JTWROS)
- Transfer on Death (TOD) account (Correct answer)
- Revocable living trust account
- Custodial account
Correct answer: Transfer on Death (TOD) account
A Transfer on Death (TOD) account designates a beneficiary who receives the assets directly upon the account holder's death, bypassing probate.
Question 4: Under FINRA's suitability rule, a registered representative must have reasonable basis to believe a recommendation is suitable based on all of the following EXCEPT:
- Customer's age
- Customer's risk tolerance
- Customer's neighbor's investment strategy (Correct answer)
- Customer's investment objectives
Correct answer: Customer's neighbor's investment strategy
Suitability is based on the individual customer's profile — including age, risk tolerance, financial situation, and objectives — not on what others are doing.
Question 5: A registered representative receives a tip about a company from a friend at that company. Trading on this information would be an example of:
- Scalping
- Insider trading (Correct answer)
- Front running
- Painting the tape
Correct answer: Insider trading
Trading securities based on material, nonpublic information obtained from a company insider constitutes insider trading, which is illegal under SEC Rule 10b-5.
Question 6: What is the primary purpose of sending a trade confirmation to a customer?
- To solicit additional trades
- To provide details of the executed transaction, including price, quantity, and commissions (Correct answer)
- To fulfill margin call requirements
- To notify the customer of account fees
Correct answer: To provide details of the executed transaction, including price, quantity, and commissions
Trade confirmations are legally required documents that inform customers of the specific details of each transaction executed on their behalf.
S-12 Client Relations and Account Management 1
When opening a new account, a broker-dealer must obtain which of the following from the customer?