SIE Customer Accounts and Suitability 2 — Questions and Answers
Question 1: What is a Uniform Gifts to Minors Act (UGMA) account?
- A retirement account for minors
- A custodial account holding assets for a minor, managed by an adult custodian (Correct answer)
- A college savings account with tax benefits
- A trust account requiring court oversight
Correct answer: A custodial account holding assets for a minor, managed by an adult custodian
A UGMA account is a custodial account where an adult manages assets on behalf of a minor until the minor reaches adulthood.
Question 2: A margin call is issued when:
- A customer exceeds the maximum position size
- The equity in a margin account falls below the maintenance margin requirement (Correct answer)
- A broker wants to promote additional trading
- A stock in the account pays a dividend
Correct answer: The equity in a margin account falls below the maintenance margin requirement
A maintenance margin call requires the customer to deposit additional funds when account equity drops below the maintenance requirement.
Question 3: Under FINRA's Best Execution rule, broker-dealers must:
- Execute all trades on the NYSE
- Seek the most favorable terms reasonably available for customer orders (Correct answer)
- Match any competitor's price
- Execute large orders before small ones
Correct answer: Seek the most favorable terms reasonably available for customer orders
Best execution requires broker-dealers to use reasonable diligence to find the most favorable terms for customer order execution.
Question 4: What is a power of attorney (POA) in a brokerage account context?
- A document allowing a minor to trade independently
- A written authorization for a third party to act on the account owner's behalf (Correct answer)
- A court order to freeze an account
- A permission form for options trading
Correct answer: A written authorization for a third party to act on the account owner's behalf
A power of attorney authorizes a designated person to make investment decisions and transactions for another person's account.
Question 5: SIPC (Securities Investor Protection Corporation) protects investors against:
- Market losses from bad investments
- Broker-dealer insolvency and missing customer assets (Correct answer)
- Fraud committed by the issuer of securities
- Losses on options strategies
Correct answer: Broker-dealer insolvency and missing customer assets
SIPC covers up to $500,000 (including $250,000 in cash) per customer if a member broker-dealer becomes insolvent.
Question 6: A pattern day trader is defined as someone who executes how many or more day trades within five business days?
- 2
- 3
- 4 (Correct answer)
- 5
Correct answer: 4
FINRA Rule 4210 defines a pattern day trader as any customer who executes four or more day trades in five business days in a margin account.
SIE Customer Accounts and Suitability 2
What is a Uniform Gifts to Minors Act (UGMA) account?