Stock Broker Customer Accounts & Suitability 1 — Questions and Answers
Question 1: What information must a broker-dealer gather before opening a new customer account under the 'know your customer' (KYC) rule?
- Only the customer's name and phone number
- Name, address, date of birth, Social Security number, financial situation, investment objectives, and risk tolerance (Correct answer)
- Only investment objectives
- Name and bank account number only
Correct answer: Name, address, date of birth, Social Security number, financial situation, investment objectives, and risk tolerance
KYC requirements mandate collecting comprehensive customer information including personal identification, financial status, investment experience, and investment objectives to ensure suitable recommendations.
Question 2: What is a 'discretionary account' and what special requirement does it have?
- An account with automatic monthly contributions; requires a minimum balance
- An account where the broker can make trading decisions without prior customer approval for each trade; requires written authorization from the customer (Correct answer)
- An account for minors; requires parental consent
- An account for options trading; requires options agreement
Correct answer: An account where the broker can make trading decisions without prior customer approval for each trade; requires written authorization from the customer
In a discretionary account, the broker has written authorization to make investment decisions (select security, price, quantity, and timing) on the client's behalf without calling for approval on each transaction.
Question 3: What is a UGMA/UTMA account?
- A retirement account for union members
- A custodial account where an adult manages assets gifted to a minor until the minor reaches the age of majority (Correct answer)
- An account for undocumented investors
- A joint account between unrelated business partners
Correct answer: A custodial account where an adult manages assets gifted to a minor until the minor reaches the age of majority
Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts are custodial accounts allowing adults to hold and manage securities gifted to minors until they reach legal adulthood.
Question 4: Which type of account allows married couples to hold securities jointly with the right of survivorship, so that assets automatically transfer to the surviving spouse?
- Tenants in common
- Joint tenants with right of survivorship (JTWROS) (Correct answer)
- Community property account
- Individual account
Correct answer: Joint tenants with right of survivorship (JTWROS)
In a Joint Tenants with Right of Survivorship (JTWROS) account, if one account holder dies, their share automatically passes to the surviving joint tenant(s) without going through probate.
Question 5: Under FINRA Rule 4512, broker-dealers must make 'reasonable efforts' to obtain which information for non-institutional customer accounts?
- Tax returns for the past 3 years
- The name of a trusted contact person (Correct answer)
- Employment history for 10 years
- A credit score from a major bureau
Correct answer: The name of a trusted contact person
FINRA Rule 4512 requires broker-dealers to make reasonable efforts to obtain the name and contact information of a trusted contact person for non-institutional customer accounts, to help protect vulnerable customers.
Question 6: What is an IRA (Individual Retirement Account) and what is the key tax benefit of a Traditional IRA?
- A corporate pension plan; employer contributions are tax-free
- A personal retirement account where contributions may be tax-deductible and earnings grow tax-deferred until withdrawal (Correct answer)
- A government-sponsored savings bond; interest is federally tax-free
- A health savings account; withdrawals for medical expenses are tax-free
Correct answer: A personal retirement account where contributions may be tax-deductible and earnings grow tax-deferred until withdrawal
A Traditional IRA allows eligible individuals to make potentially tax-deductible contributions, and earnings grow tax-deferred until distributions are taken in retirement, when they are taxed as ordinary income.
Stock Broker Customer Accounts & Suitability 1
What information must a broker-dealer gather before opening a new customer account under the 'know your customer' (KYC) rule?