CSLB General Building (B) — All Questions

In a joint tenants with rights of survivorship (JTWROS) account, when one owner dies:

• a.The account is frozen permanently
• b.The deceased owner's interest passes automatically to the surviving owner(s)✓
• c.The estate must sell all securities immediately
• d.The account converts to a corporate account

In a JTWROS account, the surviving owner automatically inherits the deceased owner's interest in the account, bypassing probate. This contrasts with tenants in common, where a deceased owner's share passes to that owner's estate according to their will or state law.

A custodial account established under the Uniform Transfers to Minors Act (UTMA) has which feature?

• a.Two minors may be named as co-owners
• b.The custodian owns the assets personally
• c.There is one custodian and one minor, and the assets belong to the minor✓
• d.The account can be opened only by a grandparent

A UTMA account has a single custodian managing assets for a single minor, and the assets legally belong to the minor. The custodian manages the account for the minor's benefit and must act prudently; control transfers to the minor upon reaching the age of majority set by state law.

To exercise discretion in a customer's account, a registered representative must first obtain:

• a.Only a verbal instruction for each trade
• b.Approval from the OCC
• c.A margin agreement
• d.Prior written authorization from the customer and firm approval of the account✓

Discretionary authority (choosing the security, the amount, or whether to buy or sell without consulting the client on each order) requires the customer's prior written authorization and the firm's written acceptance of the account. Each discretionary order must be marked as such and the account must be reviewed frequently by a principal.

Under Regulation T, the initial margin requirement for a purchase of marginable common stock is currently:

• a.50% of the purchase price✓
• b.25% of the purchase price
• c.100% of the purchase price
• d.10% of the purchase price

Regulation T, set by the Federal Reserve Board under the Securities Exchange Act of 1934, currently requires an initial margin deposit of 50% of the purchase price for marginable equity securities. The remaining amount may be borrowed from the broker-dealer through the margin account.Securities Exchange Act of 1934

A customer buys $20,000 of marginable stock in a margin account. Under Regulation T at 50%, how much must the customer deposit?

• a.$5,000
• b.$10,000✓
• c.$20,000
• d.$2,000

The Regulation T initial requirement of 50% applies to the $20,000 purchase, so the customer must deposit $10,000. The broker-dealer may lend the remaining $10,000, which becomes the debit balance in the margin account.Securities Exchange Act of 1934

FINRA's minimum maintenance margin requirement for a long stock position is:

• a.50% of the current market value
• b.10% of the current market value
• c.25% of the current market value✓
• d.5% of the current market value

FINRA rules require that equity in a long margin account be maintained at no less than 25% of the current market value of the securities. If the account's equity falls below this maintenance level, the firm issues a maintenance (house or FINRA) margin call for additional funds.

A customer holds long stock with a current market value of $40,000 and a debit balance of $32,000. Using the 25% maintenance requirement, what is the status of the account?

• a.A maintenance call is triggered because equity of $8,000 is below the $10,000 required✓
• b.No call; equity exceeds the requirement by $8,000
• c.No call; equity exactly equals the requirement
• d.A call is triggered because the debit exceeds market value

Equity equals market value minus the debit balance: $40,000 - $32,000 = $8,000. The maintenance requirement is 25% of the $40,000 market value, or $10,000. Because equity of $8,000 is below the $10,000 minimum, the account is deficient by $2,000 and a maintenance call is triggered.

In a short margin account, the customer profits when:

• a.The price of the borrowed and sold security declines✓
• b.The price of the security rises
• c.Interest rates fall
• d.The company increases its dividend

A short seller borrows shares, sells them, and hopes to buy them back later at a lower price. The position profits when the security's price declines. Because a stock's price can rise without limit, short positions carry theoretically unlimited loss potential and are subject to margin requirements.

A traditional Individual Retirement Account (IRA) offers which primary tax feature?

• a.Tax-free withdrawals of all earnings regardless of age
• b.Potentially tax-deductible contributions with tax-deferred growth until withdrawal✓
• c.No contribution limits
• d.Contributions made only by employers

Traditional IRA contributions may be tax-deductible depending on income and workplace plan coverage, and earnings grow tax-deferred. Withdrawals in retirement are taxed as ordinary income, and required minimum distributions apply. Early withdrawals before age 59 1/2 are generally subject to a penalty plus tax.Internal Revenue Code

A Roth IRA differs from a traditional IRA primarily because a Roth:

• a.Allows tax-deductible contributions
• b.Requires distributions to begin at age 50
• c.Is funded with after-tax dollars, and qualified withdrawals are tax-free✓
• d.Has no annual contribution limit

Roth IRA contributions are made with after-tax dollars and are not deductible, but qualified distributions of both contributions and earnings are entirely tax-free if the account has been held five years and the owner is at least 59 1/2. Roth IRAs also are not subject to required minimum distributions during the owner's lifetime.Internal Revenue Code

A withdrawal from a traditional IRA before age 59 1/2 is generally subject to:

• a.No tax and no penalty
• b.A penalty only, with no income tax
• c.Only state tax
• d.Ordinary income tax plus a 10% early withdrawal penalty, unless an exception applies✓

Early distributions from a traditional IRA taken before age 59 1/2 are generally taxed as ordinary income and are also subject to a 10% penalty. Certain exceptions, such as qualified first-home purchases, higher education, or disability, may waive the penalty but not the ordinary income tax.Internal Revenue Code

A 401(k) plan is a type of:

• a.Employer-sponsored defined contribution retirement plan✓
• b.Federal pension guaranteed by the government
• c.Municipal savings bond program
• d.Individual account with no employer involvement

A 401(k) is an employer-sponsored defined contribution plan in which employees defer part of their salary, often with employer matching, into investment accounts. The retirement benefit depends on contributions and investment performance, unlike a defined benefit plan that promises a set payout. ERISA governs these workplace plans.Employee Retirement Income Security Act

Under Regulation Best Interest (Reg BI), when a broker-dealer makes a recommendation to a retail customer, it must:

• a.Guarantee a profit on the recommendation
• b.Act in the retail customer's best interest and not place its own interests ahead of the customer's✓
• c.Recommend only proprietary products
• d.Avoid disclosing any conflicts of interest

Regulation Best Interest, adopted under the Securities Exchange Act of 1934, requires broker-dealers to act in the retail customer's best interest at the time a recommendation is made and not to put the firm's financial interests ahead of the customer's. It includes disclosure, care, conflict-of-interest, and compliance obligations.Securities Exchange Act of 1934

When determining whether a recommendation is suitable, a registered representative must consider the customer's:

• a.Favorite industries only
• b.Zip code and gender
• c.Investment objectives, financial situation, risk tolerance, and time horizon✓
• d.The firm's inventory needs

Suitability and the care obligation under Reg BI require the representative to understand the customer's investment profile, including objectives, financial situation and needs, risk tolerance, time horizon, liquidity needs, and experience. Recommendations must fit that profile rather than the firm's interests.

Before a customer may trade options, the firm must:

• a.Only collect a signed margin agreement
• b.Wait until after the first trade to send disclosures
• c.Guarantee the customer against loss
• d.Obtain approval from a designated options principal and deliver the options disclosure document (ODD) at or before account approval✓

Opening an options account requires that a Registered Options Principal approve the account based on the customer's suitability information, and the firm must furnish the options disclosure document (the ODD) at or before approval. The customer must also return a signed options agreement, generally within 15 days of approval.

A tenants in common (TIC) account differs from JTWROS because in a TIC account:

• a.A deceased owner's fractional interest passes to that owner's estate, not automatically to the co-owner✓
• b.Both owners must have equal percentage interests
• c.The account cannot hold securities
• d.Only one owner may enter orders

In tenants in common, each owner holds a divided fractional interest, which need not be equal, and upon death that interest passes to the owner's estate rather than automatically to the surviving co-owner. JTWROS, by contrast, provides automatic survivorship to the surviving owner.

A customer buys stock in a cash account for $10,000 with the intent to pay for it by selling the same securities before paying. This practice is known as and prohibited as:

• a.A legitimate day trade
• b.Freeriding, which violates Regulation T✓
• c.A short sale against the box
• d.A permissible good-faith deposit

Freeriding occurs when a customer buys securities in a cash account and sells them without ever paying for the purchase, using sale proceeds to cover the buy. This violates the Federal Reserve's Regulation T, and the penalty is typically freezing the account for 90 days, requiring cash up front for purchases.Securities Exchange Act of 1934

A Coverdell Education Savings Account (ESA) is designed primarily to:

• a.Provide guaranteed retirement income
• b.Fund a home purchase
• c.Allow after-tax contributions to grow tax-free for qualified education expenses✓
• d.Replace a 401(k) plan

A Coverdell ESA lets contributors make nondeductible (after-tax) contributions that grow tax-free, with tax-free withdrawals when used for qualified education expenses. Contribution limits and income phase-outs apply, and funds generally must be used by the time the beneficiary reaches a set age.

A 529 college savings plan offers which key tax advantage?

• a.Federal tax deduction for all contributions
• b.Tax-free withdrawals for any purpose
• c.Guaranteed investment returns
• d.Tax-deferred growth and tax-free withdrawals when used for qualified education expenses✓

A 529 plan provides tax-deferred growth and federal-tax-free withdrawals when funds are used for qualified education expenses; some states also offer a state tax deduction for contributions. Nonqualified withdrawals of earnings are taxed and subject to a penalty.

When a customer opens a new account, the registered representative is generally required to:

• a.Obtain essential facts about the customer and have a principal approve the account✓
• b.Guarantee the customer a minimum rate of return
• c.Immediately grant discretionary authority
• d.Require the customer to trade on margin

Firms must gather essential facts about each customer at account opening, including identity, financial background, and investment objectives, and a principal must review and approve the new account. This information supports suitability, Reg BI, and know-your-customer obligations.

In a margin account, the credit agreement, hypothecation agreement, and (optionally) the loan consent form together permit the firm to:

• a.Guarantee the account against loss
• b.Extend credit, take a lien on the customer's securities, and (with consent) lend out those securities✓
• c.Make the customer a partner in the firm
• d.Waive all margin requirements

The credit (margin) agreement sets the terms of the loan, the hypothecation agreement lets the firm pledge the customer's securities as collateral, and the loan consent agreement (optional) allows the firm to lend the customer's securities to others. These documents are required to establish a margin account.

A pattern day trader is generally required to maintain minimum equity in a margin account of at least:

• a.$2,000
• b.$10,000
• c.$25,000✓
• d.$100,000

FINRA rules require an account designated as a pattern day trading account (four or more day trades within five business days meeting the threshold) to maintain minimum equity of at least $25,000. This amount must be in the account before day trading may continue and provides an added cushion for the frequent intraday activity.Securities Exchange Act of 1934

A required minimum distribution (RMD) from a traditional IRA generally must begin:

• a.At age 50
• b.When the account reaches $1 million
• c.Only upon the owner's death
• d.At the RMD age set by current tax law, after which annual distributions are required✓

Traditional IRAs require the owner to begin taking required minimum distributions once they reach the RMD age set by current tax law. Failing to take the full RMD results in a tax penalty on the shortfall. Roth IRAs are not subject to RMDs during the original owner's lifetime.Internal Revenue Code

A customer's investment objective of 'capital preservation' would best be served by recommending:

• a.High-quality short-term debt instruments and money market securities✓
• b.Speculative small-cap growth stocks
• c.Uncovered option writing
• d.Highly leveraged limited partnerships

A capital preservation objective prioritizes protecting principal over growth, favoring high-quality, short-term, liquid instruments such as Treasury bills and money market securities. Speculative equities and leveraged or uncovered option strategies carry too much risk of loss for this objective.

A customer with a long-term retirement horizon and a growth objective, comfortable with volatility, would most suitably be recommended:

• a.Only Treasury bills
• b.A diversified portfolio weighted toward equities✓
• c.All assets in a single speculative stock
• d.Only short-term certificates of deposit

A long time horizon combined with a growth objective and tolerance for volatility supports an equity-weighted, diversified portfolio, which historically offers higher long-term returns. Concentrating in a single stock violates diversification principles, while holding only short-term instruments would not meet the growth objective.