CSLB General Building (B) — All Questions

In an account registered as joint tenants with rights of survivorship, when one owner dies:

• a.The deceased owner's interest passes automatically to the surviving owner✓
• b.The deceased owner's interest passes to the deceased owner's estate
• c.The account must be liquidated and the proceeds split evenly
• d.The account converts automatically to tenants in common

Rights of survivorship mean the surviving tenant takes full ownership without the assets passing through probate. Passing the interest to the estate is the defining feature of tenants in common, not JTWROS. Nothing in the registration forces liquidation or an automatic change of form, though the firm will require a death certificate and new paperwork.

Two business partners open an account as tenants in common with a 70/30 ownership split. If one partner dies, that partner's share:

• a.Passes to the surviving partner
• b.Is divided equally between the surviving partner and the deceased's heirs
• c.Passes to the deceased partner's estate according to that partner's will or state law✓
• d.Reverts to the broker-dealer until a court orders distribution

Tenants in common allows unequal ownership percentages and each owner's share passes to the owner's estate rather than to the co-tenant. Survivorship is the JTWROS feature and does not apply here. A broker-dealer never takes ownership of customer assets; it freezes the account pending proper documentation.

Which statement about an UTMA custodial account is correct?

• a.Gifts to the account may be revoked by the donor at any time
• b.Gifts are irrevocable, and the account may have only one custodian and one minor beneficiary✓
• c.The account may have two custodians so parents can share responsibility
• d.The custodian may pledge the account's securities as collateral for a personal loan

A gift into a custodial account is an irrevocable transfer to the minor, and the structure permits exactly one custodian and one minor per account. Joint custodians and joint minors are not allowed, so parents wanting shared control cannot achieve it through the registration. Using the minor's property for the custodian's benefit would violate the custodian's fiduciary duty.Uniform Transfers to Minors Act

An UGMA account for an 11-year-old is registered under which taxpayer identification number, and how is income reported?

• a.The custodian's Social Security number, with income taxed to the custodian
• b.The donor's Social Security number, with income taxed to the donor
• c.The broker-dealer's tax identification number, with income taxed to the firm
• d.The minor's Social Security number, with income taxed to the minor✓

Although the custodian controls the account, the property belongs to the minor, so the minor's Social Security number appears on the registration and the minor is the taxpayer. Some unearned income of a young child may still be taxed at the parents' rate under the kiddie tax rules, but the income is reported for the minor. The custodian, donor, and firm are never the account's taxpayer.Uniform Gifts to Minors Act

When the beneficiary of a custodial account reaches the age of majority set by state law:

• a.The custodian may continue managing the account indefinitely
• b.The account must be liquidated and the proceeds donated
• c.Ownership reverts to the original donor
• d.The assets must be re-registered in the former minor's own name and control passes to that person✓

Custodianship ends at the state's age of majority or termination age, and the property is retitled in the now-adult beneficiary's name with full control over it. The custodian's authority is not open-ended. Because the original gift was irrevocable, neither the donor nor anyone else can reclaim the assets.Uniform Transfers to Minors Act

To open a brokerage account in the name of a trust, the firm must obtain:

• a.Only the trustee's Social Security number
• b.The trust agreement or a certification of trust identifying the trustee and the trustee's powers✓
• c.A court order appointing the trustee, in every case
• d.Written consent from every trust beneficiary

The firm needs documentation establishing who the trustee is and what investment authority the trust grants before accepting instructions. A personal Social Security number is not sufficient because the trust is a separate legal entity with its own tax identification number. Court appointment and beneficiary consents are not routinely required for a properly documented trust.

Which document must a broker-dealer obtain before opening a corporate cash account?

• a.A corporate resolution identifying who is authorized to trade on the corporation's behalf✓
• b.A copy of the corporation's most recent audited financial statements
• c.The personal guarantee of each officer
• d.A prospectus for the corporation's own securities

The corporate resolution establishes the entity's authority to open the account and names the individuals empowered to act. Financial statements may be requested in other contexts but are not a prerequisite for a cash account. Officers do not personally guarantee a corporate account, and the corporation's own offering documents are irrelevant.

A customer asks a representative to select which mutual funds to buy and when to buy them, without checking first. The representative may do so only if:

• a.The customer confirms each trade verbally within one business day
• b.The representative documents the customer's verbal instruction in a file memo
• c.The customer gives written discretionary authority and a principal approves the account for discretionary trading✓
• d.The customer's account exceeds a minimum balance set by the firm

Discretion over asset, amount, and timing requires prior written authorization from the customer plus firm acceptance and supervisory review of the discretionary account. Verbal permission is limited to time and price discretion for a specific order on the day it is given. Account size never substitutes for written authority.FINRA Rules

Whether a Traditional IRA contribution is deductible for a given taxpayer depends primarily on:

• a.The investments selected inside the IRA
• b.Whether the taxpayer or spouse is covered by an employer retirement plan and the taxpayer's modified adjusted gross income✓
• c.The custodian's fee schedule
• d.Whether the contribution is made before or after the calendar year ends

Anyone with earned income may contribute to a Traditional IRA, but deductibility phases out based on income when the taxpayer or spouse participates in a workplace plan. Investment choices and custodian fees have no effect on deductibility. Contributions may be made up to the tax filing deadline for the prior year, which affects timing but not the deduction test.Internal Revenue Code

Which statement about Roth IRA distributions is accurate?

• a.All distributions are tax free from the day the account is opened
• b.Earnings are always taxable but contributions are not
• c.Distributions are taxed the same as Traditional IRA distributions
• d.Earnings are tax free if the account has been open five years and the owner is at least 59 1/2, disabled, or deceased, or is buying a first home within limits✓

A qualified Roth distribution requires both the five-year holding period and a qualifying event, and it comes out entirely free of federal income tax. Contributions, having already been taxed, may be withdrawn at any time without tax or penalty, so it is wrong to say nothing is available early. Traditional IRA distributions of deductible contributions and earnings are fully taxable, which is the key difference.Internal Revenue Code

A 44-year-old takes $15,000 from a Traditional IRA to remodel a kitchen. The federal tax consequence is:

• a.No tax and no penalty, because IRA owners may withdraw principal at any time
• b.Tax only, because home improvements are a qualified expense
• c.Ordinary income tax on the taxable amount plus a 10% early distribution penalty✓
• d.A 10% penalty only, with no income tax until age 59 1/2

Distributions before age 59 1/2 are included in ordinary income and carry an additional 10% penalty unless an exception applies, and home remodeling is not an exception. The narrow exceptions include death, disability, qualified higher education expenses, up to $10,000 for a first-time home purchase, substantially equal periodic payments, and certain medical costs. Tax and penalty apply together, not one or the other.Internal Revenue Code

Which statement about required minimum distributions is correct?

• a.Traditional IRA owners must begin RMDs at the age set by current law, while Roth IRA owners face no RMDs during their lifetime✓
• b.Both Traditional and Roth IRA owners must begin RMDs at the same age
• c.Roth IRA owners must begin RMDs but Traditional IRA owners need not
• d.RMDs apply only to accounts larger than $1 million

Tax-deferred accounts such as Traditional IRAs must begin distributing at the statutory age, currently 73 and scheduled to rise, because the government eventually wants its deferred tax. Roth IRAs were funded with after-tax dollars, so the original owner never faces lifetime RMDs, though inherited Roth accounts have their own rules. Account size does not determine whether RMDs apply.SECURE Act 2.0

A 401(k) plan is best described as:

• a.An individual retirement account funded solely by the account owner outside of work
• b.A defined benefit plan that promises a fixed monthly pension
• c.A defined contribution plan funded through employee salary deferrals, often with employer matching contributions✓
• d.A non-qualified deferred compensation arrangement available only to executives

A 401(k) lets employees defer part of their salary into a qualified plan on a pre-tax or Roth basis, frequently with an employer match, and the eventual benefit depends on contributions and investment results. A defined benefit plan guarantees a formula-based pension instead. IRAs are individual accounts, and non-qualified plans are not subject to the same qualified plan rules.Internal Revenue Code

A 403(b) tax-sheltered annuity plan is available to employees of:

• a.Public schools and qualifying 501(c)(3) tax-exempt organizations✓
• b.Any corporation with fewer than 100 employees
• c.Self-employed individuals only
• d.Federal government agencies exclusively

Section 403(b) plans serve public education employees and staff of qualifying tax-exempt organizations such as hospitals and charities. Small private employers commonly use SIMPLE or SEP plans, and the self-employed may use SEP or solo 401(k) arrangements. Federal employees participate in the Thrift Savings Plan.Internal Revenue Code

A key characteristic of a SEP IRA is that:

• a.Only employees may contribute, through salary reduction
• b.Contributions are made after tax and grow tax free
• c.The plan requires annual actuarial certification
• d.Contributions are made by the employer into IRAs established for eligible employees✓

A simplified employee pension is funded by employer contributions deposited into each eligible employee's own IRA, which keeps administration light. Salary deferral is the mechanism in 401(k) and SIMPLE plans. SEP contributions are deductible to the employer and grow tax deferred, and no actuary is needed because it is a defined contribution arrangement.Internal Revenue Code

A customer receives a distribution check from a former employer's 401(k) plan and wants to move the money to an IRA. Which statement is correct?

• a.The customer has 12 months to complete the rollover
• b.The customer generally has 60 days to deposit the funds into the IRA, and a direct trustee-to-trustee transfer avoids withholding and the deadline✓
• c.The customer may complete an indirect rollover as many times as desired in a 12-month period
• d.Rollovers from employer plans to IRAs are not permitted

An indirect rollover must be completed within 60 days or the distribution becomes taxable, and plan distributions paid to the participant are generally subject to mandatory federal withholding. A direct transfer between custodians sidesteps both problems and has no frequency limit. IRA-to-IRA indirect rollovers are limited to one in any 12-month period.Internal Revenue Code

Before recommending a variable annuity to a retail customer, a representative must have a reasonable basis grounded in which information?

• a.The customer's age, financial situation, tax status, investment objectives, time horizon, liquidity needs, and risk tolerance✓
• b.The customer's credit score and employment history alone
• c.The commission the product pays relative to alternatives
• d.The performance of the separate account over the past 12 months

Suitability and best-interest obligations require the representative to gather and evaluate the customer's full investment profile before recommending a product. Compensation to the representative is a conflict to be managed, not a basis for a recommendation. Recent performance alone says nothing about whether the product fits this investor's needs.FINRA Rules

A 72-year-old retiree needs to draw income from a $60,000 lump sum within the next 12 months and has no other liquid savings. Which recommendation is least suitable?

• a.A short-term bond fund
• b.A money market fund
• c.A conservative balanced fund with a small equity allocation
• d.A deferred variable annuity with a seven-year surrender charge schedule✓

Locking the customer's only liquid money into a contract with a long surrender period directly conflicts with a one-year liquidity need and would likely trigger surrender charges. The other choices keep the money accessible with varying degrees of price risk. Liquidity needs and time horizon are central suitability factors, especially for older investors.FINRA Rules

A 28-year-old contributing monthly to an IRA states that the goal is maximum long-term growth and that no withdrawals are planned for 30 years. The most appropriate recommendation is:

• a.A short-term Treasury fund
• b.A diversified equity growth fund✓
• c.A money market fund
• d.A single-state municipal bond fund

A three-decade horizon and a growth objective favor equities, whose higher expected return compensates for interim volatility. Short-term Treasuries and money market funds are unlikely to outpace inflation over 30 years, exposing the investor to purchasing power risk. Municipal bonds are inappropriate inside an IRA because the tax exemption is wasted in a tax-deferred account.FINRA Rules

A customer wants to park six months of living expenses where the money is safe and available on short notice. Which fund best matches that objective?

• a.A high-yield corporate bond fund
• b.An aggressive growth fund
• c.A money market fund✓
• d.A long-term government bond fund

Money market funds emphasize preservation of principal and same-day or next-day liquidity, which fits an emergency reserve. High-yield bonds carry substantial credit risk and growth funds substantial market risk. Long-term government bonds have little credit risk but significant interest rate risk, so their value can fall when the money is needed.FINRA Rules

Which statement about the new account form for a retail cash account is correct?

• a.The customer must sign the form before any trade may be entered
• b.The customer's signature is not required, but the form must be approved by a principal of the firm✓
• c.Only the customer's signature is required, not a principal's
• d.The form must be filed with FINRA before the first trade

For a standard cash account, the registered representative completes the form and a principal accepts the account; the customer's signature is not a regulatory requirement, although firms often collect one. Customer signatures are required for margin agreements, discretionary authority, and options accounts. New account forms are maintained at the firm, not filed with FINRA.FINRA Rules

A representative learns that an individual account holder has died. The representative should:

• a.Liquidate all positions immediately to protect the estate
• b.Continue accepting instructions from the customer's spouse
• c.Cancel all open orders, mark the account deceased, and await required documents such as a death certificate and letters testamentary✓
• d.Transfer the assets to the named beneficiary the same day

On notice of death the firm freezes the account, cancels open orders, and takes instructions only from the duly appointed representative of the estate after receiving proper documentation. Family members have no authority merely by relationship. Liquidating or transferring assets before documentation could expose the firm and the representative to liability.FINRA Rules

When a customer submits a transfer instruction to move an account from one broker-dealer to another through the automated transfer system, the carrying firm must:

• a.Validate or take exception to the instruction within one business day and complete the transfer within three business days of validation✓
• b.Complete the transfer within 30 calendar days
• c.Obtain approval from FINRA before releasing the assets
• d.Liquidate all positions and transfer cash only

The automated customer account transfer process runs on a tight schedule: validation within one business day, then completion within three business days. Assets transfer in kind whenever the receiving firm can hold them, so wholesale liquidation is incorrect. FINRA sets the timeframes but does not approve individual transfers.FINRA Rules

A firm must send the customer a copy of the account record for verification of the customer's investment profile information:

• a.Only when the customer requests it
• b.Every 12 months without exception
• c.Only when the account is closed
• d.Within 30 days of opening the account and at least once every 36 months thereafter✓

SEC books and records rules require an initial verification copy within 30 days of account opening and a refresh at least every 36 months so the profile stays current. The firm must also update records when it learns of a material change, such as a new address or a change in objectives. Waiting for a customer request or for account closing would leave stale information in place.Securities Exchange Act of 1934