Series 7 Practice Exam

Answer: The customer's date of birth

The USA PATRIOT Act CIP rule for broker-dealers requires four minimum identifying items before opening an account: name, date of birth (for an individual), street address, and taxpayer identification number, with verification of identity within a reasonable time before or after opening. Suitability data such as occupation, employer, and objectives is gathered separately under FINRA Rule 4512 and Reg BI, and the customer's signature is not needed to open a cash account.

The Trap: Confusing the four CIP identity elements with the suitability and account-record information collected on the same new-account form.

• The customer's occupation and employer name: Occupation and employer are collected for suitability and FINRA Rule 4512 account-record purposes, not under CIP; test writers count on candidates blending the new-account form's suitability fields into the anti-money-laundering minimums.
• The customer's signature on the new account form: A customer signature is not required to open a cash account — the form is signed by the representative and approved by a principal; this distractor tempts anyone who assumes every account document needs the customer's signature.
• The customer's investment objectives: Investment objectives support suitability and Reg BI obligations; they are not part of the four CIP identity elements, a distinction candidates miss because both are gathered on the same new-account paperwork.

Verified against: 31 CFR 1023.220 (Customer Identification Programs for Broker-Dealers); FINRA Rule 4512

Answer: It passes automatically to Maude by operation of law, outside of probate

In a JTWROS registration, each tenant holds an equal, undivided interest, and on the death of one tenant that interest passes automatically to the surviving tenant(s) by operation of law, avoiding probate. By contrast, a tenants-in-common registration sends the decedent's (possibly unequal) share to the estate for distribution under the will. Firms record the death, cancel open orders, and retitle the account in the survivor's name.

The Trap: Applying the tenants-in-common outcome (share passes to the estate) to a JTWROS account.

• It transfers to Maude only after Harold's executor signs a release: The executor administers the probate estate and has no claim over JTWROS assets, which pass by operation of law; this distractor plays on the assumption that the executor controls everything the decedent owned.
• The account is frozen until the probate court authorizes a distribution: The firm will cancel open orders and retitle the account on notice of death, but no probate authorization is needed because the assets never enter Harold's probate estate; this tempts candidates who assume any death freezes assets pending court action.
• It passes to his estate to be distributed under the terms of his will: That is the tenants-in-common result — the classic registration mix-up; in a JTWROS account the survivorship feature overrides the will for the account assets.

Verified against: FINRA Rule 4512 (account records); state joint-tenancy property law

Answer: The cash Rachel deposits is an irrevocable gift that becomes the property of the minor

Under UGMA/UTMA, gifts to a custodial account are irrevocable and become the minor's property, managed by a single custodian for a single minor until the state's transfer age. The account carries the minor's Social Security number for tax reporting and must be a cash account — no margin. The custodian invests prudently but cannot reclaim gifted assets for personal use.

The Trap: Believing the donor or custodian can reclaim gifted assets or run the account under the custodian's tax ID because the custodian controls the investments.

• The account may be registered jointly in the names of Rachel and her son: Custodial registration is one custodian for the benefit of one minor — the securities are registered in the custodian's name for the minor, not as a joint account; this plays on confusing custodial with joint registration.
• Account earnings are reported under Rachel's Social Security number because she controls the account: Custodial account earnings are reported under the minor's Social Security number and taxed to the minor (subject to kiddie-tax rules); candidates assume the person with control bears the tax.
• Rachel may purchase securities on margin to enhance the account's returns: Custodial accounts must be cash accounts — margin borrowing is prohibited because a custodian may not pledge a minor's property; this tempts anyone who thinks the custodian's broad investment authority includes leverage.

Verified against: Uniform Transfers to Minors Act / Uniform Gifts to Minors Act

Answer: Closing transactions only

FINRA Rule 2360(b)(16) sequences options account opening: the ODD is delivered at or before ROP approval, trading may begin once the account is approved, and the customer must return the signed options agreement within 15 days after approval. June 2 plus 15 days ran out on June 17, so from June 18 the firm may accept closing transactions only until the agreement arrives.

The Trap: Thinking a missed options-agreement deadline suspends the account entirely (or can be waived by a principal) rather than restricting it to closing transactions.

• No options activity of any kind until the signed agreement is received: Closing transactions remain permitted so the customer is not trapped in existing positions; this distractor overstates the sanction by assuming the account is fully suspended.
• Normal trading, provided a principal documents the delay in the account file: A principal's note cannot substitute for the customer's signed agreement; this plays on the pattern of other rules where principal documentation cures a deficiency.
• Opening and closing transactions, but in covered options positions only: There is no covered-only carve-out — opening transactions of any kind are barred after the 15-day window; this tempts candidates who associate 'covered' with the lowest options approval level and assume it survives.

Verified against: FINRA Rule 2360(b)(16)

Answer: The loan consent, which authorizes the firm to lend her margin securities to other customers for short sales, is optional

A margin account requires two documents: the credit agreement (terms of the loan and how interest is charged, generally at a fluctuating rate) and the hypothecation agreement (the customer pledges the securities as collateral, which the firm may rehypothecate to finance the loan). The loan consent — permitting the firm to lend the customer's securities to others, typically for short sales — is optional. Firms must also provide the Rule 2264 margin disclosure statement at opening and annually.

The Trap: Treating the loan consent as mandatory (or the hypothecation agreement as optional) because all three documents arrive as a single margin agreement.

• She must sign the credit agreement, the hypothecation agreement, and the loan consent before margin trading can begin: Only the credit and hypothecation agreements are mandatory; lumping in the loan consent is the classic error because the three documents are typically printed as one margin agreement package.
• The hypothecation agreement is optional because pledging securities as collateral is at the customer's discretion: Hypothecation is the mechanism of the margin loan itself — without the customer's pledge of the securities as collateral there is no loan — so it is mandatory; this tempts candidates who reason that anything involving the customer's property must be elective.
• The credit agreement locks in a fixed interest rate on the debit balance for the life of the account: The credit agreement discloses how interest is computed, and the rate typically floats with the broker call money rate; the fixed-rate framing preys on confusing disclosure of terms with a rate guarantee.

Verified against: Regulation T (12 CFR 220); FINRA Rules 4210 and 2264

Answer: "Invest $15,000 for me in a good pharmaceutical stock."

Discretion exists when the representative selects any of the three A's — the action (buy or sell), the amount, or the asset. FINRA Rule 3260 (Discretionary Accounts) requires the customer's prior written authorization and the firm's written acceptance of the account before any discretionary order; each discretionary order must then be identified as discretionary and approved promptly in writing by a principal, and the account must be reviewed at frequent intervals. Choosing only the time or price of a customer-specified order is not discretion, but that oral time-and-price latitude is good only until the end of that trading day.

The Trap: Mistaking time-and-price latitude ('at whatever price you think best') for true discretion, which arises only when the rep picks the action, amount, or asset.

• "Buy 300 shares of XYZ for me today at whatever price you think is best.": The customer chose the action, security, and amount; the rep decides only time and price, which is not discretion — though such an oral instruction is good only for that trading day. This is the most tempting wrong answer because 'you decide' language sounds discretionary.
• "Buy 100 shares of GHI at the market before the close.": Every element is specified by the customer; nothing is left to the rep's judgment except execution, so no discretionary authority is involved — this option tests whether candidates can recognize a fully specified order.
• "Sell my 200 shares of DEF whenever it trades above $50.": Action, security, amount, and price condition are all specified by the customer — this is simply an order instruction, not discretion; it tempts candidates who read 'whenever' as open-ended authority.

Verified against: FINRA Rule 3260 (Discretionary Accounts)

Answer: Open the account; the firm satisfied the rule by making reasonable efforts to obtain the information

FINRA Rule 4512 requires firms to make reasonable efforts to obtain the name and contact information of a trusted contact person (age 18 or older) for a non-institutional account. Asking and being refused satisfies the rule — the account may still be opened. The trusted contact has no trading authority; the designation simply gives the firm someone to reach about possible exploitation, diminished capacity, or the customer's whereabouts, and it works hand in hand with the Rule 2165 temporary-hold safe harbor.

The Trap: Treating the trusted-contact requirement as a mandatory account-opening condition instead of a reasonable-efforts obligation.

• List Arthur's spouse as the trusted contact by default and notify her of the designation: A trusted contact must be designated by the customer — the firm cannot appoint one unilaterally; this tempts candidates who assume next of kin automatically fills the role.
• Open the account but restrict it to closing transactions until a trusted contact is provided: No trading restriction attaches to a declined trusted-contact request; this borrows the closing-only sanction from the options-agreement rule, where it actually belongs.
• Refuse to open the account until Arthur names a trusted contact person: Rule 4512 requires only reasonable efforts to obtain the information, not success; refusing to open the account misreads a best-efforts obligation as a precondition.

Verified against: FINRA Rule 4512

Answer: 25 business days

FINRA Rule 2165 permits (but does not require) a temporary hold on disbursements from a specified adult's account when the firm reasonably believes financial exploitation is occurring: up to 15 business days initially, plus 10 more if the firm's internal review supports the belief, plus an additional 30 business days only if the matter has been reported to a state regulator, state agency, or court of competent jurisdiction. Without that report, the ceiling is 25 business days. The firm must also notify authorized parties and the trusted contact within two business days of placing the hold.

The Trap: Reciting the 55-business-day maximum without noticing that the final 30-day extension requires a report to a state regulator, agency, or court.

• 15 business days: 15 business days is only the initial hold; it ignores the 10-business-day extension available when the firm's internal review supports its reasonable belief of exploitation.
• 55 business days: 55 business days (15 + 10 + 30) is the ceiling only when the matter has been reported to a state regulator, agency, or court — a condition the stem says has not occurred; this trap catches candidates who memorized the headline number without its trigger.
• 30 calendar days: Rule 2165 counts business days, not calendar days, and 30 is not a hold ceiling at any stage without the state-report condition; this distractor swaps the unit and misapplies the 30-day extension figure.

Verified against: FINRA Rule 2165

Answer: The carrying firm must validate the instruction or take exception within one business day, and the transfer must be completed within three business days after validation

Under FINRA Rule 11870, once the receiving firm submits the customer's transfer instruction through ACATS, the carrying firm must validate it or take exception within one business day and complete the transfer within three business days after validation. During the transfer the account is effectively frozen — open orders are canceled — and nonstandard assets (such as proprietary mutual funds the receiving firm cannot hold) may have to be liquidated or retained rather than transferred in kind.

The Trap: Swapping the one-business-day validation deadline with the three-business-day completion window, or assuming trading continues and every asset moves in kind.

• The carrying firm may continue accepting new orders in the account while the transfer is pending: Upon validation the account is frozen for transfer — open orders are canceled and new activity is not accepted; this tempts candidates who assume the customer keeps full trading access until assets actually move.
• The carrying firm has three business days to validate the transfer instruction: This swaps the two ACATS deadlines — validation (or taking exception) is due within one business day; three business days is the completion window that begins after validation.
• Any proprietary mutual fund positions must be delivered in kind to the receiving firm: Nonstandard assets such as proprietary funds the receiving firm cannot carry are an exception — the customer may need to liquidate them or leave them at the carrying firm; 'everything transfers in kind' is the misconception.

Verified against: FINRA Rule 11870 (Customer Account Transfer Contracts)

Answer: Furnish Miguel an updated account record reflecting the change within 30 days of receiving his notice

SEC Rule 17a-3(a)(17) requires firms to furnish each non-institutional customer a copy of the account record within 30 days of opening and at least every 36 months thereafter for verification. Separately, when the customer notifies the firm of a change in investment objectives, the firm must update the record and furnish the customer a copy of the updated account record within 30 days of receiving the notice; name and address changes trigger a parallel 30-day notification. FINRA Rule 4512 imposes the corresponding FINRA account-record obligations — no customer signature or principal re-approval is required for the change to take effect.

The Trap: Assuming a reported change in investment objectives can simply wait for the routine 36-month account-record verification instead of triggering its own 30-day update-and-furnish requirement.

• Suspend recommendations in the account until a principal re-approves it under the new objective: No re-approval or suspension requirement exists for an objective change; this distractor borrows the principal-approval framework from account opening and discretionary accounts, where it actually applies.
• Obtain Miguel's signature on a revised new account form before the change may take effect: The rule requires furnishing the updated record to the customer, not collecting a signature — an oral notification is sufficient to trigger the update; this tempts candidates who assume objective changes need written customer consent.
• Update its internal records only; Miguel next receives a copy of his account record at the routine verification no more than 36 months later: The 36-month cycle is the routine re-verification interval for the account record; a customer-reported change in investment objectives independently triggers a 30-day obligation to furnish the updated record — waiting for the cycle misapplies the baseline rule.

Verified against: SEC Rule 17a-3(a)(17); FINRA Rule 4512