Chapter 2 Practice Question Answers
- 1. Answer: C. SIPC protects the accounts of customers when their broker-dealer goes out of business. All broker-dealers registered with SEC, with the exception of broker-dealers that only purchase and sell mutual funds and variable insurance policies and annuities, must be a member of SIPC. Investment advisers are not members of SIPC and are not covered by the Securities Investor Protection Act of 1970.
- 2. Answer: A. The hypothecation agreement is part of the documentation used to open a margin account. It specifically refers to the pledging of securities as collateral.
- 3. Answer: B. Broker-dealers must receive their customers’ prior written consent in order to commingle their funds with those of other customers whether or not the hypothecated securities exceed their customers’ total indebtedness. Only a few limited exceptions apply, such as the ones listed in the other answers.
- 4. Answer: B. In order to use funds from a customer’s free credit balance, the broker-dealer must send the customer a written notice listing the amount of the balance with his quarterly account statement. The notice must state that the funds are not segregated and may be used for business operations and also that the funds are payable on demand of the customer. If a free credit balance is segregated, then it is not being used by the broker-dealer for its business operations. Free credit balances are reported to the customer, not FINRA.
- 5. Answer: C. Free credit balance refers to customer funds that are available to the customer without restrictions. Such funds may come from cash deposited by a customer, proceeds from a sale of securities, or earnings from dividends and interest. The SEC requires that broker-dealers inform customers at least quarterly of their free credit balance and the fact that this money is payable to the customer on demand. With disclosure, broker-dealers may “sweep” free credit balances into mon