Series 7 Accounts and Suitability Practice Questions
Question 1
A registered representative recommends a complex structured product without evaluating the specific client's investment profile, but does have a reasonable basis to believe the product could be suitable for at least some investors. Which suitability obligation under FINRA Rule 2111 has been satisfied, but not the others?
- A. Customer-specific suitability only
- B. All three suitability obligations
- C. Quantitative suitability only
- D. Reasonable-basis suitability only
Show answer and explanation
Correct answer: D. Reasonable-basis suitability only
FINRA Rule 2111 imposes three obligations: reasonable-basis suitability (the product must be suitable for at least some investors based on reasonable diligence), customer-specific suitability (suitable for this particular customer's profile), and quantitative suitability (a series of recommended transactions is not excessive). Here, only reasonable-basis suitability is satisfied because the representative never evaluated this client's specific profile.
- A. Incorrect — customer-specific suitability requires evaluating this client's profile, which did not happen.
- B. Incorrect — not all three obligations are satisfied here.
- C. Incorrect — quantitative suitability concerns excessive trading, not addressed in this scenario.
- D. Correct.
Question 2
A retiree owns 70% of investable assets in one regional bank stock inherited decades earlier. Before recommending a covered-call strategy, what should the adviser assess?
- A. Whether the customer has held the shares at least 12 months, which the options rules require before writing calls
- B. Premium income, since it offsets most of the downside risk in the stock
- C. Concentration, liquidity, tax lots, risk tolerance and the possibility shares may be called away
- D. The exercise style of the listed call and the exchange on which it trades
Show answer and explanation
Correct answer: C. Concentration, liquidity, tax lots, risk tolerance and the possibility shares may be called away
A covered call earns premium but keeps most of the downside, caps the upside and can force a taxable sale. With a 70% concentration the adviser should weigh concentration, liquidity, tax lots, risk tolerance and assignment.
- A. No minimum holding period is required to write a covered call; this does not address suitability.
- B. Premium cushions only a small part of a decline and leaves substantial downside risk.
- C. These factors capture the risks and tax consequences relevant to a concentrated retiree.
- D. Contract mechanics matter little compared with the client's overall situation and risks.
Question 3
A registered representative learns that a highly sought-after equity IPO has limited allocation and wants to buy shares for the representative's personal brokerage account at the offering price. What must be considered?
- A. Registered representatives are entitled to IPO allocations ahead of public investors, because their industry registration qualifies them for the offering.
- B. FINRA new-issue restrictions can prohibit allocations to restricted persons, absent a relevant exception.
- C. IPO allocation restrictions begin to apply once the first trading day has passed and secondary trading in the shares has begun.
- D. The allocation restrictions cover issuers and their officers but do not extend to broker-dealers or their registered personnel.
Show answer and explanation
Correct answer: B. FINRA new-issue restrictions can prohibit allocations to restricted persons, absent a relevant exception.
FINRA Rule 5130 restricts new-issue purchases and allocations involving restricted persons, which include broker-dealer personnel. Eligibility and any exception must be reviewed before purchase at the offering price.
- A. Industry registration gives no allocation priority and in fact can make the person restricted.
- B. Rule 5130 can bar sales to restricted persons unless an exception applies.
- C. The restrictions apply to the initial allocation at the offering price, before trading begins.
- D. Broker-dealers and their associated persons are the core group the rule covers.
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Regulation Best Interest is composed of which four component obligations?
- A. Disclosure Obligation, Care Obligation, Conflict of Interest Obligation, and Compliance Obligation
- B. Suitability Obligation, Disclosure Obligation, Best Execution Obligation, and Compliance Obligation
- C. Care Obligation, Loyalty Obligation, Prudence Obligation, and Disclosure Obligation
- D. Disclosure Obligation, Care Obligation, Confidentiality Obligation, and Recordkeeping Obligation
Show answer and explanation
Correct answer: A. Disclosure Obligation, Care Obligation, Conflict of Interest Obligation, and Compliance Obligation
Reg BI is built on four component obligations: Disclosure, Care, Conflict of Interest, and Compliance. Each imposes distinct duties—for example, Disclosure requires written disclosure of material facts and conflicts, while Compliance requires the firm to establish and enforce written policies reasonably designed to achieve compliance with the rule as a whole.
- A. Regulation Best Interest is built on exactly these four components: Disclosure, Care, Conflict of Interest, and Compliance Obligations.
- B. Reg BI replaced the old suitability standard rather than incorporating it as a named component, and this list omits the Conflict of Interest Obligation that Reg BI actually requires.
- C. Care, Loyalty, and Prudence are terms more associated with fiduciary/ERISA duties, not the specific four named obligations that make up Reg BI.
- D. Confidentiality and Recordkeeping Obligations are not among Reg BI's four defined components.