Suitibility CE Exam 1 Firm Element

1. Which of the following should occur in order to adhere to fair and reasonable securities sales practices?

I. A rep should have reasonable grounds for believing that an investment recommendation is suitable.
II. A rep should make reasonable efforts to obtain from the customer any information that would be required
to determine suitability.
III. A rep should make suitability inquiries that are consistent with the NASD’s Conduct Rules.
IV. A rep should disclose all material facts concerning the investment recommendation.


A. I, II and III only
B. I and IV only
C. III and IV only
D. I, II, III and IV



2. In order to make a suitable investment recommendation, a rep must inquire as to the customer’s

I. tax status
II. investment experience
III. investment objectives
IV. financial condition

A. I only
B. I, II and IV only
C. III and IV only
D. I, II, III and IV



3. Which of the following characteristics best describes growth?

A. Increase in the value of an investment over time
B. Increase in interest and dividends over time
C. Investments that appreciate tax deferred
D. All of the above



4. Which of the following investments is least appropriate for a customer who is primarily concerned with
liquidity?

A. Preferred stock
B. Municipal bond mutual fund
C. Bank savings account
D. Direct participation program


5. Bondholders face the risk that the value of their bonds may fall as interest rates rise. This is known as

A. credit risk
B. liquidity risk
C. market risk
D. marketability risk



6. Credit risk involves:

A. safety of principal
B. fluctuations in overall interest rates
C. the danger of not being able to sell the investment at a fair market price
D. inflationary risks



7. All of the following types of financial information should be obtained from a customer before opening an
account or transacting business EXCEPT

A. the customer’s investment experience
B. the customer’s net worth
C. the customer’s actual or estimated annual income
D. the customer’s ability to borrow money from interested parties



8. If your customer’s primary investment concern is to guard against inflation, the best mutual fund for him would
be a:

A. bond fund
B. growth fund
C. money-market fund
D. Mutual funds do not offer inflation protection



9. In general, the greater the variation in an investment’s potential gains or losses, the

A. smaller the investment’s return
B. greater the investment’s return
C. smaller the investment’s risk
D. greater the investment’s risk


10. An increase in the value of an asset due to economic and other business conditions is called

A. interest
B. dividends
C. appreciation
D. depreciation



11. An elderly widow with no other income wishes to invest the proceeds from her husband’s life insurance.
Which of the following would be a suitable recommendation?

A. Call options
B. Cattle futures
C. Oil and gas exploration program that you know is going to strike
D. Blue chip income stocks



12. Registered rep Eve Grizzly always inquires into her clients’ investment objectives, financial situations and
needs. According to securities industry rules, Eve is:

A. obtaining the information required to fulfill her professional obligation regarding suitability
B. determining whether she has any inherent conflicts of interest with her clients
C. violation her ethical obligation regarding confidentially of client information
D. giving herself an unethical advantage regarding how much the client can afford to spend on commissions



13. Bonds with long maturities offer

I. stability of income
II. stability of market value
III. fluctuation of income
IV. fluctuation of market value

A. I and II
B. I and IV
C. II and III
D. III and IV



14. The NASD requires that investment recommendations must include the disclosure of

A. the risks related to the investment
B. the sales charges related to the transaction
C. all material facts related to the investment
D. all of the above


15. In order to fit the NASD’s requirement for a suitable recommendation, a product must be matched with the

I. customer’s financial means
II. rep’s commission structure
III. customer’s investment objectives
IV. rep’s risk tolerance

A. I only
B. I and III only
C. II and IV only
D. I, II, III and IV