STC Series 7 Chapter 1 Exam 2025
With 100% Correct Answers
Broker-dealers have a suitability obligation to:
A. Retail customers only
B. Institutional customers only
C. Unsophisticated customers only
D. All customers - CORRECT ANSWER✔✔D. All customers
Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail
customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for
recommending a transaction based on information obtained from the customer's investment
profile. This would include the customer's age, financial situation and needs, tax status,
investment objectives, investment experience, investment time horizon, liquidity needs, and
risk tolerance. When determining the suitability obligations of a broker-dealer concerning
institutional customers, the two most important considerations are the customer's ability to
evaluate the investment risk independently, and the extent to which the customer is exercising
that ability in connection with the recommendation.
Which of the following factors is the MOST important to consider when analyzing the
investment portfolio of a client who has retirement as her primary investment objective?
A. Age
B. Net worth
C. Education level
D. Previous investment history - CORRECT ANSWER✔✔A. Age
When analyzing a client's existing portfolio to determine how it affects recommendations you
might make, it is important to consider a client's investment objectives and the length of time
available to try to meet those objectives. When retirement is the primary objective, it is very
important to know the client's age. The other items mentioned are also valuable for an RR to
know, but they are not as critical as knowing the client's age.
, Investors with high incomes and high net worth:
A. Always have a high tolerance for risk
B. Can generally tolerate more risk than investors with low incomes and low net worth
C. Are never risk-averse
D. Are always suitable for aggressive investments - CORRECT ANSWER✔✔B. Can generally
tolerate more risk than investors with low incomes and low net worth
Investors with high incomes and high net worth generally have higher risk tolerances than
investors with more modest financial resources. However, financial resources are not the only
elements that determine an investor's risk tolerance. Personality type, age, and other
considerations also help determine a person's ability and willingness to assume risk. The courts
and regulators have made it clear that an investment is not suitable simply because the client
could afford to lose the money.
When a registered representative makes a recommendation to a customer involving a leveraged
exchange-traded fund (ETF), he will consider which TWO of the following factors to be MOST
important?
I. The security may be recommended to at least some investors
II. The security may be able to produce a profit over a long period
III. The security may be able to be sold quickly
IV. The security may be a good investment for a specific customer
A. I and III
B. I and IV
C. II and III
D. II and IV - CORRECT ANSWER✔✔B. I and IV
Although all of the choices are important factors for determining the suitability of a
recommendation, the FINRA suitability rule has listed three main suitability obligations.
The reasonable-basis obligation requires a member firm and an RR to have a reasonable basis to
believe that the recommendation is suitable for at least some investors. If the firm or its RRs do
not understand the product, it should not be recommended to customers.
With 100% Correct Answers
Broker-dealers have a suitability obligation to:
A. Retail customers only
B. Institutional customers only
C. Unsophisticated customers only
D. All customers - CORRECT ANSWER✔✔D. All customers
Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail
customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for
recommending a transaction based on information obtained from the customer's investment
profile. This would include the customer's age, financial situation and needs, tax status,
investment objectives, investment experience, investment time horizon, liquidity needs, and
risk tolerance. When determining the suitability obligations of a broker-dealer concerning
institutional customers, the two most important considerations are the customer's ability to
evaluate the investment risk independently, and the extent to which the customer is exercising
that ability in connection with the recommendation.
Which of the following factors is the MOST important to consider when analyzing the
investment portfolio of a client who has retirement as her primary investment objective?
A. Age
B. Net worth
C. Education level
D. Previous investment history - CORRECT ANSWER✔✔A. Age
When analyzing a client's existing portfolio to determine how it affects recommendations you
might make, it is important to consider a client's investment objectives and the length of time
available to try to meet those objectives. When retirement is the primary objective, it is very
important to know the client's age. The other items mentioned are also valuable for an RR to
know, but they are not as critical as knowing the client's age.
, Investors with high incomes and high net worth:
A. Always have a high tolerance for risk
B. Can generally tolerate more risk than investors with low incomes and low net worth
C. Are never risk-averse
D. Are always suitable for aggressive investments - CORRECT ANSWER✔✔B. Can generally
tolerate more risk than investors with low incomes and low net worth
Investors with high incomes and high net worth generally have higher risk tolerances than
investors with more modest financial resources. However, financial resources are not the only
elements that determine an investor's risk tolerance. Personality type, age, and other
considerations also help determine a person's ability and willingness to assume risk. The courts
and regulators have made it clear that an investment is not suitable simply because the client
could afford to lose the money.
When a registered representative makes a recommendation to a customer involving a leveraged
exchange-traded fund (ETF), he will consider which TWO of the following factors to be MOST
important?
I. The security may be recommended to at least some investors
II. The security may be able to produce a profit over a long period
III. The security may be able to be sold quickly
IV. The security may be a good investment for a specific customer
A. I and III
B. I and IV
C. II and III
D. II and IV - CORRECT ANSWER✔✔B. I and IV
Although all of the choices are important factors for determining the suitability of a
recommendation, the FINRA suitability rule has listed three main suitability obligations.
The reasonable-basis obligation requires a member firm and an RR to have a reasonable basis to
believe that the recommendation is suitable for at least some investors. If the firm or its RRs do
not understand the product, it should not be recommended to customers.
