Financial Industry Regulatory Authority (FINRA) Practice Exam

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Under the Uniform Transfers to Minors Act (UTMA), what can a custodian NOT do?

  1. Liquidate or hold securities

  2. Exercise rights or warrants

  3. Buy or sell securities

  4. Sell short and write uncovered call options

The correct answer is: Sell short and write uncovered call options

Under the Uniform Transfers to Minors Act (UTMA), a custodian is tasked with managing assets for a minor until they reach the age of majority, usually 18 or 21 years old, depending on the state. The custodian has a range of responsibilities, including making investment decisions on behalf of the minor. However, there are certain restrictions on the types of investment activities the custodian can engage in. The correct choice indicates that a custodian cannot sell short and write uncovered call options. These activities involve higher levels of risk and are considered speculative in nature. Short selling requires borrowing securities to sell them with the hope of buying them back at a lower price, while writing uncovered call options involves selling options without owning the underlying securities. Such practices can expose the custodial account to substantial potential losses, which is not in the best interest of the minor, who is intended to benefit from a more conservative investment approach that emphasizes capital preservation and gradual growth. In contrast, the custodian is permitted to liquidate or hold securities, exercise rights or warrants, and buy or sell securities, as these actions are generally viewed as part of the standard management of an investment portfolio for a minor. This allows custodians to make sound investment decisions while adhering to the