Stu Pede is an agent with broker-dealer Cavalier. A customer calls with a request to establish a classic IRA and asks for Stu’s advice regarding where the money in the IRA should be invested. Stu suggests a municipal bond fund, explaining to his client that the interest income earned on it will be tax-free at the federal level, and some of it may even be tax-free at the state and local levels. Has Stu engaged in any prohibited practices?
Explanation
Answer: C - Yes. When Stu recommends an investment in municipal bonds for a classic IRA account, he has made an unsuitable recommendation, which is a prohibited practice, and he can have his license revoked or suspended. Municipal bonds are not suitable investments for a classic IRA because municipal bonds pay interest that is at least free from federal taxation, so they offer a lower yield than fully taxable bonds of similar risk. The money in a classic IRA grows tax-free anyway, so the client is getting a lower yield with no benefit.
