Chapter 10.5 Flashcards Preview

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Flashcards in Chapter 10.5 Deck (17):

Proxies(absentee voting)

If a B/D receives a proxy concerning a customer's security being held in street name, then the B/D must send the proxy to the customer promptly.
-For equity securities: The member must forward all proxy material, annual reports, information statements, and other material furnished by the issuer.
-For debt securities: The member must make reasonable efforts to forward any communication or document pertaining to the bond issue that has been prepared by or on behalf of the issuer
-Reimbursement of costs: FINRA rules allow member firms to be reimbursed for forwarding these material to their customers. Costs associated with the mailing of proxies directly by the issuer to the customer are paid by the issuer and not the customer. Member firms do not have to send proxy materials to an ERISA plan fiduciary
-A member organization, which has not received voting instructions from the beneficial owner of the security by the date specified in the proxy material, may vote the shares on behalf of the beneficial owner provided the matter to be voted on does not involve:
-A merger or consolidation
-A proxy contest
-Appraisal rights concerning a security


Member firm charges for services performed

Service charges to customers may be made if they are reasonable and not unfairly discriminatory between customers. Service charges can be levied for:
-Safekeeping or custody of securities
-Exchange or transfer of securities
-Collecting dividends and interest

**Member firms cannot charge customers for the mailing of proxy material


Handling accounts of deceased persons

-If a customer dies, the RR must cancel all outstanding orders, freeze the account, await instructions from the estates representative. The RR would not liquidate the account.
-The death of a principal on a durable power of attorney immediately terminates the power of attorney.
-If there is a Partnership account and one partner dies, the RR should freeze the account because a partnership is legally dissolved upon the death of a partner
-Transfer on Death(TOD) - Upon the death of an individual investor or the last surviving account owner in a joint account, the assets in the account are passed on to beneficiaries according to the written TOD agreement, thus eliminating the need for probate. Beneficiaries remain responsible for any estate taxes. Transferable assets include common stock, bonds, and mutual funds. Limited partnerships, precious metals, variable annuities, fixed annuities, and commodities are not eligible assets in a TOD account.


RRs sharing in customer accounts

They must obtain prior written authorization of their employing member and obtain prior written authorization of the customer. RRs can share only in direct proportion to their financial contribution into the account. They must share in the profits and the losses.

**Sharing is allowed with prior written authorization but rebating any part of the RR's compensation is strictly prohibited


Use of information obtained in fiduciary capacity

A member is prohibited from using any information obtained while acting in a fiduciary capacity for the purpose of soliciting purchases, sales, or exchanges, except on behalf of the issuer and at their requeset


What should a RR do if the client files for bankruptcy?

RR should cancel all open orders


Holding Mail

Holding mail for a customer who is traveling is permitted if the firm receives written instructions from the customer that includes the time period the firm is requested to hold the mail. If the time period is longer than 3 consecutive months, the instructions must include an acceptable reason for the request. Convenience is not an acceptable reason


Investors cannot trade options unless..

They can be expected to be able to evaluate the risks and have signed an option account agreement


Callable securities

When a B/D has in it's possession or under its control any security which, may be called or redeemed prior to maturity, shall:
-Establish and make available on the member's website procedures by which it will allocate among its customers, on a fair and impartial basis, the securities to be redeemed or selected as called in the event of a partial redemption or call; and
-Provide written notice to new customers at the opening of an account, and all customers at least once every calendar year, of the manner in which they may access the allocation procedures on the member's website and that, upon a customer's request, the member will provide hard copies of the allocation procedures to the customer.


Favorable Redemptions

Where redemption of callable securities is made on terms that are favorable to the called parties, a member shall not allocate the securities to any account in which it or its associated persons have an interest until all other customers positions in such securities have been satisfied


Unfavorable Redemptions

Where the redemption of callable securities is made on terms that are unfavorable to the called parties, a member shall not exclude its positions or those of its associated persons from the pool of the securities eligible to be called.


Guarantee customer's signatures

B/D's can guarantee their customer's signatures, but the transfer agent determines if the guarantee is acceptable


RR creating a "list of bonds" to choose from

It would be considered a "recommendation" since the RR created the list.



If an investor sells a covered call option, and later buys it back, and then again, sells another covered call with a higher strike price



If an investor sells a covered call option, and later buys it back, and then again, sells another covered call with a lower strike price


What are REITs not considered?

Direct Participation Programs or Limited Partnerships


Dividend Reinvestment Plans(DRIPS)

Plans generally used by long-term investors who are interested in accumulating more shares of a company's stock. The investors reinvest the dividends which accumulate and are then used to buy more shares of the company. There is generally a small fee for using a DRIP.