CHAPTER 13 - TYPES OF ACCOUNTS

Question 1

Cash Account

Answer 1

Basic investment account

Customer must pay in full for securities

Accounts that can only be opened as cash:
- retirement accounts like IRAs and 401ks
- custodial accounts like UTMAs and CESAs

Question 2

Margin Account

Answer 2

Customer can use cash and some credit to purchase securities

Using borrowed money is leverage

The securities firm lends the funds at time of purchase with securities in the portfolio serving as collateral for the loan

Margin is the minimum amount of equity a customer must deposit to buy securities

Margin enhances returns in both direction so more suitability is required here

Question 3

Fee Based Account

Answer 3

Charge a single fee (fixed or percent of assets) instead of commission based

FINRA says these are appropriate only for investors who engage in moderate level of trading (low trading is better with commission)

Need to give disclosure describing services provided and cost before opening account

These accounts reduce churning but are exposed to reverse churning (putting a low trade account in fee based)

These are NOT wrap fee accounts

Question 4

Wrap fees

Answer 4

Firms providing advice in addition to brokerage services including asset allocation, execution, administration all in a single fee, usually AUM

Question 5

Churning and Reverse Churning

Answer 5

Churning - trading excessively in commission account

Reverse churning - placing low trade account in fee based account

Question 6

Prime Brokerage Account

Answer 6

Customer (usually institution) selects one firm to provide custody, trading, and other services while other firms (executing brokers) usually execute most trades placed

Prime broker must sign agreement with customer with terms and names of executing brokers

Prime will facilitate clearance and settlement of transaction, compliance of trading rules rests with executing brokers

This is great because it provides client with ability to trade with multiple brokerage houses with central master

Often includes list of specialized services and offered to BDs more active trading clients like hedge funds

Question 7

Delivery vs Payment (DVP)

Receipt vs Payment (RVP)

Answer 7

In DVP/RVP arrangement, payment for securities purchased is made to selling customers agent and/or delivery of securities sold is made to buying customers agent in exchange for payment at time of settlement

Usually for institutional accounts, this is a cash on delivery COD settlement

BD handling trade must verify arrangement

Question 8

Pattern Day Trading Account

Answer 8

Day trader is someone who buys and sells same security on same day to take advantage of intraday price movements

Pattern day trader is someone who executes 4 or more trades within 5 business days

Min equity requirement for pattern day traders is $25k

Before opening an account the member must:
- provide risk disclosure statement outlining risks
- approve account for a day trading strategy or receive written statement from customer that they do not intend to day trade

Question 9

Individual Account

Answer 9

1 owner

Account holder is only person who can
- control investments
- request distributions

suitability is only based on the 1 investor

Question 10

Joint Account

Answer 10

Joint Account:
- 2 or more adults
- joint account agreement must be signed
- account forms require signatures form all parties
- Any tenant can transact business
- Checks must be payable to names which account is registered and endorsed by all tenants (only needs to be mailed to 1 address
- When securities are sold, certificate must be signed by all tenants

Suitability - must put interest of client first but need suitability on all owners so recommendation must be based on group not just an individual

Question 11

JTWROS

Answer 11

Deceased tenant’s interest passes to surviving tenants

Most common with spouses, ownership is equal between spouses

All parties have undivided interest

Checks or distributions must be made payable to and endorsed by all parties

Question 12

TIC

Answer 12

Ownership provides deceased tenants fractional share to go to their estate

Most for non spousal relatives or friends

Unequal ownership

Each party has a specific percentage of interest in the account

Checks or distributions must be made payable to and endorsed by all parties

Question 13

Community Property

Answer 13

Marital property recognized by some states, rules differ state to state

Property acquired during marriage is considered to be JT owned by both spouses

JT ownership is automatically assumed

Exceptions for gifts, inheritances, or property owned before marriage

Question 14

Custodial Accounts

Answer 14

NOT JT accounts

1 owner and 1 beneficiary

Minor is not a legal person

Custodial account, custodian enters all trades

Securities in these accounts are managed by a custodian until minor reaches age of majority and custodian has full control over minor’s account and can:
- buy or sell assets
- exercise rights and warrants
- liquidate, trade, or hold securities

Custodian can use property for beneficiaries support (usually not for raising the kid like food)

RR rules to know:
- all gifts are irrevocable
- 1 custodian and 1 beneficiary
- donor of securities can act as custodian or appoint someone else
- parent has no legal control
- minor can have more than 1 account
- minor has right to sue custodina
- only cash accounts

Question 15

TOD

Answer 15

Upon death, the account or portion of it passes to a single or multiple beneficiaries

Beneficiaries and percentages can be changed

Avoids probate but not estate tax

Can’t be used in TIC but can in ind and JT

Question 16

Sole Prop

Answer 16

Treated like individual account

Question 17

General Partnership

Answer 17

Flows straight through to the partners

Question 18

Limited Partnership

Answer 18

Suitability decisions are similar to GP except that LPs do not have full liability of GPs

Question 19

LLC

Answer 19

Limited liability and flow through

Objectives and constraints must be viewed from suitability standpoint of individual members

Question 20

S Corp

Answer 20

Limited liability and taxed like partnership

Profits and losses pass through

No more than 100 people, no nonresident aliens, only common stock

Need to look at owners to see suitability

Question 21

C Corp

Answer 21

If needing significant capital, this is the best choice

Officers and directors are shielded from liability

Look at corp needs for suitability

Subject to double taxation

Question 22

New Account Form

Answer 22

Opening an account start with new account form, need the following info:
- name and address
- are they of legal age
- name of firms associated person
- corp or partnership account
- signature of partner
- trusted contact rules

signature of customer is not required for cash account. Only signature required is partner, officer, or principal signifying the account has been accepted.

Copy of account info needs to be sent to customer within 30 days and then every 3 years

FINRA asks each member for the following (if customer does not respond the firm is ok):
- customer SS
- occupation
- whether they are an associated person of another member
- trusted contact person

Question 23

Customer Identification Program (CIP)

Answer 23

USA Patriot Act of 2001, financial institutions required to institute a customer id program designed to:
- verify identity of new customer (need government ID or articles of incorporation for corp)
- maintain records of info
- determine whether they are on the OFAC list of terrorists

Member firm must get this info before opening an account:
- customer name
- DOB
- address
- SS
- more info if non-US person

If you cannot get the true identity of a customer then should have procedures describing:
- when BD should not open an account
- terms a customer may conduct transaction while BD verifies identity
- when BD should close an account
- when BD should file SAR

Question 24

Opening Accounts for other members employees

Answer 24

Rules around opening accounts for:
- employees of members firms and
- spouses or minor children of member firm employees

Need to notify the employer and executing member in writing of association with other member firm

before account is opened, employing firm must grant permission (prior written consent ok)

If buying mutual funds or variable annuities directly from issuer, rule does not apply or if purchasing non security products like fixed annuities or term life

MSRB is almost the same but only that sending duplicate confirmations is required (exception is 529 plans)

Question 25

Trusted Contact Person

Answer 25

Need to get contact for specified adults - age 65 or older - age 18 or older with mental or physical impairment Need to make reasonable effort to get info of trusted person Member firms can place temporary hold on distribution of funds from account if believing that exploitation is occurring Temporary is up to 55 business days if report sent to state temporary up to 15 days but MAINLY IS 55 DAYS

Question 26

Regulation SP (privacy)

Answer 26

Nonpublic personal info including: - SS - account balances - transactions - info collected through cookies Firm must provide notice to customer when new account is opened and annually thereafter If firm reserves right to disclose unaffiliated third parties nonpublic personal info, notice must provide customer reasonable means to opt out as a check off box with prepaid return envelope, electronic means, and toll free number (cannot ask them to write a letter to opt out) Need to have very safe computers and email and tech Consumers (1 time thing) are given initial privacy notice Customers (ongoing) are given initial and annual privacy notices

Question 27

Power of Attorney

Answer 27

POA Need power in writing to give a person not named on account trading authority, needs to be created by owner of account Full POA: - non owner can deposit or withdraw - non owner can make investment decisions Limited POA: - non owner allows only trading authority but NOT withdrawing Durable POA: - either full or limited, provides power even after grantors incapacitation Once death, POA is ended

Question 28

BD must not share nonpublic personal info for how many days before opt out provision?

Answer 28

30 days

Question 29

Approval and Documentation of Changes in account name or designation

Answer 29

No changes in account names can be made unless change has been authorized by qualified registered principal designated by the member Principal must be personally informed of essential facts before giving approval Approval has to be in writing Essential facts must be in writing as well and preserved

Question 30

Internal Transfers

Answer 30

Transfers from an account of which the recipient is not a signatory require approvals and documentation similar to a change in designation

Question 31

Bulk Transfers

Answer 31

When customers sell securities in an account, proceeds are deposited in their account and held in a sweep account (money market mutual fund that earns income until withdrawn or used) Sometimes BDs switch the money market fund - so the member firms can make bulk exchanges at NAV of money market mutual funds utilizing negative response letters getting affirmative consent only when specific conditions are met Negative Response Letter - informs recipient of action and requires them to respond if they object Conditions: - bulk exchange is limited to situations involving mergers and acquisitions - negative response contains tabular comparison of nature and amount of fees charged - negative response contains comparative description of investment objectives and prospectus - negative response will not be activated until at least 30 days after letter was mailed

Question 32

Can a firm send a negative response letter and charge a fee for any customer deciding to transfer their account to a different firm?

Answer 32

NO

Question 33

Retirement Plans

Answer 33

Tax-deferred - tax is put off until withdrawal Qualified Plan - employer sponsored under ERISA (401k) Qualified - pretax contributions grow tax deferred (IRA) Non-qualified - employer sponsored plan like a deferred comp plan with tax deferral (can discriminate) Deductible contribution - deductible on tax return Nondeductible contribution - funds grow tax deferred but no deductible

Question 34

Employer sponsored retirement plans

Answer 34

Qualified - pretax Non-qualified - after tax contributions limits and when distributed is taxed as OI cost basis is zero if funds were contributed by employer or pretax contributions by employee

Question 35

Non-qualified Plans

Answer 35

Deferred comp plans: - employee agrees to defer receipt of income until retirement - may not get benefit is company goes under (general creditor) - may lose benefit if you leave before retirement - taxed as OI - can discriminate - board members are not eligible because they are not employees (unless they are employees too) Payroll deduction plan - allows employees to authorize employer to deduct specified amount for retirement savings from their paychecks - money is deducted after taxes are paid and may be invested in retirement vehicles 401ks are NOT payroll deduction, they are salary deduction Payroll deduction plans are non-qualified

Question 36

Qualified Plans

Answer 36

Benefits - employer contribution are current deductible expense - employee contributions are made pretax - all earnings are tax deferred - protection are offered under ERISA

Question 37

Traditional IRAs

Answer 37

tax deductible contribution of $7k per person or 100% of taxable compensation for 2024 age 50 and older can make catch up of $1,000 Economic growth and tax relief reconciliation act of 2001 (EGTRRA) is responsible for catch up provisions compensation: - wages, salaries, tips - commissions - SE income - alimony - nontaxable combat pay not compensation: - cap gains - interest and dividends - pension or annuities - child support - DPPs or other passive income any taxpayer of any age can contribute if they have earned income can open spousal IRA and contribute even if 1 spouse does not have income if JT return is filed

Question 38

Earnings Limits

Answer 38

Deductibility phase-outs for trad IRAs: - $77k-$87k for single - $123k-$143k for JT limits are only for those that are covered by employer plans if not covered, then no deductibility limits limits are higher if only 1 spouse is covered can still contribute to IRAs but depends on how much can be deducted, either called post tax or after tax, earnings are still tax deferred

Question 39

Time for Contributions

Answer 39

Anytime from Jan 1 to April 15th of following year (even with extension)

Question 40

Excess Contributions

Answer 40

Exceeding max are penalized 6% if excess is not removed by the time the taxpayer files a tax return Earnings are taxed but no 6% penalty

Question 41

Roth IRAs

Answer 41

contributions are not tax deductible but earnings are tax free Earnings accumulated may be withdrawn tax free after 5 years AND if: - account holder is 59-1/2 or older - money is used for first time home up to $10k - died or disabled regular contributions can always be taken out tax and penalty free Contribution limits: no age limit, need earned income Eligibility: phaseout based on income

Question 42

Deductible items to get to AGI

Answer 42

- traditional IRA contribution - alimony paid pre 2019 - SE tax - penalties on early withdrawals from saving accounts

Question 43

Is tax exempt income shown on 1040 and included in AGI?

Answer 43

Included in 1040 but NOT included in AGI

Question 44

IRA rule changes

Answer 44

- no upper age limit to contribute to IRA - RMDs start at age 73 - EWP exception - $5k for first child or $5k for adoption (2 times for each spouse) - inherited IRA from 2020 on require distribution within 10 years - 529 can pay for $10k of loans - ERISA eligibility is 1,000 hours or 500 hours past 3 years

Question 45

Roth conversions

Answer 45

income tax trustee to trustee is no 10% penalty 60 day rollover is no 10% penalty

Question 46

Roth IRA points

Answer 46

- not deductible - tax free if 5 years and 59-1/2 - need earned income - no RMDs - no 10% penalty for 1st home ($10k), death, disability - named beneficiary - contributions may always be withdrawn penalty and tax free

Question 47

Withdrawals from Trad IRAs

Answer 47

RMD starts at 73 and must be taken by April 1st of year following 73 then Dec 31 every year after that For qualified plan then you can delay until April 1st of the year after you retire for that plan only (not IRAs) no EWP after 59-1/2 pre tax are all taxable after tax contributions are not taxed pro-rata formula for what is taxed and what is return of principal EWP exceptions (also from Roth): - death - disability - 1st home $10k - higher education expenses of immediate fam - medical expenses in excess of AGI - equal periodic payments 72(t)

Question 48

IRA investments

Answer 48

Can buy: stocks bonds mutual funds UITs LPs REITs US securities gold or silver US minted coins annuities CANNOT BUY: collectibles antiques gems rare coins art stamps life insurance munis are eligible but inappropriate ineligible practices: margin trading short sales options trading eligible: covered call buying puts and calls

Question 49

Transferring IRAs

Answer 49

60 day rollovers: - this is what is meant by "rollover" - once per 12 month period - rollover must be completed within 60 calendar days - 100% of withdrawn amount must be rolled into new account or be subject to tax and EWP - if taking distribution from employer plan, there is a 20% mandatory withholding but can still rollover 100% to avoid tax and EWP direct rollover: - employer retirement plan to IRA - when terminating employment, can move employer plan to IRA - want to do direct rollover (money never seen by employee) - no 20% withholding trustee to trustee transfer: - 1 IRA to another IRA - unlimited amount - no 20% withholding

Question 50

What does rollover mean on the test?

Answer 50

Means 60 day rollover

Question 51

Education IRA

Answer 51

AKA CESAs $2,000 max contribution for all contributors after tax, not deductible made before student is 18 tax deferred earnings are tax free if for qualified education expenses 10% penalty on earnings if not for education must be distributed at age 30 can be used for elementary and secondary limited contributions based on AGI can roll to family at age 30 if not, 10% penalty on earnings can continue past 18 if special needs contributions can be made up to April 15th of following year

Question 52

Tax sheltered annuities 403bs

Answer 52

Employees of: - public schools - charities - religious orgs employees eligible at age 21 and 1 year funded with employee deferrals written salary reduction must be executed between employer and employee Investments are mutual funds or annuities

Question 53

457 plans

Answer 53

Deferred comp employees of government work and some tax exempt NOT churches - exempt from ERISA - not required to follow non-discrimination rules - any employee can participate - distribution of 457 cannot be rolled into IRA - no 10% EWP - can have 457 AND 401k

Question 54

Difference between gov 457 and private charity 457

Answer 54

Gov plan must hold assets in trust or custodial accounts

Question 55

Corporate sponsored retirement plans

Answer 55

ERISA for private sector plans Trust agreement with trustee for each plan DC plans: - employer contributions - funds accumulate until future event (retirement) - funds can be withdrawn - account value depends on amount contributed and growth - employee has investment risk DB plans: - provide specific benefit - promised benefit is paid - sponsor assumes investment risk - formula for benefit amount (usually average salary of last 5 years and years of service) - better for older - actuary

Question 56

Contributory vs Non-contributory plans

Answer 56

Contributory - both EE and ER contribute Non-contributory - only ER makes contributions

Question 57

Employer Deductions

Answer 57

ER can deduct (limits) contributions made to qualified plan Limit depend on kind of plan

Question 58

Are contributions to DB factor sex in at all?

Answer 58

NO

Question 59

Are DB ER contributions mandatory?

Answer 59

YES

Question 60

Profit sharing

Answer 60

predetermined formula fixed percent of profits substantial and recurring most flexibility skip years easy to install share of ER profits

Question 61

401ks

Answer 61

EE deducts percent of salary ER makes matching contribution DCA is very good

Question 62

Roth 401ks

Answer 62

after tax same rules ER match must be in regular 401k no income limits and no RMDs

Question 63

Required Beginning Date RBD

Answer 63

April 1st of the year following the year your turn 73 or retire for qualified plans still contributing to

Question 64

Additional Corporate Plans

Answer 64

SEP - age 21 - worked 3/5 years - $750 of income - very easy SIMPLEs - 100 or less EEs - $5,000 or less - no other retirement plan - immediate vesting - catch up - matching contributions Keogh Plans - SE people Stock Purchase Plans and Stock Options - ESPP: - payroll deduction - employee buys stock - contributions 1-10% of salary - ER buys stock for participant using contributions with discount - participants can sell Stock options: - right to buy at a stated price - strike is price at grant - vesting period - usually needs to be approved by BoD

Question 65

RMD not taken penalty

Answer 65

25%

Question 66

ERISA provisions

Answer 66

participation - covered if age 21 and have 1 full year (1,000 hours) funding - funds must be segregated from other corporate assets with trustee to administer Vesting - employee is always vested with their contributions Communication - documents must be in writing and given annually to employees Nondiscrimination - all eligible EEs must be treated impartially Beneficiaries - beneficiaries must be named

Question 67

What types of plans does ERISA apply to?

Answer 67

Corporate or private sector

Question 68

HSAs

Answer 68

claim tax deduction contributions may be excluded from income contributions are in account until you use them growth is tax free distribution are tax free if for qualified medical expenses portable to be eligible: must be covered by HDHP on first day of the month (Dec 1 for whole year) no other health coverage not on Medicare cannot be a dependent each spouse must have separate HSA HDHP: high annual deductible max limit on sum of annual deductible and out of pocket max EE and ER can contribute to HSA Family members can contribute on behalf of eligible people Limit to contribution

Question 69

Can non US citizens have S Corps?

Answer 69

NO

Question 70

Under US Patriot Act, what must be maintained by financial institutions to prevent financing of terrorist operations?

Answer 70

Customer Identification Programs CIPs

Question 71

When can a fiduciary of a corporate retirement plan write covered calls?

Answer 71

If the strategy is consistent with objectives of the plan, only if prudent Outside approval not required

Question 72

Corporate profit sharing plan is set up under a what?

Answer 72

Trust

Question 73

Executing of FINRA member associate opening a account with them must provide

Answer 73

Duplicate statement if requested

Question 74

Max amount of days that proceeds of exploited adult may be held?

Answer 74

55 BUSINESS DAYS

Question 75

Amount paid into DC plans is set by what?

Answer 75

Trust agreement

Question 76

Do prime brokers supply clearing services?

Answer 76

YES

Question 77

What 2 things are necessary to open account?

Answer 77

Name and tax ID number

Question 78

If JT member of account wants to remove other JT member, who needs to make the change?

Answer 78

Registered principal designated by member

Question 79

Days for negative consent letter to opt out

Answer 79

30 calendar days before doing anything

Question 80

Day trader vs pattern day trader

Answer 80

day trader - buy and sells on same day pattern day trader - four or more trades in a five business day period

Question 81

SIMPLE Plan restrictions

Answer 81

can only be UP TO 100 employees (NOT fewer than 100) who earned $5k last year They CANNOT have another retirement plan in place

Question 82

DVP/RVP - BDs responsibility

Answer 82

BD must verify the arrangement between customer and their bank and ensure customer notifies their bank of each purchase or sale

Question 83

Tax for Roth IRA distribution after 59-1/2

Answer 83

If held for 5 years, then no tax!

Question 84

Who signs new account form for cash account?

Answer 84

Principal does

Question 85

Exception to EWP of IRA

Answer 85

education for grandchildren death disability first home medical premiums for unemployed medical expenses over AGI rule 72(t)

Question 86

On Feb 1st, 2024, a 40 year old investor wants to contribute to Roth IRA, how much can he?

Answer 86

$13,500 $7,000 for 2024 $6,500 for 2023