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Series 6 Top Off > Chapter 2 > Flashcards

Chapter 2 Flashcards

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1
Q

What is the purpose of profiling potential customers for RRs?

A

To better understand their needs and desires regarding potential investments

This is in accordance with the industry’s Know Your Customer rules.

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2
Q

What must RRs understand before making recommendations?

A

Customers’ financial status, investment experience, investment objectives, and attitudes toward risk

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3
Q

What is the documentation process involved in onboarding new clients?

A

Collecting and documenting customer information when opening and maintaining an account

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4
Q

What is the significance of proper record-keeping for RRs?

A

Protects the interests of the customer, the firm, and the registered representative

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5
Q

What does the USA PATRIOT Act require from firms?

A

Verification of potential clients’ identities and monitoring for compliance with anti-money laundering regulations

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6
Q

What is collected on a new account form?

A

Customer information to satisfy regulatory requirements and understand investment objectives

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7
Q

What are the minimum information requirements for new accounts?

A
  • Customer’s name and residence
  • Legal age verification
  • Registered representative’s name
  • Authorized persons for corporations
  • Signature of principal
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8
Q

What additional information must RRs attempt to obtain before the initial transaction?

A
  • Social Security number or TIN
  • Customer’s occupation
  • Association with another member firm
  • Financial information
  • Investment objectives
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9
Q

What is an institutional account?

A

An account of a bank, insurance company, or any person with total assets of at least $50 million

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10
Q

What is required for discretionary accounts?

A

Record of the manual signature of each named person authorized to exercise discretion

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11
Q

What is required for standard brokerage cash accounts regarding signatures?

A

Only the approving principal must sign the new account form

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12
Q

What does a predispute arbitration clause do?

A

Obligates customers to submit disputes to binding arbitration

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13
Q

What disclosures must accompany a predispute arbitration clause?

A
  • Arbitration is final and binding
  • Waiving right to seek remedies in court
  • Limited discovery compared to court
  • Arbitrators’ awards may lack detailed reasoning
  • Panel may include industry-affiliated arbitrators
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14
Q

What are numbered and nominee accounts used for?

A

To protect privacy while maintaining records of beneficial owners

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15
Q

How long must firms retain customer account information?

A

At least six years after an update or the account closure

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16
Q

What defines an individual account?

A

Opened by and for one person, who directs activity unless third-party authorization is granted

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17
Q

What is a joint account?

A

An account with more than one owner, where any owner may initiate activity

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18
Q

What are the common forms of joint ownership?

A
  • Joint Tenancy with Right of Survivorship (JTWROS)
  • Tenancy in Common (TEN COM)
  • Community Property
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19
Q

What happens to assets in a JTWROS account upon the death of a tenant?

A

Ownership passes to the remaining tenant without probate

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20
Q

What is required for corporate accounts?

A

A corporate resolution evidencing authorization to open the account

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21
Q

What is the distinction between cash and margin trading for corporate accounts?

A
  • Cash Account Trading: Yes
  • Margin Trading: Yes
  • Options Trading: Yes
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22
Q

What is a fiduciary?

A

A person acting on behalf of another for their benefit

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23
Q

What does the Uniform Prudent Investor Act (UPIA) focus on?

A

Identifying investors’ objectives and diversifying portfolios

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24
Q

What documentation is required to open a trust account?

A
  • Evidence of trustee’s authority
  • Copy of the trust agreement
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25
What distinguishes a revocable trust from an irrevocable trust?
* Revocable: Can be changed or canceled by the grantor * Irrevocable: Cannot be modified once established
26
What is limited trading authorization?
Allows an authorized person to place orders but not make withdrawals
27
What is durable power of attorney?
Continues to manage financial affairs even if the grantor becomes incapacitated
28
What is the requirement for a third party to trade in an account?
Written trading authorization signed by the account owner
29
What is a discretionary account?
An account where the registered representative has trading authority
30
What happens to a Power of Attorney (POA) upon the grantor's death?
The POA is terminated.
31
What is a discretionary account?
An account where a registered representative has authorized third-party authority.
32
What must occur for discretionary authorization to become effective?
A principal must accept the discretionary authorization in writing.
33
What is excessive trading in the context of discretionary accounts?
Excessive trading, or churning, refers to the frequent buying and selling of securities without regard to the customer's investment objectives.
34
What are the three order details that must be specified to avoid a discretionary order?
* Asset * Action * Amount
35
What is a not-held order?
An order where the client specifies the asset, action, and amount but leaves the timing and price to the discretion of the registered representative.
36
What is a Prime Brokerage Account?
A service that involves a clearing firm offering bundled services to sophisticated clients.
37
Who typically uses prime brokerage services?
* Hedge funds * Institutions * High net worth individuals
38
What is a wrap account?
An account where one fee covers multiple services provided by a broker-dealer.
39
What is the purpose of the Customer Identification Program (CIP)?
To verify the identity of individuals who seek to open accounts.
40
What is the Specially Designated Nationals and Blocked Persons List?
A list maintained by the Treasury Department identifying known and suspected terrorists and criminals.
41
What minimum information must be obtained from a customer for account verification?
* Name * Date of birth * Address * Identification number
42
What does Regulation SP protect?
A customer's non-public personal information.
43
What must firms provide customers under Regulation SP?
A privacy notice describing their privacy policies.
44
What is the opt-out right under Regulation SP?
Customers have the right to opt-out of having their information shared with unaffiliated third parties.
45
What is the FTC's Red Flags Rule designed to do?
Detect, prevent, and mitigate identity theft.
46
Can a trustee use stockholder information for solicitation purposes?
Generally, this practice is a violation of industry rules.
47
What is required for a broker-dealer to maintain records of customer identity verification?
Records must be maintained for five years following the closing of the account.
48
What happens if a client fails to provide their Social Security or tax ID number?
They may be subject to backup withholding.
49
What is the purpose of the backup withholding?
To ensure that individuals who are subject to backup withholding inform the broker-dealer.
50
What is the consequence of a firm discovering a client is on the SDN List?
The firm must block all transactions immediately and inform federal law enforcement authorities.
51
What does the term 'discretionary authority' mean in finance?
The ability of a registered representative to make trades on behalf of a client without prior consent.
52
What must a principal do regarding discretionary orders?
Approve each discretionary order promptly.
53
How often must account activity in discretionary accounts be reviewed?
Frequently.
54
Can a firm acting as a trustee for a corporation use a shareholder list for solicitation purposes?
No, it generally violates industry rules unless directed by the corporation for its benefit.
55
Who is defined as an insider according to the Securities Exchange Act of 1934?
Any director, officer, or owner of more than 10% of the voting stock and their immediate family members.
56
What form must an insider file within 10 days of becoming an insider?
Form 3.
57
What is required for insiders to report changes in their stock position?
File Form 4 by the second business day following the change.
58
What are insiders not permitted to do with short-swing profits?
Keep short-swing profits from selling their stock at a profit within six months of acquisition.
59
What legal process allows a corporation to recover short-swing profits?
Disgorgement.
60
Can insiders sell short the stock of the company for which they are insiders?
No.
61
What is 'shorting against the box'?
Executing a short sale against a long position held elsewhere.
62
What are insiders allowed to write (sell) regarding their stock?
Covered calls.
63
What type of accounts must member firms monitor for their employees?
Personal accounts opened with other broker-dealers or financial institutions.
64
What must employees do before opening outside accounts?
Obtain prior written consent from their firm.
65
Who does the rule regarding outside accounts also apply to?
Accounts in which the employee has beneficial interest, including those held by their spouse, children, and related persons.
66
What must an employee do if they had an account before joining a broker-dealer?
Obtain written consent from their employer within 30 days of employment.
67
What is required from the executing firm upon request regarding the employee's account?
Send duplicate copies of confirmations and statements to the employee's broker-dealer.
68
What types of accounts are exempt from the requirements regarding outside accounts?
Accounts limited to transactions involving redeemable investment company securities, unit investment trusts, variable contracts, or 529 plans.
69
Who must approve all new accounts before the first order is executed?
A registered principal.
70
What dictates which principal approves an account?
The type of securities being purchased.
71
What is required if restrictions need to be placed on a customer’s account?
It may be due to conflicts of interest or the client's failure to pay or deliver securities on time.
72
What is the payment requirement for purchases in cash and margin accounts?
Payment must be made within two business days of settlement (S + 2).
73
What happens if payment is not made by the deadline?
The position is closed on the third business day, and the account is frozen for 90 days.
74
What are some commonly tested concepts from this chapter?
* Important elements of a Customer New Account Form * Characteristics of cash and margin accounts * Different forms of account ownership * Activities requiring customer written authorization * Types of special client arrangements * Procedures for account registration changes * Provisions of the Bank Secrecy Act and USA PATRIOT Act
75
What does Regulation SP pertain to?
It pertains to the privacy of customer information.
76
What must be done to verify customer account and tax information?
A process must be followed to ensure accuracy.
77
What is required for employees of FINRA member firms seeking to open accounts at other firms?
They must follow specific procedures established by their employer.
78
What is the role of a General Securities Principal?
To approve accounts involving corporate securities, mutual funds, and variable annuities.

Series 6 Top Off (3 decks)

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