Chapters 1/2 Flashcards

Question

True or false: One general approach that’s used by many professionals is to subtract a client’s age from 100 to determine the % of assets that should be invested in stocks?

Answer 1

1. Capital (cash) reserve: Typically want at least three months worth of living expenses and should be held in a liquid investment (ex: MMDA) 2. Preservation of captial 3. Liquidity 4. Current income 5. Growth 6. College funding 7. Retirement funding 8. Speculation: Investors looking for above-avg. returns. 9. Tax relief 10. Meeting fiduciary obligations: At times, assets are being invested for the benefit of a 3rd party (ex: child or incapacitated relative).

Answer 2

* Promotion of just and equitable principles of trade/business * Maintenance of higher standards, honor, and integrity by RRs * Prevention of fraud and manipulation * Prevention of unreasonable profits and commissions * Protection of investors

Answer 3

True, the RR may have used their best judgement and it just didn't pan out.

Answer 4

False, they apply to both.

Answer 5

1. Reasonable-basis obligation: If RRs are going to recommend a security, they should ensure it's suitable for at least some investors. 2. Customer-specific obligation 3. Quantitative obligation: A series of recommended transactions, even if suitable for customer, may be excessive when the customer's investment profile is taken into consideration (prohibits churning).

Answer 6

* RRs must have a reasonable basis to believe that the institutional customer is capable of indepently evaluating investment risks in regards to specific securities and investment strategies. * The institutional customer must affirmatively state that it's exercising independent judgement in evaluating the recommendations. ## Footnote * When conducting business with institutional customers, the reasonable basis and quantitative obligations standards still apply, but the customer-specific obligation standard does not.

Answer 7

* Review tax forms to determine income * Review bank and brokerage statements for prior 3 months to determine net worth * Obtain written confirmation of accredited status from BDs, IAs, attorneys, or CPAs ## Footnote * The SEC doesn’t stipulate that any one of these methods must be used; instead, the requirement is to take reasonable steps to ensure that the persons to whom the solicitations are being directed are accredited investors.

Answer 8

False, they suggest it is.

Answer 9

* Criteria * Methodology * The tool's limitations * Explain that results may vary * Describe the universe of investments and how they are selected * Explain whether certain investments are favored over others * Display a disclosure saying that the productions are provided by the tool * Provide FINRA w/ access to the tool unless SOLELY used by institutional investors.

Answer 10

Total income less required payments. This is most helpful when determining the money available for a person to invest.

Answer 11

True. To satisfy this obligation, the form may be delivered electronically.

Answer 12

False, earnings generated within an annuity are tax-deferred (subject to tax at a later date).

Answer 13

Cash accounts are brokerage accounts where all trades are paid for in full. Margin accounts are brokereage accounts where a client can trade on credit.

Answer 14

* Client's name and address * Whether client is of the legal age * Name of the RR responsible for the account (if multiple RRs- each RR should be listed and their scope should be listed) (this bullet doesn't apply to institutional clients) * If the client is a corporation, partnership, or other legal entity, the names of any persons authorized to transact on its behalf * Signature of the partner, officer, or manager denoting accepance of the account ## Footnote * A PO box may not be used as an address but mail regarding the account can be sent there. The only exception is a military PO box. * Firms must ask clients for updates at least every 3 years to check for updates. * Customers are not required to provide signature for cash accounts.

Answer 15

* SSN or taxpayer identification number (TIN) * Customer's occupation and employer's name and address * Whether the customer is associated w/ another member firm. * Financial info, such as annual income and net worth * Investment objectives ## Footnote * THIS SECTION (requested information) doesn’t apply to institutional accounts and accounts in which the transactions are limited to non-recommended investment company shares (e.g., mutual fund shares)!!!!!

Answer 16

Bank, S&L, insurance, registered investment company, IA, or any person with >= $50mm of assets.

Answer 17

False, for cash accounts, industry rules do not require a client signature. However, for option/margin accounts they do. The approving principal of the BD must always sign the new account form.

Answer 18

The disclosures must be highlighted: * Arbitration is final and binding on the parties * The parties are giving up their right to seek remedies in court, including the right to a jury trial. * Prearbitration discovery is generally more limited than, and different from, court proceedings. * It’s not required that the arbitrators’ award include factual findings or legal reasoning, and any party’s right to appeal or seek modification of rulings by the arbitrators is strictly limited. * Typically the panel of arbitrators includes some individuals affiliated w/ the securities industry.

Answer 19

True, in order to protect privacy clients can trade under ***nominee*** names or just use an account number as long as firms maintain records regarding the beneficial owners of the accounts.

Answer 20

SEC and FINRA require that BDs maintain records of client info for six years after any update is made and six years after the date an account is closed.

Answer 21

1. Individual accounts 2. Joint accounts 3. Corporate accounts 4. Unincorporated association accounts 5. Sole proprietorship accounts 6. Partnership accounts 7. Fiduciary accounts 8. Custodial accounts 9. IA Accounts 10. Wrap Accounts

Answer 22

Accounts opened by and for one person. A 3rd party may be authorized to direct activity.

Answer 23

Accounts that have more than one owner. In most cases, any joint owner can direct activity, but if a firm requires client signatures, then only owners who have signed. New account info should be obtained for each joint owner.

Answer 24

1/3 types of joint accounts. These accounts are owned by at least 2 people, where all tenants have an equal right to the account’s assets and the *remaining owners* get survivorship rights when the other owner(s) die. Often creates by married couples. ## Footnote * An account record must be maintained after a joint owner’s death for six years after the account is moved to the other owner(s).

Answer 25

1/3 types of joint accounts. W/ these accounts, each owner has a % of ownership, *and at the time of death the deceased person's interest passes to their estate.* DOES NOT have to be equal ownership. This is common for business partners. ## Footnote * When the owner dies, the assets are transferred to the estate vs the other owners

Answer 26

1/3 types of joint accounts. These are essentially the same as JTWROS but only permitted between legally married couples. A community property document must be completed.

Answer 27

A brokerage account for a corporation. The RR must ensure that the person opening the account is authorized to do so by obtaining a *corporate resolution*. This is where the BOD appoints one or multiple people to operate the account. ## Footnote * A corporation opening an options/margin account must provide a copy of the corporate charter. The charter is the document that certifies whether the corporation is authorized to have such an account. * A corporate charter is not required for a cash account. * Corporate resolutions are required regardless of whether the corporation is opening a cash or margin/option account.

Answer 28

These accounts are opened in the name of the owner, which can be a business name. The ownership of the account is subject to creditors’ claims.

Answer 29

Brokerage accounts opened by a sole proprietor. The account is vulnerable to the owner's personal creditors.

Answer 30

Brokerage accounts for partnerships. RRs must obtain info from each general partner during the opening process. The partnership agreement must specify the partners who are authorized to execute transactions on behalf of the partnership. BDs must maintain a file of the partnership agreement for recordkeeping.

Answer 31

Accounts opened by fiduciaries. The fiduciary must provide documentation of their authority. The Uniform Prudent Investment Act (UPIA) acknowledges that there are no categorical restrictions on investments made by fiduciaries.

Answer 32

* Evidence of the trustee's authority to transact business in the account * A copy of the trust agreement

Answer 33

The individual can make any changes (incl. cancelling it). Assets don't transfer until death. This trust does NOT reduce taxes, but DOES avoid probate when funded prior to the grantor's death.

Answer 34

Once assets are deposited into the account, the trust cannot be modified or canceled. This type of trust reduces estate taxes and avoids probate.

Answer 35

Accounts opened for minors. The legal age for opening an account varies state by state. The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minor Act (UTMA) are the 2 primary types of custodial accounts and very similar. W/ custodial accounts, an irrecovalbe gift of cash or securities is given to a minor by an adult and an adult custodian becomes a fiduciary. There can only be one custodian and one minor per account. There's no limits on the amounts that may be gifted, but taxes occur after $19k per year. Once the minor reaches legal age, the assets are transfered into an account under their name. | * Custodial accounts are registered in the name of the custodian. ## Footnote * Under UTMA, the minor is repsonsible for paying taxes for any capital gains and the custodian may receive a fee for managing the account. * A custodian is allowed to authorize investment discretion to a RR or IA. * Custodial accounts may NOT be margin accounts. * A custodial account may be opened under the minor's SSN

Answer 36

A power of attorney that allows someone other than the owner of the account to make trades. The owner can offer this person full or limited authoization.

Answer 37

Limited trading authorization: The authorized person can place orders for the account but not make withdrawals of cash/securities. Full trading authorization: The authorized person can place orders and make withdrawals. With either of these, BDs must receive written trading authorization that's signed by the account owner and the authorized person prior to permitting the authoized person to make trades or withdrawls. ## Footnote * With limited discretion, the representative may place orders before they're approved; however, they must be approved promptly thereafter by a principal.

Answer 38

Regular (non-durable) power of attorney: Terminates if the grantor becomes incapacitated Durable power of attorney: The opposite | Either type is terminated in the event of the grantor's death

Answer 39

When the RR is the authorized third party. In order for this account to be opened, an authorization form must be signed by the client and the designated power of attorney. A principal must accept this in writing for it to become effective and then approve each trade on the day of the trade. Activity must be monitored to prevent churning. W/ discretionary accounts, RRs generally do not need the account holders approval before executing every transaction unless it's buying the member firm's own stock.

Answer 40

False, this is not a discretionary order and does not require written authorization. | Remember the 3 As: asset, action, amount- not discretionary. ## Footnote * Orders that provide discretion for price and time are often denoted as not-held orders. * A client must give the RR written instructions if the not-held order is to remain in effect for more than one day.

Answer 41

The purchase and sale—or the sale and purchase—of the same security, on the same day, in a margin account. Day trading is not permitted in a cash account.

Answer 42

Any customer who executes >= 4 days trades over a 5 day period. Member firms must provide a **risk disclosure statement** to retail customers wanting to open this type of account but this is not required for institutional clients. ## Footnote * If a customer meets the definition of a pattern day trader, but the number of day trades is 6% or less of total trades for the five-business-day period, the customer will not be considered a pattern day trader. * Firms must believe that day trading is appropriate for the customer before opening one of these accounts.

Answer 43

The account must be approved for day trading within 10 days.

Answer 44

When clearing firms offering a bundled packages of services to clients. Prime brokerage clients are hedge funds, institutions, and high net worth individual clients. In a prime brokerage arrangement, a client selects one firm as its prime broker to consolidate the bookeeping process. The client can still use multiple BDs for execution, research, and access to IPOs, but all trades are handled through the prime broker. ## Footnote * An advantage to prime brokerage services is that it allows customers to lower their cost of funds by concentrating their margin positions into a single account. * Prime brokers may execute and clear transactions, and may also provide securities lending services to a hedge fund

Answer 45

When clients instruct BDs to interact w/ banks rather than themselves for delivery of payments. The BDs then send the trade details to the bank, and the banks will send the money from the client's account to the BDs or send the securities to the BD for client sales. Before accepting this type of account, the BD must obtain the customer's account number and name of the agent bank. DVP = delivery versus payment. When the BD sends the stock the client purchases to the bank, and the bank pays the BD w/ money from the client's account. RVP = receive versus payment. When the BD sends money to the bank and the bank in return sends the BD the security from the client's account. ## Footnote * DVP is also referred to as collect on delivery (COD) * These are typically used by institutions.

Answer 46

When IAs acts as portfolio manager for clients. Clients must provide written authorization for the adviser to transact business in the account.

Answer 47

An account where one fee (usually 1%-3%) is charged by a BD or a number of services being provided. A wrap account is usually offered by a BD but managed by an IA. These are used for clients who trade frequently.

Answer 48

Federal law surrounding employer-based pension plans. ERISA does not apply to IRAs. ERISA emphasizes conservative investments being a priority. Aggressive derivative strategies are outlawed. Since pension plans grow tax-deferred, fiduciaries should avoid tax-free investments.

Answer 49

Investors can transfer funds from one 401k to another w/o incurring taxes as many times as they want within a year. Investors may also rollover 401k plans to IRAs or vice versa w/o incurring taxes as long as it's completed within 60 days. This can only be done once a year.

Answer 50

True. The withholding tax can be avoided if the funds are transferred directly from one retirement account to another and the check is made payable to the new trustee.

Answer 51

An investor who withdraws money from a retirement account before reaching 59 and 1/2 will be required to pay a 10% tax penalty on the amount withdrawn, along with paying ordinary income taxes on the withdrawal.

Answer 52

* The account owner has become disabled. * The account owner dies and the money is withdrawn by the beneficiary * The withdrawals are set up as a series of equal periodic payments over the owner's life expectancy * The money is used to pay for medical expenses not covered by insurance.

Answer 53

* Medical insurance premiums when the owner is unemployed * Expenses related to being a qualified first-time home buyer (capped at $10k) * Expenses related to birth/adoption of a child (capped at $5k) * Paying for higher education expenses for themselves of an immediate family member

Answer 54

Investors who wait too long to begin withdrawing from their IRAs will also be subject to a penalty. People have to begin withdrawing by the time they're 73. | THIS PROVISION DOES NOT APPLY TO ROTH IRAs

Answer 55

A plan that covers all employees 21 and older who have worked full-time for the employer for at least a year (full-time = 1,000 hours during a year). To be a qualified plan, employees must be either fully vested after 5 years OR 20% vested after 3 years and become fully vested after 7 years. The investment of plan assets must follow strict fiduciary guidelines.

Answer 56

1. Pre-tax contributions. Money is not taxed until withdrawn. 2. Tax deferred growth: Dividends and interest aren't taxed. 3. Payments received at retirement may qualify for special tax treatment.

Answer 57

A type of qualified plan that relies heavily on employee contributions rather than being entirely funded by employer contributions. Once withdrawn, the money is taxed as ordinary income. Employers can match employee contributions but may choose to have a vesting period. Employers are permitted but not required to allow employees to take loans from their 401k plans. The loan is typically five years. The IRS limits the max. loan amount to the lesser of 50% of the amount vested or $50k.

Answer 58

Tax-deferred retirement plans available for public school employees or employees of non-profits. Technically not a qualified plan.

Answer 59

1. Contributions 2. Growth 3. Distribution/Withdrawals | Need to have an understanding of taxation of each of these phases.

Answer 60

Contributions are typically made on a pre-tax basis: Part of the money from your paycheck goes to these plans prior to being taxed. If the contributions are made pre-tax, they are said to be on a zero-cost basis. *Pre-tax contributions reduce an individual's reportable income.* If the contributions are made post-tax, they will not be taxed once withdrawn.

Answer 61

Income during the plan's life is tax-deferred. Retirement plans never generate capital gains/losses.

Answer 62

Post-tax contributions are not taxed upon distribution but pre-tax contributions are taxed at ordinary income levels during distribution.

Answer 63

A type of non-qualified education plan. This is a tax-advantaged defined contribution plan that may be established by state and local government employers. The plans allow for pre-tax contributions that reduce taxable income. The IRS caps the annual contribution for individuals. There is no penalty for early withdrawal from these plans but any deductions are taxed as ordinary income.

Answer 64

* Must be limited to higher compensation employees * Any money invested cannot be rolled over into another tax-qualified plan. GOVERNMENTAL 457 PLANS CAN. * Any non-vested money contributed by the employer remains property of the employer. In a 401(k) or 403(b), these contributions by the employer are set aside in a trust for the exclusive benefit of the employee.

Answer 65

A type of non-qualified plan. When employers give discretionary annual contributions from the firm's profits to employees' retirement accounts. Generally, each employee receives a % of their salary as a contribution in these plans. W/ profit-share plans, employer contributions are tax-deductible and earnings grow on a tax-deferred basis, but the maximum annual contribution is determined by the IRS.

Answer 66

A type of non-qualified plan. These are employee benefit plans where the firm contributes its stock (or money to purchase its stock) to the plan. The stock generally comes from retiring employees or employees that left. When an employee retires, they usually don't receive stock but the cash equivalent of the value of the stock.

Answer 67

A type of non-qualified plan. These plans allow employees to purchase life insurance, mutual funds, and variable annuities by having after-tax deductions taken from their paychecks. These allow employees to purchase these products for lower if they bought them individually on the open market.

Answer 68

A type of non-qualified plan. When employers agree to pay employees all or part of their wages at a later date- usually at retirement, disability, death, or termination. The advantage here is that the funds are paid out when the employee moves to a lower tax bracket. These plans may be funded or unfunded. Funded meaning they are secured by specific assets, and unfunded meaning it's simply a promise.

Answer 69

CTRs are filed for all cash transactions that exceed $10k (on an aggregated basis- can't do 10 $1k transactions) executed by a single customer in a day. SARs are filed whenver a transaction or group of transactions exceeds $5k and the client is suspected of *violating federal crimes, illegal activity, the transaction is designed to evade reporting requirements, or the transactions has no legitamite business purpose.* | Under no circumstances may a RR tell a client that a SAR has been filed.

Answer 70

An OFAC list of suspected terrorists or other wanted criminals and blocked persons. ## Footnote * If a firm learns that client is on the SDN list, the firm must contact law enforcement immediately

Answer 71

* Name * Date of birth * Address * Identification number ## Footnote * A BD can waive the requirement of obtaining a tax ID # if a person has applied but not yet received one. In this case the BD MUST obtain the application for the tax ID. * A BD MUST retain records of methods used to verify customer ID for 5 years after the closing of the account.

Answer 72

False, BDs must send clients documentation of the info collected at account opening within 30 days of the opening of the account OR at the time the client's next statement is sent and MUST check for updates on account info at least every 36 months?

Answer 73

Forces financial firms to establish privacy policies, notify clients of such policies, and give clients the right to opt-out of any disclosures of their nonpublic personal info to 3rd parties. | Disclosure of clients' public info is not governed by this reg.

Answer 74

Customer= A person who has an ongoing relationship w/ the firm. Firms must provide every customer w/ a privacy notice at the time the relationship is first established and follow up w/ an updated notice annually. Consumer= A person who is in the process of providing info to the firm in connection w/ a potential transaction. A BD must provide a privacy notice before it discloses non-public info to a 3rd party. However, if the firm will not disclose nonpublic info to a 3rd party, then a notice is not required.

Answer 75

Requires member firms to create and implement a written identify theft prevention program designed to detect, prevent, and mitigate identity theft.

Answer 76

False, this is generally a violation of industry rule.

Answer 77

False, within 10 days. And an insider is required to file Form 4 to report any changes in his stock position by the second business day following the change.

Answer 78

When an insider sells their stock at a profit within 10 months of its acquisition. Insiders are NOT permitted to keep short-swing profits. This restriction also applies if an insider sells stock that was held longer than six months and then, within six months of the sale, repurchases it at a lower price than the previous sale price

Answer 79

When companies sue insiders for recovery of short-swing profits

Answer 80

False. Insiders may write or sell covered calls but not uncovered calls.

Answer 81

Must obtain prior WRITTEN approval from their firm and provide WRITTEN notification to the outside firm that they are an employee of a member firm. This applies to any employee, the employee's spouse/children, or any other individual whom the employee has beneficial interest. ## Footnote * If an employee had opened the account prior to starting at the firm, he must obtain written consent from his employer within 30 days of starting and notify the outside firm. * The outside firm does NOT need to obtain the employing firm's approval before every trade. * The executing firm is required to provide transactional info to the employing firm upon request. * REQUIREMENTS OF THIS RULE DO NOT APPLY TO MUTUAL FUND SHARES, UNIT INVESTMENT TRUSTS, VARIABLE CONTRACTS, OR 529 PLANS.

Answer 82

Payments must be made for purchases in a cash and margin account within two business days of settlement (S + 2), which is equivalent to three business days following the trade date (T +3) since most trades are settled within one business day. ## Footnote * Payment extensions can be granted by FINRA * If no payment is made and no extension granted, the position is closed (securities sold) on the 3rd business day following settlement and the account is frozen for 90 days.

Answer 83

1. Immediately cancel all open orders 2. Mark the account as deceased 3. Await instructions from the executor of the estate (rather than just any family member)

Answer 84

False, aggressive derivative strategies are prohibited but certain conservative option strategies (ex: covered call writing) are permissable.

Answer 85

Required during the opening of a margin account.

Answer 86

Limited partnerships and munis

Chapters 1/2 Flashcards

(115 cards)