Unit 3 Flashcards
1
Q
Types of Orders
A
Market Orders
Limit Orders
2
Q
market orders
A
buy or sell, executed immediately at best available price
3
Q
limit orders
A
buy or sell, limits acceptable purchase or selling price paid or received for purchases
for a buy - means limit price or lower
for a sell - means limit price or higher
stand in time priority, once stock begins trading at specified price, limit orders entered first are filled first
4
Q
buy market order
A
executed immediately to buy at best available market price
5
Q
sell market order
A
executed immediately to sell at the best available market price
6
Q
buy limit order
A
executed to purchase at price or better, in this case price would need to be lower
7
Q
sell limit order
A
executed to sell at price or better, in this case would need to be higher
8
Q
stop order
A
buy or sell a stop order does not become live working order in market until stock trades at or through specified price once triggered becomes order
9
Q
stop limit order
A
order also has a stop price and does not become live until stock trades through stop price.
has a limit price, the ordered is triggered
has a limit to buy or sell at
10
Q
day order
A
an order is assumed to be a day order, valid only until close of trading day.
if not filled is canceled
11
Q
good till cancelled GTC order
A
orders are valid until executed or cancelled
automatically cancelled on last business day of april and last business day of October
12
Q
market at open or market on close order
A
executed at the opening of day or close of day
customer is not guaranteed exact opening or closing price but instead a price at, or close to
13
Q
fill or kill order
A
applicable to limit orders
fill (execute immediately) or cancel order completely
never have partial execution
14
Q
immediate or cancel
A
IOC like FOK except partial execution is acceptable.
fill portion can, cancel the rest
15
Q
all or none orders
A
executed in entirety or not at all
can be day or GTC
don’t have to be filled immediately
16
Q
Bid Price
A
highest price anyone is willing to pay for securities at that moment in time
17
Q
ask price
A
lowest price anyone is willing to accept to sell securities at that moment
18
Q
quotations (bid-ask)
A
all quotes maintained in active markets like a stock exchange are dynamic and change constantly throughout the trading day.
19
Q
Trade Capacity - Agent
A
if the firm acts as agent, it is a broker acting on behalf of its customer to buy or sell securities in the market.
the firm is paid commission when acting as agent
agent = broker = commission
20
Q
Trade Capacity - Principal
A
if firm is acting as principal, firm is buying into, or selling out of its own inventory to accommodate its customer.
firm is dealer and will markup - selling out
markdown - buying into
rather than charging commission
principal = dealer = markup or markdown
21
Q
Long (Bullish)
A
when investor buys security, taken a position
taken ownership portion
security rise in value and will be able to sell later for profit
buy to open position = long = bullish
someone who shares, owning securities convertible into shares, rights, warrants are bullish market attitudes
22
Q
short (bearish)
A
sell security to open position
investor selling security they do not own
borrowing stock from a lender and selling borrowed shares
stock will decline price, buy back at later price
customer profits by differences between short sale price and price bought back at
sell to open position = short = bearish
long put options, owning contracts
23
Q
Opening / closing transactions
A
Long
Buy = opening
sell = closing
short
sell short = opening transaction
buy back = closing transaction
24
Q
Naked Short Selling
A
selling stock without first borrowing shares or confirming where shares can be borrowed from.
naked short selling is a violation
25
Covered Short Selling
shares have been properly borrowed, located, known they can be borrowed.
26
located shares sold short
not something investors undertake
back office function of broker dealer
meeting location requirements and borrowing of securities is by BD on behalf of customer
27
discretionary account
preapproved authority for RR to make transactions without approval
what security
number of shares or unit
whether to buy or sell
does not apply to timing
28
discretionary account - power
must file trading authorization, limited power of attorney
customer may continue to enter trades on own
29
discretionary account rules
order must be identified
officer or partner approve each order
record kept of all transactions
no excessive churning
review trading activity
30
Solicited Orders
transaction initiated by agent or registered representative
31
unsolicited orders
initiated by customer
| order tickets should mark
32
Ordinary Income
income earned form interest, wages, rents, royalties
taxed at different rates depending on IRS tax brackets
33
capital gains
sale or exchange of property including securities
34
capital gains - long term
asset sold greater than 1 year
taxed at favorable long term rate
35
capital gains - short term
asset sold within 1 year
tax rates are same as taxpayer ordinary income
36
dividends
distribution of company profits to its shareholders
37
cash dividends
distributed by check to investor holds certificate
automatically deposited brokerage account if shares held in street name
when declared paid quarterly and taxed in year distributed
38
stock dividends
wishes to reinvest profits for business purposes
company issues additional shares of common stock as dividend to its current stockholders instead of cash
own more shares, cost per share adjusted downward
stock dividend itself is not taxable
when sold will have tax consequences
39
Cash Dividends - Qualified
maximum rate specific IRS tax code
higher investor income, higher tax rate on qualified dividends
always lower than investors ordinary income tax rate
40
Cash Dividends - non qualified
ordinary taxed at investors ordinary income tax rate
41
Dividend - Declaration Date
BOD approves dividend payment recognized as date declared.
42
Dividend - Ex Dividend Date
FINRA or exchange post an ex date.
one business day before record date
customer may purchase two days prior and receive dividend
43
Dividend - Record Date
on record date receive dividend distribution
44
Dividend - Payable Date
dividend disbursing agent sends dividend checks to all stockholders whose name appear on books as owners.
45
Dividend Disbursement Dates
DERP help you remember order dates involved
Declaration - Ex - Record - Payable
declaration - record - payment = BOD
ex = FINRA
46
interest
income paid to those purchase debt securities
bond holder
% of face (PAR) value on annual basis
interest is taxed as ordinary income received in semiannual payments
47
capital gains
occurs when security sold for a price higher than cost basis
48
capital loss
selling price is lower than cost basis
49
Cost Basis - Liquidation
upon liquidation cost basis represents a return on capital. the cost basis is not taxed as a gain but any sales proceeds above cost basis would be
50
Dow Jones Industrial Average
most widely cited measure of market
performance of 30 stocks of large, well known companies
51
S&P 500 index
tracks 500 stocks of large US company
is basis for several index mutual funds and exchange traded funds
52
Russell 2000
index of 2000 small company stocks
benchmark for component of overall market
53
Dow Jones Willshire 5000
5,000 stocks covers all companies listed on major market, include all sizes, all industries
54
Lipper Fund Indexes
calculates several indexes tracking different categories of mutual funds, such as growth, core, value funds
55
Barclays Capital Aggregate Bond Index
composite index
combines several bond indexes
picture entire bond market
56
Trade Settlement
Trade Date - date transaction occurs
Settlement Date - date ownership actually changes,, date brokers dealers are required to exchange
57
Regular Way Settlement
FINRA / UPC
| regular way settlement for most corporate securities (equity and debt) is t+2
58
T+2
```
corporate securities
municipal bonds
government agency securities
Ginnie Mae
Fannie Mae
Freddie Mac
Debt securities
```
59
T+1
```
Federal government securities
T Bills
T Notes
T Bonds
Option
same day as trade date - money market securities
```
60
Cash Settlement
requires delivery of securities from seller and payment from buyer on same day trade is executed
stock / bonds - spot for deliver
both parties agree
61
Sellers Option
available to customers want to sell securities but cannot deliver physical securities in time for regular way settlement
lock in selling price without having to make delivery
seller can settle trade as specified in contract
sellers and buyers settlement option can take place sooner than the trade date plus three business days (t+3)
the seller or buyers option settlement is allowing settlement to occur after regular way.
62
Physical Delivery
physical paper certificates
| stocks & bonds
63
Book Entry
shares sold without evidence
all government issues by US treasury are issued in book entry form, no physical securities exist
64
Forward Split
make stock more attractive, increases the number of shares, reduce price, without affecting total market value of shares outstanding
more shares, reduce value per share = same total ownership interest before and after adjustment
65
Forward Split - Even Split
investor always given certain number of shares for each owned.
2 for 1 , 3 for 1
66
Forward Split - Uneven Split
split can be designated in any ratio
3 for 2
5 for 4
67
Reverse Split
price low and undesirable
investor owns fewer shares worth more per share
fewer shares, increased value per share = same total ownership interest before
68
Reverse Split - Even
1 for 2, 1 for 3
69
Reverse Split - Uneven
2 for 3, 4 for 5
70
Stock Rights
preemptive rights
entitle existing shareholder to maintain proportionate ownership shares in ownership by buying newly issued shares before offered to general public
71
A Rights Offering
stockholders purchase below current market value
subscription period 30 to 45 days
1. exercise rights to buy stock by sending the rights certificates and a check for the required amount to rights agent
2. sells rights and profit from their market value (rights certificates are negotiable securities)
3. let rights expire and lose value (not likely scenario)
72
Stock Warrants
certificate granting its owner right to purchase securities from issuer at specified price
normally higher than current market price at time warrants are issued, sometime in future
long term instrument, option buying.
hopeful exercise price will be below current market when exercised
offered as sweetener
73
Stock Rights Vs. Warrants
Rights - short term, given to existing shareholders, allows one to purchase shares below current market value
warrants - long term, bundled with other securities, allows someone to purchase shares at price above current market value at time warrants were issued
74
M&A
ownership of companies or their operating units are transferred as in the case of acquisition
combined in the case of merger
allow enterprise to grow, shrink, change nature of business
75
Takeover
purchase of one company known as target company by another company
hostile takeover - go directly to shareholders bypassing BOD
76
spin off
type of divestiture where parent company sells shares of subsidiary or distributes new share of company or division it owns to create a new company
77
tender offer
offer to buy securities for cash or cash plus securities
78
buyback
repurchase
company buys its own outstanding shares in open market from existing shareholders
doing so reduces number of shares (supply) and increase value
way to eliminate threat of takeover
79
Delivery Notice and Corporate Action Deadlines
Issuers required by SEC give notice
a notice is not required for an ordinary interest payment on corporate debt (bond) security
- title of security
- date of declaration
- date of record
- date of payment or distribution
- for cash dividend - amount
- for stock dividend - rate
- for split - rate distribution
must be given no later than 10 days prior
80
Proxy
Limited power of attorney
automatically revoked if stockholder attends shareholder meeting
81
proxy solicitation
if solicited -
proxy contest - everyone participates register with SEC
unsolicited - register as participant
82
Forwarding Proxies
Member broker dealer firms must cooperate with issuers by ensure customers securities held in street name are altered to all financial matters
Member firms that are nominal owners (stock is held in street name) must vote street name stock in accordance with wishes of beneficial owner. if signed proxy and fail to indicate member vote as recommended by management
customer not return proxy by 10th day - member may vote as seems fit if minor importance
if major importance - may never vote
if proxy not returned, shares are not voted
83
Cash accounts
payment is expected to be made in full at time securities are purchased
anyone eligible to open investment account can open cash account
Regulation T = T+2
if corporate stock is purchased in cash account and settle regular way t+2 would required to be received t+4
IRA, corporate retirement accounts, custodial account must be opened as cash accounts
84
Margin Account
payment can be partially made at time of purchase
allows customer to increase trading capital by borrowing either cash or securities
85
Long Margin Account
Borrow Money
| customer purchase securities and pay interest on money borrowed until load is repaid.
86
Short Margin Account
Borrow Securities
stock is borrowed and then sold short, enabling customer to profit if its value declines. all short sales must be executed through, and accounted for in a margin account
87
Stock Borrowed for Margin Account
1. member firm executing short sale on behalf of customer
2. margin customers of that member firm
3. other member firms
4. specialized
5. customers margin account - must receive loan consent agreement
88
Advantage of Margin Accounts - Customers
1. purchase more securities with lower initial cash outlay
| 2. leverage investment by borrowing a portion of purchase price
89
Advantage Margin Account - Broker Dealers
1. margin account loans generate interest income for the firm
2. margin customers typically trade large positions, increased trading capital, generating higher commission for firm
90
Margin Accounts - Hypothecation
is the pledging of customer securities as collateral for margin loans.
Hypothecation agreement must be signed by customer who wants to open margin accounts. This is contained in margin agreement.
Customers are giving permission for hypothecation to occur when sign margin agreement
firms can commingle one customers securities with another customers securities if customer has signed hypothecation agreement
91
Margin Accounts - Re-hypothecates
after customer pledge securities to broker dealer by signing margin account.
Broker dealer rep ledges them as collateral for loan from a bank.
Broker dealer is not lending own funds - borrowing from bank.
92
Regulation U
overseas process of bank lending money to broker dealer on customer securities pledged as collateral.
firms cannot commingle customer securities with securities owned by firm
93
Types of Accounts permitted to trade on margin
1. Individual and Joint Accounts
2. Corporate Accounts
3. Fiduciary (Trust and Custodial) Accounts
4. IRA - prohibited
94
Margin Account - Corporate Accounts
may utilize margin if not restricted / prohibited in corporate charter
95
Margin Account - Partnership Accounts
may utilize if not restricted in partnership resolution
96
Margin Account - Fiduciary Accounts
can only utilize margin if permitted with trust or collateral agreement.
margin must be specifically listed as permitted
97
Margin Accounts - Account Approvals
need to be approved by principal of firm prior to first trade
98
Regulation T
identifies which securities are eligible for purchase on margin and which may be used as collateral
FRB can change at anytime current requirement is 50%
99
Margin vs. marginable
margin - is amount of equity that must be deposited to buy securities in a margin account
marginable - securities that can be used as collateral in a margin account
100
Margin Account - Used as Collateral
1. Exchange Listed Stocks, Bonds
2. Nasdaq Stocks
3. NMS OTC issues approved by FRB
4. Warrants
101
Margin Accounts - Cannot Use As Collateral
1. Options (both calls and puts)
2. Rights
3. NMS OTC issues not approved by FRB
4. Insurance Contracts
102
Margin Accounts - cannot be used as collateral after 30 days
1. Mutual Funds
| 2. New Issues
103
Margin Account - Securities Exempt Regulation T
1. US Treasury Bills
2. US Treasury Notes
3. US Treasury Bonds
4. Government Agency Issues
5. Municipal Securities
if exempt securities are bought and sold they are subject to initial deposit requirements.
104
Margin Account - Required Disclosures
1. Credit Agreement (mandatory)
terms of credit extended
2. Hypothecation Agreement (mandatory)
allows securities pledged as collateral
3. Loan consent agreement (optional)
permission for firm to loan customer margin securities
to open a margin account, it is mandatory that the customer signs the credit agreement and hypothecation agreement. the loan consent is optional
105
Margin Account - Risk Disclosure
before opening, must provide customer with risk associated with margin trading
1. not entitled to choose which securities are sold if maintenance call is not met
2. customers can lose more money than initially deposited
3. customers not entitled to extensions
4. firms can increase their in house margin requirements without advance notice
106
Margin Requirements
first purchase
minimum amount
Regulation T - 50%
FINRA - not less than $2000
greater than $4000 = 50%
$2000 to $4000 = deposit $2000
less than $2000, deposit 100% of purchase price
107
Margin Calls
Regulation T requires margin account customers to meet initial deposit requirements
T+2
fully paid are only marginable to 50% of value
if no extension requested - freeze account for 90 days
108
Discretionary Orders
entered by registered representative without orders being approved first by customer
109
Non-discretionary Orders
no order can be entered without customers prior approval
110
Commission Based Accounts
commission is billed for each transaction
111
Fee Based Accounts
firms can offer fee based accounts that charge single fee instead of commission for brokerage services
moderate level of trading
investors must be given disclosure for services provided
112
Wrap Accounts
firm provides group of services such as asset allocation, portfolio management, executions, and administration for a single fee
are usually investment advisory accounts
113
Education Accounts - Section 529 plans
specific type of education savings account available to investors
114
Education Accounts - Coverdell (Education IRA)
after tax contributions up to $2000 per student per year younger than 18.
contributions limits - may be reduced or eliminated for higher income tax payers
distributions - tax free as long as funds are used for education
not depleted by age 30 - funds must be distributed and subject to income tax and 10% penalty or rolled over to another IRA
115
Account Owner
Person registered
only individuals allowed access and control of investments in account
116
Single Account
Has one beneficial owner.
account holder is only person who can control investments within the account and request distributions of cash or securities from the account.
117
Single Account - Take Note
if person not named on account will have authority over the account, the customer must file written authorization with the broker dealer giving that person access to account.
this trading authorization usually takes the form of a power of attorney.
118
Single Account - Full Power of Attorney
someone not owner, deposit, withdraw, make investment decisions.
custodians, trustees, guardians, similar legal duties
119
Single Account - Limited Power of Attorney
allows an individual to have some, but not total, control over an account.
also called limited trading authorization - able to buy/sell orders but no withdrawal of assets
120
Single Account - Transfer on Death (TOD)
type individual account allows registered owner to pass all ore portion of it to named beneficiary.
avoids probate (decedents will declared in court) because estate is bypassed.
assets in account do not avoid estate tax
121
Joint Accounts
two or more adults named on account as co owners.
requires signature of all owners
any or all tenants may transact business in the account.
must be designated as TIC or JTWROS
122
Joint Accounts - TIC
ownership provides that deceased tenant fractional interest is retained by that tenants estate and not passed on
123
Join Accounts - JTWROS
interest in account passes to surviving tenants
124
Joint Accounts - Test Topic Alert
JTWROS = all parties have undivided interested in account
TIC - each party must specify percentage interest in account
125
Corporate Accounts
firm must obtain corporate charter and corporate resolution
charter is proof that corporation does exist and resolution authorizes opening of account
1. business legal right to open investment account
2. indication of any limitations
3. individuals who will represent the business in transactions involving the account
126
Partnership Accounts
unincorporated association of two or more individuals.
complete partnership agreement - partners can make transactions.
Margin Account - investment limitations
amended partnership agreement - obtained each year if changes are made
127
Fiduciary Accounts
person other than owner initiates trade
fiduciary makes all investment, management and distribution decisions.
may not use for own benefit
may be reimbursed for reasonable expenses
beneficial owner SSN used
trustee designated to administer a trust, executor, administrator appointed by court, guardian designated by court, custodian of minor, received in bankruptcy,
128
Fiduciary Account - Rules
1. Proper authorization filed
2. speculative transactions are generally not permitted
3. margin account only permitted by legal documents
4. prudent invest rule, wise and safe
5. legal list approved for fiduciary accounts
6. may not share in profit, may charge fee
129
UGMA
minor reach age of majority, property of account is transferred
130
UTMA
custodian can withhold transfer of property until 25
131
Custodial Full Custody of Account and Can
1. Buy and sell Securities
2. exercise rights and warrants
3. liquidate, trade, hold securities
132
Registered Representative Rules
1. account only one custodian, one beneficial owner
2. one person can be custodian
3. minor can be beneficiary of more than one account
4. donor can act as custodian
5. unless custodian, parents have no legal control
133
Opening and Managing Custodial Accounts
representative confirms
1. custodian name
2. minors name and social security number
3. state registered
no documentation of custodial rights
securities registered
UGMA - securities cannot be registered in street name
UTMA - securiteit can be registered in street name
securities bought in custodial account must be registered that custodial relationship is evident
134
Custodial Account - Beneficial Owner
any tax liability is that of minor, parents or legal guardians responsibility to see that taxes are paid.
135
Custodial Account - limitations
1. custodial accounts may be opened and managed as cash accounts only
2. may not purchase on margin or pledge as collateral
3. custodian must reinvest all proceeds, dividends, interest within reasonable time.
4. investment decisions take into account minors age.
5. inappropriate investments include
commodities futures, naked options, other high risk
6. options may not be bought in custodial account, no evidence
7. covered call writing - normally allowed
8. stock subscription rights must be exercised or sold
9. custodian not delegate
10. custodian may loan money but not borrow
11. custodian reimbursed responsbile expenses incurred
136
Death of Minor or Custodian
if custodial dies, security pass to minors estate, not parents or custodian estate
137
Traditional IRA - Contributions
all employed individuals regardless of whether are covered by qualified plan, may open and contribute to IRA
IRAs are considered qualified plans by IRS
earnings are tax deferred
make tax contributions up to maximum dollar amount, does not exceed earned income.
138
IRA - Funding
```
investments can be made in
stocks,
bonds,
investment company securities,
US Minted gold
Mutual Funds
UITs
Government Securities
Annuities
```
although life insurance is not allowed within IRA other life insurance company products like annuities are.
Annuities are frequently used as funding vehicles for IRAs
139
IRA - Ineligible
```
Collectibles
Life Insurance
Short Sales of Stock
Speculative Options Strategies
Margin Account Trading
```
140
IRA - Rollover and Transfers
may take possession to move to another qualified plan
cannot do more than once every 12 months
must be completed within 60 calendar days of withdraw
141
IRA - Example
if individual changes employers, the amount in his pension play may be distributed lump sum payment. he may then deposit the distribution into rollover IRA, retains tax deferred status
transfer of funds between qualified plans differ from rollover in that account owner never takes physical possession of funds.
there is no limit to the number of times per year a person can transfer investments between custodians, provided the assets in the accounts do not pass through the hands of the taxpayer.
142
IRA Distributions / Withdrawals
begin without penalty after age 59.5 must before after 70.5
distributions are subject o 10% penalty and income tax
```
exempt
1. death
2. disability
3. first time homebuyer purchase of a principal residence
4. education expense
5. medical premiums for unemployed
6. medical expense in excess of AGI lists
RMD and RBD
```
ordinary income taxes apply to full amount
143
Roth IRA
after tax contributions up to maximum annual allowable limit per individual year
contributions to traditional + roth may not exceed maximum annual allowable limit.
contributions are not tax deductible
earnings are not taxed for as long as they accrue when they are distributed as long as money has been in account for five taxable years and owner has reached 59.5
required minimum distribution age does not apply to roth IRA
10% penalty waved for first time homebuyers
144
401(k) plans
retired contribution plan allows an employee to elect to contribute a percentage of salary up to maximum dollar limit to a retirement account.
catch up contributions are allowed
contributes excluded from earnings and tax deferred
145
401(b)
qualified retirement plan available to employer of education institutions.
tax sheltered annuities
earnings accumulate tax deferred until distribution
besides 403(b0 plans for employees, tax sheltered annuities are also available for employees of tax exempt organizations and religious organizations
146
Anti Money Laundering (AML)
Bank Secrecy Act establishes US Treasury Department as lead agency for developing regulations in connection with AML
money laundering defined as process of creating appearance that money obtains from criminal activity came from legitimate source.
prevent clean money from being used for dirty purposes
147
AML 3 phases
1. Placement
2. Layering
3. Integration
148
AML - Placement
first stage when assets are moved.
This stage is recognized when illegal funds are most susceptible to detection
149
AML - Layering
conceal the source of the funds or assets.
done through series of transactions and can vary in form and complexity
150
AML - Integration
Final stage
illegal commingled with legitimate funds
using front companies operating on a cash basis, import and export companies
151
AML Compliance Program
broker dealers are required to establish internal compliance procedures to detect abuse.
Red Flags
1. customer exhibiting lack of concern regarding risk, commission, other transactions
2. customer attempting to make frequent large deposits cash and currency
3. large number of wire transfer to unrelated third parties
4. excessive journey entries between unrelated accounts
5. designs currency deposits or withdrawals to fall under 10,000 - structuring
152
suspicious activity report (car)
USA patriotic requires firms report to FinCEN when questionable.
FinCEN is bearer that collects and analyzes information about financial transaction orders in order to combat money laundering.
153
SAR - Fines
transaction must involves at least $5,000
1. transaction derived from illegal activity
2. evade requirements of bank secrecy act
3. no business or lawful purpose
4. use of firm to facilitate criminal activity
file - 30 days
must remain confidential
154
USA Patriot Act
requires firms to make and retain records of wire transfer of 3,000 or more
name and address both send and recipient
amount of the transfer
the name of recipients financial institution
account number of recipient
155
Currency Transaction Report (CTR)
broker dealers report any currency received in amount of more than $10,000 on a single day.
failure to report can be 500k or 10 years
records must be retained for 5 years
report must be filed within 15 days
Federal Reserve and Department of Treasury
156
structuring
design deposits to fall under 10,000 radar
financial systems have in place to monitor
example
25 $500 deposits - structuring
157
Customer Identification Program (CIP)
USA patriot act requires maintain customer identification to prevent financing terrorist and money laundering.
financial institutions, banks, broker dealer, keep records checks against SDN maintained by OFAC
158
OFAC
publishes and maintains list of individuals
when appear on SDN assets are blocked
US persons and business - RR and BD are prohibited from dealing or conducting business with them
159
Lifetime record
```
partnership articles,
articles of incorporation,
minute books,
stock certificate books,
organization documents such as Form BD and amendments
```
160
Six Year Records
```
Blotters -
General Ledger -
Stock Record -
Customers Ledgers -
Customer Account Records -
```
161
Three Year Records
```
advertising
trial balances
form u-4 and u-5
customer confirmations
order tickets
subsidiary ledgers
list every office conduct business
associated persons compensation records
firms compliance and procedures manual
```
162
Retention Requirement
Whether 6, 3 the two most recent years must be easily accessible
163
Exception to Lifetime
six year and three year retention is requirement for written customer complaints. customer complaint records must be retained for four years
164
Account Statements - Electronic Form
customers must provide written consent to electronic delivery
165
Account Statements - Updating
must provide copy of account record within 30 days
changes in employment and financial status are two common amendments needed to be made to an account record.
changes in investment objective should be expected and are likely overtime.
166
Account Statements - Delivery Requirements
1. all activity in account since previous statement
2. secures positions, long or short
3. account balances
firms more hold cash balance.
FINRA. - send quarterly unless penny than monthly
statement advising customers to promptly report any discrepancy or inaccuracy
167
Account statement - activity
activity is defined as purchases, sales, interest, or dividend received or any funds flowing in or out of account.
penny stocks are those under $5 per share
168
Trade Confirmation
printed document confirms trade, settlement date, amount of money
for each transaction sent or written confirmation of trade at or before completion/ settlement date
1. trade date -
2. account number -
3. representative -
4. BOT
5. Number or Quantity
6. Description
7. Yield
8. CUSIP
9. Price
10. Amount
11. Commission
12. net amount
also show capacity broker firm acts (agency or principal) and commission in cases when BD acts as agent
169
Non Trade Confirmations
required to send confirmations
1. customer foreign bank account wire money to brokerage account. confirmation of deposit is sent
2. deposit or withdrawal of stock certificate is made, receive confirmation of activity
3. outside money manager withdraws quarterly fee
170
BCP Plans
data backup and recovery
alternative communication firm and customer
alternative communication firm and employees
alternate physical location employees
communication with regulators
prompt access to funds
171
Privacy Requirements
Nonpublic Personal Information - SSN, Acct Balances, Transaction history, internet cookie
Confidentiality Information - reserves write to disclose unless opt out.
Privacy Notifications - new account is opened and annually thereafter
Safeguard requirements - securing desktop and encrypting email
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Three Categories of Communication
1. Retail - 25 ore more, anyone that is not institutional
2. correspondence - less than 25 not institutional
3. institutional communication - institutional investor
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institutional investors
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another member firm or registered rep
bank
savings and loan
insurance company
mutual fund
employee benefit plan
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if an entity does not fall under any designated categories for institutional investor then they must be considered and treated as retail customer
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DNC - Exempt
1. established business relationship
2. prior express permission or invitation
3. tax exempt nonprofit organization
4. not made for commercial purpose
5. legitimate debt collection purpose
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Nonfinancial considerations
1. customers age
2. customers marital status
3. employment status
4. age and dependents
5. immediate family
6. current and future financial needs
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DNC Registry
asking a particular broker dealer to add your name to that broker dealers do not call list is not the same as adding your name to the national DNCR
broker specific request and subject to 5 year retention policy
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risk tolerance and investment goals
1. what kind of risks can you afford to take
2. how liquid must your investments be
3. how important are tax considerations
4. seeking LT or ST
5. investment experience
6. types of investments you currently hold
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Market Manipulation
no security is exempt from industry's anti fraud provision
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Market rumors
misleading information or rumors employed for sole purpose of manipulating stock price.
attempting to manipulate share price by spreading false or misleading information about stock
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Pump and Dump
inflating the price of an owned stock by perpetrating false and misleading positive rumors in order to sell the stock at a higher price.
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Front Running
Is the act of placing order for ones own account ahead of orders that are known to be entering into market in an attempt to gain form price movement that is likely to occur
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Excessive Trading (Churning)
generate commission rather than help customer achieve investment objectives.
excessive frequency or excessive size of transactions
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Marking the Open
entering orders before opening or falsely reporting trades that never occurred to influence opening price of stock
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Marking the Close
effecting trades at or near close of trading day or falsely reporting trades that never occurred to influence closing price of stock.
putting in buy orders at close for purpose of pushing up price, valued higher in one account
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Backing Away
market maker can revise quote in response to trading activity,
backing away from quote - refuse to do business at prices
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freeriding
securities are purchased and then sold before making payment for purchase.
prohibited in both cash and margin accounts
frozen account for 90 days.
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capping
short option call contracts
act of entering sell orders in stock for purpose of keeping it from rising above strike price of calls someone is short
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supporting
short put option contracts
| entering purchase orders for purpose of keeping price from falling below strike price of puts someone is short.
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pegging
any activity intended to keep the price of stock from moving
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wash sales
attempt to create a loss for tax purposes when ones intent is to still maintain ownership of securities.
repurchase within 30 days
recreating long positions, recreating short positions
attempts to recreate same positions using substantially identical
long position - sell - purchase call options or rights that can be exercise is establishing positions
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matched orders
one party selling stock to another with understanding that stock will be repurchased later.
make it appear far more activity exists
referred to as painting the tape
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Breakpoint sales
Mutual Funds
FINRA does not define near or just below breaking to trigger violation
investor make certain that customer is advised of breakpoints
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securities act of 1934
prohibits use of insider information in making trades
act of 1988 amended it and applied penalties
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insider
any person access nonpublic information and insider trader is someone that used the information
material in nonpublic, not available to general public
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Tipper
person who relays the information
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tippee
person who receives information
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key elements of liability for insider trading
1. is information material and nonpublic
2. does tipper owe fiduciary duty
3. does tipper meet personal benefits test
4. do either parties know
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Insider Trader Penalties
SEC can investigate any person
RR/BD - $1m and three times profit / loss avoided ,
criminal penalties - $5m and 20 years
employee of BD - 25M
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Use of Manipulative, Deception, Or Fraudulent Devices
FINRA member firms are strictly prohibited from using manipulative, deceptive, or fraudulent tactics to induce security sales.
Statue of Limitation - act 1934 - three years from alleged and within one year discovering.
No dollar limit
RR shows customer brochure indicating premature taken in when selling naked call options. No where in the brochure state that naked call selling has unlimited loss potential.
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Improper Use of Customers or Securities Funds
1. suspicious activity involving transfers and disbursements in customer accounts
2. activity in account of deceased person
3. excessive customer complaints
4. exception report showing discrepancies
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Borrowing Or Lending
Must have Loan Consent agreement, lending arrangements, Written notice
1. immediate family relationships between representative and customer
2. customer is in business of lending money
3. both registered with same firm
4. outside business relationship
before borrowing or lending to a customer, a representative must advise his firm in writing and receive written permission.
notice and approval are not needed if loan is between immediate family member
notice and approval are not needed if customer is a lending institution and the loan is on standard commercial terms.
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Guarantees and Sharing in Customer Accounts
Broker Dealers, investment advisers, and registered representatives may not guarantee and customer against loss or guarantee a gain.
member firms and representatives are prohibited from sharing in profits unless joint account and approved.
contributions can only be measured in dollars
firms cannot have joint accounts with customers.
representatives may have join account with customer only if the arrangement has been approved by the principal and account proceeds are shared in proportion to each party's contribution
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Financial Exploitation of Seniors
FINRA Defines
- age 65+
- age 18+ mental impairment
wrongful or unauthorized act to obtain control through deception, intimidation, under influence, over money, assets, property, or convert.
any act aligning power of attorney, guardianship, authorization.
prevent
1. reasonable efforts
2. permitted, not required place temporary holds
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Trusted Contact person
Member firm is not prohibited from opening account customer refuses to provided
1. opening accounts
2. updating information
reasonable efforts
must disclose in writing firm can contact
trusted person is intended to be resource
member firm unable to contact customer after multiple attempts contact customer person
member firm suspects diminished capacity, trusted contact
member firm financial exploitation - temporary hold, contact trusted contact
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Temporary Holds on Disbursements
member firm reasonably believe
can place, does not required
no longer than 15 days
must internal review, provide notification of hold
not required to provided notification to trusted contact
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Unregistered Person
may not conduct certain business activities
prohibited against soliciting customers and taking orders to buy or sell securities
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Paying Commission to Unregistered Person
only registered can be paid commissions.
member firms can only grant commission and other allowances to other members
nonmembers are treated as general public
nonmember firms, including suspended members, always buy at public offering price, sell at public bid price, never at discount
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Exception to Unregistered Person
foreign nonmember firms, ineligible FINRA membership, may be granted commission if they agree to abide by FINRA rules, regulation, and standards
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Continuing Commission
Registered Person Leaves, may continue to receive commission
no requirement for member firm to do this
must be contract is effect before representative leaves
heirs deceased may receive continuing commissions if in written contract
continuing commission may never be paid on business referred or introduced by an employee after that person ceases to be registered with member
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Falsifying or Withholding Documents
FINRA requires
"a member in the conduct of business shall observe high standards of commercial honor and just and equitable principles of trade."
forgery and falsification is not consistent with high standard
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Sanction
sanction against a member or associated person, if found guilty of falsifying or withholding
1. censure
2. fine
3. suspension
4. expulsion, canceling
5. barring
6. imposition
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Signatures of Convenience
altering documents previously signed by customer or reusing for convenience of customer is prohibited
reusing old signature is prohibited
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Responding to regulatory request
FINRA grants itself authority to inspect and copy books ,records, accounts of member firms, associated person whom FINRA has jurisdiction.
- documents relating to compliance
- other FINRA Rules
- SEC Rules
- MSRB Rules
- federal securities laws
met promptly - two most recent years easily accessible
