Ch 3 - Trading, Customer Accts Flashcards

Question

What is the ex-dividend date associated with dividend disbursement processing?

Answer 1

On the basis of the dividend record date, FINRA or the exchange (if the stock is listed) posts an ex-date. The ex-date is one business day before the record date. Because most trades settle the regular way—two business days after the trade date—a customer must purchase the stock two business days before the record date to qualify for the dividend. Or said another way, to receive the dividend, the stock must be purchased before the ex-dividend date. Conversely, if the stock is purchased on or after the ex-date, the new owner has purchased the stock “ex” without the dividend, and is therefore not entitled to receive it.

Answer 2

The date the stockholders of record (those who own the stock) receive the dividend distribution. Determined by the BOD.

Answer 3

the date that the dividend disbursing agent sends dividend checks to all stockholders whose names appear on the books as owners as of the record date. Determined by the BOD.

Answer 4

the date on which ownership actually changes between the buyer and seller. It is the date on which BDs are required to exchange the securities and funds involved in a transaction and customers are requested to pay for securities bought and to deliver securities sold.

Answer 5

To make the stock price attractive to a wider base of investors, the company increases the number of shares and reduces the price without affecting the total market value of shares outstanding; an investor will receive more shares, but the value of each share is reduced. The total market value of the ownership interest is the same before and after the split, but the price of future stock purchases is less/share.

Answer 6

Sometimes, a stock price becomes so low that it attains an undesirable aura about it. In some cases, a low stock price might not meet the listing criteria of a stock exchange that it is listed on and delisting can occur. To combat lowering stock prices, the company decreases the number of shares but the shares are worth more per share.

Answer 7

entitles existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public below the current market price. The rights are valued separately from the stock and trade in the secondary market during the subscription period, which is typically 30–45 days. A stockholder who receives rights may: ■ exercise the rights to buy stock by sending the rights certificates and a check for the required amount to the rights agent; ■ sell the rights and profit from their market value (rights certificates are negotiable securities); or ■ let the rights expire and lose their value (not a likely scenario).

Answer 8

[in brief: long term, bundled with other securities, allows someone to purchase shares at a price that is above the current market value at the time the warrants were issued] -a certificate granting its owner the right to purchase securities from the issuer at a specified price, normally higher than the current market price at the time issued, and at some time in the future. Unlike a right, this is usually a long-term instrument that gives the investor the option of buying shares at a later date at the specified (exercise) price. Note that while the exercise price is higher than the current market value when issued, it is hopeful that the exercise price will be below current market value when these are eventually exercised. Usually offered to the public as sweeteners in connection with other securities, such as debt instruments (bonds) or preferred stock, to make those securities more attractive. Such offerings are often bundled as units. For example, an investor might buy a corporate bond and with it receive 10 warrants, allowing the investor to purchase 10 shares of common stock at a specified price on a later date.

Answer 9

When a company issues cash dividends, stock dividends, a forward or reverse split, or a rights or warrants offering. A notice is not required for ordinary interest payment on a corporate debt (bond) security).

Answer 10

1. Title of the security 2. Date of declaration 3. Date of record for determining holders entitled to receive the distribution or to participate in the split 4. Date of payment or distribution 5. For a cash dividend—the amount to be paid 6. For a stock dividend—the rate of the dividend (e.g., 10%) 7. For a split (forward or reverse)—the rate of the distribution (e.g., 2:1, 3:2) * *Notice should be given no later than 10 days before the record involved or, in case of a rights subscription or other offering if giving 10 days advance notice is not practical, on or before the record date and in no event later than the effective date.

Answer 11

cash account: payment is expected to be made in full at the time securities are purchased margin account: payment can be partially made at the time of purchase.

Answer 12

pledging of customer securities as collateral for margin loans. Agreement must be signed by a customer who wants to open a margin account. This agreement is generally contained within the margin agreement, and thus, customers are giving permission for this process to occur when they sign the margin agreement. Firms cannot commingle customer securities with securities owned by the firm. However, firms can commingle one customer’s securities with another customer’s securities for hypothecation if customers have given specific permission by signing the hypothecation agreement.

Answer 13

When B/D repledges customers securities as collateral for a loan from a bank. In this light, you can see that a BD is not lending its own funds to customers purchasing securities on margin but instead is borrowing money from a bank for that purpose. Regulation U oversees the process of a bank lending money to BDs based on customer securities having been pledged as collateral for the loan.

Answer 14

only if it is not restricted in the corporation’s charter or bylaws. In other words, trading on margin may be listed as being prohibited, and if so, would not be allowed.

Answer 15

only if it is not restricted in the partnership resolution. Like a corporate account, a partnership agreement might list trading on margin as being prohibited, and if so, would not be allowed.

Answer 16

Only if it is specifically permitted within the trust or custodial agreement. Note the difference here. In this instance, margin must be specifically listed as being permitted.

Answer 17

No. It is specifically prohibited for these accounts to use margin

Answer 18

Margin refers to the amount of equity that must be deposited to buy securities in a margin account. Marginable refers to securities that can be used as collateral in a margin account.

Answer 19

■ Exchange-listed stocks, bonds ■ Nasdaq stocks ■ OTC issues approved by the FRB ■ Warrants

Answer 20

■ Options (both calls and puts) ■ Rights ■ Non-National Market Securities (NMS) OTC issues not approved by the Federal Reserve Board (FRB) ■ Insurance contracts

Answer 21

Mutual funds and new issues

Answer 22

■ U.S. Treasury bills, notes, and bonds; ■ government agency issues; and ■ municipal securities.

Answer 23

1. Credit agreement (Required)—The credit agreement discloses the terms of the credit extended by the BD, including the method of interest computation and situations under which interest rates may change. 2. Hypothecation agreement (required)—As noted earlier in this unit, the hypothecation agreement allows the securities to be pledged for the loan and gives permission to the BD to repledge customer margin securities as collateral. The firm rehypothecates customer securities to the bank, and the bank loans money to the BD on the basis of the loan value of these securities. All customer securities must be held in street name (registered in the name of the BD) to facilitate this process. When customer securities are held in street name, the BD is known as the nominal, or named, owner. The customer is the beneficial owner because he retains all rights of ownership. 3. Loan consent form (optional)—If signed, the loan consent form gives permission to the firm to loan the customers margin securities to other customers or BDs, usually to facilitate short sales where securities need to be borrowed

Answer 24

■ Customers are not entitled to choose which securities can be sold if a maintenance call is not met. ■ Customers can lose more money than initially deposited. ■ Customers are not entitled to an extension of time to meet a margin call. ■ Firms can increase their in-house margin requirements without advance notice.

Answer 25

after-tax contributions of up to $2,000 per student per year for children younger than age 18. Contribution limits may be reduced or eliminated for higher-income tax payers. Distributions are tax free as long as the funds are used for qualified education expenses. These expenses include those for college, secondary, or elementary school. If a student’s account is not depleted by age 30, the funds must be distributed to the individual subject to income tax and 10% penalty or rolled into an education IRA for another family member beneficiary.

Answer 26

the customer must file written authorization with the BD giving that person access to the account. This trading authorization usually takes the form of a power of attorney. Two basic types of trading authorizations are full powers of attorney and limited powers of attorney. Both would be canceled upon the death of the account owner.

Answer 27

allows someone who is not the owner of an account to deposit or withdraw cash or securities and make investment decisions for the account owner. Custodians, trustees, guardians, and other people filling similar legal duties are often given full powers of attorney.

Answer 28

allows an individual to have some, but not total, control over an account. The document specifies the level of access the person may exercise. Limited power of attorney, also called limited trading authorization, allows the entering of buy and sell orders but no withdrawal of assets. Entry of orders and withdrawal of assets is allowed if full power of attorney is granted.

Answer 29

Accounts which use a number, a symbol, or a nominee name in lieu of a customer’s real name. These accounts are subject to all customer identification procedures and other associated anti-money laundering rules. The firm must maintain a written statement signed by the client attesting to the ownership of the account.

Answer 30

a type of individual account that allows the registered owner of the account to pass all or a portion of it, upon death, to a named beneficiary or beneficiaries. This account avoids probate (i.e., having the decedent’s will declared genuine by a court of law) because the estate is bypassed. However, the assets in the account do not avoid estate tax, if applicable.

Answer 31

Yes. Any or all tenants may transact business in the account. Checks must be made payable to the names in which the account is registered and endorsed for deposit by all tenants, although mail only needs to be sent to a single address.

Answer 32

a joint account must be designated as either tenants in common (TIC) or joint tenants with right of survivorship (JTWROS). These designations determine how the account ownership will be handled if any party to the account dies.

Answer 33

provides that a deceased tenant’s fractional interest in the account is retained by that tenant’s estate and is not passed to the surviving tenant(s). Parties must specify ownership percentage.

Answer 34

stipulates that a deceased tenant’s interest in the account passes to the surviving tenant(s). All parties have an undivided interest in the account.

Answer 35

1. the business’s legal right to open an investment account; 2. an indication of any limitations that the owners, stockholders, a court, or any other entity has placed on the securities in which the business can invest; and 3. the individual who will represent the business in transactions involving the account. * *this is often established through a corporate charter (proof of existence) and corporate resolution (authorization to open account and indication of officers designated to enter orders).

Answer 36

unincorporated association of two or more individuals.

Answer 37

a partnership agreement stating which of the partners can make transactions for the account. If the partnership opens a margin account, the partnership must disclose any investment limitations. An amended partnership agreement (similar to a corporate resolution) must be obtained each year if any changes have been made.

Answer 38

An account where a person other than the owner initiates trades. The most familiar example is a trust account. Money or securities are placed in trust for one person, often a minor, but someone else manages the account. The manager or trustee is a fiduciary. In this type of account, the investments exist for the owner’s beneficial interest, yet the owner has little or no legal control over them. The fiduciary makes all of the investment, management, and distribution decisions and must manage the account in the owner’s best interests. The fiduciary may not use the account for her own benefit, although she may be reimbursed for reasonable expenses incurred in managing the account.

Answer 39

■ a trustee designated to administer a trust; ■ an executor designated in a decedent’s will to manage the affairs of the estate; ■ an administrator appointed by the courts to liquidate the estate of a person who died intestate (without a will); ■ a guardian designated by the courts to handle a minor’s affairs until the minor reaches the age of majority or to handle an incompetent person’s affairs; ■ a custodian for a minor; ■ a receiver in a bankruptcy; and ■ a conservator for an incompetent person.

Answer 40

1. Proper authorization must be given, as the necessary court documents must be filed with and verified by the BD. 2. Speculative transactions are generally not permitted. 3. Margin accounts are only permitted if authorized by the legal documents establishing the fiduciary accounts. 4. The prudent investor rule requires fiduciaries to make wise and safe investments. 5. Many states publish a legal list of securities approved for fiduciary accounts. 6. A fiduciary may not share in an account’s profits, but may charge a reasonable fee for services.

Answer 41

Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). Accounts that can be set up for minors. Require an adult to act as custodian for a minor (the beneficial owner). Any kind of security or cash may be given to the account without limitation. Under UGMA, when the minor reaches the age of majority, the property in the account is transferred into the name of the new adult. Under UTMA, the custodian can withhold transfer of property in the account until the new adult reaches age 25 (or 21 in some states). Any securities given to a minor through an UGMA or UTMA account are managed by a custodian until the minor reaches the age of majority. ***When a person makes a gift of securities to a minor under the UGMA or UTMA laws, that person is the donor of the securities. A gift under these acts conveys an indefeasible title; that is, the donor may not take back the gift, nor may the minor return the gift. Once the gift is donated, the donor gives up all rights to the property.

Answer 42

1. An account may have only one custodian and one minor or beneficial owner. 2. Only an individual can be a custodian for a minor’s account. 3. A minor can be the beneficiary of more than one account, and a person may serve as custodian for more than one account as long as each account benefits only one minor. 4. The donor of securities can act as custodian or can appoint someone else to do so. 5. Unless they are acting as custodians, parents have no legal control over a custodial account or the securities in it.

Answer 43

1. Custodial accounts may be opened and managed as cash accounts only. 2. A custodian may not purchase securities in an account on margin or pledge them as collateral for a loan. 3. A custodian must reinvest all cash proceeds, dividends, and interest within a reasonable time. Cash proceeds from sales or dividends may be held in a non-interest-bearing custodial account for a reasonable period, but should not remain idle for long. 4. Investment decisions must take into account a minor’s age and the custodial relationship. Commodities futures, naked options, and other high-risk securities are examples of inappropriate investments. Options may not be bought in a custodial account because no evidence of ownership is issued to an options buyer. Covered call writing is normally allowed. 5. Stock subscription rights or warrants must be either exercised or sold. 6. A custodian cannot delegate away fiduciary responsibility, but can grant trading authority and investment decisions to a qualified third party. 7. A custodian may loan money to an account, but cannot borrow from it. 8. A custodian may be reimbursed for any reasonable expenses incurred in managing the account as well as compensation for doing so. However, if the custodian is also the donor, only reimbursement of expenses is permitted and not compensation.

Answer 44

Individual retirement account. All employed individuals, regardless of whether they are covered by a qualified corporate retirement plan, may open and contribute to an IRA. IRAs are considered qualified plans by the IRS.

Answer 45

Designated by the IRS—allow the earnings in the account to grow tax deferred. E.g., IRAs, 401(k)s, 403(b)s. Individuals making a contribution to an IRA can take a tax deduction for the amount of the contribution if certain criteria are met. If an individual is not actively participating in other qualified plans, such as an employer’s 401(k) plan, the full amount of the contribution to the IRA is deductible. For an individual covered by another qualified plan, the portion deductible is determined by that person’s income level. The tax deduction gradually phases out as the taxpayer’s adjusted gross income (AGI) climbs. The exact income levels above which tax- deductible contributions are prohibited is not critical for testing purposes because these levels are, by law, raised each year. However, contributions may still be made because the earnings on these amounts are still tax deferred.

Answer 46

Collectibles (e.g., antiques, gems, rare coins, works of art, stamps) are not acceptable IRA investments. Life insurance contracts may not be purchased in an IRA. Although life insurance is not allowed within IRAs, other life insurance products, such as annuities, are. Annuities are frequently used as funding vehicles for company IRAs.

Answer 47

``` ■ Stocks ■ Bonds ■ Mutual funds ■ Unit investment trusts (UITs) ■ Government securities ■ U.S. government-issued gold and silver coins ■ Annuities ```

Answer 48

short sales of stock, speculative option strategies, tax-exempt municipal securities, or margin account trading. However, covered call writing is permissible because it does not increase risk.

Answer 49

Individuals may take possession of the funds and investments in a qualified plan to move them to another qualified plan, but may do so no more than once every 12 months. This is known as a rollover and it must be completed within 60 calendar days of withdrawal. If an individual changes employers, the amount in his pension plan may be distributed to him in a lump-sum payment. He may then deposit the distribution in an IRA rollover account, where the amount deposited retains its tax-deferred status. By contrast, a transfer of funds between qualified retirement accounts differs from a rollover in that the account owner never actually takes physical possession of the funds; the money or investments are sent directly from one IRA custodian to another. 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

Answer 50

Distributions may begin without penalty after age 59 1⁄2 and must begin by April 1 of the year after the individual turns 70 1⁄2. Distributions before age 59 1⁄2 are subject to a 10% penalty as well as regular income tax, except in the event of: ■ death; ■ disability; ■ first-time homebuyer for purchase of a principal residence; ■ education expenses for the taxpayer, spouse, child, or grandchild; ■ medical premiums for unemployed individuals; and ■ medical expenses in excess of defined AGI limits. If distributions do not begin by April 1 of the year after the individual turns age 70 1⁄2, a 50% insufficient distribution penalty applies. It is applicable to the amount that should have been withdrawn on the basis of IRS life expectancy tables. These are known as the IRA holder’s annual required minimum distribution (RMD) and required beginning date (RBD). Ordinary income taxes also apply to the full amount.

Answer 51

allows after-tax contributions up to a maximum annual allowable limit per individual per year. Contributions to other (traditional) IRAs when combined with contributions to a Roth IRA may not exceed the maximum annual allowable limit. Contributions to Roth IRAs are not deductible on one’s tax return. Note the difference here between a traditional IRA and a Roth IRA. Therefore, there is no phase-out schedule regarding a contribution being deductible as there is with a traditional IRA. However, there is a phase-out schedule regarding the contribution that can be made to a Roth IRA, and again, the schedule is tied to an individual’s AGI. The contribution limit is phased out from the low end of the phase-out scale until the high end, above which no contribution to a Roth IRA would be allowed. Earnings are not taxed as they accrue or when they are distributed from an account as long as the money has been in an account for five taxable years and the IRA owner has reached age 59 1⁄2. Unlike a traditional IRA, there are no RMDs required from a Roth IRA. However, if the owner dies, at some point the beneficiary must begin taking distributions. The rules vary as to when distributions must begin depending on whether or not the beneficiary was a spouse of the deceased person.

Answer 52

an employer-sponsored retirement plan offered by small businesses that employ 100 or fewer people. SIMPLE is an acronym for savings incentive match for employees. These plans are typically a less expensive and less complicated alternative to 401(k) plans, which are often favored by larger companies. Plan participants are typically given a menu of investment choices, such as stock and bond mutual funds. Contributions to SIMPLE IRAs are made pretax, and earnings accumulate tax deferred. Employers are required to make minimum matching contributions. Like many retirement plans, funds withdrawn before age 591⁄2 are subject to a 10% penalty. The maximum contribution amounts are indexed for inflation, and a catch-up provision is available for participants over the age of 50.

Answer 53

a type of retirement contribution plan that allows an employee to elect to contribute a percentage of salary up to a maximum dollar limit to a retirement account each year (a defined contribution). Just like with IRAs, catch-up contributions for those age 50 and older are also allowed. Contributions are excluded from the employee’s gross income and accumulate tax deferred, as do any earnings in the account. Employers are permitted to make matching contributions up to a specified percentage of the employee’s contributions. In addition, these plans permit hardship withdrawals for situations such as unemployment or first-time homebuyers and can also allow loans against any vested balance.

Answer 54

a type of qualified retirement plan available to employees of public educational institutions, non-profits, and religious organizations. In general, employees of colleges, universities, elementary schools, and secondary schools are eligible to participate if they are at least 21 years old and have completed one year of service. Generally set up as tax-sheltered annuities, these plans are funded by elective employee salary deferrals. The deferred amount is excluded from the employee’s gross income, and earnings accumulate tax deferred until distribution. For these plans, a written salary reduction agreement must be executed between the employer and the employee. As with other qualified plans, distributions are 100% taxable, and a 10% penalty is applied to distributions before age 59 1⁄2.

Answer 55

establishes the U.S. Treasury Department as the lead agency for developing regulations in connection with anti-money laundering (AML) programs. Before September 11, 2001, money laundering rules were concerned mostly with the origin of the cash. Money laundering was defined as the process of creating the appearance that money originally obtained from criminal activity, such as drug trafficking or terrorist activity, came from a legitimate source. Under the act, regulators became much more focused and concerned with where the funds are going. The idea is to prevent “clean” money (money that has been laundered) from being used for “dirty” purposes (such as funding terrorist activities). Firms are required to designate a chief AML officer. There is no requirement for this person to be registered as a representative or a principal.

Answer 56

1. Placement—This first stage of laundering is when funds or assets are moved into the laundering system. This stage is recognized as the time when illegal funds are the most susceptible to detection. 2. Layering—The goal of money launderers during this stage is to conceal the source of the funds or assets. This is done through a series of layers of transactions that are generally numerous and can vary in form and complexity. 3. Integration—In the final stage, illegal funds are commingled with legitimate funds in what appear to be viable legitimate business concerns. This can be accomplished using front companies operating on a cash basis, import and export companies, and many other types of businesses.

Answer 57

BDs are required to establish internal compliance procedures to detect abuses. There are signs or red flags that might suggest the possibility of money laundering. If a red flag is detected, it should be reported to the principal designated to receive such reports immediately. Examples of red flags include: ■ a customer exhibiting a lack of concern regarding risks, commissions, or other transaction costs; ■ a customer attempting to make frequent or large deposits of currency or cashier’s checks; ■ a customer making a large number of wire transfers to unrelated third parties; ■ a customer engaging in excessive journal entries between unrelated accounts; and ■ a customer who designs currency deposits or withdrawals to fall under the $10,000 cash transaction report (CTR) filing threshold, a practice known as structuring.

Answer 58

The USA PATRIOT Act requires firms to report to the Financial Crimes Enforcement Network (FinCEN) when there is an event, transaction, or series of events or transactions that appear to be questionable — any transaction that alone or in the aggregate involves at least $5,000 in funds or other assets if the firm suspects that it falls within one of the following four classes. ■ The transaction involves funds derived from illegal activity. ■ The transaction is designed to evade the requirements of the Bank Secrecy Act. ■ The transaction appears to serve no business or lawful purpose. ■ The transaction involves the use of the firm to facilitate criminal activity. Firms must file within 30 days of becoming aware of the suspicious transaction(s). Copies of each SAR filing and the related documentation must be retained for five years from the date of the filing. The act also requires that the filing of a SAR must remain confidential and the person involved in the transaction who is the subject of the report must not be notified. If subpoenaed, the firm must refuse to provide the information and must notify FinCEN of the request unless the disclosure is required by FinCEN, the SEC, an industry self-regulatory organization (SRO), or other law enforcement authority. In addition, the USA PATRIOT Act requires firms to make and retain records relating to wire transfers of $3,000 or more. Information to be collected includes the name and address of both sender and recipient, the amount of the transfer, the name of the recipient’s financial institution, and the account number of the recipient.

Answer 59

Financial Crimes Enforcement Network—a bureau of the U.S. Treasury Department that collects and analyzes information about financial transactions to detect money laundering, terrorist financing (domestic and international), and other financial crimes.

Answer 60

The Bank Secrecy Act requires BDs to report any currency received in the amount of more than $10,000 on a single day. Though paying for purchased securities with currency is not prohibited, many firms do not permit this. Failure to report can result in fines of up to $500,000, 10 years in prison, or both. Records relating to filed reports must be retained for five years. The report must be filed within 15 days of receipt of the currency. This rule is part of the regulatory effort to deal with money laundering. The two federal agencies empowered to deal with this abuse are the Federal Reserve and the U.S. Treasury Department. If anyone designs deposits to fall under the $10,000 radar, this is a prohibited activity known as structuring. Financial institutions should have systems in place to monitor for and recognize such attempts.

Answer 61

The USA PATRIOT Act requires financial institutions to maintain CIPs to prevent financing of terrorist operations and money laundering. Financial institutions, such as banks and BDs, must keep records of identification information and check customer names against the Specially Designated Nationals (SDN) list maintained by the Office of Foreign Assets Control (OFAC).

Answer 62

The Office of Foreign Assets Control publishes and maintains a list of individuals and companies owned or controlled by, or who are acting for, or on behalf of, targeted countries and individuals, groups, or entities that are designated under programs that are not country specific, such as terrorists and those trafficking in narcotics. When individuals or groups appear on the Specially Designated Nationals (SDN) list, their assets are blocked, and U.S. persons and businesses, which include RRs and BDs, are generally prohibited from dealing with or conducting business with them. New customers must be advised, before the account is opened, that the firm is requesting information to verify their identities. This notification may be placed on the firm’s website, delivered verbally, or placed on the new account form.

Answer 63

partnership articles if a partnership, articles of incorporation if a corporation, minute books (records of directors’ or partners’ meetings), stock certificate books, and organizational documents such as Form BD and amendments.

Answer 64

1. Blotters—A blotter is a record of original entry. A member generally maintains blotters relating to the purchase and sale of securities, the receipt and delivery of securities, and the receipt and disbursement of cash. Blotters must reflect transactions as of trade date (or event date) and must be prepared no later than the following business day. 2. General ledger—The general ledger contains accounting records of the firm’s assets, liabilities, and net worth accounts. From the general ledger, a firm prepares its financial statements. The general ledger must be prepared as frequently as necessary to determine compliance with the net capital rule, but in no event less frequently than monthly. 3. Stock record—The stock record shows all securities held by the firm, the ownership of those securities, and where the securities are held. The stock record must be posted no later than the business day after the settlement date. 4. Customer ledgers—Customer ledgers are customer statements. Cash accounts and margin accounts are shown on separate ledgers. These ledgers must be posted no later than the settlement date. 5. Customer account records—Customer account records might include the new account form and margin agreement, if appropriate. 6. record of when someone attained a principal designation

Answer 65

■ Advertising ■ Trial balances ■ Form U4, U5, and fingerprint cards for terminated personnel ■ Customer confirmations ■ Order tickets ■ Subsidiary ledgers such as securities borrowed and securities loaned, monies borrowed and monies loaned, and dividends and interest received ■ A list of every office where each associated person regularly conducts business ■ Associated persons’ compensation records ■ The firm’s Compliance and Procedures Manual

Answer 66

Customer complaints

Answer 67

- must have procedures to show information delivered as intended and that the confidentiality and security of personal information are protected. - customers must provide written consent - customer must be provided with the information in paper form, upon request.

Answer 68

- must furnish to each customer, within 30 days of opening the account, a copy of the account record. - must include a statement that the customer should mark any corrections on the record and return it -must include a statement that the customer should notify the firm of any future changes to information in the account record so that accurate and current records can be maintained. - must furnish the customer with an updated account record within 30 days of receipt of any notice of change. - account updating must occur at least every 36 months thereafter.

Answer 69

- employment - financial status - investment objective

Answer 70

■ all activity in the account since the previous statement; ■ securities positions, long or short; and ■ account balances, debit or credit.

Answer 71

Also known as a free credit balance - the firm may hold it in the account. - the statement must advise the customer that these funds are available on request.

Answer 72

- At least quarterly. - If there is activity in the account in any given month or if penny stocks are held in the account, a statement must be sent that month. - Activity is defined as purchases, sales, interest, or dividends received, or any funds flowing in and out of the account.

Answer 73

printed document that confirms a trade, its settlement date, and the amount of money due from or owed to the customer.

Answer 74

For each transaction, a customer must be sent or given a written confirmation of the trade at or before the completion of the transaction—the settlement date.

Answer 75

■ Trade date—day on which the transaction is executed (the settlement date is usually the second business day after the trade date) ■ Account number—branch office number followed by an account number ■ RR internal ID number (or AE number)— account executive’s identification number ■ BOT (bought) or SLD (sold)—indicates a customer’s role in a trade ■ Number (or quantity)—number of shares of stock or the par value of bonds bought or sold for the customer ■ Description—specific security bought or sold for the customer ■ Yield—indicates that the yield for callable bonds may be affected by the exercise of a call provision ■ CUSIP number—applicable Committee on Uniform Securities Identification Procedures (CUSIP) number, if any ■ Price—price per share for stock or bonds before a charge or deduction ■ Amount—price paid or received before commissions and other charges; also referred to as extended principal for municipal securities transactions ■ Commission—added to buy transactions; subtracted from sell transactions completed on an agency basis ■ Net amount—obtained on purchases by adding expenses (commissions and postage) to the principal Finally, the confirmation must also show the capacity in which the BD acts (agency or

Answer 76

■ written instructions that include the time period the request is being made for up to three months (requests may be granted for periods longer than three months for an acceptable reason, such as safety or security concerns but not merely for the sake of convenience); ■ the member firm informs the customer of any alternate methods that the customer may use to receive or monitor account activity such as email or through the member firm’s website (the member must obtain customer confirmation that this information regarding alternate methods was received); and ■ the member verifies at reasonable intervals that the customer’s instructions still apply. -must be able to communicate with the customer in a timely manner to provide important account information. -The firm must take actions reasonably designed to ensure that a customer’s mail is not tampered with or used in a manner that would violate FINRA rules or federal securities laws. -While holding mail is a courtesy that firms are permitted to extend to customers, the rule does not require them to. If extending the courtesy is consistent with the BD’s in-house rules, the written request by the customer to do so implies that the customer is also giving the BD permission to do so.

Answer 77

Required by FINRA member firms to deal with the possibility of a significant business disruption. -must address certain points having to do with the consequences of the event, including but not limited to: ■ Data backup and recovery (hard copy and electronic) ■ Alternate communications between the firm and its customers ■ Alternate communications between the firm and its employees ■ Alternate physical location of employees ■ Communications with regulators ■ Prompt customer access to funds and securities in the event the firm is unable to continue its business -Firms must designate a member of senior management who is also a principal to approve, update, and conduct an annual review of the plan. -requires firms to provide them with the names of two emergency contact persons who may be contacted by FINRA in the event of a significant business disruption. Each contact person must be a principal and a member of senior management, and firms must update this contact information promptly, in no case later than 30 days following any change. -must disclose in writing to its customers how it will respond to significant events of varying scope at the time of account opening, posted on the firm’s website, and mailed to customers on request.

Answer 78

- enacted by the SEC to protect the privacy of customer nonpublic personal information. - examples of nonpublic personal information include a customer’s Social Security number, account balances, transaction history, and any information collected through an internet cookie.

Answer 79

- must provide notice to customers and a reasonable means to opt out of this disclosure. -Reasonable opt-out means providing customers with a form with check-off boxes along with a prepaid return envelope, providing an electronic means to opt out for customers who have agreed to the electronic delivery of information, and providing a toll-free telephone number. - Asking customers to write a letter to express their disclosure preferences or to opt out would not be considered reasonable.

Answer 80

- a description of their privacy policies (a privacy notice). - notice must state the types of personal information that the firm collects and who the firm shares this information with. - Firms must initially provide every customer with a privacy notice at the time the relationship is first established. - Once the relationship is established, the firm must provide with an updated version of this notice annually.

Answer 81

-financial institutions must safeguard customer information as related to all forms of existing and developing technology. For example, this would include, but not be limited to, securing desktop and laptop computers and encrypting email.

Answer 82

- must be based on principles of fair dealing and good faith. - Statements must be clear and not misleading within the context that they are made, and must be fair and balanced regarding potential risks and benefits. - Omission of material facts is not permitted, nor is making false, exaggerated, or misleading statements or claims. - No communication should ever imply that past performance will be repeated. - members must consider the nature of the audience to which the communication will be directed and should provide details and explanations appropriate to the audience.

Answer 83

■ Retail communications ■ Correspondence ■ Institutional communications

Answer 84

any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period. A retail investor is any person other than an institutional investor, regardless of whether the person has an account with the member.

Answer 85

any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30-calendar-day period.

Answer 86

any written (including electronic) communication that is distributed or made available only to institutional investors, but does not include a member’s internal communications (e.g., internal memos). Examples of institutional investors are: ■ another member firm or RR; ■ a bank; ■ a savings and loan association (S&L); ■ an insurance company; ■ a registered investment company (mutual fund); ■ an employee benefit plan; ■ a governmental entity or subdivision; ■ a person acting solely on behalf of an institutional investor; and ■ any entity with $50 million or more of total assets.

Answer 87

- firms are required to monitor the business-related social media presence of all representatives. - Most static content, such as a website or blog, typically must be approved by a registered principal before use—and sometimes may be required to be filed with FINRA. - no requirement to preapprove individual posts in interactive online forums, but firms must have policies and procedures in their written supervisory procedures concerning these activities. -Representatives may use social media platforms to engage with both existing customers and prospective clients.

Answer 88

The Telephone Consumer Protection Act of 1991, administered by the Federal Communications Commission (FCC), was enacted to protect consumers from unwanted telephone solicitations (telemarketing).

Answer 89

a telephone call initiated for the purpose of encouraging the purchase of or investment in property, goods, or services. The act governs commercial calls, recorded solicitations from autodialers, and solicitations and advertisements to fax machines and modems.

Answer 90

■ maintain a do-not-call list of prospects who do not want to be called, and keep a prospect’s name on the list until the prospect requests it be removed; ■ institute a written policy on maintenance procedures for the do-not-call list; ■ train representatives on using the list; ■ ensure that representatives acknowledge and immediately record the names and telephone numbers of prospects who ask not to be called again; ■ ensure that anyone making cold calls for the firm informs prospects of their name, the firm’s name, and the firm’s telephone number or address; ■ ensure that telemarketers do not call a prospect from the time of the prospect’s do-not-call request; and ■ ensure that solicitation occurs only between 8:00 am and 9:00 pm of the time zone where the prospect lives.

Answer 91

calls: ■ made to parties with whom the caller has an established business relationship or from whom the caller has prior express permission or invitation; ■ made on behalf of a tax-exempt nonprofit organization; ■ not made for a commercial purpose; and ■ made for legitimate debt collection purposes.

Answer 92

- requires brokers to know their customers—understanding a customer’s financial status (net worth and net income), investment objectives, and all facts essential in making suitable recommendations. - RR’s responsibility to perform due diligence to determine the validity of a customer’s information. - Based on that information, RRs must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer. - Recommendations can be advice to invest in, or employ investment strategies to hold, or sell specific securities as well as suggestions pertaining to market sectors, day-trading, or divesting of an asset or other investments to make funds available to purchase securities. - Regarding the term customer, FINRA defines it to exclude other brokers and certain potential investors (someone who is not your client at the time the advice is given).

Answer 93

■ the customer’s age; ■ the customer’s marital status; ■ the number and ages of customer’s dependents; ■ the customer’s employment status; ■ the employment of customer’s immediate family members; and ■ the customer’s current and future financial needs.

Answer 94

■ What kind of risks can you afford to take? ■ How liquid must your investments be? ■ How important are tax considerations? ■ Are you seeking long-term or short-term investments (investment time horizon)? ■ What is your investment experience? ■ What types of investments do you currently hold?

Answer 95

1. market rumors 2. pump and dump 3. front running 4. excessive trading (churning) 5. Marking the close and marking the open 6. Backing away 7. Free riding 8. Capping 9. Supporting 10. Pegging 11. Washed sales 12. Matched orders 13. Breakpoint sales

Answer 96

the act of inflating (pumping) the price of an owned stock by perpetrating false and misleading positive rumors, in order to sell the stock at a higher price later. Generally, the shares owned are first accumulated at lower prices before the misleading information is doled out to the investing public. After the stock price rises due to the frenzied buying caused by the rumors, the operators of the scheme then sell (dump) their overvalued shares in the open market. The fraudsters profit while the selling pressure associated with dumping drives the price downward, causing investors who purchased based on the rumors to lose their money.

Answer 97

The act of placing orders for one’s own account ahead of other orders that are known to be entering the market in an attempt to gain from the price movement that is likely to occur.

Answer 98

- Excessive trading in a customer’s account to generate commissions rather than to help achieve the customer’s stated investment objectives, which is an abuse of fiduciary responsibility. - Signs include excessive frequency or excessive size of transactions not in keeping with the client’s trading history or financial ability. - To prevent such abuses, SROs require that a principal of the member firm review all accounts, especially those for which an RR or an investment adviser has discretionary authority.

Answer 99

Entering trades before the opening (or at or near the close) solely to manipulate the reported price of where a stock will open or close is prohibited. ■ Marking the open—Entering orders before the opening for a stock or falsely reporting trades that never occurred to influence the opening price of a stock is called marking the open. ■ Marking the close—Effecting trades at or near the close of the trading day or falsely reporting trades that never occurred to influence the closing price of a stock is called mark- ing the close. For example, putting in buy orders at the close for the purpose of pushing up the price of a stock so that it is valued higher in one’s portfolio or account at the end of the day is marking the close.

Answer 100

a market maker who refuses to do business at the price(s) quoted, which is a violation of trading rules. But, note that a market maker can revise a firm quote in response to market conditions and trading activity.

Answer 101

a term used when securities are purchased and then sold before making payment for the purchase. Generally prohibited in both cash and margin accounts. As a penalty, the account will be frozen for 90 days, and no new transactions can occur unless there is cash or marginable securities in the account before the purchase is made.

Answer 102

usually associated with those who are short option call contracts. This is the act of entering sell orders in a stock for the purpose of keeping it from rising above the strike price of calls someone is short; this is done so the calls won’t be in the money and thus likely to be exercised.

Answer 103

usually associated with those who are short put option contracts. This is the act of entering purchase orders in a stock for the purpose of keeping the price from falling below the strike price of put contracts that an investor has written. This artificial price support is done to prevent the puts from moving in the money and being exercised.

Answer 104

a generic term that applies to any activity intended to keep the price of a stock from moving. This can involve entering either buy or sell orders, or both.

Answer 105

Because an investor can use capital losses to offset capital gains, this violation is an attempt to create a loss for tax purposes (sell at a loss) when one’s intent is to still maintain ownership of the securities. Any repurchase of the same within 30 days before or after the date establishing the loss would be recognized as one’s intent to maintain ownership. If this occurs, the loss established at the time of the sale is disallowed for tax purposes. - the rule applies to recreating long positions and to recreating short positions. - the rule applies for attempts to recreate the same position using not only the exact same security but also substantially identical securities. * ** The rules on these do not prohibit the initial sale (for a loss) or the recreation of the position. These are permissible actions. The rule does, however, prohibit taking the loss on one’s tax return if the position was recreated within the 30 days before or after the sale window.

Answer 106

a manipulation that involves one party selling stock to another with the understanding that the stock will be repurchased later (usually the same day) at virtually the same price. The intent of such transactions is to make it appear that far more activity in a stock (share volume) exists than actually does. This is sometimes referred to as painting the tape.

Answer 107

quantity discounts on open-end management company shares (mutual funds)—the greater the dollar amount of a purchase, the lower the sales charge. There is no industry standardized breakpoint schedule, so they can vary across mutual fund families.

Answer 108

a term used in the securities industry that means sales just below the breakpoint. Allowing a sale to occur in an amount just below a breakpoint can be viewed as an effort by representatives to share in the higher sales charges. This is inconsistent with just and equitable principles of trade. FINRA does not define near or just below a breakpoint or how close a purchase can be to a breakpoint triggering a violation. Therefore, members must make certain that customers are advised of a fund’s break- point schedule. The rule is in place because members, and indirectly, RRs, could earn more concession dollars on a smaller customer investment (with a higher sales charge) than on a larger customer investment (with a smaller sales charge).

Answer 109

sales just below the breakpoint. can be viewed as an effort by representatives to share in the higher sales charges inconsistent with just and equitable principles of trade. FINRA does not define near or just below a breakpoint or how close a purchase can be to a breakpoint triggering a violation. Therefore, members must make certain that customers are advised of a fund’s break- point schedule. The rule is in place because members, and indirectly, RRs, could earn more concession dollars on a smaller customer investment (with a higher sales charge) than on a larger customer investment (with a smaller sales charge).