chapter 14 customer accounts

Question 1

margin accounts

Answer 1

to Regulation T requirements. Reg. T impacts margin accounts in the following two ways: 1) customers are typically required to deposit 50% of the trade amount and the firm will lend the other 50%, and 2) customers may pay their portion within two business days of regular-way settlement. There are two types of positions that may be established in a margin account:
 Long—the client borrows funds from the broker-dealer to purchase shares and
 Short—the client borrows shares from the broker-dealer in order to execute a short sale
− For both long and short positions, no loan (money or stock) is provided unless the customer deposits at least $2,000.

Question 2

Margin Disclosure Statement

Answer 2

 The customer can lose more money than the amount deposited in the margin account.
 The firm can force the sale of securities or other assets in the account.
 The firm can sell the customer’s securities or other assets without contacting him.
 The customer is not entitled to choose which securities or other assets in his account are liquidated or sold to meet a margin call.
 The firm can increase its in-house maintenance margin requirements at any time and is not required to provide the customer with prior written notice.
 The customer is not entitled to an extension of time for a margin call.

Question 3

non-discretionary brokerage account

Answer 3

one in which the customer decides which securities to buy and sell. If an RR makes a transaction recommendation to the customer who has this type of account, it requires the customer’s specific approval before execution.

Question 4

discretionary account

Answer 4

a customer has given trading authorization (written power of attorney) to a registered representative, the account is generally referred to as a discretionary account. If a member firm permits discretionary accounts, a principal must accept the discretionary authorization in writing before it becomes effective. Thereafter, each discretionary order must be approved by the principal promptly (i.e., on the day of the trade, but not in advance) and the account’s activity must be reviewed frequently

Question 5

A limited trading authorization

Answer 5

A limited trading authorization permits the authorized person to place orders for the account, but not to make withdrawals

Question 6

full trading authorization

Answer 6

With full trading authorization, in addition to placing buy and sell orders, the authorized person can withdraw money and securities from the account.

Question 7

ith discretionary accounts, the authorized third party generally is not required to obtain

Answer 7

the account holder’s permission prior to executing any transactions

Question 8

a member firm is selling its own stock to the public and it wants to place some of the issue in a customer’s discretionary account, the firm must obtain

Answer 8

the customer’s written consent prior to executing the trade.

Question 9

In some cases, a registered representative may accept a customer’s verbal authorization to make certain decisions without it being considered discretionary. If a customer indicates

Answer 9

the specific security (asset), (2) whether it’s to be bought or sold (action), and (3) the number of shares or other units to be bought or sold (amount), but leaves discretion only as to the time and/or price of execution, this is not considered a discretionary order and written authorization is not required. Remember, if a customer specifies the three order details that start with the letter “A” (asset, action, and amount), the order is not considered discretionary. A client must give her RR written instructions if the not-held order is to remain in effect for more than one day.

Question 10

Coverdell Education Savings Account (ESA)

Answer 10

• • for benciary’s elementary or higher education
• • max after tax contribution of 2k per year for a child under 18
• -withdrawals are tax free if they are used for pay for\ beneficiary’s educational expense.
• • if not used correctly, then normally taxed and 10% penailty
• • if money not used by 30 age, then subject to ordinary income tax and 10% penalty.
• • to avoid this you can transferr to another FAMILY member under age 30

Question 11

Joint Tenancy with Right of Survivorship

Answer 11

JTWROS accounts are often created by spouses and each person fully owns the account. Therefore, if one tenant dies, the ownership of the account will pass to the remaining tenant without being subject to probate.

Question 12

TEN COM account

Answer 12

each owner has a percentage of ownership and, at the time of death, the deceased person’s interest passes to his estate.

Question 13

Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA)

Answer 13

Under the UGMA/UTMA, an irrevocable gift of cash or securities is given to a minor by an adult donor. An adult custodian is appointed to act as a fiduciary for the minor. There may be only one custodian and only one minor per account and the custodian may also be a donor. Although there is no limitation on the amount of gifts that may be given, taxes may be due from the donor if certain dollar thresholds are exceeded (currently $15,000 per year).
Most custodial accounts are registered in the name of the custodian for the benefit of the minor. For ease of trading, an account opened under UTMA may allow for street name holding. The account is opened under the minor’s Social Security number and the minor is responsible for paying taxes on any income generated in the account. Provided the custodian is not the donor of the assets in the account, a custodian may receive a fee for managing the account.