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FINRA - Series 10 > Chapter 2 - Account Basics > Flashcards

Chapter 2 - Account Basics Flashcards

1
Q

What four pieces of basic information is needed to open a new account for a client?

A

Customer Name

Address

Social Security Number or Tax I.D Number

and

Date of Birth.

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2
Q

What are the two ways a firm may verify the identity of a new account applicant?

A
  1. Matching the information with a valid, government issued ID.
    - or-
  2. “Non-documentary method” - the firm verifies the information with a consumer credit company.
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3
Q

What 7 pieces of information are requested on the New Account form?

A
  1. Customer name and address
  2. Customer date-of-birth
  3. Customer social security number
  4. Cash or Margin account?
  5. Occupation
  6. Citizenship
  7. Officer, director, or 10%+ equity shareholder?
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4
Q

The required verification of customer identity is called the _____________.

A

“CIP” (Customer Identification Program)

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5
Q

True or False

Not all clients must be informed that the firm has a Customer Identification Program (CIP).

A

False

At account opening, each customer must be notified that the firm has a “Customer Identification Program” and that it will be requesting information to help fight funding for terrorism or money laundering activities.

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6
Q

A firm’s Customer Identification Program is intended to prevent what two activities?

A
  1. Funding of terrorist activity

2. Money laundering activity

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7
Q

True or False

Each customer must be notified in writing at the time that the account is opened that the account is covered by FDIC (Federal Deposit Insurance Corporation) insurance.

A

False.

Each customer must be notified in writing at the time that the account is opened that the account is covered by SIPC (Securities Investor Protection Corporation) insurance.

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8
Q

True or False

Each customer must be notified in writing at the time that the account is opened that the account is covered by SIPC (Securities Investor Protection Corporation) insurance.

A

True

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9
Q

SIPC insures customer accounts against what?

A

Broker-dealer failure

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10
Q

True or False

SIPC insures customer accounts against broker-dealer failure.

A

True

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11
Q

True or False

The notice regarding SIPC that is sent to clients at the time of account opening must state that information may be obtained about SIPC, including a copy of the SIPC brochure, by contacting SIPC.

A

True

The notice must provide the address and telephone number of SIPC.

In addition, this information must be made available to customers annually thereafter.

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12
Q

True or False

The notice regarding SIPC that is sent to clients at the time of account opening must state that information may be obtained about SIPC, including a copy of the SIPC brochure, by request from the broker-dealer.

A

False.

The notice regarding SIPC that is sent to clients at the time of account opening must state that information may be obtained about SIPC, including a copy of the SIPC brochure, by contacting SIPC.

The notice must provide the address and telephone number of SIPC.

In addition, this information must be made available to customers annually thereafter.

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13
Q

If a FINRA member includes a predispute arbitration agreement, it must be _____________ and must include language that explains that:

the customer is giving up his or her right to sue;

arbitration is final and binding;

arbitrators do not have to explain the reasons for their award;

arbitration panels include a minority of individuals who were, or are, affiliated with the securities industry.

A

Highlighted

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14
Q

True or False

If a FINRA member includes a predispute arbitration agreement, it must be highlighted and must include language that explains that:

the customer is giving up his or her right to sue;

arbitration is final and binding;

arbitrators do not have to explain the reasons for their award;

arbitration panels include a minority of individuals who were, or are, affiliated with the securities industry.

A

True

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15
Q

True or False

FINRA requires that within 60 days of signing an arbitration agreement as part of the account opening process, the customer must be provided with a separate “stand-alone” copy of the predispute arbitration agreement, and the customer must sign an acknowledgment of receipt of the copy of the agreement.

A

False.

FINRA requires that within 30 days of signing an arbitration agreement as part of the account opening process, the customer must be provided with a separate “stand-alone” copy of the predispute arbitration agreement, and the customer must sign an acknowledgment of receipt of the copy of the agreement.

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16
Q

True or False

FINRA requires that within 30 days of signing an arbitration agreement as part of the account opening process, the customer must be provided with a separate “stand-alone” copy of the predispute arbitration agreement, and the customer must sign an acknowledgment of receipt of the copy of the agreement.

A

True

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17
Q

FINRA requires that within ________ days of signing an arbitration agreement as part of the account opening process, the customer must be provided with a separate “stand-alone” copy of the predispute arbitration agreement, and the customer must sign an acknowledgment of receipt of the copy of the agreement.

A

30

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18
Q

In addition to the SIPC information, what else must the customer be provided with a copy of?

(3 things)

A
  1. Firm’s privacy statement
  2. Firm’s business continuity plan
  3. BrokerCheck contact information
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19
Q

FINRA rule 2090 is also known as what?

A

The “Know Your Customer” rule

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20
Q

Which FINRA rule states that the registered representative and the member firm must use reasonable due diligence to know and retain the “essential facts” relative to every customer?

A

FINRA rule 2090 - the “Know Your Customer” rule

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21
Q

The “Know Your Customer” rule (Rule 2090) requires firm’s to retain essential facts regarding a client. These essential facts are required for what?

(4 things)

A
  1. effectively service the customer’s account;
  2. act in accordance with any special handling instructions for the account;
  3. understand the authority of each person acting on behalf of the customer; and
  4. comply with applicable laws, regulations and rules.
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22
Q

True or False

The registered rep must sign the new account application for each account opened.

A

False.

There is no requirement for the registered rep to sign the new account application unless he completed a suitability determination.

The manager who approves the application is required to sign the document.

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23
Q

When must a registered representative sign a new account form?

A

If the rep completes a suitability determination, his signature is required on the new account form.

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24
Q

True or False

A customer’s signature is required on the new account form.

A

False.

Client signature is not required unless the account being opened is a discretionary account.

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25
Q

True or False

The SEC requires that the customer be given a copy of the “account profile” for verification within 21 days of account opening.

A

False.

The SEC requires that the customer be given a copy of the “account profile” for verification within 30 days of account opening.

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26
Q

True or False

The customer must be sent the “account profile” every 36 months after account opening for review and updating as needed.

A

True

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27
Q

How often must the customer be sent the “account profile” after account opening for review and updating as needed?

A

Every 36 months

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28
Q

When the client is sent the “account profile” - what information is not required to be verified?

(2 items)

A
  1. Client’s DOB

2. Clients SSN

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29
Q

True or False

FINRA Rule 2090 requires that the member firm or associated person “must have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer, based on the information obtained to ascertain the customer’s investment profile.”

A

False.

This definition describes FINRA Rule 2111.

FINRA Rule 2090 is the “Know Your Customer” rule.

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30
Q

What does FINRA Rule 2111 require?

A

FINRA Rule 2111 requires that the member firm or associated person “must have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer, based on the information obtained to ascertain the customer’s investment profile.”

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31
Q

True or False

Under FINRA rules, a customer’s investment profile includes a client’s tax status.

A

True.

It also includes:

Investment objectives;

Investment experience;

Customer age;

Other investments;

Financial situation and needs;

Tax status;

Investment time horizon;

Liquidity needs:

Risk tolerance;

Any other information disclosed by the customer

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32
Q

Under the suitability rule, what are the three main components to determining suitability for a client?

A
  1. Reasonable-basis suitability
  2. Customer-specific suitability
  3. Quantitative suitability
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33
Q

The suitability rule does NOT apply to:

3 things

A
  1. Institutional customers
  2. Unsolicited trades
  3. Investment analysis tools
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34
Q

Because of the complexity of ____________, FINRA requires that the member firm perform a “reasonable basis” suitability determination to evaluate the product’s potential rewards and risks (relative to other similar ________________ offered by other firms).

A

Structured Products

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35
Q

What type of product is an ETN (Exchange Traded Note)?

A

A listed structured product

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36
Q

EAGLEs, ASTROS and CYCLEs are acronyms for what type of product?

A

ETN’s - listed structured products

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37
Q

True or False

The main risk/consideration to a buyer of an ETN (structured product) is how liquid the ETN is.

A

False.

The main risk to be considered by a buyer of an ETN/structured product is the credit risk of the issuing bank.

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38
Q

True or False

The main risk to be considered by a buyer of an ETN/structured product is the credit risk of the issuing bank.

A

True

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39
Q

What is the main risk to be considered by a buyer of an ETN/structured product?

A

The main risk to be considered by a buyer of an ETN/structured product is the credit risk of the issuing bank.

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40
Q

What type of financial product involves the issuer promising to pay back a specified return based on the equity index, typically 5-7 years in the future?

A

Structured products - such as ETNs

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41
Q

When offering a private placement, FINRA requires the broker-dealer first to conduct a “______________” suitability determination that the investment will be suitable for at least some clients.

A

Reasonable basis

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42
Q

FINRA requires the broker-dealer to conduct a “reasonable basis” suitability determination when offering a private placement. This investigation must look at;

issuer and its management;

business prospects of the issuer;

assets held or to be acquired by the issuer;

claims being made;

AND WHAT? (1 thing)

A

The intended use of the proceeds of the offering.

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43
Q

To complete customer level suitability, the broker-dealer must do what?

A

It must gather and analyze information about the customer’s other holdings, financial situation and needs, tax status, risk tolerance, investment objectives, and any other information that would enable the firm to make its suitability determination.

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44
Q

Before opening an account for a day-trader, the member firm must give the customer a disclosure statement that states what?

A

Day trading can be extremely risky;

Be wary of exaggerated claims about the potential profits of day trading;

Day trading requires knowledge of the securities markets and the firm’s operations;

Day trading will generate substantial commissions to the firm promoting the strategy;

Day trading on margin can result m losses greater than one’s investment;

Persons who day trade for others must be registered as an Investment Adviser or a Broker-Dealer.

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45
Q

If a member firm discovers that an account that has not been approved for day trading is being used for day trading, it must approve the account for day trading as soon as possible, but no later than _____ days from discovering that the account is being used for day trading.

A

10 days

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46
Q

True or False

Non-managed fee based accounts are the same thing as wrap accounts.

A

False.

A fee-based account imposes a flat annual fee for all trade executions, rather than a “per trade” commission charge.

A wrap account imposes an annual fee that not only covers trade executions, but also includes asset allocation and portfolio rebalancing.

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47
Q

True or False

A “wrap account” is a managed fee based account (MFBA).

A

True

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48
Q

True or False

A “wrap account” is a non-managed fee based account (NMFBA).

A

False.

A “wrap account” is a managed fee based account (“MFBA”)

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49
Q

Prior to opening a “non-managed fee based account” (NMFBA) for either a new or existing customer, the member firm must provide the customer with a disclosure document describing what?

(2 answers)

A
  1. Types of NMFBA programs available from the member

2. How fees are computed

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50
Q

True or False

The rule regarding NMFBAs requires that the member firm monitor account activity and maintain written procedures for contacting those customers who are not placed in appropriate accounts, at least every 12 months.

A

True

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51
Q

True or False

The rule regarding NMFBAs requires that the member firm monitor account activity and maintain written procedures for contacting those customers who are not placed in appropriate accounts, at least every 6 months.

A

False

The rule regarding NMFBAs requires that the member firm monitor account activity and maintain written procedures for contacting those customers who are not placed in appropriate accounts, at least every 12 months.

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52
Q

True or False

“Flat fee” accounts that do not impose a “per trade commission charge” are considered to be advisory products, not brokerage products.

A

True

This is the case with both managed fee based accounts (MFBA) AND non-managed fee based accounts (NMFBA).

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53
Q

True or False

“Flat fee” accounts that do not impose a “per trade commission charge” are considered to be brokerage products, not advisory products.

A

False

“Flat fee” accounts that do not impose a “per trade commission charge” are considered to be advisory products, not brokerage products.

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54
Q

True or False

To offer “flat fee” accounts, a firm must be registered as an investment adviser, and the representative must be registered as an “adviser representative,” which is a State licensing requirement.

A

True

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55
Q

On FINRA’s interpretive notice regarding suitability of investments for senior citizens, it states that as customers age, __________ takes on added importance.

A

Liquidity

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56
Q

True or False

Member firms have an obligation to shield their senior citizen customers from risks that they want to take.

A

False.

Member firms do not have an obligation to shield their senior citizen customers from risks that they want to take.

BUT the customer must fully understand the investment being recommended.

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57
Q

True or False

FINRA prohibits certain products from being recommended to senior citizens.

A

False.

FINRA has stated that it does not prohibit any particular recommendation to a senior citizen as long as it is suitable.

However, certain types of recommendations are “red-flags” - meaning that the firm must be able to strongly defend such a recommendation to a senior citizen.

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58
Q

What do the following investment recommendations have in common?

purchase variable annuities, equity indexed annuities and real estate limited partnerships.

purchase variable life settlements;

purchase complex structured products such as CDOs (Collateralized Debt Obligations);

mortgage their residence to obtain funds for investment purposes; and

use retirement savings, including early withdrawals from IRAs, to invest in high-risk investments.

A

These are investment recommendations which are typically considered unsuitable for senior citizens.

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59
Q

True or False

Non-managed fee based accounts (NMFBAs) are considered advisory products, not brokerage products.

A

True

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60
Q

True or False

The Series #24 General Principal can approve all new accounts. In addition, the Series #24 General Principal can supervise underwritings, trading, research, marketing, etc.

A

False.

The Series #24 General Principal can approve all new accounts EXCEPT for options accounts.

In addition, the Series #24 General Principal can supervise underwritings, trading, research, marketing, etc.

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61
Q

True or False

The Series #24 General Principal can approve all new accounts except for options accounts. In addition, the Series #24 General Principal can supervise underwritings, trading, research, marketing, etc.

A

True

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62
Q

True or False

The Series #10 BOM can approve all new accounts. In addition, the Series #10 BOM can supervise underwritings, trading, research, marketing, etc.

A

False.

A 9/10 BOM can supervise sales activities in a branch and can approve new accounts (including option accounts).

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63
Q

True or False

The Series #4 ROP - Registered Options Principal - can approve any options account and can supervise all other options activities.

A

True

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64
Q

A “margin agreement” is also known as what?

A

“Customer’s Agreement”

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65
Q

True or False

All that is required to open a cash account is the new account form.

A

True

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66
Q

In addition to the new account form, what else is required (documentation-wise) to open a margin account?

A

Customer is required to sign a “loan consent” agreement.

In theory, a customer does not have to sign a loan consent agreement and can refuse to allow the brokerage firm to borrow his securities for short sales. In practice, a brokerage firm will not open a margin account unless a loan consent is signed

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67
Q

Signing a “loan consent” agreement gives a firm the right to do what?

A

To loan a client’s securities to other customers for the purposes of short sales.

The brokerage firm agrees that if the customer ever wants those securities, it will replace them.

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68
Q

When opening a margin account, the customer must be provided with a “________________ statement” that explains how the loan balance is computed, and how interest is charged on the loan balance.

A

A credit disclosure statement

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69
Q

When a customer opens a margin account, the customer must be given a “______________ statement” that explains that the leverage in the account magnifies potential gains and losses and that if margin calls are not met, the firm can sell out the securities.

A

Risk disclosure statement

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70
Q

In a margin account, if the credit agreement is changed to permit interest charges to be increased, the customer must be given ___ days advance notice.

A

30 days

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71
Q

True or False

In a margin account, if the credit agreement is changed to permit interest charges to be increased, the customer must be given 30 days advance notice.

A

True

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72
Q

True or False

In a margin account, if the credit agreement is changed to permit interest charges to be increased, the customer must be given 60 days advance notice.

A

False.

The customer must be given 30 days advance notice.

If the credit agreement was being changed to permit a decrease in interest rate, no notice is required to be given to the client.

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73
Q

True or False

In a margin account, if the credit agreement is changed to permit interest charges to be increased or decreased, the customer must be given 30 days advance notice.

A

False.

Notice is only required to be given to clients if the credit agreement is being changed to increase interest rates.

If the change is being made to decrease rates, no notice is required to be given to the client.

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74
Q

The risk disclosure statement, which is given to clients opening margin accounts, explains what?

(2 answers)

A
  1. That the leverage in the account magnifies potential gains and losses
  2. That if margin calls are not met, the firm can sell out the securities.
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75
Q

True or False

If more than one party is named on the (joint) account, New Account information must be obtained for the client whose social security number is on the account.

A

False.

If more than one party is named on the account, New Account information must be obtained for each party on the account.

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76
Q

True or False

If more than one party is named on the account, New Account information must be obtained for each party on the account.

A

True

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77
Q

Which joint account ownership type is most common for a husband and wife?

A

Joint Tenancy with rights of survivorship

Under this ownership type, each party owns an “undivided interest” in the account. If one party dies, the other person is the sole owner of the account.

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78
Q

Which joint account ownership type is most common for business partners?

A

Tenants in Common

Each party specifies a percentage interest in the account. If a person dies, his percentage interest is included in his estate. It can then be passed by will to any named person.

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79
Q

Under which account registration type, will assets be transferred to the name of the beneficiary only upon death

A

“Transfer on Death” (TOD)

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80
Q

True or False

When assets move from an account-holder to the beneficiary in a “Transfer on Death” account, it still goes through probate and may be taxed.

A

False.

Assets moving to the beneficiary from a Transfer on Death account avoids probate since the estate is bypassed.

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81
Q

Which account registration is essentially an individual account, often with a trading authorization given to the named beneficiary.

A

Transfer on Death

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82
Q

In order to open up an account for a corporation, the member firm must obtain proof of what?

A

Proof that the corporation exists.

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83
Q

When a corporation is opening a corporate account, the corporation must pass a “resolution,” authorizing what?

(2 answers)

A
  1. the opening of the account

2. Which persons are authorized to trade

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84
Q

What must be affixed to the resolution when a corporate account is being opened?

And who is required to sign the resolution?

A

The corporate seal must be affixed to the resolution.

The resolution must be signed by the secretary of the corporation.

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85
Q

On a partnership account, how often must a new partnership agreement be obtained by the firm?

A

Annually.

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86
Q

A copy of the ______________ must be obtained by the firm when opening a partnership account.

A

Partnership agreement

The agreement will have a clause allowing the opening of the account and naming the partners authorized to trade.

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87
Q

What is the difference between “full” and “limited” trading authorization?

A

Limited trading authorization: orders to buy and sell can be entered, but funds cannot be withdrawn.

Full trading authorization: orders can he entered and funds can be withdrawn. Any checks from the account are drawn in account name - not third party name. Thus, if the check will be cashed, the customer must endorse the check.

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88
Q

If trading authorization has been granted to a third party on an account, how long will the authorization be effective for?

A

The authorization remains in force unless revoked in writing by the customer.

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89
Q

What is the difference between “durable” and “non-durable” powers of attorney?

A

With a durable power of attorney, if the grantor becomes mentally incompetent, the person to whom power of attorney was granted retains control over the account; with a non-durable power of attorney, if the grantor becomes mentally incompetent, the power ceases.

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90
Q

What type of accounts are these:

Trust Account; 
Guardian Account; 
Administrator of Estate; 
Conservator for Incompetent; 
Executor of Estate; and 
Receiver fa Bankruptcy
A

Fiduciary Accounts

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91
Q

True or False

Fidudary accounts are generally prohibited from margin transactions - only cash accounts are permitted.

A

True

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92
Q

True or False

A fiduciary may not open a margin account under any circumstances.

A

False

To open a margin account for a fiduciary, the documents appointing the fiduciary must specifically authorize margin transactions.

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93
Q

What debt rating is legal under a fiduciary’s legal list of investments?

A

legal list investments consist of debt rated in the top 4 ratings categories (BBB or better)

94
Q

In a _________ account, the customer gives the brokerage firm (and hence the broker handling the account) trading authorization.

A

Discretionary

95
Q

True or False

The customer must sign a trading authorization bef o.re any discretionary trades take place.

A

True

96
Q

When placing a trade for a client, aside from whether it is a buy or sell, what four pieces of info are needed?

A

Size of the Trade: 100 shares Security: IBM common stock

Price of Execution: $80 per share Time of Execution: “At the opening”

97
Q

A trade is considered to be “discretionary,” requiring that a trading authorization be on hand, if the broker chooses more than what?

A

the price and time of execution.

98
Q

On a not-held order, if the length of time given to execute the order is longer than ______, a written power of attorney is needed from the customer to accept the order.

A

1 day

99
Q

A ________ order bypasses automated trading systems and is handled manually by a floor broker.

A

Not held

100
Q

What must brokerage firms do to prevent churning in discretionary accounts?

A

Every discretionary order ticket be signed by the appropriate principal “promptly.”

This means the trades are reviewed and approved by the principal at the end of each trading day.

101
Q

Which three scenarios regarding trades would result in a principal requiring trades to be busted in a discretionary account?

A

If the trades are:

  • unsuitable for the account
  • too frequent in the account
  • of excessive size for the account
102
Q

Which three scenarios regarding trades would result in a principal requiring trades to be busted in a discretionary account?

A

If the trades are:

-unsuitable for the account -too frequent in the account . -of excessive size for the account

103
Q

Which rule of the NYSE requires that prior written consent of the employer is required if a securities or commodities account is to be opened for a partner or employee of another NYSE member or of the Exchange itself?

A

Rule 407

the requirement for prior consent is applied to any account in which these persons are directly or indirectly interested (e.g., the account of a non-working spouse).

104
Q

NYSE RULE 407 requires what to be sent “promptly” to the employer of a person trading in an account held with a firm other than the firm they are employed by?

2 answers

A
  1. Duplicate trade confirmations

2. Account statements

105
Q

If an employee of a broker-dealer opens a securities account or places an order with a non-member financial institution or non-member investment adviser, what does the NASD require of the employee?

A

Notify his or her employer in writing prior to the execution of the initial transaction;

Upon written request of the employer, have the non-member institution send duplicate confirmations, statements, etc. to the employer.

This procedure is not required under NASD rules if mutual fund shares, or variable annuity contracts, are the only security being purchased

106
Q

What trading restrictions are imposed upon FINRA employees who have trading accounts with member firms?

A

The employee cannot have a debt or equity interest in broker-dealers, or companies with broker-dealer subsidiaries that contribute 10% or more of the parent’s revenue and cannot take options positions on these firms;

And

cannot purchase stock m an IPO.

107
Q

True or False

To open a UGMA for a minor, the custodian must be related to the minor the account is being opened for.

A

False.

Any adult can open an account for a minor. The adult does not have to be related to the minor.

108
Q

True or False

In a custodial account, the custodian may appoint a “Third Party” to trade the account.

A

False

The custodian cannot appoint a “Third Party” to trade the account.

109
Q

True or False

Any adult may gift assets to a custodial account. Once those assets are gifted, they are irrevocable.

A

True

110
Q

True or False

In a custodial account, the social security number of the minor appears on the account, since the minor is considered to be the owner of the account.

A

True

111
Q

If a stock in a custodial account has a rights offering, what is the responsibility of the custodian?

A

The custodian must sell or exercise the rights. May not let them expire worthless.

112
Q

What are the differences between a UGMA AND UTMA?

2 answers

A

UGMA limits gifts to bank deposits, secuntles and insurance; while UTMA allows almost any kind of asset to be transferred, including real estate, fine art, copyrights and patents.

UGMA specifies that account transfer occur at “legal age” in that state, which is most often age 18; while UTMA allows the state to set a transfer age (most states use age 21).

113
Q

True or False

To offer a “wrap” account, in addition to the Series 7 license, a rep must also have passed the series 63.

A

False

to offer a “wrap” account, in addition to the Series 7 license, a State administered “investment adviser representative” license (either Series 65 or Series 66) is required.

114
Q

Under which NYSE rule is a firm obligated to keep on file the name of the customer and a written statement signed by the customer showing that the customer owns the numbered account?

A

NYSE Rule 406

115
Q

After a trade is placed, how long does a broker have to mail a trade confirmation?

A

The trade confirmation must be sent by the end of the day after the trade.

116
Q

What information must be included on the trade confirmation?

3 answers

A
  1. Settlement date
  2. Commission amount
  3. State if a payment for order flow was made
117
Q

Which NYSE rule requires that statements have the following disclosure:

“A financial statement of this organization is available for your personal inspection at its offices, or a copy will be mailed upon your written request. “

A

NYSE Rule 409

118
Q

True or False

Clients can have their statements mailed to them to the address the firm has on file only.

A

False.

Confirmations and statements, and other communications must be mailed to the address provided by that customer, or alternatively, if the customer requests, the statements can be sent electronically to an e-mail address provided by the customer.

119
Q

A legend must be placed on account statements that the customer must promptly report any inaccuracies or discrepancies to the brokerage firm’s ___________ department.

A

Compliance

120
Q

True or False

If the customer requests in writing, their mail can be held for up to 6 months.

A

False

If the customer requests in writing, the mail can be held for up to 3 months. If the customer wishes the mail to be held longer, the customer’s written instruction must include an acceptable reason for this (e.g., safety or security concerns). Note that FINRA states that “convenience” is not an acceptable . reason for holding mail longer than 3 months.

121
Q

True or False

Although clients are discouraged from using them, PO boxes may be used for receiving account documents with firm approval.

A

True

122
Q

True or False

“Cancel and Rebills” are used only for trades being moved between related accounts.

A

False.

A Cancel and Re-Bill record is not only required to move a trade from one customer account to another unrelated account; it is needed to move a trade between related accounts as well

123
Q

Every order must now be recorded electronically via the __________.

A

OATS (Order Audit Trail System)

124
Q

What information is recorded via OATS?

4 answers

A

OATS = Order Audit Trail System

  1. Name and amount of the security
  2. Terms of the order
  3. Time when the order was transmitted
  4. Time when the execution report was received.

If the order is canceled, the time of entry of the order cancellation must be recorded

125
Q

Under OATS rules, members firms are required to record what information regarding the trading department (in addition to order details)?

3 answers

A
  1. ID of the rep who received the order directly from the client
  2. ID of the rep who executed the order
  3. When an order is originated by the member and transmitted manually to another department, an identification of the department that originated the order.
126
Q

True or False

OATS reports help FINRA track down “Chinese Wall” trading violations and also discourages such violations.

A

True

127
Q

True or False

FINRA Rule 4515 allows financial advisors to place trades for all of their clients in a house account as long as the customer orders are allocated to the client’s account by market close the following business day.

A

False.

This is true if the advisor allocates the trades to the appropriate account by noon the following business day and only for orders which involve more than one client.

128
Q

True or False

Under FINRA rules, any alteration to an executed order ticket:

  1. must be approved in writing by a branch manager or compliance officer of the firm;
  2. must be documented in writing with the essential facts relating to the order and the reasons for the change.
A

True

129
Q

True or False

FINRA requires that written and verbal customer complaints, along with records of actions taken by the member, must be kept and preserved in each Office of Supervisory Jurisdiction.

A

False.

FINRA requires that written (NOT VERBAL) customer complaints, along with records of actions taken by the member, must be kept and preserved in each Office of Supervisory Jurisdiction.

130
Q

Under OATS rules, members firms are required to record what information regarding the trading department (in addition to order details)?

3 answers

A
  1. ID of the rep who received the order directly from the client
  2. ID of the rep who executed the order
  3. When an order is originated by the member and transmitted manually to another department, an identification of the department that originated the order.
131
Q

True or False

OATS reports help FINRA track down “Chinese Wall” trading violations and also discourages such violations.

A

True

132
Q

True or False

FINRA Rule 4515 allows financial advisors to place trades for all of their clients in a house account as long as the customer orders are allocated to the client’s account by market close the following business day.

A

False.

This is true if the advisor allocates the trades to the appropriate account by noon the following business day and only for orders which involve more than one client.

133
Q

True or False

Under FINRA rules, any alteration to an executed order ticket:

  1. must be approved in writing by a branch manager or compliance officer of the firm;
  2. must be documented in writing with the essential facts relating to the order and the reasons for the change.
A

True

134
Q

True or False

FINRA requires that written and verbal customer complaints, along with records of actions taken by the member, must be kept and preserved in each Office of Supervisory Jurisdiction.

A

False.

FINRA requires that written (NOT VERBAL) customer complaints, along with records of actions taken by the member, must be kept and preserved in each Office of Supervisory Jurisdiction.

135
Q

How long does FINRA require written customer complaints to be held on file at the OSJ?

A

FINRA requires that customer complaints be kept for 4 years.

This is the only record with this retention period.

FINRA changed this in 2011 from its prior 3-year rule to coincide with their 4-year BD inspection cycle

136
Q

NYSE/FINRA requires that the customer must receive a written acknowledgment of receipt of the complaint no later than _____ business days after lodging the complaint with the member.

A

15 business days

137
Q

True or False

The requirement to send proxies and annual reports applies to beneficial owners inside and outside the United States.

A

False.

The requirement to send proxies and annual reports do not apply to beneficial owners outside the United States.

138
Q

How long must a member firm retain records relating to the solicitation of proxies?

A

These records must be retained for 3 years, with the last 2 years’ records kept readily accessible.

139
Q

When must the receiving firm send the completed “TIF” or “ACAT” form to the carrying firm?

A

The TIF must be sent by the receiving firm to the carrying firm “immediately.”

140
Q

During the account transfer process, once the carrying firm receives the ACAT (TIF), how long do they have to verify and validate or find exception?

A

1 business day

141
Q

During the account transfer process, after validating the assets, how long does the carrying firm have to send the assets to the receiving firm?

A

3 business days

142
Q

True or False

The account transfer rule specifically states that options positions that are due to expire within 5 business days are exempt from the requirement to “freeze” the account. Thus, these options positions can still be traded or exercised until expiration.

A

False.

The account transfer rule specifically states that options positions that are due to expire within 7 business days are exempt from the requirement to “freeze” the account. Thus, these options positions can still be traded or exercised until expiration

143
Q

Why do positions held in retirement trust accounts such as Individual Retirement Accounts, defined benefit and defined contribution plans, etc., take longer than normal to get transferred to the receiving firm during an account transfer?

A

Positions held in retirement trust accounts such as IRAs., can only be transferred from trustee account to trustee account. These take longer than normal because the trustee must give approval.

144
Q

What are the two invalid reasons to hold up an account transfer?

A
  1. Disputes over securities valuation

2. Disputes over money balances

145
Q

FINRA gives 5 specific situations where “negative consent” letters can be used to transfer customer accounts in bulk.

What are those situations?

A
  1. The member is experiencing financial or operational difficulties
  2. The introducing firm is no longer in business
  3. The member firm is being acquired by another firm
  4. An introducing firm is changing its clearing firm
  5. A networking arrangement with a financial institution is being changed.
146
Q

What is the procedure that a registered rep should take after learning that a customer has died?

A
  1. Cancel all open orders and freeze removal of assets from the account;
  2. Note that the customer is “Deceased” with the date on the account’s New Account Form (the date of death must be known for valuing the securities for estate tax purposes); and
  3. Await further instructions from the executor of the estate.
147
Q

What documentation is required to transfer assets to a beneficiary after the death of a client?

4 answers

A
  1. Death certificate
  2. Copy of the will
  3. Copy of probate court filing
  4. Proof of domicile and inheritance tax waivers (a tax filing is required in the state before the assets can be transferred.
148
Q

True or False

If a partner dies, no orders can be accepted until the remaining partners amend the partnership agreement.

A

True

149
Q

True or False

If the account had a third party power of attorney, the power is revoked upon the death of the owner of the account.

A

True

150
Q

For estate tax purposes, any securities positions owned by the decedent are valued as of the date of death. If there is any tax due (after taking into account the exclusion amount), the payment must be made by ____ months after the date of death.

A

9 months

151
Q

After an account is closed:

  1. New account forms must be kept for _____ years.
  2. Customer statements must be kept for _____ years.
A
  1. 3 years
  2. 6 years

Once an account is closed, new account forms must be retained for 3 years; customer statements for 6 years.

152
Q

Brokers must report accounts that have been dormant for ___ years (generally) to the State where the account was domiciled.

A

5 years

However, before doing so, the firm must make a diligent effort to locate the account owner.

153
Q

What does the “Margin Department” of a brokerage firm do?

A

The margin department is a bit of a misnomer since this department is responsible for keeping customer account records.

The margin department keeps a record of all stock positions in customer accounts, with debit and credit balances.

154
Q

Who oversees the accounting functions of the firm and prepares financial and operation reports that are filed with FINRA?

A

The controller

155
Q

True or False

The very first legislation aimed at money laundering was the Funds Protection Act of 1972.

A

False.

The very first legislation aimed at money laundering was the Bank Secrecy Act of 1970.

156
Q

The Bank Secrecy Act of 1970 requires financial institutions to report cash transactions in excess of $10,000 on which form?

A

A Currency Transaction Report “CTR”

157
Q

The Bank Secrecy Act of 1970 requires financial institutions to report international transportation of currency on what form?

A

A CMIR - a Currency and Monetary Instruments Report

158
Q

The Bank Secrecy Act of 1970 requires financial institutions to report foreign bank and financial accounts on a __________.

A

Foreign Bank Account Report

FBAR

159
Q

Which Act requires securities firms and financial institutions to:

establish written anti-money laundering programs;

provide ongoing training to all employees in procedures to detect and prevent money laundering;

report suspicious transactions and activity.

?

A

The PATRIOT Act

Providing Appropriate Tools Required to Intercept and Obstruct Terrorism

160
Q

The Financial Action Task Force (FATF) is an inter-governmental body made up of how many countries?

A

29

161
Q

True or False

A person who is on the terrorism watch list may open an investment account only with prior approval from a Series 24 principal.

A

False.

If a person on the terrorism watchlist attempts to open a brokerage account, the member firm cannot open the account and must notify the appropriate federal authorities.

162
Q

SAR reports must be filed within 30 days of the date of the initial detection of suspicious activity and only are required for where the amount involved exceeds $5,000.

Who is the SAR filed with?

A

FinCEN

Financial Crime Enforcement Network

163
Q

Which FINRA rule deals with money laundering and requires that the firm:

establish and implement policies and procedures to detect and report suspicious transactions;

provide for annual independent testing for compliance to be conducted by member personnel or a qualified outside party;

designate a principal responsible for implementing and monitoring day-to-day operations and internal controls of the program; and

provide for ongoing training of appropriate personnel

?

A

Rule 3310

164
Q

True or False

To oversee a firm’s “AML” Program (Anti-Money Laundering) efforts, a person must be licensed with a Series 9/10 -or- Series 24.

A

False.

This person must be a Series #24 General Principal; the Series #9/10 Sales Supervisor license does not count here!

165
Q

Each member must review the contact information filed with FINRA of the #24 principal overseeing the firm’s anti-money laundering effors annually and update it as necessary, within ___ business days of year end.

A

17

166
Q

The AML Policy should break down types of suspicious activity into 3 areas for monitoring.

What are those 3 areas?

A
  1. Wire transfers
  2. Deposits
  3. Monetary instruments
167
Q

Which of the following documents are typically signed by the customer to open a new margin account?

I - New Account Form
II - Margin Agreement
III - Loan Con·sent Agreement
IV - Arbitration Agreement

a. I only
b. II and III only
c. II, III, IV
d. I, II, III, IV

A

C.

When opening a new margin account, the customer must sign the margin agreement. Customarily, the loan consent agreement and arbitration agreement are signed as well

168
Q

True or False

Legal list requirements are not imposed on custodian accounts.

A

True

Institutions and trusts are often limited to the type of investments that they can make because the state can restrict investment to those securities included on its “legal list.” Legal list securities are generally U.S. Government bonds and investment grade municipal bonds and corporate bonds.

169
Q

True or False

Particular attention must be given to deposits of cash; cashier’s checks, money orders; and travelers checks, when looking for money laundering activity.

A

True

170
Q

True or False

The Federal Reserve has no power to set margins over U.S. Government, Agency, and municipal securities.

A

True.

Because these are exempt securities under the “Act,” so they do not come under the jurisdiction of the Federal Reserve.

The Federal Reserve can, and does set margins for corporate stocks, bonds, options, and other non exempt securities.

171
Q

Funds are borrowed from the bank by the brokerage firm at the “___________ rate.” This is a short term money market rate.

A

Broker Loan rate

172
Q

The credit relationship from bank to broker is controlled by Regulation ___ of the Federal Reserve Board.

A

Regulation U

173
Q

What is the basic premise of Reg. U?

A

That brokerage firms cannot borrow more money from banks using customer securities as collateral than the actual amount that they loan to their customers.

174
Q

A brokerage firm is limited to rehypothecating customer securities equal to a maximum of ____% of the customer debit balance.

A

140%

175
Q

What are the 4 major types of exempt securities?

A
  1. U.S. Governments
  2. Agency Issues
  3. Municipal Issues
  4. Commercial Paper
176
Q

Which regulation controls credit from broker to customer. It sets initial margins for securities and basic account procedures for collection of the margin.

A

Regulation T

177
Q

Exempt securities are marginable based on minimum maintenance margin requirements set by __________?

A

The exchanges

178
Q

True or False

Since corporate bonds are non-exempt, the Federal Reserve sets initial margin requirements for these securities.

A

False.

While corporate bonds are non-exempt, the Federal Reserve chooses not to set margins for these securities. Again, only the exchange minimum maintenance margins apply.

179
Q

What non-exempt securities are marginable?

3 answers

A
  1. Securities listed on a stock exchange (e.g., NYSE, PHLX, CBOE, etc.).
  2. NASDAQ issues;
  3. Specific issues not listed on NASDAQ, but of sufficient trading volume to be included on the OTC Margin List published by the Federal Reserve
180
Q

Which non-exempt securities are non-marginable?

A
  1. Non marketable securities.
  2. OTC issues not included in NASDAQ or the Margin List.

New Issues for the first 30 days after issuance. After this time, they have been trading long enough that the Federal Reserve allows them to be

181
Q

Regulation T defines three (3) types of accounts in which transactions can take place, and the procedures for collecting funds.

What are the three account types?

A
  1. Cash account
  2. Margin account
  3. Arbitrage account
182
Q

In a cash account, if a customer does not pay for a purchase on either “Settlement + 2” or the extension date, if one is granted, the firm is obligated to do what?

A

Sell out that position, but not the whole account, and freeze the account for 90 days.

183
Q

True or False

For arbitrage transactions, the client only needs to worry about the Reg T requirment, there is no minimum maintenance requirement.

A

False.

The Federal Reserve doesn’t set an initial margin for arbitrage transactions. Only the exchanges’ minimum maintenance margins apply.

184
Q

If a customer fails to deliver the shares from a sell order, the sold position must be bought in _____ business days after settlement date.

A

10 business days

185
Q

What is the minimum maintenance requirement for a long position in common stock?

A

25%

186
Q

What is the minimum maintenance requirement for a long position of convertible stock?

A

25%

187
Q

What is the minimum maintenance requirement for a long positioin corporate debt?

A

The greater of 20% of the market value or 7% of face value.

These requirements are the same for short positions.

188
Q

What is the minimum maintenance requirement for a long position in a municipal bond?

A

Greater of 15% of market value or 7% of the face value.

These requirements are the same for short positions.

189
Q

What is the minimum maintenance requirement for a short position on a common stock or convertible security?

A

30%

190
Q

The regulation that controls credit from bank to broker is controlled under:

a. Regulation T
b. Regulation U
c. Regulation X
d. Regulation Z

A

B. Regulation U

191
Q

Which regulation controls credit from broker to customer?

a. Regulation T
b. Regulation U
c. Regulation X
d. Regulation Z

A

A. regulation t

192
Q

What is the effect of a restriction on a margin account?

A

The only effect of restriction is that 50% of the proceeds of any sale must be retained to reduce the debit.

193
Q

To find the market value to which the account can fall before a maintenance call will be sent, the formula is __________?

A

Debit / .75

194
Q

True or False

Dividends received on stocks held are used to reduce the debit balance and are 100% credited to SMA. But if the monies are not taken out within 30 days, they leave SMA and are not available to be borrowed.

A

True

195
Q

True or False

When a client shorts shares of a stock, the shares are borrowed from the margin customers of the brokerage firm.

A

True

196
Q

True or False

For large customers like hedge funds who wish to sell short, the shares can not be borrowed from institutions such as mutual funds and pension funds. The brokerage firm must have the shares available for the large customer to short.

A

False

For large customers like hedge funds . that wish to sell short, the shares can be borrowed from institutions such as mutual funds and pension funds.

197
Q

True or False

When an institution lends out its shares to a short seller, it receives “payments in lieu of a dividend” from the borrower of the shares.

A

True

198
Q

What is the only right given up by the lender when shares are loaned to a short seller?

A

The lender gives up voting rights.

199
Q

Any short sale must comply with Regulation ____.

A

Regulation SHO

200
Q

In a short account whose value has fallen, for every dollar that the account decreases in value (above 50%), SMA increases by $_____.

A

$1.50

201
Q

A customer sells short 100 shares of ABC at 15 as an initial transaction in a new margin account. The customer must deposit:

a. $750
b. $1,500
c. $2,000
d. $2,500

A

C.

A short account has unlimited risk potential. Because of this, minimum equity is $2,000. The customer is selling short 100 shares of ABC at 15 as his initial transaction. Reg. T only requires 50% or $750. But this is not enough to meet the industry minimum of $2,000 per account.

202
Q

What is the name of a margin account established to effect transactions for another broker-dealer?

A

Omnibus Account

A margin account established to effect transactions for another broker-dealer. The other broker-dealer must give written notice that all securities are for the account of its customers; and that any short sales are for the account of its customers.

203
Q

What type of account is used for transactions of partners and owners of broker-dealers?

A

Broker-dealer credit account

204
Q

Specialists on exchanges and over-the-counter market makers must hold a dealer’s proprietary positions in what type of account?

A

A Market Functions account

205
Q

Credit transactions in commodities (which do not meet the technical definition of a “security”), foreign exchange, and employee stock ownership plans must be handled in what type of account?

A

A non-securities credit account

206
Q

True or False

Purchases of “when issued” securities are no longer covered by Regulation T. However, the exchanges have established that purchases of “when issued” securities require a deposit of 30%, whether the purchase is made in a cash account or margin account.

A

False

Purchases of “when issued” securities are no longer covered by Regulation T. However, the exchanges have established that purchases of “when issued” securities require the deposit of 25% whether the purchase is made in a cash account or margin account.

When the security is physically issued, the balance of the funds to meet the initial margin requirement (50% for stock in a margin account; 100% for stock in a cash account) must be deposited.

207
Q

Which regulation controls credit from bank to broker, for loans where securities are the collateral?

A

Regulation U

208
Q

Which regulation controls credit on securities on all lenders other than banks or broker-dealers?

A

Regulation G

Note: Regulation G has actually been folded into Regulation U, but may still show on the exam as an incorrect answer.

209
Q

Which regulation places responsibility for following Federal Reserve regulations relating to borrowing against securities on both the borrower and the lender.

A

Regulation X

210
Q

For Delivery Versus Payment (DVP) transactions (also known as a “COD”) in cash accounts, how long does FINRA give the transaction to settle?

A

35 calendar days - but the broker-dealer has the obligation to deliver and obtain payment as soon as possible and may not deliberately delay delivery.

FINRA requires that payment to the bank or depository in a DVP transaction be made by the customer for the securities no later than that required under Reg. T. for a regular way trade. Thus, payment must be obtained within 5 business days

211
Q

What is the minimum amount of equity required in a PDT account?

A

$25,000

212
Q

In a day trading account, buying power is computed based on any excess margin above the 25% minimum. In this case, buying power is __ times the excess margin above the minimum requirement.

A

4

213
Q

The most dramatic effect of “portfolio margin” is to reduce the margin requirement for what?

A

The most dramatic effect of portfolio margin is to reduce the margin requirement for stock positions that are hedged by options positions, since the margin becomes the maximum potential loss.

214
Q

True or False

Portfolio margins have no benefit for long options positions or spread positions.

A

True

portfolio margins have no benefit for long options positions or spread positions, where the margin requirement already is the maximum potential loss.

215
Q

True or False

Portfolio margin can only be used for equities and options/derivatives positions used as hedges. It cannot be used for bond positions.

A

True

216
Q

True or False

Portfolio margins generally result in overall lower margin requirements and less leverage.

A

False

portfolio margins generally result in overall lower margin requirements and greater leverage.

217
Q

Customers who are not broker-dealers or futures firms that wish to carry unlisted derivatives or conduct day trading must maintain minimum account equity of how much?

A

$5,000,000

218
Q

Any brokerage firm that wishes to offer portfolio margins must get approval of FINRA to do so, and must demonstrate what?

A

That it has the sophisticated computer systems in place necessary to compute and monitor these margin requirements on a real-time, intra-day basis.

219
Q

If a portfolio margin account has a margin deficiency at the end of the day, FINRA rules require that payment to meet the margin call be received within ____ business days.

A

3

220
Q

True or False

A client opening a portfolio margin account must receive a Portfolio Margining Risk Disclosure Statement within 10 business days of the first transaction in the account.

A

False.

The customer must receive a Portfolio Margining Risk Disclosure Statement, at, or prior to, the first transaction in the account.

221
Q

True or False

A customer opening a portfolio margin account must sign an acknowledgment that he or she has read the Risk Disclosure Statement, understands it and will abide by its provisions.

A

True

222
Q

Leveraged ETFs use what 3 types of derivatives to multiply their returns?

A
  1. options
  2. futures
  3. swaps

multiply their returns, but this means that their price movements also have multiplied volatility as compared to the benchmark index.

223
Q

True or False

For a limited partnership to be exempt from margin rules, the offering must:

be registered with the SEC or sold under an exemption;

require at least 50% of the investment to be paid at sale;

have payments that are reasonably related to the capital needs of the issuer.

A

True

224
Q

Mutual fund shares are non-marginable until they have been held for how many days?

A

30

225
Q

Lending from foreign banks to U. S. based customers, where securities are used as collateral, is controlled by the Federal Reserve under:

a. Regulation T
b. Regulation U
c. Regulation G
d. Regulation X

A

The best answer is D.

Regulation X extends responsibility for compliance with the provisions of Regulation T and Regulation U to the borrower.

Since this is a foreign bank lending to a U.S. customer, the U.S. based borrower must comply with the provisions of Regulation T.

226
Q

Lending from banks to customers, where securities are used as collateral, is controlled by the Federal Reserve under:

a. Regulation T
b. Regulation U
c. Regulation G
d. Regulation X

A

The best answer is B.

Lending from banks to anyone where securities are used as collateral is controlled under Regulation U.

227
Q

A customer wishes to sell short 1,000 shares of ABCD stock at $5. The customer must deposit:

A. $2,000
B. $2,500
C. $5,000
D. $10,000

A

The best answer is C.

The “cheap” stock rules kick-in if a customer wishes to short a stock under $10. To short a stock valued at $10 down to $5, the minimum is $5 per share. So, to short 1,000 shares of a $5 stock, $5 per share = $5,000 must be deposited.

228
Q

Under Regulation T, delivery (and payment) for “when issued” securities purchased in a cash account must be made:

A. promptly
B. within 5 business days of trade date
C. within 35 calendar days of trade date
D. within 90 calendar days of trade date

A

C.

Regulation T grants an exception to payment in a cash account being made promptly to “COD” - Cash on Delivery Transactions.

In such transactions, “when issued” securities are typically delivered to a bank that has been instructed by the customer to pay upon delivery “POD.” The broker-dealer has up to 35 calendar days after trade date to deliver such securities against payment under Regulation T. The funds must be ready to pay for these securities when they are delivered. In fact, the customer must have those funds deposited with the bank to pay no later than 5 business days after trade date - the basic requirement of Reg. T - under FINRA rules.

229
Q

A customer buys 100 shares of ABC stock at $30 as an initial transaction in a margin account. The customer must deposit:

A. $750
B. $1,500
C. $2,000
D. $3,000

A

The best answer is C.

Reg. T initial margin to buy stock is 50% of $3,000 = $1,500. However, since this is a new account, it must meet the minimum margin of $2,000. Therefore, $2,000 must be deposited.

230
Q

True or False

FINRA does not allow a customer’s mail to be held unless the customer requests in writing. As long as the request does not exceed 3 months, no other information is needed. However, if the customer wants the mail held for more than 3 months, then a valid reason must be given in the request, such as safety or security concerns.

A

True

In calculating the 3 months, FINRA aggregates all hold requests that occur within a year. The first 2 month hold request did not require an acceptable reason. The next request takes the customer over 3 months in 1 year, so an acceptable reason must be given in the 2nd request letter in order to hold that customer’s mail again.

231
Q

Member firms are obligated to review their AML compliance person designation record and update the information as necessary at least:

A. monthly
B. quarterly
C. semi-annually
D. annually

A

D.

FINRA requires that there be a designated person that is responsible for the firm’s AML program. If that individual changes, FINRA must be notified promptly through the FINRA Contact System. Each member is obligated to review the contact information annually, and update it as necessary within 17 business days of year end.

FINRA - Series 10 (6 decks)

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