Chapter 3 - Misc topics

Question 1

There are two services for which members cannot charge customers.

Answer 1

First, a member may not charge a customer for research. Providing research for a price would force the member to register as an investment adviser with the SEC for those who manage $110 million or more (with a state securities agency if it is less than $100 million, and with either if in between).

Second, a member may not charge a customer for forwarding proxy material. Members charge the issuer for providing this service.

Question 2

FINRA Rule 2251 and SEC rules require member firms to process and promptly forward all proxy and related information, such as annual reports, regarding a security to whom if the member carries the account in which the security is held for ?

Answer 2

beneficial owner

Question 3

A member firm may hold mail for a customer who will not be receiving mail at his or her usual address, provided that :

Answer 3

1. the member receives written instructions from the customer that include the time period during which the member is requested to hold the customer’s mail.
2. If the requested time period included in the instructions is longer than three consecutive months, the customer’s instructions must include an acceptable reason for the request (e.g., safety or security concerns).

Question 4

To authorize a discretionary account, the client signs a ?

Answer 4

Power of Attorney

Question 5

How is discretionary authority revoked ?

Answer 5

This authorization may be revoked by the customer in writing, at any time, and ends on the death or mental incompetence of the customer.

Question 6

Limited vs Full Discretionary Authority vs Not Held

Answer 6

Third-party trading can be limited or full. Limited authorization allows the third party to enter orders only. Full authorization allows order entry and permits the authorized party towithdraw funds from the account. Any disbursements must be in the account name, not in thename of the authorized third party. A trade is discretionary if the member chooses any of the following order-related items:

• Action (buy or sell)
• Asset (the security to be bought or sold)
• Amount (number of shares or dollar amount)

If the member chooses the price or timing of an order, it is not discretionary; rather, it is termed a not held order.

Question 7

Discretionary authority needs to be approved by a principal before its exercise ?

Answer 7

True

Question 8

When must a principal approve discretionary order tickets ?

Answer 8

In addition, a principal must approve all discretionary order tickets promptly after execution and must frequently review all discretionary accounts to detect potential abuses, such as unsuitable trades or churning (discussed later in this Unit).

Question 9

Must a customers signature be on the account opening statement ?

Answer 9

No -

There is no requirement for the customer’s signature. However, do not let industry practice get in the way of answering a signature question correctly. Most members include a W-9 and a predispute arbitration agreement as part of the new account opening package, both of which require a customer’s signature. These documents are separate from the new account form itself. Non-US citizens must sign form W-8.

Question 10

When transferring customer securities via ACATs if the assets are non-transferable, the firm has how many days to send the proceeds from liquidation ?

Answer 10

If the asset is non-transferable, the firm has five business days to send the proceeds from liquidation.

Question 11

What is a TIF ?

Answer 11

Transfer Initiation Form

Question 12

With regard to individual accounts, once a member becomes aware of the death of the account owner, the member must ?

Answer 12

Cancel all open orders, mark the account Deceased, and freeze the assets in the account until receiving instructions and documentation from the executor of the decedent’s estate. If the account has a third-party power of attorney, the authorization is revoked.

Question 13

The documents necessary to release the assets of a decedent are:

Answer 13

The documents necessary to release the assets of a decedent are:

• certified copy of the death certificate;
• inheritance tax waivers; and
• letters testamentary.

Question 15

If one party in a joint tenants with rights of survivorship (JTWROS) account dies then ?

Answer 15

The account cannot be transferred into the name of the new owner (the other party) until the member receives a certified copy of the death certificate.

Question 16

If one party in a tenants in common (TIC) account dies, then

Answer 16

If one party in a tenants in common (TIC) account dies, the decedent’s interest in the account goes to his estate. The executor for the decedent must present the proper documents before the assets belonging to the decedent can be released. In some states, the death of a tenant in a TIC account requires that the executor present an affidavit of domicile to the member, which shows the decedent’s estate will be handled under the laws of that state

Question 17

In a JTWOS, does the death of one tenant preclude the remaining tenant from entering orders ?

Answer 17

No, the death of one tenant does not preclude the remaining tenant from entering orders

Question 18

In TIC accounts, does the death of a tenant requires that the member firm freeze the account ?

Answer 18

YES ! In TIC accounts, the death of a tenant requires that the member firm freeze the account and acceptance of orders until the required documents are presented.

Question 19

Member authority in partnership accounts when one partner dies ?

Answer 19

With regard to partnership accounts, if one partner dies, the member needs written authority from the remaining partners before executing any further orders. This written authorization generally takes the form of an amended partnership agreement.

Question 20

Offers of rescission must be accepted or rejected by the customer within

Answer 20

Offers of rescission must be accepted or rejected by the customer within 30 days of receipt or give up the right to future legal action regarding the purchase

Question 21

If, on reviewing an order ticket, a principal discovers that a registered representative solicited a clearly unsuitable trade for a customer, one option available to the member is to -

Answer 21

offer in writing to rescind the trade. Under state law, an offer of rescission must be in writing and include an agreement to:

■ buy back the securities for the original consideration paid; and

■ pay interest to the customer based on cost from date of purchase to date of repurchase

Question 22

The Uniform Securities Act (USA) has jurisdiction over securities transactions at

Answer 22

the state level. State securities laws are referred to as blue-sky laws

Question 23

If a customer does not return the proxy [Voting Instruction Form (VIF)] by the X day before the annual shareholders meeting, the member may vote the shares as it sees fit as long as the matters to be voted on are of minor importance.

Answer 23

If a customer does not return the proxy [Voting Instruction Form (VIF)] by the 10th day before the annual shareholders meeting, the member may vote the shares as it sees fit as long as the matters to be voted on are of minor importance.

Question 24

The 5% markup rules doesnt apply to what type of products ?

Answer 24

This policy applies to non-exempt securities in both the OTC and the exchange markets. It does not apply to exempt securities, such as municipal bonds. It also does not apply to prospectus offerings. If a member is required to give a customer a prospectus in any transaction, that transaction is outside the scope of the 5% policy (e.g., new issues, mutual funds, variable annuities, and direct participation programs).

Question 25

Exception to Rule 2121, also known as the 5% policy

Answer 25

There is an exemption from this rule. Namely, if the customer is a Qualified Institutional Buyer (QIB) who can independently evaluate risks, and the security is non-investment grade, the broker-dealer may make transactions that are exempt from FINRA Rule 2121.

Question 26

Qualified Institutional Buyer (QIB)

Answer 26

A Qualified Institutional Buyer (QIB) is any entity acting for its own account or the accounts of other QIBs, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity.

If the institution is a bank it must have a net worth of $25 million.

If the institutionis a broker-dealer trading for its own account it must have a portfolio of at least $10 million of non-affiliated securities

Question 27

T/F - The 5% policy applies to both agency and principal transactions ?

Answer 27

The 5% policy applies to both agency and principal transactions. It applies to markups, markdowns, and commissions but not to securities sold by prospectus.

Question 28

Markups and markdowns are computed from the

Answer 28

prevailing market price at the time of the sale.

Question 29

In an active, competitive market, the prevailing market price is the…..

Answer 29

inside market at time of sale.

Question 30

In an inactive, competitive market, a market maker must use what to calculate the mark-up/mark-down ?

Answer 30

Contemporaneous (recent) purchases from other dealers as the prevailing market price for markdowns and its contemporaneous sales to other dealers as the prevailing market price for markups. Because there is relatively little trading activity, the inside market is not a reliable guide.

Question 31

In dominated and controlled markets, market makers must use what to calculate markup and markdowns ?

Answer 31

In dominated and controlled markets, market makers must use actual cost, not quotations, as the prevailing market price for markups and markdowns

Question 32

T/F - In the absence of other bona fide evidence, a member’s own contemporaneous cost (price at which the firm last bought as principal) is the best indication of the prevailing market price.

Answer 32

True - In the absence of other bona fide evidence, a member’s own contemporaneous cost (price at which the firm last bought as principal) is the best indication of the prevailing market price.

Question 33

True/False - When a nonmarket maker sells to a customer in a riskless principal trade, markup is computed from the member’s cost.

Answer 33

TRUE - When a nonmarket maker sells to a customer in a riskless principal trade, markup is computed from the member’s cost.

Question 34

To compute percentage markup in a proceeds transaction, a member must :

Answer 34

■ determine the compensation earned on the sell side;

■ determine the compensation earned on the buy side; and

■ add the two and apply the total to the inside market on the buy side (the second trade)

Question 35

Markup/markdown rules do not apply to

Answer 35

Municipal securities