Chapter 3: Trading, Customer Accounts, Prohibited Activity Flashcards
How are cash dividends taxed?
Cash dividends are either taxed as either qualified or non-qualified. Non-qualified are considered “ordinary income” and are taxed at the the investor’s ordinary income tax bracket. The maximum tax rate on qualified dividends is specified by the IRS tax code and will depend on the investor’s tax bracket. H/ever, tax on qualified dividends will always be lower than an investor’s ordinary income tax bracket.
Shareholders must be owners of stock on or before which date to receive and declared dividend?
Record Date. Key dates in cycle are: Declaration, Ex-dividend, Record and Payable.
The regulation enacted by the SEC to protect the privacy of customer information is:
Regulation SP which protects the privacy of customer information. Under Regulation SP, firms must provide their customers with a description of their privacy polices. In particular, deals with non-public information. If firm, reserves the right to disclose to unaffiliated 3rd parties nonpublic information, customers must have an easy, reasonable way to opt out.
Income from an investment in debt securities is known as:
Interest. Income from debt securities is known as interest. Income from common stock is known as dividends. Sale of a security for a price different from that originally paid is known as a capital gain or loss. The total return on an investment is the sum of income received and capital gain or loss upon sale.
What are “matched orders”?
Matching orders is a manipulation that involves one party selling stock to another with the understanding that the the stock will be purchased later (usually the same day) at virtually the same price. The intent is to make it appear that far more activity in a stock (volume) exists than actually does.
What are “breakpoint sales”?
Sales of an open-end (typically) mutual fund that falls just below the sales charge price break. RRs must be certain customers are aware of a fund’s break-point schedule.
What is “capping”
Capping is entering sell orders in a stock for the purpose of keeping the stock from rising above a certain price. Usually when this violation is detected it is in conjunction with someone who is short calls to keep the stock from rising above the strike price of calls in an effort to keep the contracts out-of-the-money and thus not likely to be exercised.
What is “backing away”
A market maker can revise a firm quote in response to market conditions and trading activity, but a market maker who refuses to do business at the price quoted is backing away from the quote. Backing away is a violation of trading rules.
Which types of securities can be purchased on Margin?
Equities, bonds and warrants can be purchased on margin.
Mutual funds, new issues nor options can be purchased on margin. However, mutual funds and new issues may be used as collateral for a margin loan after being held for 30 days.
Describe “preemptive rights” as it relates to a customer who owns stock in a given company.
Preemptive rights entitle 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. They are offered with an exercise price lower than the current market value and are issued (typically) for a period of four to six weeks (30–45 days). Existing shareholders who receive rights have three options: they may be exercised, sold in the secondary market, or allowed to expire at the end of their subscription.
May a RR share in profits/loses with a customer?
A registered representative may share in profits and losses with a customer if the customer gives consent and the principal gives permission in writing. The trades must be done in a joint account, and the representative must share in both profits and losses to the extent of his proportional investment in the account. The proportion requirement is waived if the customer is a family member of the representative.
What is a trade confirmation and what information does it include:
A trade confirmation is a printed document that confirms a trade, its settlement date, and the amount of money due from or owed to the customer. For each transaction, a customer must be sent or given written confirmation of the trade at or before the completion of the transaction - the settlement date. Trade confirmation includes:
- trade date
- account number
- RR internal ID number
- BOT (bought or) SLD (sold)
- Number (or quantity) of shares or the par value of bonds bought or sold.
- Description
- Yield
- CUSIP number
- Price
- Amount
- Commission
What type of securities are exempt from Regulation T margin requirements?
Treasury securities (bills, notes, and bonds) are exempt from Regulation T margin requirements, purchases of them on margin are allowed and would be subject to the firm’s determination of what the initial margin deposit requirement should be.
Opening a margin account for a client requires the client to do all of the following:
Customer must sign the Credit Agreement (terms of the credit extended by the BD), Hypothecation Agreement (allows securities to be pledged for the loan). Customers are not required to sign the Loan Consent form, which gives permission to the firm to loan the customers margin securities to other customers or BDs - usually to facilitate short sales.
A customer of a securities firm has concluded that selling short would be an effective trading technique to reach his investment goals. Assuming the firm’s principal agrees to permit the customer to effect short sales, what type of account would be most suitable for short selling?
Investors who choose to sell short eligible securities must satisfy Federal Reserve Board (FRB) margin requirements to do so. The margin requirement is a deposit of 50% of the sale proceeds in the customer’s margin account.
