Chapter 7 Customer Accounts Flashcards
What information do broker dealers need to open a new account?
- Full legal name of each customer having access to the account
- Home or business street address
- Date of birth
- Taxpayers identification
- Signature of the broker dealers principal
What information needs reasonable effort to obtain?
- Customer Occupation and Employer
- Discretionary Income
- Tax Status
- Experience with investing
- Marital Status
- Risk Tolerance
What happens when a customer refuses to provide all requested information at the time of opening an account?
The account may still be opened at the firms discretion
- The RR cannot make any recommendations without the information
What happens when to an individuals assets when the owner dies?
It goes to the owners estate and are subject to estate taxes
What is Transfer of Death (TOD)?
an account where the investor directs where the assets will go upon death.
What is Probate?
Legal review of a decedents will and disposition of an estate prior to distribution of property to heirs
What is required for Joint Accounts?
- New account form for all owners
- Open under one social security number
What is Joint Tenants with rights of Survivorship (JTWROS)?
- Each person owns an equal interest in the entire account
- One social is used and taxed
- Upon death assets will be transferred to joint owner
What is Tenants by entirety (TBE)?
For married couples
- assets pass to joint owner upon death
What is Tenants in Common (TIC)?
- Earining in the account will be paid to each owner based on percentage of ownership
- Upon death, the investement amount will be moved to individuals estate
Which of the following statements about a joint tenants with rights of survivorship account is false?
A) Each tenant owns an equal individual interest in the entire account
B) The joint tenant must be related to one another
C) Income generated in the account is owned equally by the parties to the account
D) Upon the death of a joint tenant the account immediately and automatically passes to the surviving party
B) The joint tenants must be related to one another
What is a sole Proprietorship account?
Business owned by one person
- all profit and losses are filed under the personal tax return
What are Partnership Accounts?
- Similar to joint accounts.
- Minimum information is required
- Require a copy of partnership agreement
What is general partnership?
All partners sharing the workload and management of the company
- Unlimited liability
What is a limited partnership?
- General partners who manage the business & the limited partners who simply make monetary investments
- LP have no management rights
- Only GP is required to sign the form
What is needed to open a corporate account?
- A copy of corporate resolution + Corporate charter must be obtained
What is a Corporate Charter?
Is the legal document stipulating that the corporation is a legal entity
- This form is needed when opening an account with a broker dealer
What is a corporate resolution?
Specifics the individuals who are authorized by the board of director to enter orders in the account and act on behalf of the company
What is a C-Corporation?
Legal entity with no flow through for tax purposes
- Subject to corporate taxation
- Corporation taxed on income + shareholders taxed on dividends
- Limited Liability
What is a S Corporation?
- A Corp that passes down income and losses to shareholders
- No more than a 100 shareholders
- Only issue common stock
What is a Limited Liability Company?
- Offers investors limited liability that cannot exceed the amount invested in the company
- Copy of articles of organization must be provided
- Signature of all members are required
Who is exempt from federal taxation?
- Religious organizations
- Charitable organizations
- Private hospital, college, or university
- Trade schools
- Museum
What is a Trust Account for?
- often used for people with disabilities or handing such matters without assistance difficult or impossible.
- Established by grantor
- Managed by Trustee
- Requires a Trust Agreement to Open
What is a revocable trust for?
The account allows the Grantor to change the trust terms when the grantor sees fit or revoke completely
- Upon death assets can pass on directly to the beneficiary
Whats an irrevocable trust?
- Where the trust and its term cannot change
- Protects from creditors
- Own tax id and tax rates
What are UTMA and UGMA accounts for?
- Money/securities are owned under the minors SSN
- Custodian acts as a fiduciary capacity
- UGMA: ownership transfers at age of majority
- UTMA: Ownership transfers at specific age up to 25
What is the Uniform Prudent Investor Act?
allows the custodian to grant trading authority to a qualified third party
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What is the Uniform Prudent Investor Act?
allows the custodian to grant trading authority to a qualified third party
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What is the Uniform Prudent Investor Act?
allows the custodian to grant trading authority to a qualified third party
Who is taxed when owning a UGMA/UTMA account?
The minor @ the parents tax rate
- everything belongs under his ssn
What is the Coverdell Education Savings Account (ESAs)?
Contribute $2,000 per year into Coverdell account to help fund childs education
- Earnings are not subject to taxation
- Under minors social security number
- Can be transferred to another relative
- unqualified withdrawls are subject to ordinary tax income + 10% penalty
What are the exceptions for the 10% penalty rule?
Child is dying, becoming disabled, and unable to attend school.
What are Section 529 College Saving Plans?
This was used to allow limited use of funds to defray the costs associated with private elementary and secondary education expenses
What is the Maximum annual contribution allowed to a Coverdell education savings account?
$2,000
What is the Employee Retirement Income Security Act of 1974?
Established minimum standards to protect the interests of participants and beneficiaries of employee sponsored retirement plans
What is a qualified retirement plan?
Must meet standards to qualify for tax benefits
- must be in writing
What is the Catch up provision?
Employees over age 50 can make an additional contribution to a qualified plan
What are the Early Distribution Rules?
Premature distributions are subject to a 10% penalty.
Does not apply to:
- Death
- Terminal illness
- Qualified medical expenses
- Qualified birth or adoption expenses
- Federally declared disaster
The account holder of a quality plan must take required minimum distributions no later than April 1st of the year after the account owner turns age:
73
What is a defined benefit plan?
Promises the employee as specific monthly payout that they will receive upon retirement
- Calculated by emplyoees age, years of service, and highest salary
- Employer funded and investment selected
What is the Pension Benefit Guaranty Corporation (PBGC) for?
Provides coverage if a terminated define benefit plan does not have sufficient assets to provide the benefits earned by the participants
What is Defined Contribution?
Is a qualified retirement plan in which employees direct the employer to withhold a defined amount
- Payout is dependent on the investment performance
- Can be transferred to another qualified plan
What are Tax sheltered annuities / 403(b) plans?
For nonprofit organizations, to hold annuities
What is a 401 (k) Plans?
A type of profit sharing plan in which the employee has the option of taking employer contributions as cash or they can be left in the plan and the employer may make a matching contribution
What is a Simplified Employee Pension (SEP)?
Are designed to be cost efficient way for smaller employers to meet their employees retirement needs by establishing an individual Retirement Account for each employee that is fully funded by the employer
What is a 403(b) plan?
The plan is available for eligible employees of public school systems and qualified nonprofit Organizations and allows for employee salary deferral contributions up to an annual limit
What are individual retirement account (IRA)?
for individuals with an earned income
What are the contribution limits to an IRA account?
up to 100% of earned income
- Contributions are made till April 15th
What are the Penalty for excess contributions to an IRA account?
6% penalty
What kind of deductibility is there for participant in non employer sponsored retirement plan?
If individual does not participate in a employer sponsored plan their deductibility is dependent on their level of adjusted gross income
Contributions to a deductible IRA may be limited depending on all the following factors, EXCEPT?
A) If the taxpayer can participate in an employer sponsored qualified retirement plan
B) Tax-Filing Status
C) Taxpayers income
D) The state in which the taxpayer lives
D) The state in which the taxpayer lives
When are you required to take minimum Distrubutions
No later than April 1st of the year after they reach age 73
What happens when you dont take the required distributions?
25% penalty of the required minimum distribution
What are Roth IRAs?
- Contributions are on an after-tax basis
- No required minimum distribution
- Distributions are tax free if qualified
- Requires investors to have an adjusted gross income
What are the requirements to be considered a qualified distribution?
-Open for at least 5 years
- Owner is 59 1/2
- The death or disability of the account owner
- The account owner takes a distribution as a qualified first time home buyer of no more that $10,000
All the following are true about Roth IRAs, EXCEPT?
A) Contributions can be made even if the individuals has no earned income
B) Contributions are made on an after tax basis
C) There are no RMDs
D) Contributions are not age limited
A) Contribution can be made even if the individual has no earned income
How is third party trading allowed?
Through POA
What does a limited power of attorney allow you to do?
Place trades but cannot remove any assets from the account
What does a Durable POA do?
Remains legally enforceable if the client becomes mentally incompetent
What does discretionary account do?
Gives an RR or broker dealer trading authority in an account. Action, Asset, Amount
When do broker dealers have to send out account statements?
Every quarter
True or false:
A customer must give specific mailing instructions in writing for confirmations and account statements
True
How long can you hold a customers mail upon request?
Up to 3 months and anything past that must be in writing with a good reason.
What is a cash account?
Is an account where transactions are paid for with cash within a specified time period
What happens when a trade cannot be paid for?
BD will sell the securities and charge the customer for any account losses
What are margin accounts?
Is a brokerage account in which the broker dealer lends the customer money to buy securities for their account or lend the customers securities to sell in the market
- Needs to sign a margin agreement
- Credit disclosure document must be provided to the customer
- Written hypothecation agreement
- Must receive a margin risk disclosure document
With margin accounts, what are the rules with new issues?
The rule states that new issues may not be purchased on margin but may be borrowed against once they have been held for at least 30 days
To receive credit in a margin account, what do you need?
Requires a deposit of $2,000 or 50% of the value of purchase which ever is greater
What can the broker dealer do if the investor does not meet the margin account requirement?
The broker dealer can sell a portion of the securities to meet that requirement
What is an Hypothecation agreement?
Permits the broker dealer to use some of the customers securities as collateral for a bank loan to finance the customers margin account
What is a short sale?
When an investor sells shares of stick that they currently do not own
What is required to open an option account?
- Investment Objective
- Employment Status
- Estimated annual income
- Estimated net worth
- Estimated liquid net worth
- Marital status and number of dependent
- age
- Investment experience and knowledge
The disclosure document provided to a customer at or before an option account is approved is known as?
Characteristics and risks of standardized options
Why might an account be frozen?
Fails to pay before deadline
- will likely be frozen for 90 days
- losses will be charged to the customer
- Other accounts will be unaffected
What is cash up front?
A customer can still trade when account is frozen if the investor has the cash in their account before any purchase
What are fee based accounts?
Investment advisors charge an annual fee based on a percentage of assets under management
What are commission based accounts?
charge a commission for each investment transaction
What are Wrap accounts?
When a client pays the investment adviser a flat fee for all advisory services and all transaction
- Does not pay commissions or sales charge
What is the wrap fee?
Assessed a fee that covers all investment advisory fees, administrative fees, and any trades processed through a broker dealer
What are Market Orders?
Does not specify a price, and filled at the current bid or ask price
- Executed immediately or next available price
What is a Market not held order?
Allows traders to decide the best price and time
- day orders and executed before close of trading day
What is Limit Order?
The investor is choosing a price that is their “limit”
- Either that price or better
- Not more than this amount
What is a buy limit?
investor specifies the highest price they are willing to pay
- placed below the current market price
What is sell limit?
The investor specifies the lowest price they will accept to sell
- placed above the current market
What is a stop order?
Placed to stop losses that might occur
- guarantees execution after hitting strike price
What is a day order?
are good only during the trading day placed
What is GTC?
Good till cancel are good until the order is filled or cancelled
To contribute to a Roth IRA, an individual must have
Earned income below a stated maximum threshold
A client is about to take a 2 week adventure into the mountains of Western Alberta. The client has informed their registered representative that within the next 2 weks, they would like to purchase $40,000 of ABC Inc. The order
May not be accepted unless the RR has previously been granted a limited or full POA
An irrevocable trust account is set up at a full servie broker dealer. When determining suitability for customer transactions, the agent should be most concerned with which item?
Trust document & Beneficiary What is Trading Authorization?
A teacher at the local school has agreed to reduce their pay by a specified amount and invest it. Which type of retirement plan does the teacher likely have?
403(b)
