Chapter 8 - Part 1 Flashcards
The uniform prudent investors act of 1994 (UPIA) does what?
Sets the basic standards by which all investment professionals acting in fiduciary capacity must abide
what is churning?
Is the practice of making transactions that are excessive in size or frequency with the intention to generate higher commissions for the adviser
what is Reverse churning?
It is the practice of placing inactive accounts or accounts that do NOT trade frequently into fee-based programs that charge an annual fee based in the assets in the account
what is capping?
An act designed to keep a stock price from rising or to keep the price down
what is Pegging?
An act designed to keep a stock price up or to keep the price from falling
what is Front running?
The entering of an order for the account of an agent or firm prior to the entering of a large customer’s order
what is Trading ahead?
The entering of an order for a security based in the prior knowledge of a soon-to-be-released research report
what is Painting the tape/matched purchases/matches sales?
An act by two or more parties designed to create false activity in the security without any beneficial change in ownership
The increased activity is used to attract new buyers
what is Unauthorized trading?
Is one that is made for the benefit of a customer’s accountant a time when the customer has no knowledge of the trade and tech advisor does NOT have discretionary power over the account
what is the definition of Fraudulent acts?
Fraud is defined as any act that is employed to obtain an unfair advantage over another party
can a rep omit material facts and guarantees?
A rep may NOT omit any material fact either good or bad when recommending a security
can you Short term trade in mutual funds?
no
which mutual fund may be more suitable for an investor with a shorter holding period?
front-end load aka A shares
what is Reg BI?
Was adopted by the SEC in June of 2019 as an amendment to the Securities Exchange Act of 1934
All broker dealers, investment advisors, and agents are subject to standards of conduct that require the firm and its agents to act in the best interest of retail customers
what is the June 2020 (part of Reg BI) change?
All broker dealers and investment advisers will be required to provide retail clients with a client relationship summary (CRS)
Required to post the CRS on their publicly available website
CRS may be provided in hardcopy or electronically
If the CRS is provided in hardcopy…
The CRS may not be more than two pages long and the CRS must be the first page among any documents sent in the same package
the CRS Must be written in …
plain english using everyday terms
the CRS Should be written using what kind of voice?
“active voice” with a strong, direct, and clear meaning
Should be written as if speaking to the retail investor directly
if Electronic CRSs are used what can be in them?
should use graphs and charts, specifically dual column charts to compare services
May use videos and popups and must provide access to any referenced information via hyperlink or other means
May be delivered via email provided that the email contains a direct link to the CRS
Broker dealers are required to provide the CRS to customers when?
before or upon the earlier of recommending the type of account to establish or an investment strategy or upon opening an account or placing an order
Investment advisers must provide the CRS to clients when?
prior to or at the time the contract is entered into even if the contract is oral
The CRS is aka…
“ADV part 3”
For entities registered as both a broker dealer and as an investment adviser the CRS must be delivered when?
upon the earliest requirement for either registration
Any changes required to be made to the CRS must be completed within how many days? and sent to customers within how many days?
Must be completed within 30 days and an updated CRS clearly reflecting the changes must be sent to existing customers within 60 days
Are the changes to the CRS required to be filed with the SEC?
yes
Broker dealers will file through the what?
Central Registration Depository (CRD)
investment advisors will file through the what?
Investment Adviser Registration Database (IARD)
The relationship summary must be provided to the client upon request within how many days?
30
are Minors are not allowed to own securities ?
no
what does The uniform Gifts to Minors Act (UGMA) do?
Regulates how accounts are operated for the benefit of minors
All UGMA accounts must have:
One custodian
One minor
UGMA and the state in the account title
Assets registered to the child’s name after he or she reaches the age of majority
how many custodians allowed on each UGMA account?
Only one custodian and one minor are allowed on each account
Husband and wife may NOT be joint custodians
Can The same person serve as custodian for many minors?
yes
Can the minor have more than one account with more than one custodian?
yes
does the donor of the security have to be the custodian for the account?
no
what is the limit on the size of the tax free gift of a UGMA account?
$15,000 per year
is there a dollar limit as to the size of the gift that may be given in a UGMA account?
no
The custodian may use the assets in a UGMA account for?
the minor’s welfare and educational needs
Is the minor is responsible for the taxes on the UGMA account?
yes
UGMA taxation of any unearned income that exceeds how much? will be taxed how?
Any unearned income that exceeds $2,200 per year will be taxed at the parents’ marginal tax rate if the child is younger than 14 years old
UGMA gifts that exceed $15,000 per year are taxed how?
The tax liability in on the donor of the gift, not the minor
Prudent man rule for Third party and fiduciary accounts are what?
The individual with this responsibility must act as a prudent person would and may NOT speculate
what is the Legal list for Third party and fiduciary accounts?
Many states have an approved list of securities that may be purchased by fiduciaries
what does Full discretion mean?
Meaning the fiduciary may have full power of attorney
Which means they may purchase and sell securities as well as withdraw cash and securities from the account
what does Limited discretion mean?
It is a limited power of attorney
The fiduciary may only buy and sell securities and may not withdraw assets
When opening an account for a guardian the rep must obtain a copy of the court order appointing the guardian within how many days?
Court order must be dated within 60 days of opening an account
If its older than 60 days
The rep may NOT open the account until a new court order is obtained
C corps are taxed how?
at the corporate rate independent for the owners’ tax rates
C crop Would be most suited for a business that has what objectives?
needed to raise a substantial amount of capital or was projected to be very profitable
S corp allows the income to do what?
to flow through to the owners and to be taxed as ordinary income
how many people can be owners in an S corp?
No more than 100
what type of corp Must be organized as a domestic corporation?
S corp
Limited partnership consists of what kind of owners?
Consists of at least one general partner and one or more limited partners
what is the duty of the general partner in a limited partnership?
It is the duty of the general partner to manage the partnership in accordance with the partnership’s objectives
what is the duty of the limited partners in a limited partenrship?
The limited partners put up the investment capital required but may NOT exercise management or control over the partnership
what type of partnership is often used for estate planning?
Family limited partnership
what is the parents role in a family limited partnership?
Parents may place significant assets into a family limited partnership as a way to transfer their ownership
Usually the parents will act as the general partners and will transfer limited partnership interests to their children
As this happens, the parents may become subject to gift taxes
Gift taxes are usually lower than they would have suffered without the partnership
The LLC will pass through what?
income without being taxed at the LLC level just like a partnership
The owners of the LLC are classified how?
as members of the LLC not as shareholders and are NOT personally liable for the debts of the LLC
which type of entities provide asset protection and avoid double taxation by distributing income and losses to the owners or members?
limited partnerships, LLCs, and S corps
